Earlier this month Sirius XM CEO Mel Karmazin crowed that “things have been great” at the satellite radio company. Its stock is up 23% so far in 2012 and “our free cash flow is growing, it’s extraordinary,” he told CNBC’s Jim Cramer. But Sirius sings a different tune in a new lawsuit that accuses SoundExchange — a clearinghouse authorized by Congress to handle music artists’ royalty payments — and the American Association of Independent Music, a trade group, of leading an “industrywide conspiracy” to raise the fees Sirius pays to air recorded music. The groups’ “unlawful conduct” has “significantly raised Sirius XM’s costs, (and) threatened the viability of its business model in a highly competitive and technologically volatile sector of the entertainment market,” it just told the U.S. District Court in New York. Last year the company spent nearly $200M for royalties to play recordings on the 71 of its more than 135 channels that feature commercial-free music. The fees were set by the government’s Copyright Royalty Board (CRB) in a license that expires this year. Sirius says that SoundExchange has asked CRB to more than double its rates — to a maximum of 20% of the satellite radio company’s gross revenues — for a new license that would run through 2017. Although Sirius acknowledges that it’s growing, it “is far from recovering the enormous capital investment (to build the service) and is just at the point where it it beginning to earn a small profit on its investment.”
Usually about 45% of royalties go to SoundExchange to pay artists, while 5% goes to music unions (typically to pay session musicians), and the remaining half goes to record labels. The satellite radio company hoped to avoid a big new royalty expense with a controversial plan to make all royalty payments to the record companies. It has 80 deals but with relatively minor players, and none of the four major music companies that account for as much as 65% of Sirius’ music plays. “This was no coincidence,” the suit says although “the full extent of Defendants’ conspiratorial acts, many of which will have occurred in private communications and behind closed doors, is not presently known.” The company says SoundExchange and the trade group violated laws designed to promote competition, and prevent restraint of trade. It wants three times its unspecified damages, and to have SoundExchange either dissolved or monitored to comply with antitrust laws.
SoundExchange says it didn’t do anything wrong. “It should not go unnoticed that Sirius XM chose to file this meritless complaint less than three weeks before our trial is set to begin before the Copyright Royalty Judges – the trial in which Sirius XM is advocating for a decrease in digital performance rates that it pays creators of music, despite its unprecedented financial success and annual revenues in the billions of dollars. We are proud of what we do as an organization and we remain committed to making sure recording artists and record labels receive the compensation they deserve.”