The U.S. Copyright Royalty Board today decided new royalty rates for sound recordings broadcast via satellite radio stations. The rates set the amount that XM Satellite Radio and Sirius Satellite Radio must pay to SoundExchange, the non-profit organization established to collect and pay royalties to recording artists, musicians, record companies and other sound recording copyright holders.

The CRB determined the value of the sound recordings to be 13% of gross revenue. But, following guidelines set out in the Copyright Act, it provided discounts so as not to cause undue disruption of the fledgling industry. With the discounts, the effective rates during the following years are: 2007 6%; 2009 6.5%; 2010 7%; 2011 7.5%; 2012 8%.

The decision "provides our company certainty regarding music performance royalties to be paid through 2012," said XM chairman Gary Parsons in a statement. "Moreover, the music performance fees set by the CRB are in the range projected by many financial analysts who cover this industry."

The standards used to set these rates are different from those used to set rates for webcasters earlier this year. Under the webcasting rate-setting statute, the CRB was required to determine what a willing buyer would pay a willing seller to license music in the open marketplace.

Under the satellite statute, the CRB was required to consider four factors: what rate would maximize the availability of creative works; what amount would provide a fair return to copyright owners and to licensees (i.e., satellite services); the relative contributions of the parties such as their technology and investments; and whether the rate would have a disruptive impact on the licensees' industry.

Sources close to the parties say that the CRB essentially decided that the first three factors resulted in a fair royalty of 13% of revenue. But based on the testimony of XM and Sirius executives on what they could afford to pay while still investing in the companies, as well as other evidence, the CRB determined that the discount was reasonable to prevent any disruptive impact on satellite radio.

"This result once again highlights the inequity of a rate standard that forces creators of music to subsidize certain music services with below market rates," said John Simson, SoundExchange executive director, in a statement. "We are glad that the decision affirmed the importance of music to XM and Sirius, but disappointed that the rate standard led to a lack of full and fair compensation because of the business circumstances created by XM and Sirius."

The revenue that is subject to royalty fees includes subscription revenue from subscribers and revenue from advertising on channels other than those that use only incidental performances of music. Excluded from revenue used to determine the amount of royalties due are: revenue from channels, programming and products or other services offered for a separate charge where such channels use only incidental performances of sound recordings; revenue from equipment sales; revenue from current and future data services; fulfillment service fees; and bad debt expense.

The decision applies to satellite services in existence in 1995 when the law went into effect granting a digital performance right for sound recordings. It does not affect any rates XM and Sirius may be required to pay for any webcasting, cable broadcasting or DirectTV services.

The written decision will not be available to the public until the parties' lawyers confirm that there is no confidential information included in it.