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Post-CRB, Pandora execs answer wide range of investor questions

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Pandora CEO Brian McAndrews

In an open conference call that was bumped back three hours by a late-day release of webcaster rates by the Copyright Royalty Board (CRB), Pandora addressed the new rates and answered investor questions about the business going forward.

The call was important not only because Pandora is the largest payer of music licensing royalties to labels through the SoundExchange mechanism, but also because the CRB ruling clarified Pandora’s cost of business starting in a few weeks. Investors (and perhaps the company brass) had been maddened all year by not knowing what their biggest supplier would be paid in 2016 and beyond.

The “Blended Rate”

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Pandora CFO Mike Herring

The familiar tag team of CEO Brian McAndrews and CFO Mike Herring made a brief introduction of what they called a “blended rate” derived from the CRB ruling, then moved quickly to Q&A. the blended rate calculates an effective royalty rate for Pandora across its two service tiers.

Per-Performance Rate Ad-Supported Subscription Blended*
“Web IV Rate” Decision for 2016 $0.0017 $0.0022 $0.00176
Current “Pureplay Rate” for 2015** $0.0014 $0.0025 $0.00153

*Pandora’s projected blended rate for 2016.

**From 2006-2015, Pandora paid rates and terms under a Pureplay Agreement negotiated with SoundExchange. In 2015, the “Web III” or statutory rate was $0.0023.

(The $.0017 and $.0022 numbers are key royalty rates released by the CRB. Most of Pandora’s streams get the lower, non-subscription rate, which is why the “blended” rate is only slightly higher.)

General Comments

Pandora’s general public reaction to the CRB ruling is, “We can work with this.” The tone of the conference call was upbeat, forward-looking, with some relief that the waiting and uncertainty were over.

One investor asked how the ruling compared with Pandora advance thinking about it. “We had no advance notice of the direction the judges were taking,” Mike Herring said. “We expected it to be within 15% of what we’re paying today. It is exactly that, on a blended rate.”

Herring also noted a favorability, what he called “the consistency of the rate structure.” That is due to the four years after 2016, when the royalty rates are governed by U.S. cost-of-living metrics — inflation, in other words. Anticipating lower year-over-year rate increases than in the past, Herring said, “Next year, our costs are 15% higher. But as we go, our previous 3-5 year assumptions have better than expected outcomes. It does give us confidence in investing today. We know what the returns on investments will be. If we make those investments now, we can enjoy significant return in the future.”

Labels and Newcomers

One investor asked whether the record labels should be happy with the CRB outcome. “It’s difficult to know their expectations. This [ruling] fell in the middle of our proposal and theirs. We feel this is a reasonable rate, and they should feel the same.” (They don’t. See the official response from SoundExchange.)

Although Pandora is generally content with the CRB rate for 2016, McAndrews did express concern for newcomers to the field that don’t have Pandora’s first-mover advantage, scale, and monetization prowess. “It does make it harder for new players. It would be a challenge for a new company to start up and pay these rates from the start.” (In the past 12 hours RAIN News has heard from small webcasters that the new rates could force changes in their businesses, including a block on U.S. listening.)

Does It Change Pandora?

Another investor asked about potential fine-tuning changes to Pandora’s monetization method, including high ad loads. Mike Herring acknowledged that the new rates, which raise the cost of non-subscription streaming (free listening) and lower the cost of subscription streaming (paid listening without commercials), are not impactful enough to change strategy. “It does change the relative gross profit at various RPMs,” he said. “The trade-off is now different between subscription and advertising revenue. It’s probably not enough in itself to drive changes in ad strategy. Our strategy goes a lot farther than ad load in any given quarter.”

That led to more comments about how Pandora measures its investing pace.

“The investments we’ve made each year have always been looking at long-term outcomes. We don’t invest for the next quarter. That’s not the world we’re in. [There is a] transformation from over-the-air to online radio. To the extent that we can exploit that, we’re in a good position. We should invest aggressively in what we think the market is going to do. That’s why we invested this year, even not knowing our costs for next year. Now, we feel good because we’ve made the right investments, and we know our costs. We’ve doubled down on the business at hand.”

SoundExchange is considering its options, in clearly stated disappointment about the new rates. The final question in Pandora’s conference call asked whether the company is anticipating an appeal from SoundExchange.

“They can appeal. There is an appeal process. They can also ask the judges to re-open this process again. Those avenues have not been successful historically. […] We’re proud of the role we play, providing a new revenue stream for the music industry, replacing a form of radio [that does not provide any performance revenue].”

 

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Brad Hill

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