Online music streaming company, Pandora Media, Inc P has completed the earlier announced acquistion of technology and intellectual property rights from Rdio for $75 million after receiving approval from the U.S. Bankruptcy Court of the Northern District of California. The company will absorb 100 employees of Rdio in its product, engineering and content licensing divisions. Also, the company simultaneously announced a direct deal with Atlas Music Publishing.
These developments are a part of Pandora’s strategy to overhaul its operations to provide all of “radio, on-demand and live music” on its own platform. The company had been seeing a slowdown in its subscriber base, owing to the aggressive marketing strategy of Apple Inc.’s AAPL Apple Music (especially three-month free trial plan) and competition from other players like Spotify and Amazon AMZN Music. What is even more concerning is that even after the end of the free trial period, Apple managed to amass a decent number of paid subscribers.
As a part of this effort, the company acquired streaming music service provider, Rdio. While Rdio has not been able to sustain its growth amid stiff competition, Pandora is betting on its technology and geographical reach.
Rdio, founded in 2010, is a popular streaming music service. The company that was once valued at $500 million (in 2013) had filed for bankruptcy in November to save itself from the accumulated debt.
In contrast to Rdio’s availability in 100 countries, Pandora is operational in only 3 so far: the U.S., Australia and New Zealand. Furthermore, a major drawback in Pandora’s existing offering (or rather the strength of its peers) is the lack of curated playlists, which is popular at present. In fact, this led users to switch from Pandora to other services despite the significant price differences. The acquisition of Rdio should allow Pandora to diversify and expand its offerings. Pandora plans to offer the integrated offerings toward the end of 2016.
Pandora has also announced the acquisition of ticket provider Ticketfly, worth $450 million. The duo will harness user-generated data to tell fans when bands or artists are in town and sell tickets while also steering artists to areas where a large amount of people gave them a “thumbs up” on Pandora’s platform.
In addition to acquisitions, Pandora is cutting direct deals with music labels so as to reduce dependence on CRB rates and better manage its content costs. Apart from Atlas Music, in December itself, Pandora signed multiyear licensing agreements with ASCAP and BMI, the eminent Performance Rights Organizations, Downtown Music Label, a leading rights management firm and Warner/Chappell Music.
Earlier Pandora had signed a direct deal with Sony Corp's SNE Sony/ATV music label. These deals with music labels will offer greater certainty and help Pandora to reduce dependence on CRB rates over time. Pandora and other Internet radio stations like iHeartRadio still “rely on compulsory, government-issued licenses for music.”
Recently, CRB issued a long-awaited ruling on the royalty rates case. As per the ruling, Pandora will have to pay 17 cents per 100 streams of a song as royalty to the artists. The rate is higher than 11 cents that Pandora asked for but is lower than 25 cents as demanded by musicians and record labels.
Despite a 15% increase over Pandora’s 2015 effective per-performance royalty rate, CEO Brian McAndrews labelled it as a “balanced rate we can work with and grow.” Many analysts observe that as Pandora tries to move away from government-regulated rates, the CRB ruling “could set a benchmark for future licensing deals with the record labels that would enable Pandora to extend its reach.”
However, considering the risks involved in pursuing so many new products at once and also the tedious task of integrating the two strategic acquisitions, investors can’t be blamed for being jittery. So far, in the year, shares of Pandora have tanked 20%.
It can’t be denied that there are too many headwinds currently that threaten Pandora’s prospects in the near term. However, we believe that if the company is able to successfully implement its overhauling strategy, it can position itself well to gain from increasing demand for music streaming, thus improving monetization and driving strong mobile growth.
Currently, Pandora has a Zacks Rank #3 (Hold).
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