Sirius XM (NASDAQ:SIRI) saw a sharp rise in equity price at the close on Friday on the heels of news that the Copyright Royalty Board had established royalty rates for the satellite radio provider that were not overly burdensome. This news may bode well for Pandora (NYSE:P) as it goes about trying to argue for more favorable rates in its own right.
It is no secret that Pandora pays a lot of money for royalties. It has been an ongoing challenge for the Internet radio provider for years now. In fact, over half of Pandora's revenue is often shelled out to pay royalties. The debate here is not whether Pandora should get cheaper rates, but rather whether or not a viable business model can be sustained with the rate structure the way it currently exists.
This critical issue impacts Pandora, Spotify, Sirius XM, terrestrial radio, and any company that streams audio entertainment over the Internet. So how is it that the new rates for Sirius XM on satellite streaming might benefit Pandora? The answer is somewhat simple if we review the facts.
In its hearings for new royalty rates Sirius XM was seeking the rate for 2013 through 2017 to be 5% of revenue with a cap at 8%. In contrast, Sound Exchange (the company that collects and distributes royalty payments) was seeking the 2013 rate to start at 13% and work its way up to 20% for 2017. The Copyright Royalty Board (CRB) decided on a 9% rate for 2013 and a cap at 11% in 2017.
While the decision by the CRB was higher than Sirius XM was seeking, it was substantially lower than the rates sought by Sound Exchange. In essence the CRB leaned in favor of the distributor of the copyrighted content rater than the supplier. If the CRB decision is any indication of what direction royalties for Internet streaming may go, it would appear that they are headed in a direction of leaning toward rates that may be much more workable for Pandora.
There are a few points of clarity needed here. The first is that the rates depend on the services offered, and rates for Sirius XM's Internet platform are more than the satellite platform. In point of fact Sirius XM pays out more in royalties if user Joe is listening on the Internet vs. user Mark listening over satellite, even if they are listening to the exact same song. It is just the way it is!
There is currently legislation regarding royalties that Pandora is backing in full force. The Internet Radio Fairness Act has a goal of creating a more level playing field. You can bet your bottom dollar that the new rates that Sirius XM is going to pay between 2013 and 2017 will come up as an exhibit in the debate about not only the bill, but royalties in general.
As with anything in life, there is another side to the coin. While Sirius XM getting lower rates may well help Pandora in its own battle, it could create an entirely new battle for Pandora! Sirius XM will be launching a personalized Radio service (Internet delivered) later this year. With the satellite streaming rates appearing to be great for Sirius XM, the satellite provider can likely afford to make its personalized radio experience even better rather than just mimic Pandora. This means more competition!
The bottom line is that the royalty battle is the most important battle Pandora faces right now. Investors in Pandora need to pay close attention to ANY news on royalties. Savvy investors will seek out the bits of information that could lead to a decent trade.
Additional disclosure: I have no position in Pandora