Sirius XM Radio Inc (NASDAQ:SIRI) has had a good year. The firm’s stock price has risen by more than 50% in the last twelve months and currently stands at $2.80 on improving metrics in the sector, and the increasing prominence of Liberty Media Corp (NASDAQ:LMCA) (NASDAQ:LMCB) in the firm’s decision making.

Sirius XM

One stumbling block for the company, outlined today in a report from Barclays PLC (LON:BARC) (NYSE:BCS) Equity Research, is the upcoming setting of royalties the company must pay on the music it streams. Current royalty rates have been set since 2007. The upcoming rates will kick in in January 2013 and will affect the firm’s business until 2017.

Music royalties are one of the major costs for Sirius XM Radio Inc (NASDAQ:SIRI). The firm pays much less for music streaming than the Internet services it competes with, such as Pandora Media Inc (NYSE:P), pay. If the new royalty rates are set higher than expected, the firm could see its core business slide in the coming five years.

A second major concern is the growing momentum for a change in the way that Internet streaming sites pay royalties for their music. The current system gives Sirius a major advantage over companies like Pandora Media Inc (NYSE:P).

There is currently a bill before Congress, The Internet Radio Fairness Act, that would see royalties for Internet music streaming fall. Currently, according to the Electronic Frontier Foundation, standard transmission radio stations (FM, AM) pay no music royalties for their content in the United States, satellite radio stations, like Sirius XM Radio Inc (NASDAQ:SIRI) pay about 10% of their revenue, while Internet streaming services pay about 50% of their revenue in royalties.

The new legislation would change that, and would level the playing field between satellite and Internet radio. If the legislation passes, both would have their royalties decided by the same mechanisms. That would make Internet radio much more competitive, and much more of a thorn in the side of Sirius XM Radio Inc (NASDAQ:SIRI).

According to the Barclays report, it is unlikely that that legislation will pass through Congress. Sirius has a much more effective monetization model, and pays more per average user hour in royalties. Music royalties are calculated as a proportion of revenue.Even if legislation does pass, it is unlikely it will come into effect before the end of this royalty cycle, giving Siriue five years to prepare for its impact.

Each service is supposed to negotiate the royalties it pays with the companies it pays them to. Because of the structure of the music market in the United States, most royalties are collected by SoundExchange. That body negotiates for the musicians, while Sirius negotiates for itself.

When the two sides cannot come to an agreement, a government body called the Copyright Royalty Board hears proposals from both sides and sets royalty rates. That body has to announce its rates for Sirius before the fourteenth of December.

The analysts at Barclays expect the CBR to follow the ruling they gave in 2007 when modest increases in royalty payments were instituted. Only one thing has really changed since 2007, Sirius XM Radio Inc (NASDAQ:SIRI) is now a much more successful company.

That means two things. First of all, in absolute terms, the amount of money coming to SoundExchange is increasing by a wide margin. Secondly, the board will not be taking into account, as they did in 2007, that Sirius needs low rates to continue as a thriving business.

The analysts at Barclays PLC (LON:BARC) (NYSE:BCS) expect that the increase in total royalties will sway the board more than the changes in Sirius’ fortune will. Despite the positive outlook on the royalties front, the report sets a price target of $2.25 on Sirius XM Radio Inc. (NASDAQ:SIRI).

The rise of Internet radio seems unstoppable, and Sirius will have to fight tooth and nail with those services if it wants to compete. Internet infrastructure is much more widespread and accessible than satellite systems. The firm will have to really stand out if it wants to survive the onslaught in the next few years. It has survived the last few, however, if that is any indication of the company’s future.

Sirius has an uncertain future, but royalty rates are, according to the Barclay’s analysts, unlikely to be responsible for the firm’s downfall. We’ll know more when the rates are posted by the CBR.