There has been chatter in the entertainment industry with regard to SiriusXM’s recent attempt to directly license music from record labels. SiriusXM, a satellite radio, currently has a statutory license to play music and pays digital public performance royalties to a nonprofit organization called SoundExchange, which is a nonprofit organization designated by Congress pursuant to the 1995 Digital Performance Right in Sound Recordings Act, to collect license fees and distribute royalties to copyright owners and performers.

The percentage SiriusXM and other digital webcasters like Pandora pay to SoundExchange is set by the Copyright Royalty Board, and the current amount of 7.5% is set through 2013. Royalties are distributed to sound recording copyright owners, performers, and non-featured performers in varying percentages; the sound recording copyright owner gets 50%, the performer gets 45%, and the non-featured performers get 5%. SoundExchange’s distribution process is transparent: the money gets distributed directly and simultaneously to all parties involved.

SiriusXM’s new direct licensing proposal entails SiriusXM making the full royalty payment directly to the record labels, totally bypassing SoundExchange. The artists will need to get their cut of the royalties from the record labels. In addition, SiriusXM is proposing to pay independent labels a royalty rate of 7% of gross revenues, which 0.5% less than the amount it currently pays to SoundExchange.

This new proposal by SiriusXM leaves many in the entertainment industry wondering if record labels will engage in some “creative accounting” or simply reduce the royalty percentage from the 50% artists have been receiving through SoundExchange to the typical royalty rates of 15 – 20%. I’m leaning in the direction of the later, but probably in the form of merely a contractual definition change on those already overly complicated record contracts.

SiriusXM attempts to justify its direct licensing proposal by stating that a direct licensing arrangement would provide for more functionality, i.e. SiriusXM users would be able to record programs and rewind or fast-forward through programs. However, SiriusXM’s new proposal takes away the transparency created by Congress’ 1995 Digital Performance Right in Sound Recording Act and, in the end, will likely be another way for many record labels to take a bigger cut of gross revenues.