Stifel analyst Blair Levin issued a follow-up report today regarding the CRB royalty decision. The bottom line is that some assumptions made in the first report turned out to not be as negative as the analyst originally thought. Levin had assumed that the publishers would seek a matching rate to Sound Exchange. However, as noted in the testimony during the hearing, the performance rights are typically a multiple of the publishers rights. While the publishers can seek better rates, the precedence that exists indicates that they may be fighting an uphill battle in attempting to do so.

REPORT EXCERPTS

• As we discussed earlier this week, the Copyright Royalty Board has set the royalty rates that XM (XMSR) and Sirius (SIRI) will pay to Sound Exchange as collector of payments to artists and labels. The new rates begin at 6% of gross revenue (with certain exclusions) for 2007 and 2008, increasing to 8% for 2012.

• In addition to these payments to the artists and labels via Sound Exchange, XM and Sirius must pay music publishers through separately negotiated payments to ASCAP, BMI, and SESAC, and there has been some confusion over the relationship between the two payments.

• Although we expect that the publishers will be encouraged by the CRB decision to seek a rate increase, there are some limiting factors to how far they are likely to go, including the likely lower starting rate and the different structure of the negotiations, which we discuss in this note.

This week the Copyright Royalty Board (CRB) released its decision setting the royalty rate that XM and Sirius will pay artists and labels through their collecting agent, Sound Exchange, under a statutory license covering the performance of sound recordings. XM and Sirius will pay 6% of gross revenues (minus certain exclusions) for 2007 and 2008, gradually increasing until they reach 8% for 2012. (For our initial take, see "Copyright Royalty Board Decision LooksIncrementally Negative for XM-Sirius," Dec. 4, 2007.)

In addition to these performance rights payments that are set by the Copyright Royalty Board when the parties can not reach agreement, XM and Sirius must also pay music publishers through separately negotiated payments to three collection agencies, ASCAP, BMI, and SESAC.

Except for rates set by the CRB, royalty payments for both payment streams are confidential. The received wisdom has been that the current total satellite radio payment was approximately 7% of gross revenue, with half going to labels/performers (via Sound Exchange) and half going to the publishers (via ASAP/BMI/SESAC). Thus, if one were to extrapolate this payment structure, it might suggest that the total potential rate for XM and Sirius could ramp up to 16% payment by 2012.

There appear to be several factors in play, however, that should keep the total rate from reaching that point. First, we believe that the actual rate for the publishers may be closer to 2.5% rather than the assumed 3.5%, making the starting point lower. We have heard reports ranging from 2% to 4%. We understand that the terms of the license may not be set as a percentage of revenue, and may vary by collecting organization, but on balance we believe that 2.5%is a more accurate figure.

In addition, the royalty rate for the publishers is not directly tied to the Sound Exchange rate, and they are not automatically entitled to a matching rate. In fact, in a recent decision that may be invoked by XM and Sirius lawyers, the Copyright Royalty Board rejected the publisher rate as a benchmark in the Webcaster royalty rate decision, noting that sound recording rights (collected by Sound Exchange) are generally larger than musical works rights (collected for publishers). Given the different legal standards governing the license terms for Webcasters and satellite radio operators, it is possible that this determination may end up being confined to the Webcaster regime. But it is clear thatthe two rates are established through very different mechanisms.

XM and Sirius negotiate directly with ASCAP, BMI, and SESAC, and in the event of an impasse, they take the disputeto a "rate court" (established as the result of earlier antitrust cases against the collection agencies) which determines whether the rate proposed by the collection agency is "reasonable and nondiscriminatory." XM entered into a five-yearcontract with ASCAP in 2007, and we understand that the licensing fee is close to what it was under the preceding license. We do not know when the BMI license expires, and we believe that Sirius has not renegotiated a long-termcontract with ASCAP or BMI, so it is certainly possible that when those licenses come up for renegotiation, the publishers will invoke the higher rate set by the CRB. However, we would view the rate set by the XM-ASCAP agreement to be a more likely benchmark.

Finally, we note that it appears that the CRB decision excludes a number of sources from the revenue base upon with the royalty rate is calculated. Although the final order will not be published for a few more days while the parties are allowed to review the text to redact confidential information, XM's press release indicates that certain revenue sources are excluded from the gross revenue base used to calculate the license fees, including revenues from "channels or services offered for a separate charge where such channels use only incidental performances of sound recordings,"bad debt, revenue from equipment sales, and data services. To the degree XM and Sirius move toward an à la cartemodel or increase their data service, they should be able to decrease the payment base and thus the effective royalty rate, in our view.

Position - Long Sirius, XM