Tuesday, March 13, 2007

Adjustment of Rates and Terms for Pre-Existing Subscription Services and SDARS Proceeding

Both XM and Sirius are participants in the “Adjustment of Rates and Terms for Pre-Existing Subscription Services and Satellite Digital Audio Radio Services” hearing before the Copyright Royalty Board (CRB). This is the primary rate determination tribunal. As mentioned in a previous post, XM and Sirius are proposing a rate of 0.88% of revenue. SoundExchange (RIAA more or less), is proposing an initial rate of 10%, rising to 23% in the final year (2012).

SoundExchange’s principal witness appears to be Dr. Michael Pelcovits. He was the one that proposed the royalty rates for the Webcasters. The CRB agreed with the bulk of the analysis submitted by Dr. Pelcovits. The problem was that the Webcasters presented a weak argument and it was tossed by the CRB. He uses two benchmarks for determining the appropriate royalty rate for satellite radio: 1) by comparing what Sirius paid for Howard Stern and the expected rate of return; and 2) by using satellite radio costs and revenues and on standard economic modeling techniques.

In the first case, he states that, “The market price the SDARS would pay for sound recordings should be consistent with the market prices already paid for other content.” In our opinion, he is comparing apples and oranges. What does the price of sounds recording that are available for free on terrestrial radio have to do with the market price paid for content such as Stern, NFL, or MLB? We digress. He selects Howard Stern as his benchmark. He states, “In non-technical terms, the amount Sirius paid for Howard Stern and for other content on a per-customer-acquired basis ought to equal the amount Sirius would pay for sound recordings on a per-customer-acquired basis.” The argument really becomes silly, in our opinion, when he states, “SoundExchange is not fairly compensated under the compulsory license if sound recording payments, relative to the value sound recordings provides, are lower than the comparable market-based payments to other content providers.” If sound recordings were not free on terrestrial, he might, might have a point.

The Stern analysis is interesting, none the less. He states that Sirius paid Stern $415 million (net present value) for five years (he discounts at 12% per year). He intentional neglects the incentive payments. Based on analyst opinions, Sirius expected to draw 1.6 million subscribers due to Stern. He then adds in customers that Sirius would have otherwise lost to XM, arriving at a final figure of 1.75 million subscribers. He concludes that Sirius paid $237 per subscriber to Stern for the incremental subscribers. He then uses an average life of a subscriber of 42 months and calculates that Sirius paid Stern $5.64 per month for each incremental subscriber. According to Mr. Butson, Sirius expected to generate revenue of $10.25 per subscriber in 2006, rising to $11.65 in 2010, the last year of Stern’s contract. The implications are that Sirius paid 48% to 55%of revenue for each incremental subscriber, averaging a little over 50%. Drum roll…. And “The 50% figure ought to apply equally to music content as to Stern, since a large catalog of music is essential to a music-based service and attracts customers to Sirius just as Stern attracts customers.” Next, he quotes a survey by a Dr. Wind that indicates that 56% of all Sirius subscriber revenue would be lost if it offered no music channels. From that, he concludes that SoundExchange should receive 50% of 56% of revenue for the use of sound recordings, or 28%. Assuming that music publishers receive 3.5%, he concludes that SoundExchange should receive 24.5%.

In the second case, he examines the revenue that satellite radio will likely generate in 2012. He arrives at the conclusion that satellite radio will generate a surplus of $4.67 per customer per month in 2012 in 2007 dollars. He states that economic modeling would receive 62% of that surplus, or $2.90 per subscriber per month, or 24% of revenue.

Therefore, his conclusion is that SoundExchane’s request between 10% and 23% is entirely reasonable.

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Anonymous said...

The following survey seems to contradict Pelcovits' analysis,even though both were conducted by SoundExchange:

Music Keeps Satellite Radio in Orbit, Survey Finds
Despite Marquee Names, Music Key to Survival of XM and SIRIUS
By PR Newswire

WASHINGTON, Nov. 10 /PRNewswire/ -- A recent study of satellite radio subscribers and potential subscribers shows that music -- not big name celebrities, sports or talk radio -- is what attracts listeners to those services and keeps them subscribing. The independent survey, conducted by Dr. Yoram "Jerry" Wind, professor of marketing at The Wharton School of the University of Pennsylvania and author of 23 books on marketing, establishes the enormous value of music to the satellite radio services.

The survey was conducted for SoundExchange, Inc., a non-profit corporation responsible for collecting and distributing digital music royalties (e.g., satellite and Internet radio) on behalf of artists and record labels, and was included in SoundExchange's recent filing before the federal Copyright Royalty Board (CRB). Using testimony from a variety of leading experts, including Professor Wind, SoundExchange's filing made the survey available to the CRB in support of SoundExchange's assertion that fairer royalties should be paid by XM Satellite Radio and SIRIUS Satellite Radio to artists and copyright holders whose works are transmitted by those services.

Bert said...

Pelcovits actually uses numbers from Wind's survey to prove his point. Both seem to be saying that people subscribe overwhelmingly for the music, which should come to no surprise. I am not quite sure why you say there is a contradiction. Perhaps you would be kind enough to explain further.

You can read the entire 427 page survey here:


Anonymous said...

Maybe contradiction was a incorrect term. But I(like you) fail to see how Pelcovits can use market prices of other content as compensation for sound recordings. If the significance of Winds findings is "music drives listeners towards satellite radio," then why would Pelcovits use Stern's contract to distill what music is worth?

Bert said...

>>>If the significance of Winds findings is "music drives listeners towards satellite radio," then why would Pelcovits use Stern's contract to distill what music is worth?

That's a very good question. It is like the water company saying that gas is $3 a gallon; therefore, they should be able to charge its customers $3 a gallon for water.