SoundExchange

If the current music royalty arrangement is a "mountain" between webcasters and profitability, Michael Robertson says broadcasters have two choices: go around the mountain, or blow it up.

Robertson is founder and CEO of DAR.fm (which enables recording/time-shifted listening of online radio). He spoke on the panel "The Streaming Music Landscape" at RAIN Summit West in Las Vegas.

The first option, according to Robertson (left), entails radio creating an entirely new model that allows webcasters to avoid the high royalties. Fellow panelist Paul Campbell is founder/CEO of Amazing Radio in the UK, and is doing exactly this sort of thing. A terrestrial station, Amazing Radio plays only independently-owned music. In exchange for the promotion the publishers and performers receive by being aired on Amazing, they waive their royalty claims (allowing the station to perform the music for free).

Radio's second option is get far more involved in the royalty-setting process than it has to this point. "Unless the NAB gets off their ass and gets on the Copyright Office and influences those rates," Robertson exhorted, "as your business goes digital, you guys are screwed."

While Rhapsody Chief Product Officer Brendan Benzing thinks the "renaissance around consumer demand" for curated audio online will shine a brighter spotlight on untenably-high royalties webcasters pay, Robertson was less optimistic. "None of this other stuff matters unless royalties are radically changed," he said. His optimisim lies in the news of Sirius' lawsuit against SoundExchange (see background here). "That is the most important development this year for the Internet radio business. Fantastic development. You better hope Sirius wins."

After Robertson (also founder of the MP3Tunes.com, which recently declared bankruptcy, more here) brought up public earnings reports from Pandora that showed the company pays fully 50% of its revenues for royalties, moderator Ted Cohen (right) asked why that's so out-of-line. Cohen, TAG Strategic Managing Partner, said, "Look at physical retail, durable goods, where 60-65% (of retail revenue) goes to supplier. Is 50% that eggregious?"

The difference, according to Robertson, is in the nature of the business involved, and radio's important role as a copyright "intermediary" between creators and the public. "Look at broadcast radio, which pays about 5% (of its earnings for musical content, in the form of composer/publisher royalties to ASCAP, BMI, and SESAC). Would any radio station have a business if they paid 50% of revenue? No." The problem, he Robertson insisted, is that lawmakers now see the purpose of copyright not to benefit the public (as many interpret the Constitution to mandate), but rather to benefit copyright owners. And what the rate structure fails to take into account is the importance of "distributors" of copyright -- those entities like webcasters and radio -- that are necessary for the public to reap the benefit of copyright by broadcasting and streaming that content.

On the topic of distribution, Robertson advised broadcasters to "pay attention to mobile. That's where the majority of your listening will come from in the future." He said, "Get your signal everywhere, don't do exclusive deals. Any digital guy that comes to you (to make a deal), as long as it doesn't cost you any money, you should do it."

That is, of course, once the royalty matter is solved. The Internet radio business "is a rocket," Robertson said. Right now, "unfortunately, it's a North Korean rocket."

See the entire video of this panel, and all our RAIN Summit West content, at RTTNews here.

SoundExchange is seeking dismissal of the lawsuit brought against it and A2IM (American Association of Independent Music) by SiriusXM in March. SiriusXM contends that the music industry organizations interferred with its attempts to secure direct licenses with rightsholders.

In SoundExchange's court documents filed yesterday, the royalty collection agency accuses SiriusXM of trying to use the courts to influence royalty negotiations. SoundExchange also argues that SiriusXM's failure to obtain direct licenses doesn't imply a "conspiracy."

You can find previous RAIN coverage of the SiriusXM lawsuit here, here and here.

Seeking Alpha has more coverage on SoundExchange's dismissal request here.

SoundExchange has appointed Marie Knowles as vice president of communications. Knowles has more than a decade of communications experience. She's worked with clients like Rosetta Stone, Iridium, Blackboard, New Media Strategies and Ruckus Entertainment Network.

You can find SoundExchange's press release here.

Last week we wrote about new calculations from Live365 general counsel Angus MacDonald, which found that 90% of SoundExchange's 2011 revenue came from just SiriusXM and Pandora (RAIN coverage here).

Now SoundExchange refutes the claim, though the collection agency says they "are not able to publicly disclose the payments to SoundExchange from specific digital music services." SoundExchange argues that royalty payments from SiriusXM and Pandora made up "substantially below" 90% of their revenues.

Billboard.biz has more coverage here.

MacDonald calculated that Pandora's royalty payments alone made up 36.66% of SoundExchange's revenues. The webcaster paid "about as much in royalties for its FY 2012... as it made in TOTAL REVENUES for its previous fiscal year, FY 2011," wrote MacDonald.

Pandora paid 49.7% of its FY 2012 revenues to SoundExchange, according to its 10-K submitted to the SEC.

SiriusXM is currently suing SoundExchange and A2IM, accusing the record industry organizations of interfering with its efforts to reach direct deals with rightsholders (RAIN coverage here and here).

According to new analysis from Live365 general counsel Angus MacDonald (pictured), 90% of SoundExchange's 2011 revenues "came from only two sources": SiriusXM and Pandora.

MacDonald estimates SiriusXM's royalty payments to SoundExchange to be around $200 million in 2011 (based on the company's judicially-filed complaint against SoundExchange from March 23, though "a small portion" of the figure may be non-U.S. statutory payments). And Pandora's royalty payments to SoundExchange totaled $136.3 million in the 12 months that ended January 31, 2012.

SoundExchange's total 2011 revenues were $371.9 million. Combined, Pandora and SiriusXM's royalty payments make up around 90% of SoundExchange's revenues.

"That is a staggering figure," comments MacDonald, "especially if you consider all of the major and not-so-major terrestrial broadcasters who must pay royalties to SX for their simulcasts, as well as all the other types of services that pay royalties to SX... This suggests that Sirius and Pandora have a good deal of leverage to extract a fair royalty deal from SX for their respective royalty proceedings in the CRB."

The finding is also noteworthy considering SiriusXM is trying to avoid paying SoundExchange by reaching its own direct licensing deals with rightsholders (RAIN coverage here). SiriusXM recently filed a lawsuit against SoundExchange and the American Association of Independent Music (A2IM), accusing the record industry organziations of interfering with its efforts to reach those direct deals (RAIN coverage here and here).

MacDonald also recently calculated (as published yesterday in Audio4Cast here) that SoundExchange's total royalty collections were up 40% from 2010 to 2011. That growth was mainly fueled by Pandora, which paid out nearly 50% of its revenues to SoundExchange in the fiscal year that ended January 31, 2012, according to MacDonald.

"Another interesting fact: Pandora paid about as much in royalties for its FY 2012 (i.e., $136.3M) as it made in TOTAL REVENUES for its previous fiscal year, FY 2011 ($137.7M).

"With Pandora’s ever-growing listening hours and royalty payments," MacDonald continues, "SoundExchange and the labels need a healthy Pandora as much as Pandora needs a reasonable Pureplay-like rate for the next royalty term (2016-2020). This is especially true if Sirius XM continues to sign up more direct license deals, thereby bypassing SoundExchange (though Sirius XM’s recent antitrust complaint suggests that may be a tough row to hoe)."

In the upcoming legal battle between SiriusXM and SoundExchange, the satellite radio broadcaster (along with broadcasters and others) has everything to gain, while SoundExchange and the CRB face potentially serious set-backs. So argues Kevin Goldberg, Special Counsel at Fletcher, Heald & Hildreth, in the CommLawBlog.

Last week news broke that SiriusXM had sued SoundExchange and the American Association of Independent Music (A2IM), accusing the record industry organziations of interfering with its efforts to directly license the sound recordings (find RAIN's coverage here).

The eventual outcome of the lawsuit aside, Goldberg (pictured) says SiriusXM "made the right play... litigation is expensive, but not as expensive as the $200 million in royalties that SiriusXM claims to have paid last year," he writes. "Add in the fact that a victory would not only reduce that expense, but also afford SiriusXM more flexibility in future negotiations and the ability to innovate."

Moreover, broadcasters (and, RAIN would add, webcasters) stand to "reap the benefits" of SiriusXM's lawsuit "without any effort." Goldberg echoes Davis Wright Tremaine partner David Oxenford (RAIN coverage here) in reasoning that SiriusXM's direct licensing deals "would provide important concrete data – possibly the only such data – regarding the value of a digitally transmitted sound recording" in future CRB royalty hearings for both SiriusXM and broadcasters.

"This would be especially important if the broadcasters’ own worst case scenario – enactment of the Performance Rights Act – were to occur," writes Goldberg.

The outlook is less rosy for SoundExchange. The royalty collection agency faces, at the very least, a long and expensive legal battle, Goldberg argues. At worst, it could face "possible dismantling... or the imposition of some limiting consent decree... or the forced introduction of a competitor receiving agent."

The lawsuit may also "be enough to rethink the entire regime" of the Copyright Royalty Board (CRB), writes Goldberg. "From allowing SoundExchange to exist without competition to siding with SoundExchange on virtually every contested fact in the 2007 Webcasting II decision (and many other ratemaking proceedings), the CRB may have created the environment that allowed questionable, if not illegal, activity to flourish."

The constitutionality of the CRB and its appointment process have been repeatedly questioned and challenged in the past (RAIN coverage here, here, here and here).

But who wins or loses this particular lawsuit may be "beside the point," says Goldberg. "The mere initiation of the case may represent an early tremor signaling the onset of a seismic event, an event that would likely, one way or another, fundamentally affect all the players."

You can find Goldberg's extensive analysis and explanation of the SiriusXM lawsuit against SoundExchange and A2IM here.