Pandora Heads Into Battle

Pandora’s (NYSE:P) future hangs in the balance as the company’s Chairman and Chief Executive Officer Joseph Kennedy prepares to ask the House Judiciary Committee on Wednesday to support Internet Radio Fairness Act, a bill that proposes to make changes to the music licensing system.

What are Pandora’s Complaints?

In the months preceding the hearing, Pandora led an aggressive campaign aimed at putting Internet radio services on the same royalty-setting standard as cable and satellite radio stations. This, Pandora has said, will lower the royalties the company pays to stream music online. As record producer Jimmy Jam told Bloomberg, the bill would lower the rates paid by Pandora by 85 percent.

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“The current rate-setting structure is a clear case of discrimination against the Internet and innovative services,” read Kennedy’s written testimony. “This lack of a level playing field is fundamentally unfair and indefensible.” What is unfair, according to Kennedy, is that more than 50 percent of Pandora’s revenue will go towards royalty payments this year, while cable and satellite radio providers will pay 15 percent and 7.5 percent of their revenue, respectively. Pandora expects to pay $250 million to SoundExchange, a non-profit performance rights organization that collects statutory royalties from streaming music providers.

Internet radio providers pay different rates because the royalty rates for most other uses of copyrighted sound recordings fall under section 801B of the Copyright Act, while standards set for streaming radio providers like Pandora come as a result of the 1998 Digital Millennium Copyright Act, which made Internet radio an exception to the original act…

GavelClear Channel (NYSE:CCO)  joined Pandora in support of the bill.

What Does the Music Industry Have to Say?

As Bloomberg reported, SoundExchange president Michael Huppe stated in his testimony that “the claims that the current rates are ‘too high’ are wrong, overblown, and based on an incomplete and premature record.” What his statement refers to the inherent differences between satellite radio, which broadcasts its content to an unknown percentage of its subscriber base, and Internet radio, which streams songs to individual users. Therefore, based on this difference, satellite radio services like Sirius XM (NASDAQ:SIRI) are charged a flat royalty fee per user account, and internet radio stations pay a small fee for each song paid. For Pandora, that fee is $0.0011.

Huppe also noted that Pandora decided to “focus on building its audience — and thus its usage — while keeping its advertising load and subscription fees low.”

CHEAT SHEET Analysis: Could the Internet Radio Fairness Act Be a Positive Catalyst for Pandora’s Stock?

One of the core components of our CHEAT SHEET Investing Framework focuses on catalysts that will move a company’ stock. The proposed bill, which could lower Pandora’s fees by as much as 85 percent, could be “a major catalyst for Pandora’s earnings growth and therefore share price,” Albert Fried analyst Rich Tullo wrote in a September report. However, if the bill fails to pass, Pandora may have to adjust its business model so that royalties don’t decimate the company’s revenue to such a large degree.

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