FCC Gives Final Approval Of Pandora’s KXMZ Purchase

Hits 102.7 KXMZ Rapid City Pandora ASCAP Royalty Music LicensingUpdate 6/2: The FCC has given full approval granting the transfer of Hot AC “Hits 102.7” KXMZ Box Elder/Rapid City, SD from Connoisseur Media to Pandora Radio.

In a supplemental pleading to the FCC as part of its Petition To Deny, ASCAP stated “that Pandora is motivated by obtaining the benefits of copyright licensing payment terms applicable to broadcasters rather than by a sincere desire to become a
broadcaster; and that grant of the Petition could lead to the collapse of the collective copyright licensing system, to the detriment of copyright owners, the broadcasting industry, and American society in general”.

The FCC responds that “ASCAP fails to establish any likelihood that the KXMZ(FM) acquisition would result in a court victory for Pandora. ASCAP’s predictions do not directly result from any Commission action, but from the intervening actions of various third parties—not only Pandora and the U.S. District Court for the Southern District of New York,but also Congress, the Department of Justice, and the U.S. Copyright Office. Because ASCAP does not and cannot say with any degree of certainty what the actions of these parties will be, it has not established either causation or redressability. We find that ASCAP’s standing argument is thus too attenuated and speculative to demonstrate that ASCAP has suffered or will suffer an actual or imminent injury-in-fact as a result of the KXMZ(FM) transaction, or that such injury will not occur if the Commission denies the Application. Therefore, we find that ASCAP has failed to establish standing to file the petition to deny on its own behalf“.

With all legal hurdles cleared towards the purchase of KXMZ, Pandora has until its contractual drop-dead date of June 10 to close on the acquisition. The full ruling from the FCC can be read here.

Update 5/4/15: The FCC today gave a Declaratory Ruling approving Pandora’s argument to allow it to purchase Hot AC “Hits 102.7” KXMZ Box Elder, SD from Connoisseur Media after nearly two years of holdups.

While Pandora is purchasing KXMZ with an intent to match terrestrial broadcasters or music royalty rates, the agency did not comment on that plan, but focused completely on the foreign ownership issue it first denied the acquisition on. The purchase is not approved completely as Pandora must satisfy the following conditions within ninety days:

  • Pandora must obtain prior Commission approval for: 1) aggregate foreign equity and/or foreign voting interests in Pandora Media exceeding 49.99 percent; or (2) any change in the Pandora Media Board of Directors that would result in a majority of foreign members; or (3) any individual foreign investor or “group” acquiring a greater than five percent voting or equity interest (or ten percent for certain institutional investors) in Pandora Media
  • Pandora Media shall modify its certificate of incorporation, bylaws, or other appropriate organizational documents to ensure that the Board of Directors has all necessary powers to implement the provisions of this Declaratory Ruling.
  • Pandora must also within 90 days of the date of the release of the Declaratory Ruling shall submit a list of steps it has taken or intends to take to ensure compliance and enable it will be able to meet the conditions every two years in its Biennial Ownership Report.

    Commissioners Ajit Pai and Michael O’Reilly released statements in regards to the decision.

    From Pai:

    Pandora’s application to acquire KXMZ, an FM radio station in Box Elder, South Dakota, has been pending at the FCC for almost two years. Why? Because of questions regarding Pandora’s level of foreign ownership.

    Let’s put this in perspective. Today, foreign companies can own majority interests in cable operators, cable programmers, common carriers, Internet backbone providers, satellite video providers, newspapers, and the list goes on. Indeed, foreign companies now own majority interests—together worth tens of billions of dollars—in two of the four nationwide wireless carriers. And right now, over 79 million Americans—more than 10,000 times as many people as live in Box Elder—listen to Pandora’s Internet radio service. Yet the Commission has tied itself (and Pandora) in knots trying to determine whether foreign interests own more than 25% of Pandora stock, and if so, whether Pandora should be able to own a single FM radio station in a small South Dakota town.

    This is absurd.

    Here are just two reasons why. First, the best evidence in the record indicates that Pandora’s level of foreign ownership falls below the 25% statutory benchmark found in section 310(b)(4) of the Communications Act. Yet, Commission precedent prohibits broadcasters (but not other regulated entities) from relying on this evidence. FCC case law makes it uniquely difficult to invest in broadcast stations, and as I have previously pointed out this is as anachronistic as it is illogical. And so we have decided to decide whether Pandora should be allowed to have more than 25% foreign ownership. The Commission should spend its time resolving actual controversies, not creating more work for ourselves. I am therefore pleased that we commit to examining in the near future whether we should revise our methodology for assessing compliance with the 25% statutory benchmark in the broadcast context. At this point, our outdated methodology may simply discourage capital from flowing into the broadcast space—which undermines struggling broadcasters, particularly rural and minority-owned stations.

    Second, there is no evidence whatsoever in the record that the public interest would be harmed by allowing a publicly traded company with widely dispersed foreign ownership to own an FM radio station in South Dakota. Given these circumstances, the scope of relief that the Commission grants to Pandora is too narrow and the conditions that the Commission imposes on Pandora are too numerous.

    Had it been up to me, this Declaratory Ruling would have read differently. Specifically, rather than applying a 49.99% limit and requiring Pandora to undertake a comprehensive monitoring regime to ensure that it stays within that limit, I would have followed our precedent with respect to common carriers and allowed Pandora to have up to 100% foreign ownership, so long as no single foreign investor owned more than 5% of the company without prior Commission approval. This approach would have safeguarded the public interest. It would have been much simpler for Pandora to administer. And it would have been consistent with “the Commission’s longstanding determination, in both the broadcast and common carrier context, that a shareholder with a less than five percent interest does not have the ability to influence or control core decisions of the licensee.”

    Notwithstanding all of this, I am voting to concur with today’s decision because it is a step in theright direction, one that brings us closer to finally bringing this proceeding to an end. And I do so with the hope that the Commission will be more forward-thinking the next time it evaluates broadcast applications involving foreign ownership questions.

    And from O’Reilly:

    I approve this Declaratory Ruling as a small step toward the ultimate goal of affirmatively expanding permissible foreign ownership in broadcast licensees above the current de facto 25 percent cap. The difficulties encountered by Pandora Media, the publicly traded parent of the licensee, in its efforts to prove that foreign entities do not beneficially own or vote more than 25 percent of its shares, are far from unique. In an increasingly global economy, it is an impossible task for a publicly traded company to establish the identity, let alone the nationality, of the majority of its shareholders. But there is no reason this undisputed fact need stand in the way of U.S. companies’ access to capital from foreign investors bullish on the prospects of the dynamic American communications marketplace. Under the law, the Commission is free to permit a higher foreign limit or waive the limit altogether, and I support our doing so here.

    However, as I have stated previously, I believe that the Commission can, and should, go beyond the current case-by-case approach to these requests by setting rules and policies affirmatively permitting more foreign ownership, subject to our authority to reject any application, pursuant to coordination with executive branch agencies, to address uncontroverted national security concerns. Further, any such affirmative expansion should not include the types of burdensome conditions set forth in this ruling, which have the potential to entrap any investment plan in a web of red tape for no value. I appreciate the Chairman’s commitment to work with me toward an overall liberalization of our broadcast-related foreign ownership rules, and this ruling’s clarification that the actions taken are specific only to this case and will not impact our discussions going forward.

    The full ruling can be read here.

    Update 6/30/14: Pandora has opened another box in its attempt to acquire “Hits 102.7” KXMZ Box Elder, SD from Connoisseur Media.

    Pandora has filed a Petition for Declaratory Ruling with the FCC over its foreign ownership stake. Stating that the FCC’s guidance to prove that its ownership is at least 75% held by United States citizens “is based on a decades old Commission policy that is irreconcilable with the manner in which publicly traded securities are held and traded in the United States today” due to Securities And Exchanges Commission “privacy regulations make it virtually impossible for publicly traded companies such as Pandora to determine the identity, much less the alien status, of many of their shareholders”.

    Pandora cites two private analysis firms data that Pandora’s stock is 80% held by Americans. As part of its petition, the company requests that the FCC allows “Pandora to be up to 100% beneficially owned by foreign entities and for foreign entities to hold up to 49.9% of the aggregate voting authority over Pandora”. Doing so, it states will prohibit foreign investors from acquiring
    voting control over Pandora while being more restrictive “than the
    approach that the Commission has adopted with respect to common carrier wireless licensees, and it should mitigate concerns historically expressed by the Commission regarding foreign influence over U.S. broadcasters. Second, this approach better aligns the Commission’s foreign ownership limitations with other federal agency policies, such as the SEC’s shareholder privacy rules.”

    Update 1/15: The FCC has rescinded its grant of the purchase of KXMZ by Pandora.

    Following a petition to deny filed by ASCAP in July, the FCC asked Pandora to prove that its ownership was held by at least 75% United States citizens. Pandora used mailing addresses as proxies for shareholder citizenship, which the FCC says “is not a
    sufficiently reliable indicator of citizenship for Section 310(b) purposes”.

    Until Pandora is able to demonstrate it fits under the foreign ownership caps, the FCC is shelving any further discussion on the status of the application. Billboard.biz reports on the effects the sale’s delay in closing may have on the trial set to start between Pandora and ASCAP over music licensing fees.

    Update 6/21/2013: The filing of the KXMZ sale has been made to the FCC. Pandora will be paying $600,000 to acquire the station and began operating it via LMA on June 10.

    Original Report 6/11/2013: Billboard is reporting that Pandora has acquired Adult CHR “Hits 102.7” KXMZ Box Elder/Rapid City, SD from Connoisseur Media. The sale and purchase price have yet to be filed with the FCC.

    Pandora did not acquire the station for the purpose of expanding into operating terrestrial radio stations, but rather acquired the stand alone in market 255 to take advantage of the disconnect between what performance royalty fees are available to terrestrial radio stations and digital services operated by terrestrial station owners as opposed to companies that are strictly digital. In operating the station, Pandora’s Christopher Harrison, tells Billboard that it will not change the station’s format, but will attempt to “apply Pandora’s insights and listening habits to program music that accurately reflects local listeners’ evolving tastes.”

    By owning a traditional FM signal, Pandora can attempt to operate with a lower licensing fee to ASCAP and the record labels, which Billboard explains in detail here.

    Harrison, General Counsel for Pandora, wrote a column at TheHill.com explaining the purchase as well.

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    1. K.M. Richards says

      Maybe the Chinese own it.

      Oh, wait, that was the argument against the failed KDAY sale.

    2. Autodyne says

      The FCC is no place for commissioners like Pai and O’Reilly. They cut through the old-world political cobwebs too easily. Sitting on that board must drive them both insane on a daily basis.

      They’re both refreshing to read though..

    3. only1moore says

      It’s going to be interesting to see how well Pandora run the station, even if it’s in a small radio market like Rapid City.

      1. Lance Venta says

        Pandora has been operating it under an LMA already for at least a year, if not longer. Doubt much will change after the sale closes.

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