Pandora Fails to Reassure on Royalties

(Reuters) – Shares of Pandora Media Inc dropped nearly 4 percent on Tuesday after the online radio company said it will not renegotiate fees paid to music companies until 2014, offering little comfort to investors worried about hefty royalty charges.

The Internet music-streaming service operator said on its first analysts’ conference call that improved margins would come through more advertising rather than declining music royalties.

It would start negotiating in 2014 for new music royalty rates that would take effect in 2016, executives said. Royalties are based on a complicated rates-formula that essentially rises each year until 2016, after which a new, unknown set of rates will kick in.

“We believe it will be an economically rational rate,” said Joe Kennedy, Pandora’s chief executive officer. Royalties currently eat up more than half of company revenue.

Pandora hopes to offset those expenses with revenue growth from new markets. He said the company saw growth coming from mobile devices, where it is seeing success on benchmarks such as the number of consumers downloading its mobile applications.

But growth from the car market will not ramp up significantly for another few years as it will take time for automakers to get Pandora onto their dashboards, and for consumers to replace existing cars, executives said.

On Tuesday, Pandora announced an expanded relationship with Ford Motor Co, bringing the service into 10 vehicles, and a new relationship with Toyota Motor Corp’s Scion unit. It said it had 100 million registered users and 36 million active monthly users.

Pandora shares were down 3.6 percent at $18.56 on Tuesday afternoon, off an earlier low at $18.50.
Pandora lost $1.76 million on revenue of $137.8 million in the year ended January 31. Royalty payments totaled $69.4 million.

Its initial public offering in June attracted considerable attention after its stock quickly rose well above the $16 offer price before reversing course and crashing below it the following day.

(Reporting by Sarah McBride, editing by Matthew Lewis)