Sirius XM vs. SoundExchange

On March 27th, 2012 PRNewswire reported that Sirius XM Radio filed a complaint against SoundExchange, Inc. and American Association of Independent Music (A2IM). The complaint was filed in the United States District Court for the Southern District of New York. According to Sirius’ complaint, SoundExchange and ‘the industry’ had used tactics that illegally prevented free market competition, and made Sirius’ efforts to acquire its own direct licenses with rights-holders nearly impossible.

SoundExchange is an independent, non-profit performance rights organization that collects statutory royalties from satellite radio, including Sirius XM, Internet radio, cable TV, music channels, and similar platforms for streaming sound recordings. The PRO was appointed by the Copyright Royalty Board, and ultimately the U.S. Library of Congress, as the collector and distributor of the above monies on behalf of recording artists, master rights owners (record labels), and independent artists who record and own their own masters.

Sirius XM Satellite Radio provides over 140 channels of commercial-free music, sports, exclusive talk and entertainment, in addition to comedy, news, traffic, weather and more. Programming is available on more than 800 devices, including pre-installed and after-market radios in cars, trucks, boats and aircraft, smartphones and mobile devices, and consumer electronics products for homes and offices. They currently have over 21 million subscribers.

The Complaint

Sirius XM is charging these two organizations with illegal interference in its efforts to secure copyrights critical to its business in a competitive market. It alleges that SoundExchange and other industry trade associations, including the RIAA, NARAS, and the Future of Music Coalition, NARAS, have eliminated price competition in the market for digital transmissions of sound recordings licensable under the statutory licensing provisions of Section 114 of the Copyright Act of 1976. The conduct, it is said, violates federal antitrust law, as well as New York state law.

Specifically, the complaint states “artists and music labels [fear] that if they agreed to a direct license with Sirius XM, SoundExchange would withhold or otherwise diminish the royalties otherwise due from SoundExchange for performances of their music by companies other than Sirius XM”. In addition, taking on SoundExchange may ostracize such artists and music labels from the music industry, and force them to abandon cherished leadership roles.

Sirius XM maintains that it has been forced to work solely with SoundExchange and is paying higher prices for fewer licenses- -it has signed 80 direct licenses to date but believes it could have done better. According to the lawsuit, SoundExchange is seeking to increase the rates from the current 8 percent to possibly 13 to 20 percent during 2013 -2017. SoundExchange also wants that percentage to exclude a carve-out for any direct licensing deals that Sirius brings to the table. This would eventually force Sirius to pay twice for the music it licenses directly– once to SoundExchange and then again to the right holders.

All of this is happening while Sirius XM has embarked on more one on one negotiation with the record labels. As well, Sirius wants a single license covering all of its platforms, including satellite, Internet, mobile devices and more. This is apparently advantageous for the record companies, because they get more value than they would by relying just on distributions from SoundExchange. The problem is SiriusXM can only acquire these platforms running afoul of SoundExchange’s statutory license.

Rebuttal

SoundExchange argues that its revenue collections are steadily growing, and that the income it provides is a tide of new money that raises all music industry boats equally. As of January 2012, SoundExchange announced a fourth quarter 2011 distribution of $89.5 million with more than 18,000 payments, bringing annual estimated royalty payments to $292 million, up 17% from the prior year. For Michael Huppe, President of SoundExchange, “Royalty payments are proof positive that digital performances continue to grow at a rapid clip.” And, of course, if distributions grow, the case for unfair competition is not as glaring. Moreover, Huppe would likely add that such collections would not have been possible without either the legislation that created SoundExchange nor its early collection efforts.

Others support this view. On March 30th, an anonymous artist manager was published in Digital Music News vaildating the modus operandi of SoundExchange.

He got good answers from management when he had questions on behalf of his clients and regular checks every quarter. Not once did he have to negotiate percentages for his clients and he contrasted this with to the lengthy bartering that a label engaged, for instance, with Spotify. Moreover, he argued that without the statutory rate everyone would be paid differently: direct licenses with master owners, typically the large labels, are subject to nondisclosure agreements and hide the fact that superstar artists are given preferential treatment in terms of per stream royalties. SoundExchange, he believed, guaranteed equal treatment for all, “as all cash paid is split 50/50 between the master owner and the performing artists and the artist share is paid directly to the artists, not to the labels and then delayed in ‘unrecouped accounts’”. Finally, the artist manager derided any notion of ‘big brother’ in SoundExchange, alleging that the license that Sirius XM offers to indie labels comes with a threat of not playing their music in the future if they don’t sign up. (All of this, of course, would be more credible if the source of DMN had gone put a name for the record.)

Monopoly and the Law

Sirius is not asking for compensatory payments to offset damages. Rather, it is making a bold move to cut out the middleman so it can negotiate royalty payments directly with the record companies. It is strictly a strategic business move and, if successful, the irony is that it would benefit its competitors; i.e Pandora, iHeart Radio, and various other smaller IP distribution platforms that would take advantage of the royalty reductions. Therefore, Sirius XM can stand tall arguing that the complaint promotes a more competitive marketplace.

That, in the end, is where Sirius XM will likely stake its case: on the validity of its anti-trust action. However, at a time when the business is attempting to simplify music transactions, it may be difficult for Sirius XM to curtail SoundExchange’s operations. The latter, after all, is the product of landmark legislation in 1995 that granted a new performing right for music in the U.S., albeit only in the digital domain.

By Megan Graney

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