Business Matters: If Big Radio Had Pandora's Royalty Rate, It Would Owe Billions
Business Matters: If Big Radio Had Pandora's Royalty Rate, It Would Owe Billions

The Copyright Royalty Board established new rates for satellite radio on Friday for the years 2013 through 2017. The rates are based on Sirius XM's revenue, so the faster Sirius XM grows its revenue, the more revenue will be paid to record labels and performing artists through SoundExchange.

Based on Billboard's projections of the company's revenue growth over that time, and taking into account the company does not pay for non-music programming, Billboard estimates Sirius XM will pay from $1.02 billion (at 6% annual compounded growth rate) to $1.22 billion (at 12% annual compounded growth rate) in statutory royalties to SoundExchange from 2013 to 2017. The range of revenue takes into account the company's recent growth: Sirius XM has grown revenues 12.4% in 2010 and 6.2% in 2011 and is on track to increase revenue 12.8% this year.

At $1.02 billion of royalties, and assuming the 5.4% administration fee SoundExchange had in 2011, roughly $480 million will be paid to record labels, $435 million will be paid to performing artists and $48 million will be paid to backing musicians.

The statutory royalty rate established by the CRB is not applied to Sirius XM's top-line revenue (which Sirius XM forecasts will be $3.4 billion in 2012). According to a SoundExchange spokesperson, Sirius XM's rate assumes a 50-50 mix of music and non-music revenue and the company is allowed to exclude revenue from certain non-music packages (such as sports). Such carve-outs are excluded from these calculations because that information is not publicly available, however. As a result, these royalty estimates are overstated by the amount of any excluded non-music revenues.

SoundExchange believes the CRB's decision represents "a below-market outcome" due to the judges' use of "a special rate standard that permits below market rates for Sirius XM," according to a spokesperson. "We believe that all radio services should pay a fair market rate for their use of sound recordings." Sirius XM had not responded to a request for a statement by press time.

The CRB used the 801(b) standard in setting rates for satellite radio and cable radio services. That is the standard sought by webcasters in the Internet Radio Fairness Act in hopes different criteria will result in lower statutory rates. The CRB uses a different standard, the "willing buyer, willing seller" standard, when setting rates for webcasters. SoundExchange supports draft legislation by Rep. Nadler that would direct the CRB to use the "willing buyer, willing seller" standard for all three types of services.

One important question is how much more revenue the new rates will put into the pockets of rights owners and performing artists. In other words, what is the incremental increase in revenue over the rates Sirius XM were already paying? Using the previous growth in statutory royalty rates as the baseline, the incremental increase in royalties is pretty modest.

Sirius XM currently pays 8% of gross revenue and its royalty rate had increased at 0.5 percentage points per year. The CRB decided to increase the rate to 9% in 2013, skipping the 8.5% rate altogether. That leaves a 0.5-point spread between the baseline rates and the new royalties announced Friday. Billboard estimates this incremental amount to range from $50.8 million (at 6% compounded annual growth rate) and $60.6 million (at 12% compounded annual growth rate).

Digital performances are a healthy part of today's music business. Labels and artists will benefit from the popularity of satellite radio and Sirius XM's continued ability to attract subscribers.