With the announcement that Sirius XM (SIRI) is filing antitrust claims against the likes of Sound Exchange and A2IM, the company has drawn a line in the sand regarding royalties. While consumers and investors may see this move as a bold one, it has been a long time coming. In actuality, ever since the Royalty board established current rates the entire industry has been active in skirmishes that cross over into terrestrial radio, mobile rights, artist rights, performance rights and of course the rights of the labels. This swirling tornado of stances and rights has been building and building.
While the merits of the lawsuit can certainly be debated, it is the impact of the suit that investors may want to look more closely at. In fact, some of the impacts have already happened.
Sirius XM's Neutered Lynx and Stifled Satellite Radio 2.0
Late last year Sirius XM's CEO Mel Karmazin began speaking about Satellite Radio 2.0. It promised additional channels, features and products. One key to Satellite Radio 2.0 was the Internet side of the business. Sirius XM, in order to match the capabilities of services like Pandora (P), Slacker, MOG and Spotify, needed to delve into the web based delivery system more than ever before.
It is widely known that royalties for streaming music on the Internet are more expensive than streaming them over satellite. While this may seem odd, it is what it is, and we simply had to get used to it.
Mel Karmazin had also announced about a year ago that the company was working toward direct deals with the record labels. By cutting a direct deal Sirius XM could add additional capabilities to its services and do some things that they cannot do under the current deal. This is exactly why the new Satellite radio 2.0 product, the Lynx, is so neutered. Sirius XM released in the time-frame promised, but did so without the freedom to make the capabilities of the radio what they really wanted to give consumers. The neutered Lynx exists because Sirius XM has been unable to cut the direct deals they want with record labels. With this lawsuit it may well mean that a watered down retail product will be with us for quite some time. This is something that investors need to consider.
Early this year Karmazin promised "Personalized Radio." The concept of personalized radio is a gray area. Services like Pandora personalize, but do so by learning your listening habits and then selecting songs for you to listen to. True personalization comes more from a service like Spotify, where you can listen to exactly what you want as often as you want. The difference between Pandora and Spotify is that Spotify has direct deals with the labels, exactly what Sirius XM is trying to do.
Prior to Spotify Sirius XM simply needed to match the capabilities of Pandora to have a shot at getting to the top of Internet streaming. The launch of Spotify in the United States last year threw a wrinkle into the works. Now a well branded company, Spotify, was on the scene. Sirius XM has to now up the ante in order to offer up true personalization. Essentially Spotify has something Sirius XM wants.
With litigation now on the table, it could be quite some time before the issue is resolved. Investors need to consider this.
The MOG Effect
Ironically there is another company that has direct deals in much the same way Spotify does. That company is MOG. This is where things get interesting and is yet another reason that I preach that investors should follow the entire audio entertainment sector.
Mel Karmazin has discussed what Sirius XM can do with its cash many times. One option that he dismisses is acquisitions. Karmazin simply states that there is nothing out there that he would be interested in acquiring.
While Mel expressed little interest in anything out there, he may have passed by a smaller Internet Radio company called MOG. Last week it was reported the Beats may have acquired MOG. The price is unknown, but perhaps part of the value of MOG to Sirius XM would have been the deals they have in place with record labels. Obviously these deals have been difficult to obtain given that Sirius XM has had little success in the past year getting similar deals in place. MOG is now off the market, and Spotify is too big. That means the company has little left to do but file a lawsuit.
The Positives
Sirius XM has taken a bold stance. They are bringing the royalty issue to a head, and may be able to force all sides to the table to iron out royalty rates that allow audio entertainment companies to thrive alongside the labels.
Should Sirius XM be successful in its quest to sign direct deals, they will be able to make the offerings that they want to. This will enable the service to go to the next level.
Lower royalty rates will be beneficial to the bottom line and investors.
The Negatives
Sound Exchange has been seen as a positive organization for artists and performers. They have been successful at getting royalties to these people that have not received them before. Have you seen where certain artists refuse to allow their songs to be aired on Spotify? The reason behind that is royalties. Sirius XM could fall into ill will with artists and performers.
Litigation is expensive. This will hurt the bottom line and expend cash.
Sound Exchange outlined some compelling reasons why direct deals are bad. Their stance is not without merit.
Summary
It is too early to tell how the reaction to this will impact the stock, but we can see that the royalty issue already has impacted how business is conducted. I wouldn't base an investment decision on this suit yet, but would weigh the current and longer term impacts and possibilities.
Disclosure: I am long SIRI.
Additional disclosure: I have no position in Pandora.
