Pandora Is Now Over 50% SoundExchange’s Royalty Collections; Implications For Webcasting IV

angus macdonaldLast week, SoundExchange publicly released its Annual Report (Draft) for 2013.  According to the report, SoundExchange’s 2013 collections from all statutory services amounted to $650 million!  This represents a year-over-year increase in SoundExchange’s royalty collections of 29%.  (In 2012, SoundExchange collected $502 million. See SoundExchange’s Draft Annual Report for 2013, p.4.)  Based on its annual growth rate over the past several years (which has averaged over 30%), SoundExchange will easily surpass one billion dollars in annual royalty collections by 2015.

While these numbers are impressive – including a $148 million jump in royalty collections compared with last year – it is important to note that Pandora’s increase in royalty payments to SoundExchange for 2013 (as compared with 2012) accounts for most of that increase, as discussed below.

Pandora now accounts for about one-half of SoundExchange’s total royalty collections.  According to its most recent 10-K filing (from mid-February 2014), Pandora paid 48% of its total revenues to SoundExchange for the last eleven months of 2013.  (See Pandora’s 10-K, p.23: “For the eleven months ended December 31, 2013 we incurred SoundExchange related content acquisition costs representing 48% of our total revenue for that period.”)  Based on the same 10-K filing, Pandora’s total revenues for the last eleven months of 2013 amounted to $600.2 million.  (See Pandora’s 10-K, pp.46, 56, 74. Note:  in 2013, Pandora changed its fiscal year so that its most recent fiscal period was shortened from twelve months to an eleven-month transition period that ended on December 31, 2013.)

Based on the above figures, Pandora paid SoundExchange over $288 million ($600.2 million multiplied by 48%) for eleven months of 2013.  That $288 million figure represents 44.3% of SoundExchange’s total statutory royalty revenues ($650 million) for the entire 2013.  Since Pandora’s figures were based only on eleven months of 2013 and SoundExchange’s figures are based on the full calendar year of 2013, it is easy to conclude that Pandora’s total royalties paid to SoundExchange for the full twelve months of 2013 would have been well over $300 million – roughly $314 million based on the average monthly royalty payments over eleven months.  In other words, Pandora’s royalty payments represent over 50% of SoundExchange’s total royalties collected (and not just for Internet radio services).**  And that percentage has been growing substantially every year.

Pandora’s growing royalty share has important implications for the recently-commenced royalty rate proceeding – known as Webcasting IV – in the Copyright Royalty Board.  This proceeding will determine the Internet radio royalty rates for 2016-2020.  With Pandora’s surging listening hours and royalty payments, SoundExchange (as well as the record labels and artists who split the royalties collected by SoundExchange) needs a robust Pandora as much as Pandora needs a reasonable Pureplay-like rate for the next royalty term.  More broadly, given the record industry’s growing reliance on streaming revenues – which RIAA recently touted to be $1.4 billion in U.S. in 2013, according to its recent report – a healthy and growing Pandora is necessary for the stability and growth of the industry.

There are several other interesting facts from this year’s Annual Report by SoundExchange.  One of the most significant statements is that, in 2013, SoundExchange “released unclaimed funds for distribution years prior to 2009.”  SoundExchange had never previously released any of its allocated but undistributed royalties, other than a small release in 2007 “used to repay some start up costs of SoundExchange” (see p.6 of the Annual Report for 2007).  Its recent release of undistributed royalties certainly was a significant amount.  (Indeed, according to some reports that cite SoundExchange’s IRS Form 990 disclosure for 2010, SoundExchange had been sitting on over $200 million in unclaimed royalties through 2009.)

The omissions in this year’s Annual Report are particularly noteworthy.  In all of its previous annual reports, SoundExchange included discussions regarding its “Administrative Expenses,” “Administrative Rate,” headcount, and other details.  In this year’s report, those sections have been excluded.  And, arguably, the most important item in the report – the total statutory royalties collected by SoundExchange – was relegated to a footnote at the end of this year’s Annual Report.  Hopefully, future reports by SoundExchange will disclose more details than what is disclosed in this year’s report.

**SoundExchange collects statutory royalties from many different types of services – including noninteractive Internet radio (Pandora, etc.), satellite (Sirius XM), cable subscription services (Music Choice), and business establishment services (Muzak & DMX).  In terms of statutory royalties, SoundExchange collected $650 million in 2013.  SoundExchange collected an additional $6 million  Therefore, if you look only at SoundExchange’s Internet radio revenues, which are not separately broken out in SoundExchange’s Annual Report, Pandora’s royalty payments would clearly represent well over 75% of royalties paid to SoundExchange by all Internet radio services.

Angus MacDonald is an intellectual property attorney who has litigated copyright matters in the Copyright Royalty Board and in various federal courts in the U.S.  Currently, Mr. MacDonald handles copyright and trademark matters for the University of California system.  The views expressed in this article are solely Mr. MacDonald’s and should not be attributed to his employer or clients.

Angus MacDonald

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