How Did SoundExchange Get So Big?
On January 28th 2015, digital performing rights organization SoundExchange announced that they had distributed $773 million to record labels and recording artists in 2014. An extremely impressive number, especially if you consider that they had paid out just $252 million five years ago. That’s an increase of 31% over 2013, and follows a pattern of strong growth in payouts, which since 2010 has averaged 29%. Such steady growth in payments is due to the ever burgeoning non-interactive streaming industry.
The non-interactive streaming industry is made up of several different types of companies, with the largest being online radio, and satellite radio (Sirius XM). We’ll take a look at how much SoundExchange collects from a couple of the major players in this space, and compare those companies’ growth against the organization over the last five years (from 2010 through 2014). We’ll also see that while SoundExchange has over 2,500 licenesee’s who pay the organization’s fees, the vast majority of payments are handled by a select few.
If you’re unfamiliar with how the rates and terms for non-interactive streaming services are established, generally it’s all handled by what’s called the Copyright Royalty Board or “CRB”. They conduct rate proceedings (which I’m sure is about as exciting as watching floor gymnastics), which licensees along with SoundExchange participate in to set a statutory rate (usually escalating) for a number of years. Of course, the last two rate proceedings ended in a very unhappy way for most licensees, so the vast majority of them currently abide by settlements they negotiated with SoundExchange in line with what’s called the Webcaster Settlement Act of 2009.
Online Radio
The Online Radio industry is far more diverse in terms of offerings than traditional terrestrial radio. There are many different types of companies all competing for a listener’s attention. First, there are companies strictly offering digital transmissions of their radio stations. Secondly, there are companies who have established “terrestrial-like” radio services, where a staff picks out the playlist, but they only operate online (e.g., Dash Radio, Live365.com). Lastly, there are companies who offer stations tailored to a consumer’s preferences, whether that be through a specific artist, decade, or genre, which often use algorithms to select the songs that will stream.
We’ll be looking into the most successful company in the online radio space, which happens to operate within the third realm, Pandora.
Pandora
The radio giant has over 250 million registered users and an active user base of 76.2 million[1]. That makes Pandora SoundExchange’s largest licensee in terms of user base (registered or active). Pandora is also the one of, if not the largest licensee in terms of payments, and they make it pretty easy to suss that out. They revealed in their 2014 10-K that 48% of their gross revenue went purely to content acquisition costs associated with SoundExchange, which equates to over 288 million dollars.
Pandora is responsible for paying what’s called the “Pureplay Settlement” rate, pursuant to the Webcaster Settlement Act of 2009. The settlement instructs licensees to pay the greater of a) 25% of Gross Revenues or b) a per-play rate on Sound Recordings performed as follows:
The vast majority of what Pandora is responsible for is the non-subscription rate. The subscription rate applies only to customers who (you guessed it) pay a subscription fee to access the service. This affects streams occurring for Pandora One customers, which probably represents less than 5% of total users.
Unfortunately, we don’t have enough public data to determine exactly what the year-by-year growth of revenue against SoundExchange payments is, but we can get pretty close. For the years in which Pandora specifies the SoundExchange content acquisition cost as a percentage of revenue within their 10-K filings (2012–2014), the amount hovers around 50%. Given their sizable gross revenue, this gives a nice little boost to SoundExchange’s total collections each year.
For the other two years in question, 2010 and 2014, we can estimate their SoundExchange related costs at 50.5%, based upon the average percentage of payments over the other three. Given the years we’ve calculated, we can now see how greatly Pandora affects SoundExchange payouts:
Which is to say, quite a bit. Between 2010 and 2014, Pandora payments amounted to an average of 37% of SoundExchange’s total collections. With the above visual, it’s easy to ascertain just how tied SoundExchange is to the streaming service.
In five years time, Pandora has quadrupled their subscriber numbers, and has infiltrated cars, gaming consoles, set top boxes, TV’s, every major smartphone, and hell, even terrestrial radio. The company as grown exponentially, and become perhaps the most fiscally important piece of SoundExchange’s future.
Satellite Radio / Sirius XM
An industry dominated by (and only consisting of) one entity, Sirius XM. The radio giant has over 27.3 million subscribers[3], and has been on a path of strong growth since 2009, after they nearly filed for bankruptcy. 2014 was an especially strong year of growth for Sirius, as they posted gross revenue of $4.18 Billion, which represented a 9% increase over 2013.
Primarily, Sirius XM is responsible for paying SoundExchage the statutory royalty rate as it applies to Pre-Existing Satellite Digital Audio Radio Services or “SDARS” for short. As the only actual “SDARS” (pre-existing before the CRB was established or not) they’re also the only entity that pays the aforementioned royalty rate. The statutory rate for SDARS has increased steadily over the past five years, increasing from 7% to 9.5% of gross revenue (subject to certain exclusions).
The company also operates an internet-based radio service, which is subject to a separate per-play rate that was agreed upon with SoundExchange, pursuant to the Webcaster Settlement Act of 2009. Sirius’ rate has increased from $0.0017 to $0.0022 between 2010 and 2014, and is $0.0024 for 2015
Sirius doesn’t publicly disclose how much they pay to SoundExchange each year; however, they do include it as a cost within their “Revenue Share & Royalties” category of operating expenses within their 10-K filings.
“Revenue Share & Royalties” as a percentage of gross revenue has gone from about 15% in 2010 to 19.4% in 2014, though not all of that growth can be attributable to SoundExchange (especially the 17.8 to 19.4% jump from 2013–2014). For instance, 2014 was the year that featured the elimination of the benefit to earnings from the amortization of deferred credits on executory contracts initially recognized in purchase price accounting associated with the merger between Sirius & XM Radio.
However, a better way to look at SoundExchange payments compared to Sirius XM revenue might be to look at the “U.S. Music Royalty Fee” that the company charges customers. The fee is set as a percentage of the radio tier, which a customer pays for (in 2014 it was 12.5%). Sirius lists the royalty fees that they collect from customers as “Other Revenue” within their 10-K. In addition, Other Revenue consists of revenue earned from the company’s ownership stake in Sirius XM Canada (of which they currently own a 37% share).
The royalty fee is also used to reimburse the company for any performance royalties due for use of the composition or musical work, which goes to the US Performing Rights Organizations (PROs) ASCAP, BMI, and SESAC. So, if we subtract the revenue they report from their share in the Canadian Sirius XM, and estimate that their ratio of SoundExchange payments to PRO payments is about 10 to 1…we can get better picture of where Sirius XM’s obligations stand:
Even then, however, (and as you can see below) the “Other Revenue” figure is an impossibly high percentage within SoundExchange total collections for 2010 and 2011 (80% and 57% respectively). It could be because the Music Royalty Fee, as a percentage of a radio tier’s cost, has only increased a few times in the past couple of years, while both statutory rates have steadily increased (along with the company’s subscriber base).
Nonetheless, the 2012–2014 figures paint a (most likely) accurate picture in terms of Sirius’ royalty obligations to SoundExchange. Within those years, you’re looking at Sirius XM’s contribution at an average of 42% of SoundExchange’s total collection. Not insane looking, like 2010 & 2011’s estimates, though still quite an impressive figure.
Sirius XM hasn’t experienced the explosive growth that Pandora has over the last five years. What they do have, however, is a fantastic way of attracting new customers. Around 60%[2] of new cars come with Sirius XM pre-installed, and many three-month subscriptions are thrown in with the cost of the vehicle. Of those new cars purchased, Sirius XM reported a conversion rate of 41% (within their 2014 10-K). Consider that those converted subscribers (and all of their subscribers for that matter), are paid, rather than the vast majority of free Pandora subscriptions, and it’s not hard to see why they continue to play such an important role in regards to SoundExchange payments.
Evaluating the Royalty Payments
Given the extremely large percentage of SoundExchange payments which come from the above two licensees, I think it’s fair to say they’ll both play an extremely important role in the future growth of the organization. I think it’s reasonable to assume that the two companies have combined for at least 75% of the payments made to SoundExchange over the past 5 years. Now, perhaps that’s too much importance relegated to only two companies. I would certainly be surprised, if say, 75% of ASCAP or BMI collections were the result of two licensees (or even 5 for that matter). Sure, it’s an apples to oranges comparison, however, in a business where the consumption model is still drastically shifting year to year (think of the crazy growth we just talked about), reliance upon one or two licensee’s can be risky.
Others have asked if Pandora and Sirius XM can even sustain payments this large to SoundExchange. Both of these companies are purportedly willing to enter negotiations with labels for master performance licensing in order lessen the fiscal burden of the settlement fees they’re paying (in more ways than one).
Truthfully, I think the most interesting issue here is the significant difference in collections between SoundExchange and the PRO’s (for composers/publishers) for these services. Labels can certainly present a better case for a larger share of royalties (think of the difference in a label marketing a song to actually become a hit vs. what the publisher contributes), but does the gap really need to be so large? Especially for the realm of online or satellite radio, where many listen for the chance of discovering new music that may not have been already marketed to them on terrestrial radio.
In writing this article, numerous other companies were studied, such as iHeartMedia, Radio One, Mood Media, and Music Choice, to name a few. Unfortunately, there were some issues with being able to accurately pinpoint either revenue numbers (e.g., Music Choice — and their parent, Stingray), and/or estimated SoundExchange payments (fucking everyone). I would personally love to hear what webcaster settlement iHeartMedia opted in for (or if they did at all), so please let me know if you’re interested in sharing.
Future SoundExchange Rates
The next rate court proceeding, coined “Web IV” will commence with an initial hearing on March 23rd, 2015. Parties involved in the proceeding have already submitted initial statements (& rebuttals).
Satellite royalties on the other hand, are in the books through 2017. The rate will grow at .5% per year, concluding with a 11% rate ending December 31, 2017. Expect the CRB to schedule another hearing for rates 2018 and forward.
Works Cited
[1]Pandora Media, Inc., ‘PANDORA 2014 Annual Report’.
[2]Trefis Team, ‘Can Sirius XM Tune In Big Subscriber Growth This Year?’, Forbes, 12-Apr-2013. [Online]. Available: http://www.forbes.com/sites/greatspeculations/2013/04/12/can-sirius-xm-tune-in-big-subscriber-growth-this-year/. [Accessed: 10-Mar-2014].
[3]Sirius XM Holdings Inc., ‘FORM 10-K’, Feb. 2015.
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