My take on the new royalty rates for internet radio

  • The new rate is pretty balanced. I believe Pandora sought $0.0011 and Majors $0.0025. Add ’em and divide by 2 = $0.0018, so just a tad more favorable for Pandora in this calc. The quick math that I consider: the cost per 1,000 hours (denominated as a CPM) increases from $21 in 2015 to $25.50 in 2016 (21%).
  • Definitely a win for all internet radio services in that the rate doesn’t escalate but for CPI index each year. I suspect that will always be the case going forward, so we effectively now have a “final” rate in perpetuity. Having said that, I’d expect the compulsory rates to be largely irrelevant by the next round, 5 years out, as most internet radio services will be licensed under direct deals.
  • Helpful for any internet radio service in the event of M&A in that it removes the 25% “greater of” term that would have made a formerly Large Pureplay webcaster less attractive to potential buyers.
  • One thing that’s bad for competition (if that were intended by the DMCA) but good for *existing* internet radio services is that it effectively forecloses entry by new competitors. There’s no longer an option for a Small Pureplay webcaster (% of revenue) so the table stakes for entering internet radio in the US are probably at least $10–15m for an angel or seed round. Raising such a round is unlikely in a highly competitive, relatively low margin business.
  • Good for Pandora. The rates and thus marginal profitability are workable at Pandora’s scale. Pandora’s advertising RPM last quarter was $72 on desktop and $54 on mobile (vis-a-vis the $25.50 hourly royalty CPM mentioned above). The most meaningful cause for investor concern is a lack of steeper growth (listeners, hours) over last 12–18 months due to Spotify’s ascent. P is looking to address growth in part via international expansion, which in turn requires an interactive subscription offering as the Majors prefer its higher ARPU and are unlikely to undertake direct deals with P otherwise (and no compulsory license in most parts of the world).
  • Huge for iHeartMedia. IHM gets a nearly 1/3 discount from what it was paying in 2015 ($0.0025 to $0.0017). Obviously this is practically a rounding error vs terrestrial ad revenues, but I’d expect it makes a big digital push all the more attractive.