Six Key Takeaways From This Week's Massive Copyright Decision
The decision by a federal judge in California that came down on Monday -- that owners of master recordings released before Feb. 15, 1972 have an exclusive copyright that applies to performances -- is not only seen as a major victory for Flo & Eddie (the pair who initiated a class action suit against SiriusXM on behalf of recordings they made as the Turtles during the 1960's), but also for record labels and the artists who recorded under them. The decision is wide-ranging in its implications and deals with the complicated interplay between labels, artists, copyright holders and modern digital broadcasters like Pandora. Below, Billboard outlines six key takeaways.
1. The decision could cost Sirius XM and Pandora a lot of money.
Sirius XM paid out about $240 million to SoundExchange (the U.S. government’s overseer of digital performance royalties) in 2013, according to a May filing with the U.S. Copyright Office. Assuming 12.5 percent of songs played were pre-1972 recordings -- the average of widely cited figures based on testimony from last year's satellite radio rate proceeding -- SiriusXM would have incurred another $33.4 million in royalty expense if it had needed to pay for plays of pre-1972 recordings. Pandora also stands to be negatively affected by the decision. That company paid out roughly $326 million in performance royalties to SoundExchange in 2013. If we assume that 5 percent of songs streamed on Pandora are pre-1972 recordings, a figure given by CEO Brian McAndrews on an April 24th earnings call, Pandora's additional royalty expense last year would have been $17.1 million. And that's just for 2013 -- in California the digital services may be on the line for four years worth of back royalties in total. And that doesn't include punitive damages.
2. Wall Street hasn't much cared.
On the day the decision was announced, Sirius XM and Pandora shares experienced slight declines that could be attributed to a broader market selloff rather than fears of greater expenses. Worries about royalties would have caused deeper losses, since the added expenses could noticeably impact the companies' market caps. In the case of Pandora, an incremental $17.4-million annual royalty expense -- an amount that will grow over time -- is certain to reduce future earnings and, thus, hurt its market capitalization. In fact, Pandora has already warned of this scenario. In its latest 10-Q filing with the S.E.C., the company warned a lawsuit about pre-1972 sound recordings could result in a "significant" liability.
3. Even though the ruling could serve as legal precedent in other lawsuits around pre-1972 masters, the decision currently only impacts California.
Both SiriusXM and Pandora (which is being sued on the issue in New York by the major labels), could try to limit their liability to California. In the case of Pandora, if it only paid the additional royalty costs in California it would mean an estimated payout of only $7 million more, not $57 million. For SiriusXM, its incremental royalty payout in that situation would be $4 million more, not $33 million. But, we wonder: Would SiriusXM incur any liability if a subscriber that lives in Nevada drove into California, then tuned to Little Steven's Underground Garage channel and heard the Turtles' "Surfer Dan" song?
4. Could terrestrial radio stations in California also be obligated to pay master recording performance royalties?
Terrestrial radio’s free ride (at least in California, for the time being) could be over. That's the interpretation that the Flo & Eddie lawyer Henry Gradstein of the firm Gradstein & Marzano is taking from the ruling, as are some major label executives. However, if the labels try to enforce this, it will most likely lead to another legal battle. The NAB, the radio industry trade group, has ferociously fought off every legislative initiative the labels have mounted down through the decades in their search for performance royalties from radio, so they likely wouldn't shy away from a judicial battle.
5. Legislation could bring all pre-1972 sound recordings under federal copyright.
If Congress moves on this matter, either in a standalone bill or as part of a larger update to music copyright law, digital service providers such as Pandora and Sirius XM would have to pay for all performances of pre-1972 sound recordings. The RESPECT Act introduced in May would place pre-1972 sound recordings under federal law. The subject could be included in whatever results from the current push to update U.S. copyright law within the next four to five years.
6. The ruling will likely have no effect on consumers.
Neither SiriusXM or Pandora are likely to transfer any additional royalty costs onto consumers, locked as they are in a battle for market share. Moreover SiriusXM will more than likely appeal the decision, sources say. A Pandora (which faces a similar lawsuit filed by the major labels in New York) spokesperson tells Billboard: "We continue to be confident in our legal position on this issue." However, there is a chance Pandora changes the music its listeners hear. In the risk section of the company's latest 10-Q S.E.C. filing, Pandora warns investors that if it's found liable for violation of pre-1972 rights, not only could it face "significant" financial liability but it "may have to remove pre-1972 sound recordings from our service, which could harm our ability to attract and retain users."