Pandora Signs Major Labels as It Looks Toward Long-Awaited On-Demand Service

Pandora, the world's largest Internet radio, said it signed licensing deals with major labels and a string of indies, paving the way for a new on-demand service.

Pandora (P) CEO Tim Westergren told investors last week that Pandora is rarely the first to market with a product, but it's always the best.

After more than three years of speculation amid Spotify's global expansion and Apple (AAPL - Get Report) Music's high-profile entrance into so-called on-demand listening, Pandora appears to finally be on the cusp of its own subscription-based service that builds on its current ad-free Internet radio platform, Pandora One. Pandora's ad-supported free service has 78 million listeners, the company said.

On Tuesday, Pandora announced that after many months of negotiations it had signed a series of licensing agreements with major record labels as well as more than 40 independent distributors. The agreements with Sony Music and the Universal Music Group as well as the Merlin Network, which represents some 20,000 independents, are seen as essential steps in creating an on-demand service that can rival Spotify and Apple Music.

Conspicuously absent from Pandora's announcement was Warner Music Group, home to Madonna, the Red Hot Chili Peppers, Led Zeppelin, AC/DC and many others. A service without Warner, which does have licening agreements with Spotify and Apple, could severely cripple Pandora's ambitions. Westergren said conversations with Warner Music are continuing and that Pandora hopes to have the label signed for its on-demand service by the end of the year.

"This really was a collaborative effort," Westergren, the company's founder, said in a conference call with Wall Street analysts. "The fact that we have this enormous audience on the platform already, for whom we know so much and for whom we reach in a very contextual and targeted way, sets up an opportunity that no one else has, and I think the industry recognized that in the course of our conversations."

Pandora says the average user of its free ad-supported service listens to an average of 24 hours of music a month.

Finance chief Michael Herring said that by converting roughly 10% of listeners of its free service to its premium subscription platform, which is expected to be priced at $9.99 per month, it can add revenue of $1.3 billion by the end of 2020. Pandora's total business, he added, can rise in that time period to more than $4 billion. Typical of music streaming services, Herring said 65% to 70% of revenue from Pandora's subscription service would go toward royalty costs for songwriters and artists.

To convert listeners to an on-demand platform will require convincing Pandora's users, who have grown accustomed to Pandora's free "lean-back" curated music platforms, that they should pay a monthly fee to become more engaged in choosing their listening, buying concert tickets or watching live-streams of those same concerts.

Shares of Pandora, though, were falling 1.6% to $14.06 on Tuesday, an indication that even though Westergren's description of the new service highlighted new features not readily available from its chief rivals -- concert ticketing, for instance -- the Oakland-based music streaming provider will be entering the on-demand market more than a year after the launch of Apple Music and a full eight years after Spotify.

"Where investors might be underwhelmed here is if you say, 'they're late,' there's already quite a bit of competition and they're fighting a perception issue where people know Pandora for a certain mode of listening," Paul Verna, senior analyst at eMarketer said in a phone interview. "Investors may be thinking that Pandora's on-demand service could be good, but they're just not totally sure yet."

At present, Pandora has about 4 million subscribers to its ad-free Internet radio service whereas Apple Music said last week that is paid subscriber base had surpassed 17 million. Spotify, meanwhile, retains the lead with a global following of 39 million paid subscribers.

Pandora has hinted for months that its on-demand service would offer listeners "multi-tiered" pricing, with speculation that it could offer a product for as low as $5 per month. Westergren said that "having these mid-tiers can address the mass consumer, which we think has been a missing piece in this industry," though he stopped short of revealing what that lower price might be. Herring said that the new agreements would "facilitate multi-tiered" products.

Either way, such a lower tier would undercut Spotify and Apple's $9.99 per month on-demand services, which raises questions as to how Pandora intends to generate sufficient revenue from its lower tier offering to pay royalty fees to songwriters and artists. Complicating matters for Pandora is speculation that Amazon (AMZN - Get Report) is also poised to enter the music streaming battle with a service tied to its popular voice-activate Echo speaker.

"It's certainly a sensible strategy to hit different price points along the spectrum," Verna added. "But it's hard to know if they're offering anything that's really going to move people off one of the other services. There's enough brand loyalty with Spotify and Apple and even [Jay-Z's] Tidal and now Amazon is getting into the game, that you're not seeing this great consumer outcry that we need something different."

As he has done since taking over as CEO in March, Westergren emphasized that Pandora's service won't simply be a copy-cat of his rival's platforms. It's expected that Ticketfly, the concert ticket service which Pandora purchased in October, will be integral to the new service, alerting listeners when a particular artist is playing in their area and then selling them a ticket to the performance.

Unlike royalty costs, the economics of the ticket business are far more favorable than music streaming. Pandora said revenue from Ticketfly is forecast to exceed $300 billion by the end of 2020.

The Orchard was among the indie labels cited by Pandora as having signed the licensing agreements. Recently, Pandora secured licensing agreements from ASCAP and BMI, the largest two organizations that collect royalties for songwriters and artists.

Pandora's first order of business may be ensuring that Warner Music group comes on board its on-demand platform. Of the top 15 best-selling albums in history in the U.S., more than half are artists signed to Warner Music, Verna said.


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