Pandora Survives The Royalty Rate Hike Scare As The Web IV Verdict Goes Its Way

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The copyright verdict is out and Pandora Media (NYSE:P) has survived. In fact, the company’s shares jumped 20% in after-hours as the increase in royalty rates turned out much lower than expected. The Copyright Royalty Board has set Pandora’s royalty rates at $0.0017 per performance (ad-supported) effective 2016, up slightly from $0.0014 that the company is paying in 2015. [1] As per the earlier CRB guidelines, the Internet radio company was increasing its royalty rates by $0.0001 every year and the latest verdict reflects an increase of just $0.0003, while many expected it to be much higher, thanks to SoundExchange’s proposal of $0.0025. Also, the increase beyond 2016 through to 2020 will be based on the consumer price index, which somewhat indicates that it could be much less than $0.0003 every year. Interestingly, subscription based royalty rates were actually lowered by $0.0003 for next year.

We believe that Pandora should be extremely pleased with how things have turned out, because the situation could have been a lot worse. If the verdict had gone SoundExchange’s way, it would have put a question mark on the company’s sustainability. Pandora was pushing against SoundExchange which was representing the music industry, with its proposal of $0.0011. [2] Asking the CRB to lower the rates while the entire music industry is lamenting the fact that they are not being paid fairly by streaming services was too far fetched. Royalty rates at $0.0017 for ad-supported and $0.0022 for subscription is something that Pandora can easily work with. It has won a small battle in its quest to become profitable, and now it needs to focus on strategies that can propel its topline growth without a proportional increase in expenses.

Our current price estimate for Pandora stands at $19, implying a premium of less than 20% to the current market price.

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Artists and songwriters have long been lamenting the fact that music streaming services such as Pandora and Spotify are not paying them fairly. On the other hand, Pandora has not been able to generate enough revenues through advertisements to justify an increase in royalty rates from its perspective. And as the company’s royalty rates were up for a revision at the end of 2015, SoundExchange saw an opportunity and submitted a proposal for a 65% increase in Pandora’s royalty rates with the CRB. Pandora, however, pushed back against the proposal, soliciting a favorable revision in rates.

Even though the royalty rates have been increased and Pandora is still a long way from generating profits, the threat to its business sustainability has been curbed to a large extent. The increase in rates was only moderate and the company is striving hard to strike direct deals with music publishers, to gain a better control over its content related expenses. On the topline front, the company appears to be doing very well in the local advertisement domain, where it still has a lot to explore. Pandora even made a couple of acquisitions recently, Ticketfly and Rdio, to further stabilize its business, attract subscribers, and provide artists with a platform to increase visibility. [Read: What Do Pandora’s Recent Acquisitions Have To Offer?]

We believe that the royalty rate hike scare actually worked out well for Pandora. The potential threat of aggravating content costs had Pandora looking desperately for avenues which can propel its topline growth. Now the rates are under some control and the company has made some progress on its topline expansion, which could pay off in the long run. And now it is somewhat more certain that Pandora will be there for the long race.

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Notes:
  1. Correcting and Replacing Copyright Royalty Board Issues Ruling in “Web IV” Pandora Case, Pandora, Dec 16 2015 []
  2. Copyright tribunal slaps Pandora with 20 percent rate increase, Pandora, Dec 17 2015 []