Sirius XM: Wait On Legal Battle Resolution

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Sirius XM Radio (NASDAQ: SIRI) is making headlines lately and for a very big reason. The company has filed a lawsuit against Sound Exchange and American Association of Independent Music (“A2IM”) for interference with its ability to secure copyrights critical to its success and continuation. The news is not to be taken lightly, as it represents a large step for the company in its procedures in obtaining these copyrights and artist licenses.

Sound Exchange is a one-of-a-kind organization that collects statuary royalties for artists. The non-profit organization was appointed by The Copyright Royalty Board (who, in turn, was appointed by The Library of Congress) as the sole entity in the US to handle these distributions. Its main objective is to collect the rights for these artists for their play on internet radio channels, cable TV music channels, and satellite radio for which the organization’s website singles out Sirius XM as an example. It works under a limited antitrust exemption, which gives it special rights in negotiation and litigation dealings.

Sirius has charged the organization with an illegal interference specifically for its supposed orchestration of a Sirius-based boycott with independent record labels. Essentially, Sound Exchange wishes to become the full licensing agent for these labels and thus have Sirius contract through them a larger scale model of the current situation. Sirius, on the other hand, wants to have the freedom to approach these labels and work out a deal leaving Sound Exchange to simply handle the collecting responsibilities.

Sound Exchange puts itself in a particularly precarious situation. Sirius currently provides a huge chunk of its revenue, $200 million last year alone. It risks complete alienation and scorn from its largest client. Sirius risks angering its future business partner, because a Sound Exchange victory in the courtrooms locks them together for some time when it comes to obtaining artist rights.

As it often is the case, it’s easy to see the logic from both sides. Sirius feels it should be able to go in and negotiate for its licensing rights in a free and open market. Sound Exchange, charged with the protection of these labels, feels its need to protect them from exploitation and regulate an industry that faces copyright issues on a daily basis from illegal downloading and streaming. Sound Exchange may have gone too far in organizing a boycott, which it did allegedly through press releases, mailings and other postings. And, on the other hand, Sirius may be going to far in its lawsuit, in which it calls for the dissolution of Sound Exchange.

It should be pointed out that Sirius fights for itself, but it also will be working in the courtroom for its industry, and thus, its competitors. Other radio platforms, like giant Pandora (NYSE: P), will benefit from a Sirius win, and continue its status quo should Sirius lose (and have to pay out courtroom fees). Other competitors like traditional radio’s Saga Communications (NYSEMKT: SGA), stand to benefit from the change in licensing procedure as well, which could be a helpful hand to the struggling AM/FM industry. Truly, the outcome of the lawsuit will set a new standard in the negotiations for licensing agreements for years to come.

 

The news comes at an unfortunate time for Sirius, as it overshadows some recent moves that company has made. One, for instance, is its new multi-year agreement with MLB.com for exclusive rights to baseball broadcasts. Sirius subscribers will now have access to all major league broadcasts, which could be a huge selling point for relocated fans. Now, fans in Los Angeles can listen to Yankees’ games through their smart phones, mobile devices or online with a subscription for Sirius’ service.

 

On the same page, though, the news of the lawsuit also covers up some recent bad press Sirius has been given. Just last week, Forbes named Sirius CEO Mel Karmazin as one of the worst CEOs among Fortune 500 companies. The publication’s rationale involved Karmazin taking an enormous CEO salary while his company’s stock price has fallen from near $9 to just over $2 per share. Certainly not anything long-term investors would like to be reminded of, even if his performance has been defended from other analysts.

 

So, yes, Sirius’s legal matters have dominated its recent news headlines ¾ for better or for worse. Investors should hope that the lawsuit ends soon and smoothly, with the hope that a judge hears Sirius’ call for a free and open market in which to conduct its licensing business. Though there a few things to consider:

 

For one, speed is just not the reality with lawsuits. There’s always the possibility of the sides settling out of any courtroom ¾ but the issue is bigger than a monetary settlement or the two sides shaking hands and forgetting about it. With the entire online radio community watching, the outcome of the Sirius/Sound Exchange lawsuit will have lasting effects.

 

On a stock-related front, these effects may not have anything to do with its stock price. Think of it this way ¾ a win for Sirius doesn’t allow them to collect anything (aside from court fees), but rather open the door for its smaller competitors to have an easier time licensing rights. Some suggest it may be in Sirius best interest to keep Sound Exchange as the middleman, since its larger purse allows it pay off both that middleman and the artist.

 

With a win for Sirius possibly being months or years away, I simply cannot get behind its stock seeing much growth for the time being. Sirius’ resources will be tied up in the impending legal battle and the company may not want to make any big moves if a courtroom loss looms in the possible future. So, I have to say stay away from Sirius if you can’t be patient. However, if you’re willing to wait, a courtroom victory could cut out quite a bit of costs for Sirius, and give it some capital to expand its operation, which is always an encouraging possibility. 


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