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Pandora Asks Users To Lobby Congress On Royalty Ra
Sept 25, 2012 12:38:06 GMT -5
Post by Peaches. [Ch, r. is] on Sept 25, 2012 12:38:06 GMT -5
Just checked my email and saw mail from Pandora.
The Internet radio site Pandora has begun pushing its users to write their Congressmen to support a newly introduced bill called the Internet Radio Fairness Act. The idea, crafted pretty specifically for Pandora, is to reduce the royalties the company has to pay for the music played on the service. The company notes that it pays out over 50% of its revenues in performance royalties, while satellite radio provider Sirius XM pays under 10%.
William Blair analyst Ralph Schackart makes the obvious point that passage of the bill could considerably improve the economics of Pandora’s business. He expects under the current royalty regime the radio industry’s take from Pandora’s revenues will climb to 60.2% in the company’s January 2013 fiscal year. The statutory rate paid by satellite radio is 8%. Cable TV music services pay a 15% royalty rate.
BTIG analyst Richard Greenfield, who has been bearish on Pandora for as long as the company has been public, sees a substantial issue with the proposed legislation. Basically, he argues that the issue is not with the current royalty rate structure, but instead a flaw in Pandora’s business model.
“On the surface, the rates paid by Pandora and other online radio services appear onerous and in need of congressional relief,” he writes. “However, the reason why companies such as Pandora pay such high royalty rates as a percentage of revenues is because they severely limit audio advertising to protect the user experience and keep people on the platform. If Pandora ran several minutes of audio ads per hour (the way terrestrial radio does) vs. just a few 15 second spots, the percentage of revenues paid out as royalties would be dramatically lower and would be more in line with satellite radio or cable TV. Interestingly, Spotify’s radio product runs substantially more advertising per hour than Pandora. We suspect this is a business decision focused on reducing royalty costs relative to revenues.”
Greenfield asserts that the Internet Radio Fairness Act is “crazy.”
“Just consider how crazy this Internet Radio Fairness Act really is: Pandora chooses to not generate as much advertising revenue per streamed hour as it could to enhance the user experience and … capture share from terrestrial radio (based on lesser ad load), satellite radio and music downloading/playlist sites (iTunes),” he writes. “So Pandora is effectively asking the government to intervene and reduce its cost structure, helping it remain a viable business because it knows its business model only works while running limited advertising. Why should the U.S. government allow musicians to be harmed simply to help Pandora and its investors generate enhanced returns?”
Greenfield has a point: The issue is not the money Pandora is paying to the music industry. The issue is Pandora’s own weak business model.
Indeed, he asserts that Pandora’s royalty rate should be increasing, not decreasing, “which would force them to either increase the ad load and survive at that ad load (with likely fewer users) or find other ways of generating revenue to sustain their service.” And he concludes that “Pandora may simply need a new business model if it hopes to exist long-term.”
Here’s the text of a letter from Pandora founder Tim Westergren that the company has been sending users via email:
Update: Nomura analyst Brian Nowak this afternoon is picking up coverage of Pandora with a Reduce rating and $8.50 target price. “Pandora is the Internet radio leader (~78% of total US Internet radio use),” he writes. “However, online radio is a structurally weak industry, with low barriers to entry. New competitors (with arguably superior products) continue to emerge, and deep-pocketed technology companies pose significant threats. Even if P “wins” the battle to capture more users, we think the Street is overestimating its ability to draw local radio ad dollars and to improve monetization.”
Update 2: Pandora in today’s regular session rose 39 cents, or 3.7%, to $10.89.
www.forbes.com/sites/ericsavitz/2012/09/24/pandora-asks-users-to-lobby-congress-on-royalty-rates/
The Internet radio site Pandora has begun pushing its users to write their Congressmen to support a newly introduced bill called the Internet Radio Fairness Act. The idea, crafted pretty specifically for Pandora, is to reduce the royalties the company has to pay for the music played on the service. The company notes that it pays out over 50% of its revenues in performance royalties, while satellite radio provider Sirius XM pays under 10%.
William Blair analyst Ralph Schackart makes the obvious point that passage of the bill could considerably improve the economics of Pandora’s business. He expects under the current royalty regime the radio industry’s take from Pandora’s revenues will climb to 60.2% in the company’s January 2013 fiscal year. The statutory rate paid by satellite radio is 8%. Cable TV music services pay a 15% royalty rate.
BTIG analyst Richard Greenfield, who has been bearish on Pandora for as long as the company has been public, sees a substantial issue with the proposed legislation. Basically, he argues that the issue is not with the current royalty rate structure, but instead a flaw in Pandora’s business model.
“On the surface, the rates paid by Pandora and other online radio services appear onerous and in need of congressional relief,” he writes. “However, the reason why companies such as Pandora pay such high royalty rates as a percentage of revenues is because they severely limit audio advertising to protect the user experience and keep people on the platform. If Pandora ran several minutes of audio ads per hour (the way terrestrial radio does) vs. just a few 15 second spots, the percentage of revenues paid out as royalties would be dramatically lower and would be more in line with satellite radio or cable TV. Interestingly, Spotify’s radio product runs substantially more advertising per hour than Pandora. We suspect this is a business decision focused on reducing royalty costs relative to revenues.”
Greenfield asserts that the Internet Radio Fairness Act is “crazy.”
“Just consider how crazy this Internet Radio Fairness Act really is: Pandora chooses to not generate as much advertising revenue per streamed hour as it could to enhance the user experience and … capture share from terrestrial radio (based on lesser ad load), satellite radio and music downloading/playlist sites (iTunes),” he writes. “So Pandora is effectively asking the government to intervene and reduce its cost structure, helping it remain a viable business because it knows its business model only works while running limited advertising. Why should the U.S. government allow musicians to be harmed simply to help Pandora and its investors generate enhanced returns?”
Greenfield has a point: The issue is not the money Pandora is paying to the music industry. The issue is Pandora’s own weak business model.
Indeed, he asserts that Pandora’s royalty rate should be increasing, not decreasing, “which would force them to either increase the ad load and survive at that ad load (with likely fewer users) or find other ways of generating revenue to sustain their service.” And he concludes that “Pandora may simply need a new business model if it hopes to exist long-term.”
Here’s the text of a letter from Pandora founder Tim Westergren that the company has been sending users via email:
Hi there,
This is Tim, the founder of Pandora.
I am writing to ask for your urgent help. An important piece of legislation has just been introduced in Congress that could end long-standing discrimination against Internet radio. I’m asking that you contact your Senator to urge them to support the Internet Radio Fairness Act.
This bipartisan bill will correct the incredible inequity in how different digital radio formats are treated under the law when it comes to setting royalties. The difference is quite extraordinary. In 2011, Pandora paid over 50% of our revenues in performance royalties, while SiriusXM paid less than 10%.
As a lifelong musician, I’m fully supportive of artist compensation, but this situation can’t continue. Internet radio is bringing millions of listeners back to music, and is playing the songs of tens of thousands of promising artists who would otherwise never be heard. It should be given a fair chance to succeed.
To voice your support for this initiative, please reach out to your Senator today and say you support the Internet Radio Fairness Act.
It’s crucial that Congress hears from fans of Internet radio today. Thanks for your support, and thanks for being a loyal listener.
Update: Nomura analyst Brian Nowak this afternoon is picking up coverage of Pandora with a Reduce rating and $8.50 target price. “Pandora is the Internet radio leader (~78% of total US Internet radio use),” he writes. “However, online radio is a structurally weak industry, with low barriers to entry. New competitors (with arguably superior products) continue to emerge, and deep-pocketed technology companies pose significant threats. Even if P “wins” the battle to capture more users, we think the Street is overestimating its ability to draw local radio ad dollars and to improve monetization.”
Update 2: Pandora in today’s regular session rose 39 cents, or 3.7%, to $10.89.
www.forbes.com/sites/ericsavitz/2012/09/24/pandora-asks-users-to-lobby-congress-on-royalty-rates/
