Sirius XM Price Hike Using Royalties As Income Boost Excuse?

Sirius XM has been notifying subscribers of a price hike that the company ascribes to increased music royalties that the service is incurring. But while the company is getting charged more, the subscription increases far outstrip the higher royalties, seeming to put the company in conflict with a promise it made the FCC at the time of the merger between former competitors Sirius and XM.

In a letter to subscribers, Sirius CEO Joe Zarella said “Beginning on July 29, 2009, a ‘U.S. Music Royalty Fee’ of $1.98 per month for primary subscriptions and $.97 per month for multi-receiver subscriptions will be effective” the next time they renew their subscription.

The Copyright Royalty Board has indicated that satellite radio will pay higher royalties, which jumped from 6 percent to 6.5 percent last year and will grow over time to 8 percent in 2012. There’s just one problem: the so-called “U.S. Music Royalty Fee” of $1.98 per month for primary subscriptions or $0.97 a month for additional subscriptions is higher than even the 8 percent that will eventually be in effect, and far beyond the current 6.5 percent.

Let’s look at some of the subscription levels of the company. Subscription rates run from $6.99 to $19.99 a month for a first subscription. An eight percent royalty would run from roughly $0.56 to $1.56 per month. Checking my own XM bill I notice that a second radio runs about 54 percent the cost of the first. Assuming for a moment that the percentage doesn’t radically change by plan, that would mean that an additional line would run from about $3.77 to $10.79 a month. The eight percent royalty there would be $0.30 to $0.86 a month. I’m sure the pricing for commercial use is significantly different, but remember that the price increase letter is going to consumers.

In other words, Sirius XM seems to pick up a hefty monthly premium and deposit it right into its seriously hurting financial picture. Maybe management hopes that no one whips out a calculator.

One condition of the merger in 2008 was that subscription rates were not to rise, but that the company could pass along cost increases. But the figures above are based on a comparison with the 2012 royalty, not the lower one today, and even then it’s clear that Sirius XM is bringing in more than what it must pay. You don’t suppose this was on purpose, do you? Nah, didn’t think so.