Pandora Media Inc (P) / ASCAP Trial Could Affect Daily Volitaility

0
Pandora Media Inc (P) / ASCAP Trial Could Affect Daily Volitaility
By w:Pandora [Public domain], via Wikimedia Commons

Susquehanna International Group analysts Brian Nowak and Michael Costantini highlight Pandora Media Inc (NYSE:P) and ASCAP’s trial.

Tom Claps, our litigation analyst on SIG’s Event-Driven/Special Situations Desk, was in Federal Court in NYC yesterday (1/21) to observe the opening arguments in Pandora and ASCAP’s trial. Tom will continue distributing daily midday updates over the course of the trial. 

Seth Klarman’s 2021 Letter: Baupost’s “Never-Ending” Hunt For Information

Baupost's investment process involves "never-ending" gleaning of facts to help support investment ideas Seth Klarman writes in his end-of-year letter to investors. In the letter, a copy of which ValueWalk has been able to review, the value investor describes the Baupost Group's process to identify ideas and answer the most critical questions about its potential Read More

Pandora Media Inc (NYSE:P) vs ASCAP: Royalty rates

The issue in question is the royalty rate Pandora pays ASCAP for music publishing rights. Pandora Media Inc (NYSE:P) currently pays ASCAP ~1.85% of gross revenue less an undisclosed advertising cost. ASCAP wants to increase the rate Pandora pays to 3% by 2015 (Fig 1). Note that any 2013 increase in ASCAP rates (as ASCAP is arguing for) above 1.85% of revenue would also lead to a catch-up payment by Pandora. ASCAP is basing these higher rates on Pandora’s current rates it pays independent publishers, Pandora’s current rates to SESAC, and Apple Inc. (NASDAQ:AAPL)’s current rates.

Pandora Media Inc (NYSE:P) is arguing it should only pay 1.7% of gross revenue less the undisclosed advertising cost, in-line with what terrestrial radio stations currently pay ASCAP. ASCAP argues that Pandora should not be treated as a terrestrial station as it plays/uses more musical content than terrestrial radio stations (which play news, talk, sports, weather, and other non-music content). In one set-back for Pandora, the Court yesterday stated it would not allow Pandora to consider its pending South Dakota terrestrial radio station acquisition as part of its argument to pay a lower ASCAP fee (closer to terrestrial radio stations). Pandora can re-raise the argument after the acquisition closes, but that is currently being held up by the FCC.

Pandora Media Inc (NYSE:P)’s ASCAP rate to remain steady

In our model, we expect Pandora Media Inc (NYSE:P)’s ASCAP rate to remain steady at 1.85% in 2014, but there is a wide range of outcomes (see Fig 2). If Pandora’s rates fall to 1.7%, it would add ~$1.1mn (1%) to our 2014 EBITDA (assuming 80% flow-thru) and if ASCAP wins and rates rise to 3%, it would reduce EBITDA by $12mn or 11% (again at 80% flow-thru). We have ignored the undisclosed ad cost deduction, implicitly assuming it stays constant.

Pandora Media Inc (NYSE:P) often trends on ad driven beats, but a path toward profitability matters too, so the outcome of this case could impact daily volatility. We intend to continue monitoring the case (with, as mentioned above, daily updates) and expect a ruling by mid-February.

Updated on

Sheeraz is our COO (Chief - Operations), his primary duty is curating and editing of ValueWalk. He is main reason behind the rapid growth of the business. Sheeraz previously ran a taxation firm. He is an expert in technology, he has over 5.5 years of design, development and roll-out experience for SEO and SEM. - Email: sraza(at)valuewalk.com
Previous article Netflix, Inc. (NFLX) Shares Surge After Earnings Beat
Next article Mario Gabelli: El-Erian’s Terrific, but Not an Equity Guy

No posts to display