Will New Royalty Rates Cut Costs in Half for Pandora?

A proposed House Resolution, the Internet Radio Fairness Act, could cut content costs for Pandora (NYSE:P) by as much as half.

Currently, the largest U.S. online radio service is charged a fixed price for each track. Because Pandora is a non-interactive online radio service, it falls under a different standard in the U.S. Copyright Act than other radio services like Sirius XM Radio (NASDAQ:SIRI). Last year, according to a press release issued by the company, Pandora paid approximately 50 percent of its total revenue in royalties, more than six times the percentage paid by Sirius.

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“Royalty rates for different formats of digital radio are astonishingly unequal,” said Chief Strategy Officer Tim Westergren in a statement. “Currently, Internet radio shoulders the largest royalty burden, far higher than any other form of radio.”

If the Fairness Act passes into law, royalties would be determined by a panel of judges. A report issued Monday by analysts at Albert Fried said that Pandora’s content costs could be reduced by 40 to 50 percent under the act because royalties would be determined as a percentage of revenue rather than the current fixed price per track.

“The law could be a major catalyst for Pandora’s earnings growth and therefore share price,” wrote analyst Rich Tullo in the report.

The bill, House Resolution 6480, was introduced on September 21 by Jason Chaffetz, a Republican from Utah, and Jared Polis, a Democrat from Colorado.

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