Is Lobbying a Company's Best Investment?

Sean is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Roughly $3 billion dollars is spent on lobbying in the US every year. The industry is dominated by trade groups like the American Farm Bureau and the Chamber of Commerce, but is also dominated by big pharmaceutical companies like Merck (NYSE: MRK), which singlehandedly spent $4.5 million on lobbying in the first quarter of 2012.

While these companies have been the standard lobbying bodies for a while, over the last few years we have seen quite a few technology companies enter the ring. Google (NASDAQ: GOOG) outspent Merck in the first quarter of 2012, spending over $5 million on lobbying efforts. Google spent over $9 million on lobbying in 2011 and is on track to spend well over $13 million in 2012.

Facebook (NASDAQ: FB) is also upping its lobbying efforts. In the first two quarters of 2012, Facebook spent $1.6 million on lobbying, significantly more than what it spent on lobbying in all of 2011.

Why are Google and many other technology companies getting increasingly involved in lobbying efforts, and what do they hope to gain from it?

It is becoming more and more obvious that lobbying pays off. Research done by professors at the University of Mississippi indicates that there is a direct correlation between lobbying and a higher stock price. The research indicates that a company lobbying for five years would end up with a stock price 3.9% higher than a company that did no lobbying over that same period.

That research is also corroborated by another study reported in the Economist in which they took a stock index of the fifty companies with the highest lobbying intensity and compared it to the S&P 500. The results showed that this index outperformed the S&P by 11% from 2002 to 2011.

Now, the researchers producing the study recognized that just taking the companies that spend the most on lobbying would just result in an index of the largest firms. Thus the index is based on the firms with the highest lobbying intensity, which is lobbying expenditures as a percentage of assets.

Here is the chart:


<img src="/media/images/user_14475/lobbying-index_large.JPG" />

With such research touting the benefits of lobbying it is no wonder that tech firms like Google and Facebook are jumping into the lobbying scene.

Google now spends so much money on lobbying that it is involved with dozens of issues. It is interesting to look at its filings to take note of some of the issues it is advocating. Much of what it spent in the first quarter of 2012 was to defeat the SOPA anti-piracy legislation.

The Lobbying Disclosure Act of 1995 requires companies to disclose both the amount of money they spend on lobbying and the bills and issues they spend that money on. Taking a look at Google’s disclosure form for the first quarter of 2012 we see that some of the issues they spent money on were “benefits of cloud computing and online advertising for small businesses” and “online small business advertising issues.”

Such admissions drive home that fact that lobbying in Washington is not done with the consumer's or citizen's best interest at heart. It is done because through laws and policies these companies will be able to increase revenue and protect their business. Google undoubtedly wants to trumpet the benefits of online advertising for small businesses, since Google will be the company many small businesses turn to for their advertising needs.

A recent article in the Wall Street Journal discussed the struggles that Pandora (NYSE: P) is going through as it grows its customer base while simultaneously paying more in royalties. Pandora spends about 55% of its revenue paying royalty fees. It currently pays $0.11 for every song played. This number increases by $0.01 every year from now till 2015.

This might seem like a minuscule number, but when 3.6 billion hours of music are listened to in three months, the costs really begin to add up. Pandora’s solution was to of course add more sales reps, but as WSJ reports they are also “aggressively lobbying congress” to pass the Internet Radio Fairness Act.

This law would allow Pandora to have a royalty payment structure similar to that of Sirius XM Radio. Sirius Radio currently pays 8% of annual revenue as royalties, far lower than the 55% of revenue that Pandora pays. Researcher Tony Evans is quoted in the Wall Street Journal as saying, “From a strategy perspective it’s [lobbying for the Internet Radio Fairness Act] the best single thing they could for their business.”

As an indication of what effect this act would have, if Pandora ended up with a royalty deal similar to Sirius it would cut Pandora’s royalty expenses from $65.7 million in the third quarter to $8.5 million. It would save Pandora roughly $229 million per year.

The chances of Pandora getting the same type of deal Sirius has are pretty slim. Nonetheless, this scenario illustrates the huge opportunity companies have to increase their bottom line not through innovation or expansion, but through a few million dollars spent lobbying in Washington.

SeanMSullivan has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and Google and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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