Fitch: Clear Channel's Big Machine Deal Is A Long-Term Positive

Fitch Likes The Deal

FITCH RATINGS believes CLEAR CHANNEL's performance rights agreement with BIG MACHINE LABEL GROUP "will drive moderately higher costs to CLEAR CHANNEL over the near term. However, we believe there are longer term positive implications for both the company and the terrestrial radio broadcasting industry."

On JUNE 5th, CLEAR CHANNEL announced that it would pay performance royalties to BIG MACHINE and its artists on all of CLEAR CHANNEL's broadcasts -- over-the-air and digital streaming (NET NEWS 6/5). While exact terms of the deal were not disclosed, the payments will be structured as a percent of total advertising revenue, rather than the per-performance basis currently paid on digital streaming.

FITCH writes, "CLEAR CHANNEL, like all broadcasters, did not pay performance royalties on over-the-air broadcasts. The deal will therefore increase CLEAR CHANNEL's expenses. That said, we expect the increase to be minimal relative to CLEAR CHANNEL's financial profile. We expect CLEAR CHANNEL will first take a wait-and-see approach and assess the impact of the initial deal on its financials and digital operations before executing a significant number of additional agreements. Second, we expect the negotiated rate is likely lower that the fee (approximately 3% of local advertising revenue) that broadcasters currently pay to the songwriters."

"On the positive side," continues FITCH, "the deal reduces the royalties CLEAR CHANNEL pays to BIG MACHINE for its digital streaming. Broadcasters currently pay $0.002 per performance to SOUNDEXCHANGE for their digital streams. Approximately 2% of CLEAR CHANNEL's listening is digital. While we do not expect many more deals over the near term, should the deal prove beneficial over the longer term, we believe it could set a precedent for CLEAR CHANNEL and other broadcasters. Similar agreements with more record labels would improve the profitability of digital businesses. A challenge here is the logistics of negotiating with thousands of independent record labels."

FITCH concludes, "We believe CLEAR CHANNEL's iHEARTRADIO digital streaming service could provide an opportunity to capture a sizable portion of digital listening over the next few years. Key advantages lie in its superior content lineup, mobile application, and absence of subscription fees. Whether the ability to capture digital audience will translate into incremental revenue will depend on advertising demand and pricing. Nonetheless, we expect digital to remain only a small portion of total revenue in the medium term. We believe the risk to this agreement is that the company will not be able to sufficiently monetize its digital platform and that the terrestrial payments will result in a longer term net negative to CLEAR CHANNEL, but is mitigated by our expectations that CLEAR CHANNEL will wait to assess before signing other deals. While this deal opens the door for broadcasters and record labels to negotiate performance royalties on their own, we do not believe it necessarily precludes regulation mandated royalties. While the previous congressional proposal to impose royalty payments on terrestrial broadcasters died in 2010, such payments are being discussed in Congressional hearings."

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