The following is a guest post by Angus MacDonald, General Counsel, Live365:
A few days ago, SoundExchange publicly released its Annual Report (Draft) for 2011. According to the report, SoundExchange’s 2011 collections from ALL statutory services amounted to $371.9 million. See SX’s Annual Report, p.7 (“In 2011, SoundExchange collected statutory royalties from all statutory classes of services in the amount of $371,922,621.”). That’s an increase of 40% ($106M) in collections compared with the previous year – i.e., $265.9M in 2010 vs. $371.9M in 2011.
Impressive increase. However, as discussed below, Pandora accounts for most (over 70%) of that growth. In its most recent 10-K filing (released about 3 weeks ago) for the fiscal year that ended Jan. 31, 2012, Pandora paid 49.7% of its revenues to SoundExchange. See Pandora’s 10-K , p.20 (“For our fiscal year ended January 31, 2012 we incurred SoundExchange related content acquisition costs representing 49.7% of our total revenue for that period.”).
Using the 49.7% figure (along with Pandora’s recently-reported revenue of $274.3M for its last fiscal year) means that Pandora paid $136,346,980 to SoundExchange in the 12 months that ended Jan. 31, 2012. That $136.3M figure represents 36.66% of SoundExchange’s total revenues ($371.9M) collected in CY2011. [NOTE: For the purposes of this exercise, I'm comparing Pandora's FISCAL year (Feb. 1, 2011 to Jan. 31, 2012) to SoundExchange's 2011 CALENDAR year, even though it's not entirely apples-to-apples.]
That 36.66% figure certainly would be much higher – well over 50%, I’d safely bet – if you look only at SX’s Internet-radio revenues, which are NOT separately broken out in SX’s Annual Report. [As many of you know, SoundExchange collects statutory royalties from many different types of services – including noninteractive Internet radio (Pandora, etc.), satellite (Sirius XM), cable subscription services (Music Choice), and business establishment services (DMX).]
Pandora’s royalty payments to SoundExchange more than doubled year-over-year – $61.99M in FY2011 vs. $136.35 in FY2012. That $74.35M increase in royalties paid by Pandora accounts for MOST – i.e., over 70% – of SoundExchange’s increased revenues ($106M increase) for 2011.
Another interesting factoid: Pandora paid about as much in royalties for its FY 2012 (i.e., $136.3M) as it made in TOTAL REVENUES for its previous fiscal year, FY 2011 ($137.7M).
My own editorial: With Pandora’s ever-growing listening hours and royalty payments, SoundExchange and the labels need a healthy Pandora as much as Pandora needs a reasonable Pureplay-like rate for the next royalty term (2016-2020). This is especially true if Sirius XM continues to sign up more direct license deals, thereby bypassing SoundExchange (though Sirius XM’s recent antitrust complaint suggests that may be a tough row to hoe).
There are several other semi-interesting tidbits from SoundExchange’s Annual Report, including its mini-hiring binge in 2011 (55 employees in 2010 vs. 72 employees in 2011) – which was probably necessary to handle all of the additional royalties from Pandora!