While music streaming is the star of the music industry’s renaissance, Pandora is making headlines for the opposite reason: SiriusXM expects to write down its music streaming service by about $1 billion, a 28.6% decline from the $3.5 billion price paid fewer than two years ago.
In a press release issued Thursday, the company singled out an expected impact of Pandora’s “royalty cost structure” on its financial performance. New CEO Jennifer Witz went deeper during Thursday’s Citi TMT West Conference, explaining that expected increases in per-play royalty costs will have “a meaningful impact on Pandora’s profitability” in the coming years. Not only must Pandora battle Spotify, Apple and Amazon for streaming relevance, it knows when a royalty rate hike is coming.
Witz was referring to “Web V,” the rate-setting proceeding currently before the Copyright Royalty Board, that will set the per-play royalty owed by non-interactive — the opposite of premium, on-demand access — Internet radio services from January 2021 through 2025. (Pandora also has a subscription service that pays rates negotiated with rights owners.) A rate increase could further erode margins by deepening the difference between how successfully Pandora monetizes listening time and what it pays rights holders.
In the third quarter of 2020, Pandora’s advertising revenue per thousand hours (RPM) decreased $0.87 — $85.33 to $84.46 — while licensing costs grew $1.11 — $39.05 to $40.16 (compared to Q3 of 2019). The net result was a 4.3% decrease in net revenue for each hour streamed — a significant change in the thin-margin music streaming business.
The pairing initially looked good on paper. When SiriusXM acquired Pandora in February 2019, it boasted how the streaming service was a perfect, non-overlapping fit for its satellite radio business. At the time, the satellite and streaming listenership exceeded 100 million, according to the company. But market changes have pushed SiriusXM and Pandora in opposite directions.
Also on Thursday, SiriusXM revealed it added 909,000 self-pay subscribers, net of churn, 109,000 more than expected, and finished 2020 with 30.9 million self-pay subscribers. Pandora ended September — the last period with available financial data — with 58.6 million monthly active listeners compared to 66 million when the deal closed in February 2019. Streaming competitors such as Spotify, Apple Music and Amazon — all global services — grew mightily over the same time period. Spotify in particular improved its subscriber count from 100 million to 144 million and ad-supported listeners from 123 million to 185 million.
The write-down will be a major blemish on SiriusXM’s yet-to-be-released fourth-quarter and full-year earnings. If 2020 is on par with 2019, the $1 billion impairment expense would turn net income of roughly $250 million to a net loss of $750 million. In truth, the expected write-down will be a non-cash expense that will not affect two arguably more informative metrics, earnings before interest, taxes, depreciation and amortization (EBITDA) and free cash flow.
Nevertheless, writing down an asset doesn’t reflect well on the buyer: the price was too high, performance is worse than expectations, or a combination of the two.