Topics: Radio, Royalties, Internet radio Pages: 5 (1540 words) Published: April 17, 2014
Question 2

Slide 1 and 2– Pandora Horizontal conflict
Pandora used to have its target on desktop usage. Now it is switching to mobile and cars, with mobile adds growing faster than any other form. (We are going to see the numbers later). This happens to create an internal horizontal competition among its vehicle distribution channels and causes a necessity to invest resources in each of them at the same time.

Slide 3 – Pandora vertical conflicts
Pandora’s membership v.s. advertising sales
Pandora’s focus is to increase the advertising sales, especially in mobile devices, but at the same time it needs to grow the number of users. Right now Pandora is struggling to keep its membership rates increasing, and also has to face seasonal demand and competition threats.

Pandora Renata – Question 4

Slide 1 – Threats to success (with a graph)
Cost structure:
. Pandora pays royalties for every song played: membership and listening hours increases, royalty expenses increase at a linear rate. Until last year, Pandora was not yet profitable, the biggest concern of investors. But what’s worth considering is that Pandora seems to have addressed the biggest concern of investors – whether or not it can create a profitable business. And the business seems sustainable as the company expects to continue generating profits for the full-year 2014, despite expecting some loss in the first quarter. While market valuation is certainly under doubt, Pandora’s transformation into profitable business is encouraging considering the losses it experienced in the past few years.

Slide 2 - royalty volatility
.Pandora is in a constant battle over royalty prices.
Threat: While internet radio royalty fees are expected to rise with time, increasing number of users and increasing listener hours will also require Pandora to pay more royalties in the per track fee agreement. Pandora maybe be unable to favorably renegotiate royalty rates with the Copyright Board. If this implies that Pandora can not bring down these costs (as % of revenues) from current levels, there could be about 40% downside to Trefis price estimate.

Recently, Pandora has announced that it has filed a motion in federal court alleging that ASCAP (performing rights organization) has been discriminating against Pandora compared to similarly situated services like Clear Channel’s iHeartRadio in various ways. One of Pandora’s complaints is that ASCAP refused to give Pandora the royalty rates (for musical compositions) it gives to fellow webcaster iHeartRadio because iHeartRadio is owned by Clear Channel (first mover-internet radio mkt), which also owns several hundred AM/FM broadcast stations. So, Pandora has now purchased an FM radio station so it can also be eligible for the lower rates (regarding that are only available to internet radio services owned by terrestrial broadcasters. During an investor conference in early 2013, Pandora Media’s management had stated that the company expects to lower its content acquisition costs (as % of revenues) to 40% over the next few years. Pandora seems to be on the right track, as is evident from the recent jump in its mobile monetization. The company had earlier been lobbying for a bill called the “Internet Radio Fairness Act”. This bill is aimed at bringing the Internet radio business under the same roof as terrestrial and satellite radio. The basic issue is that Pandora pays much higher royalties (as a % of revenues) for music compared to traditional radio companies such as Sirius XM. Part of this has to do with higher rates and partly with the fact that Pandora is an under-monetized service, due to its almost sole dependence on advertising revenues. However, the company recently gave up its legislation efforts and will instead seek other resolutions for reducing royalty rates. Nevertheless, it is worthwhile to see how Pandora’s value could be impacted if the royalty rates (as % of revenues) were to reduce to the level that...
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