Pandora Jumps On Copyright Office’s Positive Response

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Good news may be just around the corner for the Internet radio company, Pandora Media (NYSE:P). After much fuss around its royalty rates and proposed hike by SoundExchange, the company finally has something positive to share on the ‘Webcasting IV’ proceedings. In a recent press release, Pandora stated that the Copyright office has agreed to consider its deal with Merlin, a global rights agency, as a valid benchmark for royalties in the case. [1] Following the news, the company’s stock price jumped 15%, before closing at a 5% increase.

This is an important development for Pandora as it seeks to bend the royalty setting proceedings its way, the final verdict on which will be out at the latest by December 16. The company isn’t profitable with the royalty rates it currently pays, and an increase could easily make things worse. However, the recent update on the case indicates that the decision might just go Pandora’s way. After all, the company is comfortable with how it pays royalties through Merlin, an agency representing 20,000 independent music labels and distributors.

Our price estimate for Pandora is at $21, which is just ahead of the current market price.

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Only July 29th this year, the Copyright Royalty judges solicited Register’s opinion on whether a specific direct-licensee deal benchmark can be presented as an evidence for the ‘Webcasting IV’ proceedings. The deadline for the Copyright office ended Friday, following which the Copyright office proclaimed that Pandora’s agreement with Merlin can indeed be regarded as a valid benchmark for the ongoing proceedings. Following the update, the company and investors have gotten optimistic about the rate setting proceedings. Since the current royalty rates are based on almost a century old legal framework, a revision of the paradigm is certainly overdue. However, it is the magnitude of the revision in rates that is bothering Pandora. [2]

According to SoundExchange’s proposal, Pandora should pay $0.0025 per performance in 2016, with a $0.0001 increase every year thereafter until 2020. However, the Internet radio company paid just $0.0015 per performance in 2015, and SoundExchange’s proposal would mean a significant increase in its content acquisition costs, which are already high at about 48% of revenues. A revision in rates is certain, but both the parties are presenting arguments to set the rates closer to their proposals. The validation of Merlin contract as a benchmark for the proceedings indicates that Pandora does have a strong case.

We currently project the company’s content acquisition costs as percentage of revenues to spike in 2016 (49.5%) and 2017 (52%), on account of a significant revision in royalty rates. However, given the recent development, if the revision does not turn out as bad as expected from the company’s perspective, with the metric rising to just 48% in 2016 and 50% in 2017, with a gradual decline thereafter, there can be more than 5% upside to our price estimate for the company.

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Notes:
  1. The Register of Copyrights Issues Opinion on Novel Questions of Law in Pandora Rate Case, Pandora, Sept 21 2015 []
  2. Pandora Media Jumps After Preliminary Decision on Royalties, Bloomberg, Sept 21 2015 []