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#DigitalSkeptic: Digital Royalties Will Stay a Royal Investor Pain

Not different rates: Different rate models
The discord, Huppe said, starts right in digital music's bass line: the core rates different outlets pay for the rights to play recorded commercial music legally over a digital network.

"Pandora pays rates set under a fair market standard, while Sirius XM pays rates set under a below-market standard. And AM/FM radio pays nothing at all," he said. "Those rates may change in the future, but unless you spend real time understanding the nuance of how this unlevel playing field works, it's easy to get lost in how those rates will evolve."

Take, for example, how regulator-dependent these rates are. In early October, Mel Watt, a Democratic U.S. senator from North Carolina, introduced the Free Market Royalty Act. "Under this bill, artists may negotiate any rates they can," said Watt in his statement to Congress when the bill was introduced. "The value of music will be determined by the market."

Huppe points out that it is not merely the timing of the passage of the bill that matters, it's how free market economics will ultimately affect the costs of streaming music.

"The ability to withhold," Huppe explained, "may or may not, depending on market conditions, have a dramatic effect on the cost to do business."

"I am very bullish about this business, but to predict two years ahead on what the profit and loss will be for a streaming music business is not the kind of prediction I can see anybody making," he said.

Collecting static
What makes SoundExchange worthy of an investor love song is that its status as a 501c3 nonprofit means it must disclose pretty much how it spends every single of its pennies. That makes it a fantastic listening tube into the inner workings of digitized music market.

Certainly, SoundExchange is far from an industry masterpiece. In 2011 (oddly, the latest year reported) its $20.9 million in revenue was eaten up by $21 million in costs, resulting in a $51,194 loss. SoundExchange can also struggle to collect its fees. It is suing Sirius XM on underpaid royalties. And there can be startling jumps in accounts receivables: I saw a 35 or so-percent spike over just last year.

And of course, just like everything else in the Digital Age, the big numbers hide the big hardship. Yes, SoundExchange collected $507 million in royalties last year, but that was for the work of more than 100,000 artists, which means the average annual payment per artist was about $5.07. So most still starve.

Even given these limits, SoundExchange deserves real credit for doing what Google (GOOG), Facebook (FB), Twitter (TWTR) and all the digital rest tacitly imply is impossible: protect the value of music on an in-the-wild, digital network.

As of now, friends, that song of freedom, may be all we'll ever have.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.
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