Statement: SoundExchange Answers Questions We Have Received about Direct License Offers

Statement: SoundExchange Answers Questions We Have Received about Direct License Offers

Many independent record labels and other rights owners have recently contacted SoundExchange with questions about offers that they have received from Sirius XM.  According to these inquiries, Sirius XM is seeking to directly license the use of their recordings on Sirius XM’s various digital radio platforms – including its satellite radio service, as well as its webcasting, business establishment and “cable radio” platforms – instead of relying on the statutory license that we administer.

We don’t advise record companies about what is best for their individual businesses and, in any event, don’t know the terms of Sirius XM’s offers.  However, it is our responsibility to ensure that all of our constituents have a full picture of the legal, regulatory and business landscape so that any decisions they make are fully informed.  We’re posting this to provide some of that background.

I. SoundExchange Fights for the Value of Music.

SoundExchange represents more than 100,000 artists and record labels. We are governed by a Board of Directors comprised equally of artist and record label representatives.  We spend countless hours and millions of dollars fighting for the rights of artists and rights owners.  We are guided by a single principle – all creators deserve fair compensation.

The royalties paid for digital radio by services such as Sirius XM, Pandora, and other digital radio providers, and paid to SoundExchange under the statutory license, are set in proceedings before the Copyright Royalty Board (“CRB”) every five years.  When the CRB sets a rate, it applies to all copyright owners.  SoundExchange represents artists and rights owners in those proceedings and advocates for rates that fairly value your music.  We’ve achieved meaningful increases in the statutory rates for webcasting and satellite radio in the past.  In the last satellite radio proceeding, we obtained an increase in the rate paid by Sirius XM of almost 40% over the 5-year rate term (2013-2017). 

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Likewise, in previous webcasting rate proceedings, we’ve achieved consistent increases in the webcasting royalty rates, from $0.0008 in 2006 to $0.0023 in 2014, almost tripling the rate in that time.

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The proceeding to set webcasting rates for the next term (2016-2020) has already started. As in the past, we are representing our artist and record label members against a well-funded and vast array of services, including Sirius XM, Pandora, iHeartMedia (formerly known as Clear Channel), and many others.

II. SoundExchange Distributes Royalties with Unprecedented Accuracy and Speed. 

In the more than 10 years since we were created, SoundExchange has distributed more than $2 billion in royalties, and in 2013, we represented approximately 10% of total revenues for the U.S. recorded music industry.  In everything we do, we are guided by the principles of efficiency, transparency and accuracy:

  • Efficiency – We have one of the lowest administrative rates in the industry – if not the lowest.  For 2013, our administrative rate was 4.5% – which covers rate settings, royalty accounting, oversight, enforcement and audits on behalf of all of our members and other activities that labels otherwise might have to undertake themselves.  And we distribute royalties almost as soon as they come in the door:  Earlier this year, we instituted monthly payments for thousands of artists and record labels.

  • Transparency – The way we distribute royalties is spelled out by statute and regulations and we’ve always sought the maximum degree of precision from services that we can get.  We have added more detail to statements over the years and have recently launched online portals so that artists and rights owners can have instant access to their SoundExchange data.

  • Accuracy – We devote substantial resources to registering artists and record labels to ensure that every penny is distributed to its rightful owner, and we continue to dedicate resources to correcting the insufficient data we receive from services.  And we are building a comprehensive sound recording database based on information direct from the source – data that is constantly tested and corrected by those with a direct stake in its accuracy.

III. Artists Receive 50% of the Performance Royalties Paid to SoundExchange Directly and Immediately – Regardless of Recoupment.

When services use the statutory license administered by SoundExchange, artists directly receive 50% of the royalties – even if they don’t own their masters.  Specifically, 45% of the performance royalties are paid directly to featured artists, whether or not they own their masters or are “recouped”.  And SoundExchange pays 5% of all performance royalties to a fund for distribution to non-featured artists.

The ability of artists to participate directly and immediately in this stream of revenue is a core policy of the statutory license – and of SoundExchange.

It’s a matter of public record that, in the past, Sirius XM specifically promised record labels that they could collect the artist share themselves and urged those labels to accept a lower rate as a result. Sirius XM suggested that even if the offered rate was lower than the statutory rate, the record label would nonetheless receive more revenue because it would receive the portion that would otherwise go to the artists.  As the CRB itself noted in 2012, payment of 100% of the royalties directly to the record labels “avoid[s] the statutory apportionment of 50% to record companies and 50% to artists and performers” and “receipt of 100% of the royalties upfront [was] clearly attractive to certain record labels and was a selling point in negotiations with independent record labels.”  (emphasis added).

IV. In the Last Rate-Setting Proceeding for Satellite Radio, Sirius XM Used the Below Market Rates in Its Direct Licenses to Argue that the Royalties for All Rights Owners and Artists Should Go Down.

As in past rate proceedings, we expect that Sirius XM and other digital radio services will attempt to use a handful of direct license agreements as evidence of the webcasting rates that they argue should apply to all artists and record labels.

Indeed, the centerpiece of Sirius XM’s case in the 2012 rate proceeding was the direct licenses it negotiated with some independent record labels at rates below the statutory rate.  The CRB did not place great weight on those deals in part because they represented only a small sliver of the market.  But the CRB did not reject the evidence of those direct licenses entirely, and it is not unlikely that Sirius XM will continue to use its direct licensing efforts in order to develop “evidence” for current and future rate proceedings.

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While rights owners can and should strike whatever deal makes sense for them, they should be fully informed in their decision-making.  The rates that the CRB sets will apply to all copyright owners and are available to all eligible services.  Sirius XM and the other digital radio services are intensely focused on how market evidence will be used in their case, and you should be as well.

Please contact us at 202-640-5858 or info@soundexchange.com if you have any questions at all.