KEY POINTS
- LOCAL TRAJECTORY? 4Q15 Local Adverting revenue growth decelerated from 52% y/y to 34%, which is more than just a red flag since that's lower than the rate that P onboarded Local sales reps in any of the last 5 quarters (as far back as we can calculate). Maybe that was just a hiccup, but if not, the Local Radio Ad opportunity may be concentrated in the major markets that P has already entered, and the runway is likely a lot shorter than P believes. That said, the Ad-Supported model may be fizzling out since P’s growth will become even more dependent on sell-through (i.e. ad load), which we estimate has historically pushed its users away (see second note below).
- INTERACTIVE TIMING? P expects to finalize interactive agreements with the labels by 4Q16 and go to market by 1Q17. However, P is trying to negotiate additional terms beyond the interactive agreements. That will ultimately slow negotiations down since both sides have to be careful not to set dangerous precedent for the Webcaster proceedings, which is very tough to achieve, and why there is a dearth of direct license agreements in the field today. The above timing may prove ambitious; we’ll be keying in on any updates.
- NON-INTERACTIVE PRODUCT(S)? P suggested that it’s expecting “maybe 5% y/y” in sub revenue growth in 2016, which basically means the sub product is an afterthought until it hammers out new terms with the labels. But P has the ability to create a new market overnight if it started tiering its non-interactive subscription offering today. It's a considerable opportunity (first note below), but more importantly, would be a strategic defensive move (retention) that could actually help drive conversion for the pending interactive product (up-sell). But the longer P waits to try and lock its users into some form of a subscription contract, the more potential subs it will cede to its competition, which are currently deploying aggressive promotional tactics (e.g. discounting). We’re hoping for some indication that P plans to aggressively pursue the sub market today vs. whenever it's done jockeying over terms with the labels (see point 2). For now, we remain on the sidelines.
Let us know if you have any questions or would like to discuss in more detail.
Hesham Shaaban, CFA
Managing Director
@HedgeyeInternet
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