P | What's Your Gameplan? (Web IV)

Takeaway: Ruling is out sometime tomorrow. This note is more about P’s model in a post Web IV world than the decision itself (notes on that below)

KEY POINTS

  1. NO BASIS FOR FLAT RATES: The only way to get to down to flat rates is if the CRJs overweight the Merlin deal, which we actually expect to receive the least amount of credence (links below).  The other key benchmarks are advocating for a rate above what P is currently paying today (.16c); including the IHRT-WMG deal that has an effective rate of .17c while offering WMG a terrestrial radio revenue share, which IHRT has no legal obligation to pay for, and is also not covered by the statutory license.  SX is looking for .25c starting next year, which may seem extreme, but is not that far off from what the Web III Remand CRJs (same CRJs in Web IV) ruled for in the 2015 period (.23c).  In short, we can’t see the CRB ruling for a rate below .20c starting in 2016; the structure of the pre-1972 settlement alone suggests P is expecting the same.
  2. WEB IV = POWDER KEG: The issue is not so much that there is a certain rate threshold that would require P to sunset its ad-supported model, but rather the limited flexibility P has to manage any rate increase.  P's revenues are highly dependent on its cost structure (Content + S&M), so it can't really trim expenses without putting more of its revenues at risk.  Rather, P will likely need to spend more in S&M (i.e. salesforce) in hopes of driving enough revenue growth to offset the royalty rate increase; especially since it has yet to show any real improvement in ad revenue/sales rep over the past 2 years (both on a direct & trailing-rep basis).  But more importantly, very small misteps in execution (revenue growth/cost containment) could lead to considerable increases in cash burn (see slides below).  The risk of getting it wrong is too severe to continue prioritizing the ad-supported model.    
  3. WHAT'S YOUR GAMEPLAN? Mgmt will be hosting a call to discuss the Web IV outcome tomorrow at 4:30ET; what mgmt says on this call may be more important than the actual decision.  Mgmt implied on its Strategic Update call that its recent acquisitions/agreements were essentially hedges against the Web IV outcome, but stated that it wouldn't deemphasize its ad-supported model.  Granted, that may just be posturing, but if mgmt continues to devote the bulk of its resources (i.e. its loan) to its ad-supported model that has barely limped along under the Pureplay rates, then P will remain a secular short.  But if P chooses to demphasize the ad-supported model in favor of a dedicated push into the higher ARPU/margin subscription market, then it could be a different story.  

See below for supporting analysis on the implications of Web IV on P's business model.  Let us know if you have any questions or would like to discuss further.

Hesham Shaaban, CFA


@HedgeyeInternet 

P | What's Your Gameplan? (Web IV) - P   pre 1972

P | What's Your Gameplan? (Web IV) - P   Web IV benchmarks

P | What's Your Gameplan? (Web IV) - P   Web IV prior rates

P | What's Your Gameplan? (Web IV) - P   Web IV leverage slide

P | What's Your Gameplan? (Web IV) - P   Cost structure slide 2

P | What's Your Gameplan? (Web IV) - P   Web IV fallout 1

P | What's Your Gameplan? (Web IV) - P   Web IV fallout 2

P | What's Your Gameplan? (Web IV) - P   Web IV ARPU slide

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