Pandora pays two sets of royalties for the right to stream music. The first is for sound recording rights which are payable to SoundExchange. SoundExchange is the sole sound recording rights collection agency in the USA, collecting money from broadcasters and distributing to artists. These have been determined for 2011 after a lengthy court battle as the greater of 25% revenue or US$0.00102 per track (for non-subscribers). These per track fees rise every to US$0.0014 in 2014. In other words a 37% increase over 5 years.

Pandora also has to pay musical composition royalties to the major USA performing rights organizations (PROs) which are ASCAP, BMI and SESAC. It currently pays 1.75% of Gross Revenue to BMI and 0.38% to SESAC. These royalties are also therefore completely a variable cost. For the largest of PROs, ASCAP, the Pandora IPO doesn’t reveal the royalty rate, but does reveal that it is dispute with ASCAP over what Pandora consider an onerous royalty rate. Once again, Pandora has to resort to the USA courts to determine a major element in its cost base.

Altogether, Pandora paid US$29m in royalties compared to total revenues of US$51m in the first quarter of 2011 or 57% of Gross Revenue. In the whole of 2010, Pandora paid US$69m royalties on total revenues of US$138m - or 50%.

Adding to the business model woes, Pandora only operates in the USA, because there are completely different licensing regimes for different countries, which makes internet radio a purely national rather than global play.

Video: Sony Films off Netflix - is $8/month sustainable?

Netflix got the rights to stream Sony Films through its much-talked about deal with the Starz Movie channel. The deal was struck in 2008 and is due to expire in 2012 and gave Netflix the right to stream Sony and Disney films. The problem seems to be that Netflix has grown so fast, it has triggered a clause in the Sony-Starz contract, whereby Sony is due more money.

The Hollywood Reporter has a round-up of analysts’ opinions.

Our Take:

Contract spats are an inevitable part of life for distributors. MSOs and DTHs face the same challenges and are frequently in the news for the loss of channels during contract negotiations. As Netflix grows in importance and the contract negotiations become ver ever larger sums of money, we expect to see more situations like the Sony Films withdrawal.

The real question is whether Netflix in the long run can put together a sufficiently attractive package against an $8/month consumer contract, and still provide an attractive return for its shareholders. We seriously doubt it and think 2012 will be the year of a fight back from the MSOs/DTHs with their TV everywhere services gathering serious momentum.

We plan on examining Netflix’s prospects in a more in depth analysis when the 1st Half financial reporting season is complete.

Cable: Virgin Media Vs the BBC in UK platform battle

In the UK, Neil Berkett, the CEO of MSO Virgin Media, took to the Guardian, of which he is an non-executive director, to request that the BBC change its ways:

Why then, just as the digital revolution is gaining unstoppable momentum, has the BBC suddenly changed tack and started trying to replicate its traditional dominance by developing its own entertainment platforms whose development and distribution it can exert control?

More here.

Our Take:

The BBC iPlayer has provided Virgin Media with a differentiator from their DTH rival, BskyB over the last few years. With the coming launch of YouView, Virgin Media is understandably worried that the UK broadcasters will use their on-demand content to improve the chances of YouView to succeed. We believe Neil Berkett is right to be worried.

The future connected TV landscape will not be shaped by technology alone; we believe that attracting premium content onto platforms will be just as important as the technology. As ever the content owners will in a large part be skewing the odds of success for the platforms.

However, the role of state owned broadcasters differs from their commercial counterparts. We believe Neil Berkett is right to question the BBC’s strategy, but we don’t believe any answers will be forthcoming in the near future as his pleas are likely to fall on deaf ears.

Further reading: YouView - the future of British TV?

Telco: can Vodafone raise its Pay TV game in Germany?

Vodafone announced 25k subscribers to their €40/month German triple-play offer. Not happy with the 300 additions per day, Vodafone are planning a big marketing push in the 2nd half.

More here.

Our Take:

PayTV is a scale business and Vodafone really needs to up its investment if it has any chance of making progress. Germany is underpenetrated in PayTV compared to other countries and competition seems to be hotting up. The incumbent Telco, Deutsche Telekom, has around 1.3m subscribers on its IPTV platform and has aggressive expansion ideas of its own. The Telcos are competing head on with a reinvigorated DTH provider, Sky Deutschland, and regional MSOs who are vigorously upgrading their plant to support the digital future.

Germany is probably going to become the most interesting battlefield for payTV in 2011/2012 and we expect both big investments and innovations. Later in the year, we’ll be providing a deep analysis of the state of the German market.

Publishing: Barnes & Noble Nook takes on Amazon

Barnes & Noble are gaining momentum with their Amazon challenger strategy. Nook-related sales have grown to $250 million a year, with overall sales at BN.com at $858 million. Extremely healthy growth but still a pin-prick compared to physical stores ($4.4bn) and colleges ($1.8bn)

More detail here.

Our Take:

E-Books and E-Readers are going to continue their rapid growth, but whether they cannibalize or add to physical sales is still an open question. We believe that publishers have to be far more innovative in their bundling strategies and would recommend experimentation with bundling both physical and digital copies of books together, in a similar way to how the movie studios are experimenting with Ultraviolet.

Barnes & Noble put their USA market share at 27% which lags well behind our estimates for Amazon at around 60%. We are at early stage in the digital transition, but the Barnes & Noble figures show that all is not lost for traditional booksellers. We are fascinated by the evolution of the market and especially in the recent surge of self-publishing.

Further reading: Ultraviolet, Amazon.

Books: Harry Potter disapparates from publisher’s grasp

Harry Potter, arguably the most successful book (and movie) franchise of all time, gets a new home which is to be the exclusive distributor for eBooks. The Harry Potter franchise is owned by the author JK Rowling who retained the digital rights to the franchise and is the driving force behind the new site.

Our Take:

We can’t imagine that the eBook distributors, especially Amazon, are happy with the arrangement. We are intrigued by the presence of Overdrive who is providing the platform for the e-Books. Overdrive also serves the Waterstone’s and W H Smith’s e-book stores, as well as being a major player in the library e-book lending market. Perhaps, we are seeing the emergence of serious competitor for Amazon in the UK.

In any event, as more details emerge, we’ll publish an in-depth analysis covering self-publishing platforms and the rise of eBooks.

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