The question isn’t whether artists deserve to be paid. It’s whether companies that are more than willing to pay are being asked to burden royalties that will either kill them, or force them to adopt extreme licensing and programming alternatives.

The sad part is that the recording industry seems determined to milk this cow to death. The majors are notorious for prying unworkable advances that ultimately suffocate well-funded startups, and SoundExchange – a former label appendage – seems determined to ratchet royalties as high as humanly possible.  That is, irrespective of market forces, and at the risk of accelerating adoption of licensing alternatives that would greatly reduce the need for SoundExchange itself.

The latest developments reaffirm this assessment.  According to details tipped by investment journal Seeking Alpha, SoundExchange is now pushing for royalty rates that would run as high as 20 percent of total Sirius XM Radio revenues by 2017, up from roughly 8 percent currently.  So, more than double the current rate.

Sirius is pushing for something in the range of 5-7 percent, while SoundExchange wants a schedule that immediately starts at 13 percent and escalates to the 20 percent marker.  These rates are negotiated and determined by the Copyright Royalty Board (CRB), in processes that are complicated, time-consuming, and often produce inflexible results (but are great for lawyers and bureaucrats).  And according to details shared by Sirius, the resource and time costs required to arrive at these rates are stunning:

Both Sirius and SoundExchange participated in the CRB proceeding that set the statutory rates for the 2007-2012 license period. That proceeding involved over 26 trial days, 230 exhibits, 7700 pages of transcripts, and over 400 pleadings, motions and orders. … In a lengthy written opinion affirmed by the D.C. Circuit, the CRB set the rate for 2007 at 6% of a satellite radio provider’s gross revenues, rising each year to 8% in 2012. 

And if all this seems ludicrous to Sirius, it’s absolute insanity to Pandora, whose royalty obligations represent roughly 60 percent of total revenues.  These are two of the largest streaming music services on the planet, and as you’d expect, both are taking affirmative action to fix the situation.  Pandora – seemingly mired in permanent financial losses – is stumping to change royalty rates on Capitol Hill, while Sirius is moving aggressively to strike direct licenses with various labels and largely diminish SoundExchange’s role in the process.

But don’t whip out a violin for Sirius quite yet.  The company now has considerable free cash flow, and is one of the largest entertainment subscription services on the planet.  Which means they can probably afford it, but like most corporations, are uninterested in any massive cost increases and will fight them aggressively.

Which brings us back to direct licensing.  The acrimonious backdrop also involves a major lawsuit from Sirius against both SoundExchange and A2IM, both of whom are accused of scuttling Sirius’ direct licensing attempts.  The technology now exists for one-to-one, direct-licensing arrangements, including accommodations for innovative uses like time-shifting and tethered storage.  Those aren’t permitted in more generic SoundExchange licenses, and starting in 2011, Sirius partnered with Music Reports, Inc., to craft individual deals that would eliminate the middleman and allow for a broader range of uses.

And, reduce a bureaucratic morass at SoundExchange that takes the form of massive unpaid balances and failures to distribute to many of the largest of artists alive.  Sadly, a large chunk of collections never make it back to the artist, a situation that would only be exacerbated by increased royalty amounts.