Sirius XM Radio Adds 334,000 Subscribers in Third Quarter
Sirius XM Radio Adds 334,000 Subscribers in Third Quarter

Sirius XM will be paying a bit more to play music for the next five years. The Copyright Royalty Board (CRB) announced Friday new statutory royalty rates for satellite radio that cover 2013 through 2017.

The CRB set the statutory royalty rates for pre-existing satellite radio companies at 9% of gross revenues for 2013; 9.5% for 2014; 10.0% for 2015; 10.5% for 2016; and 11.0% for 2017. These new rates will deliver more revenue to record labels and performing artists -- Sirius XM currently pays 8% of gross revenue -- without weighing heavily on Sirius XM. Both sides most certainly would have preferred different outcomes, but both got what they wanted.

In addition, the CRB set the statutory royalty rates for pre-existing subscription services -- otherwise known as cable TV services such as Music Choice -- at 8% of gross revenues for 2013 and 8.5% for 2014 through 2017.

For both classes of services, 5% of the royalty obligation is for Section 112 royalties that cover ephemeral copies of sound recordings. The remaining 95% of royalties will cover Section 114 royalties. Both types of royalties are paid to record labels and performing artists via SoundExchange, the organization that collects statutory royalties from Internet radio services, cable TV services and satellite radio.

Investors immediately sent Sirius XM shares up 7% to $2.91 when the CRB released its determination. Although the satellite radio company will have to pay more for playing music in the coming years, it certainly faced the prospect of paying far more. In 2008, the CRB determined the fair market value of the performance royalty to be 13% of gross revenues but lowered the royalty rate to 6% (starting in 2008) to 8% (in 2012) because it determined the higher rate would have a destabilizing effect on Sirius XM.

Four years later, Sirius XM is in much better financial health. The company ended the third quarter with $556 million of cash and cash equivalents even after using nearly $1.6 billion to eliminate long-term debt from its balance sheet. In the first nine months of the year, Sirius XM generated $439 million in free cash flow, up from $62.1 million in the same period in 2010.

SoundExchange wanted Sirius XM to pay 12% in 2013; 14% in 2014; 16% in 2015; 18% in 2016; and 20% in 2017, according to rate proceeding documents. One expert suggested even higher rates. Janusz Ordover, a professor of economics at New York University, presented research on behalf of SoundExchange that estimated Sirius XM's appropriate royalty rate would range from 22.3% to 32.5%.

For a rate proceeding that had to imitate a marketplace transaction, Sirius XM presented evidence of its own marketplace transactions. The company testified that it had negotiated nearly 100 direct deals with record labels for royalty rates that would otherwise be covered by the statutory rates determined by Friday's outcome. Rates negotiated directly range between 5% and 7% of gross revenue and grant Sirius XM "broader rights" than the compulsory right, the company wrote in its testimony.