SoundExchange filed suit against Sirius XM Radio (NASDAQ:SIRI) in the US District Court in Washington, DC "to recover a massive underpayment of digital royalties" for the six-year period from 2007 through 2012. According to the press release issued by SoundExchange,
During this time, the satellite radio company took a number of impermissible deductions and exemptions in calculating its royalty payments to SoundExchange, including deducting for pre-1972 sound recordings and certain channel packages containing music. In addition, SiriusXM failed to pay the legally required fees due for several late payments within the same period. SoundExchange believes SiriusXM's underpayments amounted to $50 to $100 million or more, which it is seeking to recover on behalf of the artists and labels it represents.
It would come as no surprise if Sirius XM had failed to pay the "legally required" late fees. During part of the six year period, Sirius XM was having trouble paying bond holders, so delaying payments to vendors was probably the norm rather than the exception. Having worked with accounting departments, trying to get certain companies to pay their bills on time was always a problem, and it was not unusual to just forget about late payment fees and be thankful we eventually got paid.
And, if Sirius XM, as alleged, underpaid the agreed to royalty payments, I would hope that the company pays up and that the artists involved receive their fair compensation. I also expect that there is a significant disagreement about which portions of Sirius SM revenue should be subject to the royalty payments.
The alleged underpayments are for not paying a percentage of applicable Gross Revenues as that term is defined in the federal regulations. SoundExchange claims Sirius XM devised its own definition of Gross Revenues - a definition that substantially reduced its royalty payments to SoundExchange. Further, SoundExchange claims:
- During the entire period of the agreement, Sirius XM improperly reduced its Gross Revenues by an amount purportedly attributable to performances of sound recordings fixed prior to February 15, 1972
- From October 2008, Sirius XM excluded from its reported Gross Revenues the incremental revenue it received from the difference in price between its standard package (which includes both music and talk channels) and its "Sirius XM Premier" package (which includes all the content in the standard package as well as certain additional all-talk channels), and
- Sirius XM excluded all revenue derived from its Family Friendly and Mostly Music packages even though those packages contained many channels broadcasting recordings covered by the statutory license
Part of the issue revolves around the definition of Gross Revenue. Sirius XM is permitted to exclude:
Channels, programming, products and/or other services offered
for a separate charge where such channels use only incidental
performances of sound recordings; . . . [and]
... Channels, programming, products and/or other services for
which the performance of sound recordings and/or the making of
ephemeral recordings is exempt from any license requirement
Obviously, the term "use only incidental performances" will be an area of contention. Sirius will claim that there are stations for which no fees are due.
Another area concerns the pre-1972 recordings. SoundExchange notes that:
Sirius XM has taken the position that the federal statutory license does not cover pre-1972 sound recordings
SoundExchange claims that there is no provision that permits Sirius XM to exclude these songs from Gross Revenue. The last major area concerns "Premium," "Best of," "Mostly Music" and "Family Friendly" packages where SoundExchange claims Sirius XM has incorrectly excluded the fees from Gross Revenue.
I am all for musicians and artists to be fairly compensated for their works, especially when others are profiting from their use. And with the amounts in question, it may not make too much of a difference to the musicians and recording artists involved.
Regardless of how the suit is decided, it should be of little concern for investors. Ignoring the issue around late payments which should be fairly straight-forward, SoundExchange claims that the underpayments are:
For compensatory damages not less than $50 million and up to $100 million or more in such amounts to be determined at trial arising from Sirius XM's underpayment of royalties as required by the statutory license
and, in addition seeks legal fees. An amount of $50 million - $100 million over a six year period is $8-$17 million/year.
From a bottom line perspective, the amounts in question should have minimal impact on the share price.
Additional disclosure: In addition to my long positions, I have January 2014 $3.50 covered calls written against many of my long positions in Sirius XM. I also trade blocks of Sirius XM on a regular basis and may do so at any time.