- Royalty Board issues Internet radio decision for 2016-2020
- Rival IHeartMedia also soars after ruling sets low rates
Pandora Media Inc. jumped as much as 21 percent, the most since March 2013, after a ruling set music streaming rates well below the amount sought by performers and the major record labels.
Pandora, the largest Web-radio provider, had the most at stake in the decision by the U.S. Copyright Royalty Board, and fought off what Bloomberg Industry analysts Matthew Schettenhelm and Tamlin Bason called “a potentially catastrophic royalty hike.” Shares of smaller rival iHeartMedia Inc. also rose Thursday.
As a provider of online radio, Pandora has relied on statutory protections afforded to terrestrial radio to preserve its access to songs. That’s distinct from on-demand products like Spotify or Apple Music, which allow users to choose individual songs rather than “stations.” They negotiate rates directly with the music industry. In order to expand into on-demand streaming and expand into new global territories, Pandora too must forge direct deals with labels.
Internet-radio companies must pay rights-holders 17 cents per 100 streams under the ruling issued Wednesday that runs from 2016 to 2020. Pandora, which had been paying 14 cents per 100 streams for its free, ad-supported service, sought a rate of 11 cents. The music industry wanted 25-29 cents, while iHeartMedia suggested 5 cents.
“It’s a win,” Rich Tullo, an analyst with Albert Fried & Co., said in an interview. “Any number below 20 cents was good for the company.”
Pandora, the pioneer in online radio, surged 20 percent to $16.16 at 9:46 a.m. in New York, while iHeartMedia gained 9.1 percent to $1.20. Through Wednesday’s close, Pandora and iHeartMedia had slumped 25 percent and 85 percent this year as they jousted with SoundExchange, which represents record labels and artists.
“This is a balanced rate that we can work with and grow from,” Pandora Chief Executive Officer Brian McAndrews said in a statement.
The new rates, applied to this year’s usage, would have increased Pandora’s content costs by almost $50 million to $517 million through the first three quarters of 2015, company executives said in an investor presentation after the ruling.
While higher, the new costs are below the $100 million in extra payouts the company could have faced, Tullo said.
The 17-cent rate on non-subscription services will rise with inflation. For subscription services, it will be 22 cents, according to the royalty board.
The ruling doesn’t reflect fair market rates and “will erode the value of music in our economy,” SoundExchange said in response to the ruling. The group said it will “consider all of our options.”
The decision may serve as a starting point for negotiations between Pandora and music-rights holders. It’s “the last big impediment to that next-level conversation,” Pandora Chief Financial Officer Mike Herring said in a Dec. 9 interview. “You’ll see a lot of new things come out of Pandora in the new year.”
The Oakland, California-based company, which said it had 78.1 million monthly active users at the end of its most recent quarter, has spent the past few years trying to do just that -- launching several initiatives to improve its relationship with record labels and develop new features to appease artists. However, record labels were unwilling to negotiate until the resolution of two issues: a dispute over royalties for songs recorded before 1972, and the CRB’s rate ruling.
In October, Pandora agreed to pay $90 million to temporarily resolve issues related to the pre-1972 recordings. In November, the company reached a deal to acquire assets from streaming service Rdio for $75 million to accelerate its efforts in on-demand streaming. It has also reached out to record labels about rights for territories beyond the U.S., Australia and New Zealand.