The following is a guest post by Angus M. MacDonald, a digital media attorney.
Last week, SoundExchange publicly released its Annual Report (Draft) for 2012. According to the report, SoundExchange’s 2012 collections from all statutory services amounted to $502.2 million – yes, a half-billion dollars! And it was another impressive year-over-year increase in royalty collections for SoundExchange. For 2011, SoundExchange collected $372.2 million, meaning that it collected $130 million (or 35%) more in 2012 than it did in 2011. See SoundExchange’s Annual Report (Draft) for 2012, p.7.
However, as discussed below, Pandora accounts for all of SoundExchange’s revenue growth. In its most recent 10-K filing (released a few weeks ago), Pandora paid 55.9% of its revenues to SoundExchange for the fiscal year that ended January 31, 2013. See Pandora’s 10-K, p.22 (“For our fiscal year ended January 31, 2013 we incurred SoundExchange related content acquisition costs representing 55.9% of our total revenue for that period.”). According to the same 10-K filing, Pandora’s total revenues last year were $427.1 million.
Based on the above figures, Pandora paid SoundExchange over $238.7 million ($427.1 million multiplied by 55.9%) in the 12 months that ended January 31, 2013. That $238.7 million figure represents 47.53% of SoundExchange’s total royalty revenues ($502.2 million) in 2012. [NOTE: Because SoundExchange uses the calendar year for accounting purposes while Pandora uses a fiscal year that ends January 31, this estimate may be slightly off. Using an alternative method that attempts to estimate Pandora’s revenues for the calendar (instead of fiscal) year likely yields a higher percentage – just about 50% – in term of Pandora’s share of SoundExchange’s total collections for 2012.]
While it appears to be an impressive feat for SoundExchange that its royalty collections increased in 2012 by $130 million, it is important to note that Pandora’s royalty payments to SoundExchange also increased in 2012 by about $132 million – i.e., $136.3 million in FY2012 vs. $238.7 million in FY2013. Therefore, ALL of SoundExchange’s increased revenues for 2012 can be attributed solely to increase in royalties paid by Pandora. Another interesting fact: Pandora paid nearly as much in royalties for its FY 2013 (i.e., $238.7 million) as it made in total revenues for the previous year (i.e., $274.3 million for FY 2012).
Pandora clearly represents a large share of SoundExchange’s business and, more broadly, the total streaming royalty revenue collected in the U.S. (which was estimated to be $1.032 billion in 2012 according to a recent report by RIAA). As such, Pandora’s market share has important implications for the upcoming royalty rate negotiations and proceedings, known as Webcasting IV, which will commence in January 2014 before the Copyright Royalty Board. With Pandora’s ever-surging listening hours and royalty payments, SoundExchange (as well as the record labels and artists who split the royalties collected by SoundExchange) need a healthy Pandora as much as Pandora needs a reasonable Pureplay-like rate for the next royalty term (2016-2020).
There are several other semi-interesting tidbits from SoundExchange’s Annual Report, including its continued increase in headcount over the past few years (55 employees in 2010, 72 employees in 2011, and now 97 employees in 2012) – probably necessary to process those whopping monthly checks from Pandora! However, despite the additional headcount, SoundExchange has successfully lowered its administrative rate over the past several years (6.7% in 2010, 5.3% in 2011, and 5.0% in 2012), indicating increased efficiencies by SoundExchange in collecting, processing and distributing the royalties over the years.
 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). Therefore, this 47.53% figure certainly would be much higher – I’d bet close to 75% – if you look only at SoundExchange’s Internet radio revenues, which are not separately broken out in SoundExchange’s Annual Report.
The views expressed in this article are solely Mr. MacDonald’s and should not be attributed to his employer or clients.
RAIN Summit West this Sunday in at the Las Vegas Hotel will host a panel discussion called The Song Plays On, a discussion of royalty issues, including Brad Prendergrast, SoundExchange; David Levin, BMI; Artist Patrick Laird, Break of Reality; Rusty Hodge, Soma fm; Ted Cohen, TAG Strategic; and moderator David Oxenford, WBKLaw. Hope to see you there!