Sirius XM’s Lawsuit Settlement Signals The Arrival Of The Inevitable

For some time now, songwriters, artists and labels have lamented the fact that subscription based and free music streaming services have not paid them fairly. The royalty rates for players such as  Sirius XM (NYSE:SIRI) and Pandora (NYSE:P) set by the Copyright Royalty Board have been often regarded as too low by the music industry. There have been several copyright disputes across the industry as well. Most recently, one such copyright lawsuit was settled between Sirius XM and several record companies, with the satellite radio provider agreeing to pay $210 million for broadcasting songs made before 1972. ^[1]

Since the Federal copyright only protected songs made after 1972, players such as Sirius XM and Pandora were not paying royalties for songs launched before 1972. Thanks to the case filed by the Turtles and others, older performers will get royalties in the future. In a recent filing, Sirius XM revealed the agreement with labels that the company will continue to use old songs until 2017 and will strike new licensing deals thereafter. ^[2] Though the settlement amount for the lawsuit isn’t too significant for Sirius XM (5% of total revenues), it is a moral victory for several artists and can even pave the way for others to ask for better payments in terms of royalties.

Our current price estimate for the company stands at $3.82, which is inline with the current market price.

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Increasing royalties paid to artists and songwriters is almost inevitable for music providers. With increasing competition in the market, content on offer will eventually become the main differentiating factor, for which radio and streaming services will have to shed out more money. Though increasing royalties in the future will not threaten Sirius XM’s business as it would Pandora’s, it will be a dent in profits nonetheless.

Just a few days before Sirius XM settled the lawsuit, Apple (NASDAQ:AAPL) had reversed its stance on paying royalties for music during the free trial period for its new service. This was in response to a public threat by recording mega-artist Taylor Swift to withhold her music.  ((With a Tap of Taylor Swift’s Fingers, Apple Retreated, The New York Times, June 22 2015)) Though this will not cost Apple much given its sheer size, it does indicate that artists are finally succeeding in bending royalty agreements in their favor, with or without lawsuits. Internet radio company, Pandora is still fighting hard for its business sustenance. Webcasting IV proceedings are well under way to decide Pandora’s royalty rates after 2015. Given that governing bodies are now favoring artists and songwriters, it will not at all be surprising if Pandora’s royalty rates increase considerably 2016 onwards, forcing it to rethink its business strategy.

If Sirius XM does in fact have to increase its royalty rates in the future, can it offset the rise in expenses by leveraging other avenues? It is likely that in such a case, Sirius XM would be able to pass the potential increase in expenses to its customers in the form of higher subscription fees. However, the satellite radio provider cannot increase the subscription fee beyond a certain point or it will lose customers to Spotify, who is proactively building up its content portfolio. Eventually, the company may have to take a marginal profit hit in order to keep its content several steps ahead of its counterparts. We believe that Sirius XM along with Spotify will be relatively more willing to increase their royalty rates, given that Sirius XM has a business model to support the rise and Spotify appears to have a lot of investor cash. For Pandora, it’s a question of survival and it will try its best to keep increase in royalty rates to a minimum.

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1. Sirius XM Settles Royalty Dispute Over Old Recordings, The New York Times, June 26 2015 [↩]
2. Sirius XM SEC Filing [↩]