Will Record Labels Soon Have a Sirius Problem?

The satellite giant's purchase of Pandora could give it leverage.

SiriusXM's $3.5 billion purchase of Pandora, finalized Feb. 1, will create a digital-radio behemoth with customized radio playlists, a contract with Howard Stern and an estimated 100 million listeners who tune in from cars, smartphones and laptops alike. And while some music executives are excited about the potential promotional possibilities, others worry about how this new company might use its considerable leverage to push for better terms.

SiriusXM has a reputation as a tough negotiator: It was the first digital radio company to not pay for the use of pre-1972 sound recordings, and it has consistently opposed labels' attempts to raise its royalty rates for recordings, arguing that AM-FM pays nothing to use them. It fought the Music Modernization Act until labels agreed to lock in its current 15.5 percent-of-revenue royalty rate until 2027. "SiriusXM is a company that we still have issues with," says a major-label source.

In the past, SiriusXM has pointed out that it generates considerable royalties for labels and artists, plus offers airplay for genres that are all but ignored by conventional radio. (Representatives for both Pandora and SiriusXM, in addition to the top three record labels and the RIAA, declined to comment.)

Pandora once had an adversarial stance toward the music business -- the company even bought a traditional radio station in an effort to lower its royalty payments -- but eventually backpedaled, presumably so it could enter the on-demand streaming business. "Pandora has become much more of an ally," says the major-label source. "Is this going to be a return to those days?"

It's unclear how, or even if, the combined company could change the royalties it pays, which are set by the Copyright Royalty Board, although it can also make direct deals with rights holders. But it is certainly big enough to throw its weight around. "The concern is certainly real," says Kevin Erickson, director of the Future of Music Coalition. "They can essentially say, ‘You have to agree to our terms or we don't have to play you at all.'"

Other label executives are excited about the promise of combining SiriusXM's original content and growth in cars with Pandora's ability to reach smartphone users -- and both companies' listener data. "If they execute this well, they become a formidable competitor to AM-FM radio," says Zack Silver, analyst with investment bank B. Riley FBR.

Glassnote Records founder/president Daniel Glass predicts SiriusXM could benefit from Pandora's new Amazon Echo functionality. "It's hard to ignore the mass of Pandora. The audience and engagement is massive," he says. "SiriusXM is great in cars, and Pandora is in people's homes and restaurants. If SiriusXM gets to use the data and voice recognition, it's going to be a very good deal."

This article originally appeared in the Feb. 9 issue of Billboard.