Confused by something your favorite company did? Diving into an SEC filing can often clear things right up.

The mandatory Risk Factors section of the ubiquitous annual 10-K filing can cast a whole new light on companies you thought you knew well. And it's often instructive to look at how different businesses treat the same risk factor, especially if they compete in a common market.

The dangers of media
Today, I'm looking at 10-K filings by giants of digital media to see how they think about media licenses. I'm pretty sure we'll find some significant differences from one statement to the next.

Let's start with video vixen Netflix (Nasdaq: NFLX). Grab the latest 10-K right here to play along. Here's how the company presents its media license risk: "If studios and other content distributors refuse to license streaming content to us upon acceptable terms, our business could be adversely affected."

That's putting it mildly. Netflix's future hinges on its ability to land those content contracts in a way that leaves some cash for signing more deals, or even -- gasp! -- passing profits on to shareholders. The trick is to figure out what Netflix thinks is "acceptable."

The initial $30 million streaming license it paid for titles passed down by Liberty Starz (Nasdaq: LSTZA) was too good to be true, and it appears to be crumbling under its own success. Sony (NYSE: SNE) has revoked Starz's right to sell licenses for its catalog to Netflix. That's a surprise, but it shouldn't shock a diligent reader of 10-K filings: "Many of the licenses provide for the studios or other content distributor to withdraw content from our service relatively quickly. ... In addition, the studios and other content distributors have great flexibility in licensing content."

Sony is taking full advantage of that flexibility now, much to Netflix's chagrin. Since the details of the Starz agreement aren't public, we don't know what's next -- perhaps Walt Disney (NYSE: DIS) is about to "pull a Sony" on Netflix? I bet cable king Comcast (Nasdaq: CMCSA) would love to revoke its NBC Universal material from Netflix as soon as legally possible.

The new Starz deal needs much more headroom for growth than the old one, and will hence become a lot more expensive. Or perhaps Netflix can leave Starz in a ditch and start signing direct deals with the major studios instead. I believe that's the long-term plan, anyhow.

This section contains a bunch of other nuggets that may escape a less voracious filings fan:

  • Why streaming licenses are so hard to do when DVD rentals were easy: "Unlike DVD, streaming content is not subject to the First Sale Doctrine."
  • The road ahead is not silky-smooth: "As streaming content license agreements expire, we must renegotiate new terms which may not be favorable to us. If this happens, the cost of obtaining content could increase and our margins may be adversely affected."
  • Subscriber growth is absolutely essential: "Given the multiple-year duration and largely fixed nature of content licenses, if we do not experience subscriber acquisition and retention as forecasted, our margins may be affected by these fixed content licensing costs."

Netflix's management clearly put a lot of thought into these disclosures, and you can learn a lot here. And that's just one out of several dozen potential threats outlined and dissected.

Long story short
Let's compare that to a much more pithy version of a very similar threat, as presented by satellite radio giant Sirius XM Radio (Nasdaq: SIRI): "Royalties for music rights may increase."

Sirius then goes on to explain how it pays royalties to the three big music performing rights organizations ASCAP, BMI, and SESAC. The company has negotiated contracts with two of them but relies on an interim agreement with BMI. Standard rates are set by the Copyright Royalty Board, but can also be negotiated directly with each rightsholder body or the central SoundExchange clearinghouse.

All of this intricate info can be found in two short paragraphs of Sirius' 10-K. As shown here, licensing doesn't appear to be a big concern for Sirius. Royalties and revenue-sharing agreements added up to $435 million in 2010, making it the largest operating line item but still a rather small part of the $2.4 billion in total operating costs.

But wait -- there's more!
But is Sirius telling the whole story? Consider what Pandora Media (NYSE: P) thinks about content royalties in its S-1 IPO prospectus: "We operate under statutory licensing structures for the reproduction and public performance of sound recordings that could change or cease to exist, which would adversely affect our business."

And Pandora launches into a more nuanced discussion of the performing rights bodies, their licensing processes, and the difference between them. For example, there's no default royalty rate for SESAC recordings, so messing up that particular license agreement could mean losing the rights to a huge block of media rights. Because Pandora is an online media wrangler rather than a traditional radio format, it also has to pay additional royalties under the DMCA act and other expensive laws.

In short, Pandora is under heavy financial pressure from more than one royalty collector, but goes to great lengths discussing these issues. Should Sirius fill out its risk disclosures, or is a simplified view of the same complicated picture justified? You tell me, but I always like more transparency. In my eyes, Pandora and Netflix are doing the right thing when they go the extra mile with their explanations.

We've only looked at a minuscule part of those vital filings, yet uncovered a heap of highly investable information. Just imagine what you might find in a longer reading session. These articles on digital media investing will hold you over until you have time for that adventure:

Fool contributor Anders Bylund owns shares of Netflix, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Netflix and Walt Disney. Motley Fool newsletter services have recommended buying puts in Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.