Legal Issues

XM Satellite Radio announced today that they have settled their suit with Warner Music Group. Warner joins Universal who settled the suit last week. Terms of the settlements have not been disclosed for either suit, however, the the fact that a settlement has been reached is positive news that helps remove a cloud that has been over XM’s head for quite some time.

Universal and Warner represent two big names in the suit, and should pave the way for an outright settlement across the board with the record labels. The deals being reached cover existing as well as future devices.

[via Yahoo Biz]

XM satellite Radio announced today that they have settled with one of the recording labels on their lawsuit surrounding XM’s portable Inno device. The suit, which came as a result of some recording features on the Inno has been ongoing for quite some time. While the news of a settlement with UMG is positive, there are still other recording industry parties that have not yet reached an agreement with XM.

Universal Chairman and CEO Doug Morris stated, “We are pleased to have resolved this situation in an amicable manner” adding, “We pride ourselves on empowering new technology and expanding consumer choice. And XM is providing a new and exciting opportunity for music lovers around the world to discover and enjoy our content, while at the same time recognizing the intrinsic value of music to their business and the need to respect the rights of content owners.”

Nate Davis, XM’s President and CEO applauded the settlement saying, “Our agreement is a win for everyone involved, especially for consumers”, and “Today’s announcement underscores the fact that XM competes in an audio entertainment market in which consumers have more options than ever. We commend UMG for being the first music company to take this step forward with us and look forward to continuing our discussions with our other partners in the music industry.”

The lawsuit over the Inno has been a damper on XM’s stock for quite some time, and even hampered XM’s ability to launch newer recordable devices as capable as the Inno. Terms of the settlement have not been disclosed, so it is unclear whether the Inno device will still be capable of doing all of the features that brought the suit.

Likely, with Universal stepping up to the plate, other record labels will follow suit. Sirius, for their part, has agreements with the record labels.

Position – Long Sirius, XM

Robert Peck of Bear Stearns issued a note today relating to the pending Copyright Royalty Board (CRB) decision for satellite radio royalty rates. The board had the arguments outlined earlier this quarter, and a decision is expected prior to the end of the year.

Peck expects 10% of revenue to be tagged for royalties, but acknowledges the possibility that that figure may be based on a subset of revenue that is specific to music programming, and not other content such as talk radio and sports.

Continue Reading »

As the merger process has evolved over the last 10 months, the NAB seems to be taking a new tact. Early in the process, the main spokesman seemed to be David Rehr, the President and CEO of the NAB. Rehr testified in congressional hearings and was quite vocal regarding the merger in the early months. Many of Rehr’s statements have been used to counter his own arguments, and Rehr became a virtual lighting rod for the angst of merger supporters.

For the past couple of months though, the NAB seems to have rolled out Executive Vice President Dennis Wharton as the lead spokesman in merger matters. Even as the latest folly regarding the form letter campaign, it was Wharton who took the call and not Rehr.

This leads one to ask why? Why has Rehr taken a back seat on this issue? Did he lose credibility with mischaracterizing the sentiment of senators, or was it the mischaracterization of Toyota that drove Rehr behind the curtain? Perhaps it was differing stances depending on whether he was talking about the Sirius and XM merger, or the desired consolidation of in media. Perhaps it was tied to the comments relating to the competitive landscape where he stated that satellite competes with terrestrial, but terrestrial does not compete with satellite. Did these issues marginalize the stature of David Rehr? Is this what necessitated Wharton to take on a larger role?

Continue Reading »

Traditional radio broadcasters have seen their world change substantially in the past five years. The introduction of satellite radio, iPods, MP3 players, Internet radio and cell phones capable of delivering audio content have stormed onto the scene and brought new challenges to an industry that was status quo for decades.

One distinct advantage traditional radio has enjoyed for many years is the fact that they pay no royalty for the music that they broadcast. The theory has been that the radio stations offer promotional value to the music industry, and that Record sales would increase due to that exposure. That theory has recently come under fire by the record labels, who in the face of all of the audio entertainment outlets have seen record sales tumble. Because of this, the recording industry is now seeking royalties from traditional radio.

The issue is contentious. Newer media outlets such as Internet radio and satellite radio pay royalties. One has to ask why these newer mediums are not receiving the same treatment, and allowed royalty free broadcasts. Also at the heart of this issue are the performers, who have long seen very small residuals (if any), from their performance of songs. In most cases, it is the writer who gets the larger checks, and performers who did not pen their own music get very little.

The National Association of Broadcasters has been fighting RIAA backed legislation that would bring royalties for traditional radio stations. Yesterday the NAB announced that 26 new members of the House of Representatives have joined the original 51 members who oppose the RIAA backed legislation. All 76 members have added their name to a Resolution.

The RIAA is in the midst of scrambling to find a way to recoup money in lost record sales. In many ways, both traditional radio and the RIAA themselves were simply not fast enough to see the speed at which emerging technologies would come to the market, and the broad acceptance of consumers for alternative methods of audio entertainment.

For followers of the satellite radio sector, the final arguments have been made to set satellite radio royalty rates. The decision rests in the hands of the panel that heard the case. That decision is expected by years end. The many moving parts of this issue can carry lasting impacts on how consumers get audio entertainment.

Position – Long Sirius, XM

Mention the RIAA or the record industry to a satellite radio investor, and thoughts of the RIAA suit with XM come directly to mind. The RIAA is seeking billions from XM in a lawsuit over recording capabilities of the Inno and Helix. Most casual observers seemed to feel that the RIAA was simply seeking too much in their lawsuit, and likely felt some reasonable settlement could be reached.

Today, record companies won a major court case that may give satellite radio investors some pause. According to the Associated Press, the RIAA won a $220,000 judgement against Jammie Thomas of Minnesota for the illegal sharing of 24 songs which she downloaded from a Kazaa file sharing account. The suit alleged that she shared over 1,000 songs, but limited their suit to 24 songs.

Copyright law sets a specific range for damages ($750 to $30,000 per infringement). In cases where the violation is deemed willful, the penalty can be up to $150,000 per infringement. In the XM suit the RIAA is categorizing XM’s activities as willful, and is seeking $150,000 per song downloaded to an Inno or Helix. The RIAA has likely taken this tact with XM because even after failed negotiations on the device, XM still went to market with it.

As if the lawsuit was not bad enough on it’s own, it has also stifled XM’s ability to promote and update their wearable line. Each sale of an Inno or Helix brings with it a potential liability if the suit is lost. Consumers who purchase Inno’s and Helix’s are not being sued by the RIAA.

Sirius Satellite Radio came to an agreement with the RIAA for their wearable products, and no law suits have been filed against Sirius. The XM/RIAA suit centers around specific capabilities that the Inno and Helix have such as artist/song seek and the ability to save songs without having heard them as they were originally broadcast. Likely, there have been ongoing discussions between XM and the RIAA to come to a settlement on the case. How these negotiations play out with a merger are unknown. The RIAA and the satellite radio companies are also in the midst of mediation regarding royalty rates going forward.

Position – Long Sirius, Long XM

While the proposed satellite radio merger of Sirius and XM has been a major focus of terrestrial radio, a bigger storm has been brewing, and looks to be coming to a head. ROYALTIES. California legislator Howard Berman is proposing that the 7 decade exemption that radio has had regarding performance royalties should come to an end. This legislation is estimated to have an impact of billions of dollars per year in royalties, and would directly impact the bottom line of station owners regardless of the quality of their programming.

Berman’s legislation would require that radio stations pay performance royalties going forward. The legislation is backed by the RIAA. The bill has certain concessions that would offer discounts to small radio operations, and religious programming. The National Association of Broadcasters calls the bill a “Billion Dollar Bail-Out of Foreign Owned Record Labels With A Tax On Americas Home Town Radio Stations” , and state that they will fight the legislation aggressively.

This year, the NAB seems to have a lot on their plate. The Sirius and XM merger, the Media Ownership Hearings, Royalties, and several other issues. This type of concentrated activity has the organization spreading out lobby power as well as budgets as they try to fight several battles on several fronts. The main question that needs to be asked is whether or not they can effectively lobby on ALL of their issues, or whether they would be better served to concentrate more on one or two of these issues.

Position – Long Sirius, Long XM

Sirius and XM are in the midst of mediation with the Copyright Royalty Board. The current deal in which Sirius and XM pay a percentage of revenue has expired, and the parties could not come to agreement on how royalties would be handled going forward.

This situation is being closely watched by many, as there are many issues that need to be considered now that simply did not exist less than 10 years ago. For the purpose of this mediation, Sirius and XM are negotiating on one singular front.

The current rate, and estimated by many is between 4.5% and 7% of revenue. In the first round of negotiations Sirius and XM proposed a figure of less than 1% (0.89%), while the CRB was seeking a tiered system starting at 8% and capping off at 23% over time. Obviously the two groups were not seeing eye to eye, and thus the mediation.

In the latest proposal, Sirius and XM turned the debate on it’s ear by proposing a flat rate per performance of $1.20. This number would rise over time as subscriber targets are met, and the audience is larger.

What Sirius and XM have on their side is that they are seeking a solution that ties to the music, and not all revenue. Why should CRB get a portion of revenue derived from the NFL, MLB, Howard Stern, or Oprah? In point of fact they shouldn’t. The safety net for Sirius and XM is that they can control their royalty expenditures by either airing songs or not airing songs. The more they play, the more they pay…the less they play, the less they pay.

So what does this $1.20 per performance boil down to? Well, if we assume 15 songs per hour played on 65 channels, 24 hours per day, and 365 days per year we arrive at $10,249,200 per year from Sirius as well as XM. It is not the unique songs that come into play, but rater any performance of a song.

Reasonable thinking tells you that it is perfectly fine to get paid on an artists performance, but not so right to get paid on the work of someone else such as a talk show host. This new methodology seems far more logical, no matter what the “per performance” rate ends up being. Artists and performers get paid for their work only, and not the work of other non musical talent. Good music will be played, and the reward comes in the form of a check each time a song is played.

There are protections for each party in place with this type of proposal. As the subscriber base grows (the audience), the amount per performance grows. If music is not cutting it, Sirius and XM can trim back. The key is that they are paying for what they are using.

Position – Long Sirius, Long XM