Pandora: The Beat on Music Royalties

Since the internet service provider’s IPO in June 2011, Pandora Media Inc (NYSE:P)’s stock price has declined 10.5%.  The company allows listeners to create personalized stations to access unlimited free music and comedy delivered via computer, mobile, and other connected device platforms.  Revenues are primarily derived through video and display advertising, but the company also offers a paid subscription service to listeners.

Pandora Media Inc (NYSE:P)

On August 29, 2012, Pandora’s second quarterly earnings were announced, and they were impressive.  Pandora’s stock price rose over 13% on revenues improving 51% to $101.3 million.  The announcement pushed Pandora’s stock price up to $12.43, the highest price the stock has reached in the past five months.  Over 40 million Pandora shares traded hands on August 29th, that’s 11.3 times the average daily value.  There remains a high short interest in Pandora since various investors have doubts that the company has established a sustainable competitive advantage and a solid revenue model.    Over 28.88 million, or 17.4%, of Pandora’s shares outstanding are shorted, giving Pandora a 10.4 short interest ratio.

Insiders have sold 535,480 shares in the past three months, and sold 4.84 million shares in the last 12 months.  Crosslink Capital is the largest hedge fund holder of Pandora stock and owns 34.96 million shares, comprising of over 40% of the fund’s portfolio.  Crosslink’s portfolio also consists of various other technology companies including the online family history resource Ancestry.Com Inc (NASDAQ:ACOM), the tech giant Apple Inc. (NASDAQ:AAPL), and they are also the largest hedge fund holder of the social game service Zynga Inc (NASDAQ:ZNGA).

The boost in Pandora’s share price is not only attributable to the company’s earnings release; they also may be positioned to benefit from federal regulation.  Democratic New York representative Jerrold Nadler released a discussion draft of a bill August 20, 2012, that would increase compensation for music artists by putting cable, satellite and Internet radio on the same royalty-setting standard.

Music artists are paid by broadcasters when their song is played on digital radio services like satellite, cable and Internet radio.  Nadler believes that it is not fair to music artists that broadcasters do not have to pay a royalty fee to artists when they play their music on traditional broadcast radio stations.

First Act, Nadler’s draft bill, will put satellite and cable radio services on the same royalty standard as Internet radio, making cable and satellite radio stations pay higher royalty fees to music artists.  Nadler’s draft bill proposes a marketplace stand that accounts for today’s technological environment and treats artists and platforms fairly and equally.

First Act was not viewed with the same optimism from the National Association of Broadcasters (NAB), which represents radio and television broadcasters.  NAB strongly opposes the draft legislation, claiming it fails to recognize the unparalleled promotional value of local radio airplay, and it would kill jobs at America’s hometown radio stations.

Republican Utah representative, Jason Chaffetz, also has his attention on music royalties.  He is working on a bill that would put Internet radio services, such as Pandora, on the same royalty-setting standard as other digital radio services.  Pandora has backed Chaffetz’s bill, which aims to lower the royalty fees Internet radio stations pay and make them more level with the rates of other digital radio services pay.

The Nadler bill and the Chaffetz bill amount to the same means to a different end.  Nadler believes that in establishing a level playing field, performing artists should not be hurt in the process, instead a royalty standard parity for all parties and compensate creators fairly should be created. This could create a considerable advantage for Pandora going forward and give its shares some momentum.

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