SiriusXM's Grandfathered Rates for Music Must End (Guest Post)

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SiriusXM recently issued its latest outstanding earnings reports, celebrating yet another quarter featuring billion dollar revenues, steadily climbing subscriber rolls, and multimillion dollar profits. We're not surprised SiriusXM is doing so well -- they offer a great product standing on one of the strongest possible foundations a business could have, music.

But it is pretty unseemly for the satellite giant to be announcing record earnings out of one side of its mouth while it argues to cut pay for artists out of the other.  Because at the very same time SiriusXM was releasing these eye-popping financials, its lawyers were in front of the federal Copyright Royalty Board demanding to pay even less to performers and copyright owners for the music that it uses online.

And that juxtaposition is even more offensive when you consider that SiriusXM already pays below-market royalties for its satellite broadcasts thanks to a special "grandfathered" royalty rate standard it wrested from Congress years ago.  While that special deal may have made sense when Sirius and XM were two separate companies struggling to get off the ground -- although many would challenge even that --  why  on earth should SiriusXM continue to pay below-market royalties for the music it uses to draw in subscribers today when it is one of the strongest music services in existence? Why has Congress allowed a temporary deal that many deride as crony capitalism to linger on for nearly two decades??

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It is time for Congress to pass legislation that would end this. To ensure all music creators receive market value pay, regardless of when they recorded or the technology used to broadcast their songs, which is why the bipartisan Fair Play Fair Pay Act of 2015 is so critical.

The history regarding SiriusXM's royalty giveaway is simple. When digital radio services were getting started in the 1990s, Congress wisely required them to pay royalties to performers and copyright owners for the music they used. However, Sirius and XM, then two separate companies, complained they had already made costly plans to launch satellites and wooed investors who did not anticipate paying these royalties.

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So, a deal was struck. When the 1998 Digital Millennium Copyright Act was passed, Sirius and XM were dubbed "pre-existing" satellite services and given a special below market royalty rate standard. Internet radio, by contrast, is governed by a fair market value standard. Since then, the Copyright Royalty Board has relied on this so-called "grandfathered" rate standard to slash music creators' pay below market value -- essentially forcing music creators to subsidize satellite radio's massive growth.

Whatever the wisdom of that special treatment back in 1998, it makes no sense today. Times -- and the radio business -- have changed.

Sirius and XM have merged. These two former competitors have joined forces in one of the most controversial mergers ever approved by the Justice Department. SiriusXM is now the only "pre-existing satellite digital audio radio service" in the United States. The last thing Congress should do is allow this functional monopoly to grow even fatter off an unfair royalty standard.

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"The world has changed" -- in Sirius's CEO's own words -- in other ways as well. When Sirius went to Congress to defend the merger, it faced a key obstacle -- its initial FCC license precluded it from merging with another satellite provider. Sirius argued that condition should no longer apply because "the idea of comparing where we are from a technology point of view today and comparing it to where it was 10 or 12 years ago." And that is exactly right -- the world of radio has changed in almost every meaningful way. Special deals negotiated almost two decades ago no longer make sense.

The playing field is being leveled. When asked by Congress back in 2006 why their special deal should continue, their only defense was to point to AM/FM's own special deal.  XM's CEO said, "'Fair market value' is an inherently flawed concept where the largest users of the rights (i.e. terrestrial broadcasters) are completely exempt from any royalty obligation". The bipartisan Nadler/Blackburn Fair Play Fair Pay Act will address this concern, bringing all forms of radio under the same fair market rate standard at the same time with no one exempt.

Sadly, SiriusXM has also abused its dominant status by refusing to pay any royalties at all to vulnerable, pre-72 artists. SiriusXM's exploitation of legacy performers is well documented and appalling. State courts are quickly righting this unjustifiable wrong. Any company that has twisted the law in this way to abuse some of our most cherished musical icons, backup signers, and their bands has forfeited any claim to favored treatment of its own.

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Finally, the new company is an economic powerhouse. As they worked to sell their merger, Sirius and XM said that combining operations would yield a $7 billion windfall in cost savings. Since the merger, the company has indeed grown by leaps and bounds -- reaching nearly 28 million subscribers and reporting over a billion dollars in revenue and a hundred million plus in profits per quarter. It's no wonder the company brags about being, "the largest radio broadcaster measured by revenue."

Indeed, any doubt that SiriusXM could afford to pay fair market royalties was eliminated once and for all when its former CEO Mel Karmazin bragged in 2012 that, "We're a very profitable, successful company. If we want a performer, we can afford to pay more than anybody else can because we're making more."

It is time to level the playing field in radio, to eliminate the special deals and grandfathered royalty rates. It is time to ensure the all music creators receive fair pay for their work, regardless of when it was recorded or what technology was used to air it.

It is time for Fair Play Fair Pay.

Ted Kalo is executive director of musicFIRST Coalition, which aims to ensure music creators get fair pay for their work.

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