Sirius Will Shoot Higher On Sound Exchange Lawsuit Victory
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Song royalties from Sirius XM (NASDAQ: SIRI) now account for over half of the SoundExchange’s earnings, Angus MacDonald, an attorney for the Live365 internet radio network, told Digital Music News. MacDonald said he estimated that Sirius is now paying around 53% of all the royalty payments that the Sound Exchange is receiving.
MacDonald also thinks that this could give Sirius effective veto power over the decisions that the SoundExchange makes. The SoundExchange is a music industry group that licenses tunes to digital music providers. Digital networks and other electronic entertainment providers that want to legally play hit music have to pay the Sound Exchange. SoundExchange was set up by the U.S. Copyright Office in 2000 to ensure that artists and others get paid for digital play of their music.
The attorney told Digital Music News that he got his figures from court documents that Sirius had filed with its antitrust suit against the SoundExchange and the American Association of Independent Music last month. The documents indicate that Sirius paid around $200 million in royalties to the SoundExchange last year, MacDonald claimed. This figure is higher than the $150 million in royalties that the New York Times estimated Sirius was paying for songs last year.
If true, that would give Sirius XM a lot of leverage over the Sound Exchange because the organization’s total revenues are $371,922,621, according to MacDonald. It is also easy to see why Sirius is suing the SoundExchange. It is costing the company a lot of money.
Sirius has tried to get around the SoundExchange by making direct licensing deals with record companies in the past. In its suit, Sirius contends that music companies, SoundExchange, and others are engaged in an industry-wide conspiracy to drive up the prices that it has to pay for music. Musicians and others have opposed direct licensing deals because they think it would cut into their royalties.
The New York Times reports that Sirius’s suit could have a good chance of succeeding. DMX, a company that provides background music to businesses, has won the right to make its own deals with music companies in lawsuits. If Sirius could win its lawsuit, it would have a good chance of being able to make deals with record labels or even major artists themselves, which could enable it to get better prices for hit songs.
MacDonald’s revelations shed light on Sirius’s music royalty payments, which until now, have been hidden in the shadows, according to Digital Music News. MacDonald admitted that before he saw the court documents, he thought a portion of Sirius’s royalties were being directed to big music companies. Now he apparently thinks almost all of them are going directly to the SoundExchange.
Pandora Revealed as One of Sirius’s Biggest Competitors
MacDonald’s revelations also indicate that Pandora (NYSE: P), the internet radio company, is one of Sirius’s biggest competitors. He estimates that Pandora now accounts for 37% of the SoundExchange’s music royalty payments or around $136,346,980. Pandora and Sirius are both copyright licensees, and therefore pay music copyright royalties to SoundExchange. In turn, participating music labels receive their share of royalty payments from SoundExchange.
Given the "buying power" that Pandora and Sirius hold over SoundExchange, the two companies could be in a position to force the music industry and SoundExchange govern down royalty rates or agree to other less favorable terms. It also means that Sirius could have quite a bit of leverage over the exchange to deal directly with music labels, particularly if it were to win the antitrust lawsuit.
The data also indicates that Pandora is seriously competing with Sirius. It would not be paying out those huge royalty payments if it were not attracting a huge number of listeners. Pandora has a huge advantage over Sirius because it doesn’t have to manufacture or sell equipment.
All you need to get Pandora is an internet connection; just go to Pandora and type in the song you want. Then you can listen to it or download it directly to your iPod, MP3 player, or other device. Since all Pandora is paying is the royalties, its profits would seemingly be higher than Sirius.
MacDonald isn’t the only one who has noticed Pandora’s success. Last year, Dish Network CEO Joseph Clayton named Pandora as one of several companies that he and his boss Charlie Ergen were interested in buying. Ergen and Liberty Media’s (NASDAQ: STRZA) John Malone competed to buy a stake in Sirius in 2009.
Internet Rumor: Liberty already Owns 50% of Sirius
Liberty Media has responded to Sirius’s challenge in its attempt to take control of the satellite radio network. Liberty is to take over Sirius, but it needs permission from the FCC to complete that move. Sirius’s current management team filed a petition challenging Liberty’s move in an effort to stop that takeover attempt on March 28. Now Liberty has responded to Sirius’s challenge.
Seeking Alpha reported that Liberty is actually trying to take over Sirius’s licenses. The website also makes the interesting claim that Liberty may already own 50% of Sirius XM, so it already has control of the company. It simply lacks the legal right to take ownership of the licenses.
It is known that Liberty owns around 40% of Sirius and part of its debt as well. An anonymous post at Seeking Alpha makes the claim that Liberty may already own another 10% of Sirius, which would give the media giant control or at least ownership. Liberty’s owner billionaire John Malone was given a 40% stake in Sirius in 2009 when he bailed the radio network out.
It should be noted here that Seeking Alpha does not present any evidence to prove these contentions beyond an unnamed reviewer’s opinions about Liberty’s FCC filings. Therefore, these claims should be viewed with skepticism until some evidence verifying them actually turns up. Another possibility is that Liberty is planning to buy up the percentage Sirius needs to get control if it gets permission from the FCC.
Underpaid Karmazin gets $9.2 Million Bonus
It is also easy to see why Sirius’s present management team is fighting Liberty’s takeover bid so hard. An article in the Hollywood Reporter noted that Mel Karmazin just received a pay raise of 8%. That means he made around $10.7 million in 2011. In the past, Karmazin has told reporters that he is grossly underpaid for a CEO.
Citing SEC filings as his source the Reporter’s Paul Bond concluded that Karmazin received $1.5 million in salary and a $9.2 million bonus in 2011. That casts some doubt on Mr. Karmazin’s claims of being underpaid, although his salary seems to be rather low for a CEO’s. Bond did note that Karmazin’s pay raise did mirror the rise in the number of Sirius subscribers in 2011, which was around 8%.
Interestingly enough, Karmazin is not the highest paid executive at Sirius. The same Reporter article noted that CFO David Frear took home $20.8 million in 2011. That was a $17.4 million increase over the $3.4 million he earned in 2010. The pay increase resulted from $18.9 million in stock options that Frear received.
Live 365 could Sue Pandora and Sirius XM
Live365 is a smaller radio network that operates much like Pandora. It allows users to download tunes via MP3 and create their own radio stations by purchasing a DJ membership. Unlike Pandora, Live365 is not publicly traded.
It is interesting to note that Angus MacDonald, a man identified as Live365’s lawyer, is scrutinizing court documents about SoundExchange, Pandora, and Sirius. I have to wonder why 365’s lawyer would be looking at those documents.
We could speculate that Live 365 is planning an antitrust lawsuit of its own. There is no actual evidence that the company is planning such an action. Nor is there any indication what the target of that possible suit could be. It could be SoundExchange, Sirius, or even Pandora. If Sirius and Pandora really do have 90% of the market, Live 365 would seem to have a good case for an antitrust action.
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