The Turtles may be bringing new meaning to "Happy Together" now that a U.S. judge in California is allowing older musical artists to unite forces as they demand access to the digital royalties from Sirius XM Radio (SIRI +0.00%) is doing the right thing. An SEC filing over the weekend spells out a settlement between the satellite radio provider and the record companies responsible for the lion's share of the oldies that have played on Sirius and XM over the years.
Sirius XM will be paying the labels $210 million to resolve past royalty claims pertaining to pre-1972 sound recordings. The settlement will square away the two sides through the end of 2017.
At the heart of this long legal battle is that federal copyright protection didn't kick in until Feb. 15, 1972. Sirius XM wasn't paying royalties on those tracks, leading labels and artists to argue that individual state laws should apply since they were more protective of their rights to get paid.
The settlement is significant, but Sirius XM is good for the money. It generated $276 million in free cash flow through the first three months of the year, more than enough to cover the settlement. It's targeting $1.25 billion in free cash flow for all of 2015.
Obviously Sirius XM has bigger plans for the money it's raking in than paying off oldies artists, but it's comforting to know that this settlement won't break the bank. Unfortunately it also won't make all of the pre-1972 demons go away. The labels in the settlement account for 80% of the music that Sirius XM has broadcasted, but it still leaves several indie artists out there waiting for their score -- including The Turtles which have been the most vocal about demanding financial retribution for more than two years.
Sirius XM is in a much better place than other music services. It has a user base that not only pays to access its service -- unlike the vast majority of ad-supported platforms -- but it has also accepted the burden of covering the overhead of music royalties on Sirius XM's behalf. Subscribers on plans that feature music channels pay what Sirius XM calls a U.S. Music Royalty Fee on top of their subscriptions, and with royalties inching higher with every passing year it's something that subscribers gotten used to. They're not flinching. Sirius XM's subscriber base has grown by 7% to 27.7 million accounts over the past year, and churn rates remain near historic lows.
This doesn't mean that Sirius XM can afford to given musical artists, songwriters, and record labels blank checks. Sirius XM is growing well in this era of connected cars with a couple of rate hikes since 2012, but we can't assume that there's unlimited elasticity here.
For now, Sirius XM is winning. It has the means to pay, and it's doing the right thing by not making itself a target of the music industry. The settlement is a win-win, and hopefully Sirius XM will settle the score with the artists behind the other 20% of its pre-1972 recordings soon.
