A Look At SoundExchange's 2017 Financials From Its IRS Filing

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SoundExchange reported $63.61 million in total revenue for 2017, slightly up from $56.4 million the prior year thanks mainly to its acquisition of the Canadian Musical Reproduction Rights Agency (CMRRA). 

The organization, which collects and distributes artist and label royalty payments from programmed digital radio services like SiriusXM, Pandora, and Music Choice, released the figures in a 990 form filed with the Internal Revenue Service, which it made available to Billboard in advance of a public posting at SoundExchange CEO Michael Huppe received nearly $1.4 million in salary and other employee benefits, about $300,000 over last year, according to the filing.

Income rose despite a $235 million drop in revenue collection from Pandora, which cut direct deals with record labels to launch an on-demand tier and now pays the labels directly, leaving SoundExchange to collect the royalties only for recording artists.

CMRRA creates a new revenue stream by collecting different kinds of royalties -- mechanical royalties for compositions that it pays to songwriters and publishers, as opposed to SoundExchange’s traditional collection of performance royalties for master recordings, which it pays to labels and artists.

SoundExchange's revenue is funds it retains for expenses after it paid $683 million in artist and label royalties in 2017, which it previously announced in March 2018. At that time, the not-for-profit organization, which files as a tax-exempt entity, said $652 million was paid out from U.S. collections for sound recording performance rights. $31 million was apparently paid out from collections made by the Canadian Musical Reproduction Rights Agency (CMRRA), which was acquired in May 2017 and handles Canadian mechanical publishing royalties.

Of the $63.61 million, $59.9 million came from collections, while $3.68 million came from investments, mainly short-term instruments that the organization invests in as part of its cash management of royalty revenues. It also includes $3.8 million in fees paid to CMRRA subsequent to its acquisition by SoundExchange -- the main reason why total income is up.

Overall, royalty collections from programmed digital services, SoundExchange’s traditional business operations, totaled $717 million last year, according to the organization's website, while the form 990 puts expenses at $57.7 million. After reducing expenses by subtracting $3.8 million in interest from cash and security holdings, that means expenses for all of SoundExchange traditional operations -- excluding CMRRA -- comprised 6.8 percent of total revenue. That's up from 5.3 percent in the prior year, even though expenses only increased by about $1 million, as shown on SoundExchange's website.

The financials shown on the 990 form include SXWorks, created to own CMRRA, which had $18 million in collections last year after its acquisition counted toward SoundExchanges financials, and means total collections were $735 million.

That 1.5 percentage point increase in the expense ratio is due to a drop in revenue, not increased costs. In the prior year, revenue collections totaled $952 million. The $235 million drop in collections occurred because Pandora, in order to add an on-demand tier, had to cut direct deals with major labels and also with most indie labels. As a result of those direct deals the labels get paid directly from Pandora, while SoundExchange only collects the royalties portion due to recording artists and no longer collects the label portion.

According to another document provided to Billboard, SoundExchange held $527 million at year's end. Of that, $294 million was due to data and account issues that needed to be reconciled or inadequate paperwork -- including issues with digital services play reports -- and rights owners still needing to be registered. In the past, sources suggest that this amount is divided between current problems and longer issues going back over three years, and that on average about 11% of annual collections have informational problems that need to be resolved before distributions can be made.

Looking at the organization's $57.7 million in expenses, employee compensation and benefits comprised the largest component at $22.06 million. Of that, $5.1 million went to 10 senior staff executives, including Michael Huppe, who received nearly $1.4 million in salary and other employee benefits. If senior staff members' salaries are subtracted from total compensation, that means the other 153 employees at the organization at year-end averaged about $110,000 in 2017 in total annual compensation, including salaries, pension fund, and other benefits, Billboard estimates. (Billboard used the year-end employee number given on the 990 form for its estimation; the actual number is likely somewhat different depending on the average number of employees employed during the year.)

After employee compensation, other expenses totaled $35.7 million, of which the next biggest expenses were $13.5 million million in depreciation and amortization and $7.5 million on information technology. 

Moving over to the organization's balance sheet, it listed licensing costs at $32.7 million, which sources indicate is the amount that SoundExchange has paid for Copyright Royalty Board litigation down through the years. At the end of the year, SoundExchange reported $566 million in assets and $555 million in liabilities, and held nearly $385 million in short-term securities. 

Ed. Note: This story has been updated to provide a more complete description of the breakout of financials and functions between SoundExchange and its SXWorks/CMRRA operation.