Well, well. Last fall, we discussed how Sirius XM was aiming to cut out SoundExchange
and try to do deals directly with labels for performance rights. There's some history here. SoundExchange was set up and spun out of the RIAA specifically to collect performance royalties from Sirius XM and emerging internet streaming offerings. Radio doesn't pay performance rights to musicians (they just pay mechanicals to songwriters/publishers), and while the RIAA has wanted that to change for years, it used the "newness" of satellite and the internet to suddenly claim that this extra tax must be paid there, and then set up SoundExchange to collect it. The "rate" was a statutory rate set by the Copyright Royalty Board (CRB), which involved a huge
fight, with SoundExchange basically demanding a significant cut of everyone's revenue. The CRB eventually agreed to a sliding rate starting at 6% and moving up to 8% over time -- much, much lower than what SoundExchange wanted (there was an even more intense fight over internet rates, but that is a separate issue).
Even with this "lower" rate, Sirius XM provides a huge chunk of SoundExchange's revenue -- around $200 million last year alone. Realizing that the deal that set up SoundExchange noted that it was "nonexclusive," Sirius sought to cut SoundExchange out of the loop and go direct to labels. Obviously, Sirius's goal is to pay less in royalties, and that led some to wonder why a label would want to do it, since the royalty rate would be lower. Except, it's a little more complex than that.
Sirius notes that in cutting out the middleman, you avoid SoundExchange's (hefty) administrative fee, as well as its notoriously opaque
payment process which has left many labels scratching their heads. SoundExchange provides little information as to why artists get paid what they're paid, leaving open significant concerns that the money is not being accounted for properly. Similarly, SoundExchange has been notorious for having "difficulty" finding artists
-- though I will say that they've definitely been improving a lot on that front, and really have made a huge effort to reach out to artists. Still, there certainly could be benefits for labels to go direct. Cutting out the middleman, having more relevant and accurate data, as well as more timely payments could certainly be worth it. In fact, Jeff Price at TuneCore explained how indie artists who were their own labels would almost certainly benefit
by going direct.
However, the wider industry flipped out and closed ranks, with SoundExchange, the RIAA and A2IM (like the RIAA but for indie labels) all urging labels not to have anything to do with direct deals. Sirius XM looked at all of this and saw a clear antitrust violation as it certainly feels like the entire industry colluding against it. To that end, it has sued SoundExchange and A2IM for antitrust violations
-- and even gone so far as to ask for SoundExchange to be "dissolved and unwound." While the actions of other music industry trade groups -- including the RIAA, NARAS, AFRTA and AFM -- are mentioned in the lawsuit, they are not listed as defendants (yet). The focus is very much on SoundExchange and A2IM, whose boss, Rich Bengloff, sits on the board of SoundExchange (along with a bunch of RIAA folks).
In the filing (embedded below), Sirius reports on multiple attempts it made to sign deals with indie labels, in which it was repeatedly rebuffed with claims about how Rich or A2IM had urged them not to do direct deals.
For example, Sirius XM's direct license outreach to independent label Bandit
Records was short-circuited when a representative of Bandit Records told Sirius XM that
"[w]e're members of A21M and Merlin. I think that prevents a direct license." Upon
information and belief, one or both Defendants communicated with Bandit Records (or through
its representative Merlin Network) and pressured them to refuse a direct license.
O. Sirius XM's effort to engage in direct license discussions with independent label
Unitedlnterests was similarly derailed when, on August 30, 2011, a representative of
Unitedlnterests wrote: "I heard that XM was making these requests. I will look at the license,
but will also confer with A2IM and other indies." Upon information and belief,
UnitedInterests pursued those discussions and therefore agreed with A2IM and/or other record
companies not to enter into a direct license.
Sirius XM's approach to independent label CA Management was stopped in its
tracks when, on October 27, 2011, a representative of CA Management told Sirius XM that he
was "getting mixed reviews about the best way to handle" the direct license offer. Several weeks
later, on November 15, 2011, he told Sirius XM that "the RIAA has asked everyone to hold off."
CA Management never entered into a direct license with Sirius XM because, upon
information and belief, after CA Management communicated with RIAA, it agreed to participate
in the industry boycott.
There are more, similar, examples in the filing. There's also a discussion of some indie labels who did
sign on, but then backed out, claiming pressure from A2IM. From the filing:
Defendants' unlawful efforts have also extended to extracting agreements from
labels that have already signed direct licenses to attempt to back out of them. By way of
example. on November 28. 2011. Sirius XM entered into a direct license with Paracadute, TMB
Productions, Michael Doughtv. and Michael Viola. On February 9, 2012, Paracadute and TMB
Productions requested that they be released from the deal. Surprised by this request, Sirius XM's
agent asked Darren Paltrowitz, the person with whom they had negotiated the deal, for an
explanation. Mr. Paltrowitz's, response was an e-mail with talking points strikingly similar to the
Defendants' press release, which Mr. Paltrowitz indicated were supplied by the bands' business
manager. That business manager is Perry Resnick, an artist manager with RZO LLC, and a longtime member of the SoundExchange Board. After further discussions, on February 22, 2012,
Mr. Paltrowitz wrote that he "relayed [Sirius XM's] feedback to RZO, and they -- per
conversations with A2IM and other folks beyond SoundExehange -- stand their ground about
wanting us to opt out" of the direct license. That same day. Mr. Paltrowity cut and pasted an email
he received from Mr. Resinick that stated: "I know for a fact that Rich Bengloff, the head of
A2IM ... is against this. Rich and I have had this exact conversation, and are both in
agreement that SoundExchange is the better way to go."
Of course, there are a few reasons why
SoundExchange and its board members would be so against this. As noted earlier, they still think that the royalty rates should be much higher, and have indicated multiple times that in the next round of ratesetting at the CRB, they are going to push for royalty rates double to triple of what Sirius XM is already paying. That's certainly part of why Sirius would like to cut them out of the picture. But, as some have noted, doing direct deals outside of SoundExchange doesn't just let Sirius avoid whatever crazy rates the judges at the CRB choose out of thin air, but it allows them to argue that the actual market rate
is lower. You see... the way the CRB works is that it's supposed to try to set a statutory rate that is effectively what the market would choose on its own. Historically, since there were no market-based deals
, it had nothing concrete to base its decision on, other than what SoundExchange or Sirius told the judges. However, if Sirius is able to cut direct deals (and do them at an even lower
rate) then when the CRB hearing comes around, Sirius now has empirical evidence of a lower market rate. That's a pretty big deal.
Honestly, I'm not sure either side in this fight comes out looking good. It's really just a fight about who pays how much, and who gets a cut. This is the kind of messy thing that happens when a clueless Congress decides that a clueless judicial board should magically "set rates" based on nothing in particular. Sirius XM is hardly an angel in this fight, but based on some of the quotes in the filing, there may be something of a case here -- though proving full on antitrust violations are not easy.
The real issue, it seems, is that groups like A2IM are supposed to represent the industry, but are not
supposed to be a central point of collusion for the industry, driving policy decisions back to the labels. That's coordinated effort among competitors that could very well cross the line. The close-knit nature of the SoundExchange board makes all of this even more complicated (and again raises serious questions why Congress ever allowed SoundExchange to be birthed from the RIAA, rather than being truly independent in the first place). I can't image a court would actually dissolve SoundExchange, but if it turns out that this lawsuit has legs, things could get very, very messy in the industry (and it certainly could shake up A2IM in a big way as well). This is one worth paying attention to.