Pandora (P) Surges More Than 19% Following CRB Ruling

Yesterday, shares of Pandora Media, Inc.P surged over 19% in the aftermarket session following the Copyright Royalty Board's ruling on the royalty rates case.

As per the ruling, Pandora will have to pay 17 cents per 100 streams of a song as royalty to the artists. The rate is higher than the 11 cents that Pandora asked for but is lower than the 25 cents as demanded by musicians and record labels. This rate is applicable for non-subscribers while for subscribers Pandora will have to shell out 22 cents per 100 plays as against 25 cents paid currently.

The rates are only applicable for Pandora and other Internet radio stations like iHeartRadio. Other "on demand" services like Spotify and Apple Inc.'s AAPL Apple Music, which do not "rely on compulsory, government-issued licenses for music" are beyond the purview of the ruling.

Despite a 15% increase over Pandora's 2015 effective per-performance royalty rate, CEO Brian McAndrews labelled it as a "balanced rate we can work with and grow". He also added "this decision provides much-needed certainty for both Pandora and the music industry." We are moving full-steam ahead with our ambitious plan to continue to build the world's most powerful music discovery platform."

This provided a huge relief to investors, causing a share price rally. Apart from the CRB ruling, another factor that contributed to the upside was Pandora's signing of a multiyear licensing deal with Warner/Chappell Music. Though the terms weren't disclosed, the deal is likely to benefit Pandora by providing "greater rate certainty and the ability to add new flexibility to the company's product offering over time". Earlier Pandora had signed a direct deal with Sony Corp's SNE Sony/ ATV music label. These deals with music labels will offer greater certainty and help Pandora to reduce dependence on CRB rates over time.

The new rates, which will be effective from Jan 1, 2016 through Dec 31, 2020, will increase Pandora's already escalating costs by nearly another $20 million. However, some analysts view it as a relief compared with an increase of $100 million had the ruling favoured SoundExchange, which represented music labels and artists in the case. SoundExchange, clearly miffed with the ruling, stated "we believe the rates set by the CRB do not reflect a market price for music and will erode the value of music in our economy."

Many analysts observe that as Pandora tries to move away from government-regulated rates, the CRB ruling "could set a benchmark for future licensing deals with the record labels that would enable Pandora to extend its reach".

Of late, Pandora has fallen out of investors' favor. Before yesterday's rally, shares of Pandora had tanked over 26.3% in the year. Pandora, which is primarily popular for its Internet radio service, has been struggling as a result of the increasing popularity of on-demand streaming music. The company had been seeing a slowdown in its subscriber base owing to the aggressive marketing strategy of Apple Music (especially three-month free trial plan) and competition from other players like Spotify and Amazon AMZN Music. What is even more concerning is that even after the end of the free trial period, Apple managed to amass a decent number of paid subscribers.

Pandora is overhauling its offering to provide all of "radio, on-demand and live music" on its own platform. As a part of this effort, the company acquired streaming music service provider, Rdio for $75 million. While Rdio has not been able to sustain its growth amid stiff competition, Pandora is betting on its technology and geographical reach. In contrast to Rdio's availability in 100 countries, Pandora is operational in only 3 so far namely the U.S., Australia and New Zealand. The company also announced the acquisition of ticket provider Ticketfly worth $450 million. The duo will harness user generated data to tell fans when bands or artists are in town and sell tickets while also steering artists to areas where a large amount of people gave them a "thumbs up" on Pandora's platform.

However, considering the risks involved in pursuing so many new products at once and also the tedious task of integrating the two strategic acquisitions, investors can't be blamed for being jittery.

Moreover, Pandora reported dismal results in the third quarter of 2015. Not only was the company's reported loss much higher due to a one-time royalty settlement, but revenues also failed to meet expectations. Furthermore, investors were disappointed as Pandora lowered its revenue guidance for 2015.

The company's content acquisition costs escalated significantly in the quarter as it had to shell out $90 million in a settlement with record companies for pre-1972 recordings. Pandora now expects revenues for 2015 in the range of $1.153 billion to $1.158 billion, lower than the earlier projection of $1.175 billion to $1.185 billion.

Last year alone, the company paid 66% of its total revenue in royalties. In addition, stiff competition from Spotify, iHeartRadio, and Apple Music are making things tough for Pandora. Therefore, if the royalties are less, it will have more money to reinvest in its business and drive profitability.

It can't be denied that there are too many headwinds currently that threaten Pandora's prospects in the near term. However, we believe that if the company is able to successfully implement its overhauling strategy; it can position itself well to gain from increasing demand for music streaming, thus improving monetization and driving strong mobile growth.

Currently, Pandora has a Zacks Rank #3 (Hold).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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