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Takeaway: We were looking at Web IV as the last leg to our short, but it didn't go our way. We’re evaluating the position from here

KEY POINTS

  1. THIS TIME REALLY WAS DIFFERENT: The CRB ruled for a bifurcated rate structure, which took us by surprise since there is no historical precedent for a dual rate structure outside of the Merlin or Pureplay agreement, and P was the only involved party requesting such a rate structure.  The 2016 Web IV ad-supported/subscription per-track rates for 2016 are .17c/.22c vs. .14c/.25 under the Pureplay Rates, which translate to an effective rate of .18 for 2016 vs. the .23 that the Web III remand CRJs (same as Web IV CRJs) ruled for the 2015 period.  In short, Web IV is massive reset off Web III.
  2. WEB IV ≠ POWDER KEG: The 2016 Web IV blended effective rate is .18c vs. .15c under the Pureplay Rates that P is paying today; translates to a manageable ~15% increase in royalty rates.  P will continue to pay lower ad-supported rates (vs. subscription), which is how P structured its model.  In short, the structure of the Pureplay agreement is largely intact, but the Web IV rate structure has essentially shifted more of P's margin profile further away from the ad-supported business into the subscription business.  
  3. NOW WHAT? We were looking at Web IV as the last leg of our short.  We wouldn't necessarily look at the pre-market squeeze/relief rally as a short opportunity since P would still be trading at basically a 2-yr low.  We'll be monitoring consensus estimates to decide what to do with the position from here.  

Let us know if you have any questions or would like to discuss further.

Hesham Shaaban, CFA


@HedgeyeInternet 

P | Web IV ≠ Powder Keg - P   Web IV Rate comparison