Favorable Royalty Rates Hike Sends Pandora Stock Higher

  • Pandora stock price has been moving higher after the CRB delivered  a favorable ruling on an impending hike on music royalty rates.
  • The CRB also ruled that future increases will be pegged on inflation based on the Consumer Price Index which is favorable to Pandora Media as well.
  • Pandora Media still has to climb a wall of worry regarding its subscriber loss. Is it worthwhile to invest in Pandora stock now?

Pandora Media (NYSE:P) stock is up 18% after the Copyright Royalty Board, or CRB, hiked U.S. music webcasting recording royalty rates. While the stock movement might appear strange at first glance, some perspective will help to shed some light into the situation. Pandora and Music royalty collector SoundExchange had differed greatly over a fair rate to charge as royalty for subscription and non-subscription (ad-supported) music. Pandora requested CRB to fix royalty rates for subscription per-performance music rates at $0.00215 to $0.00240 and $0.00110 to $0.00129 for non-subscription music. Meanwhile SoundExchange wanted CRB to fix the per-performance rate at a much higher level of $0.0025 to $0.0029.

The CRB seems to have found a middle ground between requests by Pandora and SoundExchange. The CRB has raised the rates for non-subscription music from $0.0014 to $0.0017 while lowering rates for subscription music from $0.0025 per performance to $0.0022, effectively increasing the blended rate from $0.00153 per performance to $0.00176, or about a 15% increase. These rates will apply in 2016 and will be adjusted as the years roll on on the basis of inflation calculated as per the Consumer Price Index.

Pandora stock 5-Day Returns

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Source: CNN Money
The decision by the CRB helps to remove a long-standing source of uncertainty for Pandora investors. The fact that the CRB will be adjusting future royalties based on Consumer Price Index also comes as a welcome reprieve for Pandora Media since the YoY increase is likely to be much lower than the current rate of 9% the company has been accounting for using its current structure.

So what happens if royalties are hiked to much higher levels in the future? If such a scenario unfolds, Pandora could be forced to cut exposure to right holders’ music in a bid to lower royalty payments. The biggest challenge with pulling off such a move would be that the company would end up with a less diverse offering for its fans. Pandora says that 80% of the music it plays is not available on FM stations, which could be the reason why fans are so enamored by the company.

Another alternative for the company would be to do direct deals with labels. Pandora has already signed a comprehensive deal with Merlin, a global rights agency that represents more than 20,000 record labels. The company followed on the Merlin deal by signing another deal with BMG, an international music rights management company. The company can get better deals by doing direct deals with labels.

Slowing Active Listener Base

Pandora’s success has lately been overshadowed by the decelerating growth in its active listener base. Pandora is facing growing competition from music curation services such as Apple iTunes Radio and Google Play Music. Pandora has, as a result, been losing subscribers. This is partly because the company has already covered much of its U.S. home market.

Pandora-2

But, as Pandora CEO Ander Friis has repeatedly pointed out, investors should be focusing more on the increasing loyalty by listeners and not just on their sheer numbers. Listening hours have been steadily growing. Most of the company’s future growth will have to come from this important metric.

That said, it’s important to note that Pandora does not compete directly with satellite radio provider Sirius XM (NASDAQ:SIRI) for subscribers. The two serve discontinuous markets. One market consists of people who do not mind ads so long as they receive the service for free while the other is made up of individuals who are not willing to curate their listening experience. Pandora also does not compete directly with on-demand subscription services such as Spotify and Apple's (NASDAQ:AAPL) Beats Audio for consumer wallet-share. Meanwhile, iTunes Radio has co-existed with Pandora for many years without inflicting much harm to the company. And, Pandora, unlike iTunes Radio, is readily available across multiple devices, which gives it an upper-hand.

One of the reasons why Pandora has been having a hard time attracting new subscribers is due to the company’s lack of an on-demand streaming service. But this might now become a thing of the past after Pandora said it will purchase the assets of Rdio, an on-demand streaming service provider, for $75 million.

Takeaway

The decision by CRB appears quite favorable for Pandora Media and removes a big source of uncertainty for the company and its investors. Meanwhile, Pandora has started moving in the right direction to solve its subscriber loss problem with the acquisition of on-demand streaming assets. Pandora stock looks like a good hold.

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