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P: It's All About the Benchmarks (Web IV)

Takeaway: Wishful thinking does not trump precedent set by the prior CRJs.


P and SX are worlds apart in their proposals, but the big difference is that SX is looking for a steady increase off the Web III rates, while P is asking for a massive reset.   We can all exchange jabs on who has the better benchmark, but unless P is the clear winner, it will likely be the loser since its proposal is the one that deviates most from prior rates set by the CRB (see the below quote for context).  In short, P was playing from behind before the game even started.


“the rates in these negotiated agreements serve as a caution to us not to depart radically from past rates where we cannot be confident, based on the quality of the benchmark evidence in the record, that the magnitude of such a departure is fully supported in the target market.” 

- Web III Copyright Royalty Judges


As we mentioned during our call last week (P: Webcaster IV = Powder Keg), the benchmarks matter most, and this is where P has the weakest argument of all the players involved.  Below we discuss each of the major benchmarks, with supporting slides from our deck.  



  1. IHRT (Warner Deal): The deal includes a series of benefits not covered by the statutory license, particularly a revenue share opportunity for terrestrial radio, which IHRT doesn’t have any legal obligation to pay WMG for since terrestrial is considered promotional.  For context, terrestrial represents the overwhelming majority of radio consumption in the US (vs. internet).  Further, IHRT's effective rate for the WMG deal was supposedly recalculated at $0.0017/spin at final arguments vs. the $0.005 it previously submitted (we're still trying to verify).  What we do know is that SX calculated the effective rate for the IHRT-WMG deal at $0.00309/spin (for the 10/2013-5/2014 period) after attempting to adjust for perceived calculation errors and extra-statutory factors.  IHRT doesn't appear to make any attempts to adjust its own benchmark for these extra-statutory features in its Proposed Findings, so it would seem that if $0.0017/spin is indeed the effective rate, that would be the lower bound of the zone of reasonableness, not the upper bound, especially considering the terrestrial radio revenue share in the deal.  
  2. SX (Interactive Deals): SX's benchmark is derived from 80+ interactive agreements.  Note that outside the ability to choose specific songs, interactive and non-interactive are largely the same service, buyers, and sellers.  Further, the Copyright Royalty Judges (CRJs) in both the Web II and III proceedings used the interactive benchmarks as a baseline for setting rates.  The question is what is the appropriate interactivity adjustment, with SX calling for 2x based on the ratio of retail subscription prices in the interactive vs. non-interactive market, and P calling for 4X based on the ratio of total webcaster revenues in the interactive vs. non-interactive market.  The former was the same analysis used by SX in Web III, which the CRJs adopted with downward adjustments.  The latter essentially calls for a greater interactivity discount given the lower relative monetization levels of a non-interactive webcaster (primarily ad-supported) vs. an interactive webcaster (primarily subscriptions).  Since P is the largest non-interactive player in the market, P is essentially asking the judges tailor the rate to suit its model.  Note that all of the CRJs in every Webcasting proceeding before Web IV suggests that they copyright licensee’s business model (e.g. P's ad-supported model) is secondary concern at best for determining rates under the willing buyer/seller standard (see slides below and email us for direct quotes).  
  3. P (Merlin): We’re not sure why one 18-month deal between P and an entity that represents 5%-10% of P’s total spins could receive the greatest weighting as a benchmark for what a willing buyer/seller would agree to over the next 5 years; regardless of statutory influence.  But that’s the major issue.  All the CRJs agree that their role is to establish rates that would have been negotiated in the market assuming no statutory license existed.  P really hasn’t done anything to prove that Merlin wasn’t directly tethered to the Pureplay Agreement, which is both the prevailing statutory rate, and inadmissible as a benchmark for setting rates (see below).  Further, the Register has never "blessed" the Merlin agreement; it has never even seen the agreement.  The Register's role in this process was a matter of law, not fact.  The Register allowed it because it was a direct license agreement, which legally can't be thrown out.  However, the Register is also allowing SX to submit the Pureplay Agreement as evidence to assess its statutory influence over the deal (see actual excerpt from decision below).  All indications are that Merlin was very careful in structuring the deal so that it couldn't be separated from the Pureplay agreement, which means P has likely already lost; especially since the onus was on P to prove why the CRJs should depart radically from past rates.


Below are the slides from our call last week specifically discussing the Web IV benchmarks.  Let us know if you would us to send over the the full deck and replay.


Hesham Shaaban, CFA



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Cartoon of the Day: The Real Hurricane

Cartoon of the Day: The Real Hurricane - jobs report cartoon 10.02.2015

So, Hurricane Joaquin looks like a "no-show" this weekend along the East Coast of the United States. The U.S. jobs market? Well that there is another story...Talk about a stink bomb of a jobs report today. Just awful.


As anyone who subscribes to our research products knows, we've been the non-consensus financial research firm out front-and-center making the contrarian call on slower-for-longer (economy) and lower-for-longer (Fed rates).


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Unintended Consequences: What $15 Minimum Wage Means for Fast-Food Industry

In this brief excerpt from a recent edition of The Macro Show, Hedgeye Restaurants Sector Head Howard Penney discusses the unintended consequences of raising the minimum wage for fast food workers to $15 an hour. According to Penney, the industry can’t afford it, people will get fired and stores will close.


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BONUS! Is 'Mobile Order & Pay' the Holy Grail for Starbucks?

If you missed it...Check out Penney's review of the new Starbucks Mobile Order & Pay app and how it plays into his long-term view on the company. 



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Retail Callouts (10/2) | Ups and Downs in Athlete Endorsements, NKE, AdiBok, UA, JWN, AMZN

Takeaway: James Harden's start with Adidas, and remembering 10/2 -- The ups and downs of Athlete Endorsements.

AdiBok, NKE - On the first day of his contract, Adidas delivered a truckload of shoes to James Harden.  Now he won't have to wear Jordans when going to the movies.



After Nike was dealt several blows in the sports endorsement world by UA -- starting with Kevin Durant, then Misty Copeland, Jordan Spieth, Tom Brady and Steph Curry -- Nike finally wins one in the press at the expense of Adidas' endorsement of James Harden. Not only is Adi paying Harden a total of $200mm over the next 13 years, but it also had to self deprecate itself (we don't know what else to call a truckload delivery) after the basketball player was spotted wearing Jordans and Nike in public not once but twice since singing the deal. That begs the question for Adi as to whether the investment is really worth it. Nike and Jordan collectively have 97% share of the US basketball market. And, if Adidas can't get its players to buy into the brand (who it is paying handsomely) then how does it convince the consumer to give it a shot?

Retail Callouts (10/2) | Ups and Downs in Athlete Endorsements, NKE, AdiBok, UA, JWN, AMZN - 10 2 2015 chart1

Retail Callouts (10/2) | Ups and Downs in Athlete Endorsements, NKE, AdiBok, UA, JWN, AMZN - 10 2 2015 chart2

Harden leaving the theater in mid-September

Image source: TMZ


BUT...Let's Keep Nike's Ego In Check On This One

Anyone know what today is? It was October 2, 1996 that Lance Armstrong was diagnosed with Cancer. Nike subsequently commercialized his ensuing popularity into its 'yellow bracelet' business, which exceeded $100mm, and then into 'wear yellow' apparel and footwear line, which we think approached $400mm at its peak. Needless to say, that business is close to zero today.  Just a subtle reminder as to how quickly and dramatically things can change in the athlete endorsement world.

Retail Callouts (10/2) | Ups and Downs in Athlete Endorsements, NKE, AdiBok, UA, JWN, AMZN - 10 2 2015 chart3


NKE - Nike Forced to Hand Over Communications with Lance Armstrong. Court is assessing whether Armstrong must return more than $30 million paid to him by the U.S. Postal Service in sponsorship money.



AMZN - Amazon announces that Apple TV and Chromecast will not longer be sold via Amazon saying it wants to avoid customer confusion since these players don’t interact well with the Prime Video platform.  Roku, Xbox and PlayStation are unaffected.



JWN - Nordstrom has closed on the sale of its credit card portfolio to TD Bank.  The company is using the $2.2bn in proceeds to pay off debt, issue a special cash dividend of $4.85 per share, and increase share buyback by $1bn.



Neiman Marcus cuts 500 jobs bringing the headcount to 15,500.


JCP - JC Penney taking action to reduce the risk of its pension plan, by offering a lump sum to some participants, and entering into agreement to pass portion of obligation over to Prudential.



KSS - Madden Girl launching at Kohl's on Oct 15th.



DKS - SVP and CMO Lauren Hobart named Executive VP, CMO and general manager of Dick’s new women's store Chelsea Collective. She will retain marketing oversight for all Dick’s lines of business.



WMT - Walmart opening yet another e-commerce fulfillment center, this one in Atlanta.



Gilt by Appointment seeing average order values more than twice as high as those placed via its e-commerce site.



ShoeBuy Appoints Bob Mullaney as COO and President 



BEBE - bebe stores, inc. eliminates 50 positions in workforce reorganization.  Expecting $4.8mm in annual savings.



SVU - SUPERVALU CEO Sam Duncan Announces Plan to Retire February 2016. He served as CEO since February 2013, appointed as part of sale to Albertson's.



CHS - Chico's appoints Cynthia A. Fields, former Victoria Secret CEO to its Board of Directors


Och Ziff (OZM) | It's Darkest Before Dawn - Tax, FCPA, and Performance Fears Rampant

Takeaway: September performance was very soft and the stock reflects that now trading at trough levels on a Price/AUM basis.

  • September performance released this morning was very soft and underperformed both the broader market and the early calculation of leading alternative benchmarks. OZM's core Multi-Strat product experienced a -3.66% decline in September, more in line with beta as the S&P 500 lost -2.64% and with the Barclay's Hedge Index currently running at a -0.80% decline. Importantly, OZM Multi-Strat lost its running year-to-date positive return now down -2.0% for 2015 versus the Barclay's Hedge Index running down -0.6% but better than the S&P 500's performance of down -6.5%. Och's other Multi-Strat products are faring better year-to-date with its Asian strategy up +2.8% and its European product up +3.8% for '15.
  • Backing out investment losses for the month, we calculate that OZM also had a -$821 million redemption in the period, which annualizes to a -21% organic growth rate. The year-to-date score however is not as bad with Och's running fund raising at -$1.2 billion, or a negative growth rate of just -4%. 
  • OZM stock has underperformed the broader market and the asset management sector since March of last year and the disclosure of a potential FCPA violation (see our note titled Watching the Same Movie Twice) which was also reduxed in a major media outlet last month. We see nothing new on this issue other than shares continue to overly discount this item in our view. With the current depreciation of the stock on its core dividend payout alone (without incentive earnings), OZM now yields 7.8% as the company dividends out over 85% of its earnings and we calculate core OZM earnings at $0.80 per share on an annual basis. Putting a traditional asset management multiple on this core earnings stream translates to a $10 per share fair value, however with 3 months to go in 2015, there is also the opportunity for the firm to earnings back its slight performance deficit and create a year-end incentive payout. OZM shares are near their all-time trough on a Price-to-AUM multiple with the firm's current market cap at just 9.6% of its asset-under-management. The stock bottomed at 9.3% on this metric in 2009 with the long term mean value at 15.8%.


September Results


This morning Och Ziff reported soft performance in September with negative returns in all of its main products. The firm gives four numbers in a shortly worded 8-K on a monthly basis, which includes the monthly performance for its OZ Master Multi-Strat Fund (~59% of total assets-under-management), its multi-strat fund in Asia (~3% of AUM), its multi-strat fund in Europe (~3% of AUM), and its total month ending assets-under-management. The OZM reported numbers this morning were:

  • OZ Master Fund performance in September of -3.66% (YTD: -2.0%)
  • OZ Asia Master Fund performance in September of -1.39% (YTD: +2.8%)
  • OZ Europe Master Fund performance in September of -2.11% (YTD: +3.8%)
  • Ending total assets-under-management of $44.1 billion (YTD: -4.1%) 


The most current tabulation of running OZM performance and AUM: 


Och Ziff (OZM) | It's Darkest Before Dawn - Tax, FCPA, and Performance Fears Rampant - table


Relative to other Alternative benchmarks including the Barclay's Hedge and the Barclay's Multi-Strat, OZM returns under performed:


Och Ziff (OZM) | It's Darkest Before Dawn - Tax, FCPA, and Performance Fears Rampant - comp 1

Och Ziff (OZM) | It's Darkest Before Dawn - Tax, FCPA, and Performance Fears Rampant - comp 2


However capitalizing the firm's core management fees of $0.80 per share at a traditional asset management multiple translates into $10 per share in value alone:

Och Ziff (OZM) | It's Darkest Before Dawn - Tax, FCPA, and Performance Fears Rampant - implied price


OZM stock is also close to trough levels on a Market Cap-to-AUM basis at 9.6%, well of off its mean of 15.8% and near the '09 bottom of 9.3%:

Och Ziff (OZM) | It's Darkest Before Dawn - Tax, FCPA, and Performance Fears Rampant - Price to AUM



Sell in May and Miss a Payday 

Magnum P&I

Robust March Performance - 2015 Off to a Hot Start

Don't Call it a Comeback...I've Been Here for Years

The VIX Vaporizer

Watching the Same Movie Twice - Reload on OZM shares

Hedgeye BlackBook Best Idea Long



Jonathan Casteleyn, CFA, CMT 




Joshua Steiner, CFA


CHART OF THE DAY: Payrolls Running into the Law of Large Numbers?

Editor's Note: Below is a brief excerpt and chart from today's Early Look which was written by Hedgeye U.S. Macro Analyst Christian Drake. If you're interested in staying a step ahead of consensus, we encourage and invite you to subscribe.


  • RoC | Past Peak:   From a rate of change perspective NFP peaked in February at +2.343% YoY.  Re-breaching that growth rate to the upside is not going to happen.  It’s just math meeting realism.  The M/M change in NFP would have to be +602K for that to happen.  What does that mean?  Not much in the very immediate-term, at least based on historical precedent.  As the Chart of the Day below illustrates, payrolls run into the law of large numbers as an expansion matures with peak rate-of-change in NFP occurring ~2yrs ahead of the peak in the cycle.  Cycles take time to play out – let it breathe.  And, as noted above, typical business cycle oscillations in the post-war period are only loose analogs for the post-crisis expansion.  

CHART OF THE DAY: Payrolls Running into the Law of Large Numbers? - z chart 1 cd

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