Pandora Nears Deals For On-Demand Streaming

Fergie Duhamel performs at Pandora Summer Crush in Los Angeles this month. Pandora plans to roll out new subscription tiers in the U.S. and then in other English-speaking countries before launching elsewhere, say people familiar with the matter. ENLARGE
Fergie Duhamel performs at Pandora Summer Crush in Los Angeles this month. Pandora plans to roll out new subscription tiers in the U.S. and then in other English-speaking countries before launching elsewhere, say people familiar with the matter. Photo: Broadimage/Rex Shutterstock/Zuma Press

Pandora Media Inc. P -0.69 % is aiming to start expanding its internet-radio service as soon as next month, offering its hallmark free tier as well as two new monthly subscription options that will mark its foray into on-demand music streaming, said people familiar with the matter.

Pandora is close to inking deals with major record companies that will allow it to do so both in the U.S. and in new overseas markets, though the agreements haven’t been finalized, these people said.

While the music industry broadly supports the new paid tiers, some record-label executives are still wary of granting Pandora permission to launch its free service in new foreign markets without the ability to control which songs they put on the free tier.

Until now, the 16-year-old outfit hasn’t had to secure permission from record labels to use their music because it doesn’t let users listen to particular tunes on demand. It also had limited its service to the U.S., Australia and New Zealand—the few countries that make music licensing essentially automatic for internet-radio firms, as long as they pay rates mandated by federal judges or licensing collectives.

Pandora plans to roll out its new subscription tiers in the U.S. and then in other English-speaking countries before launching elsewhere, these people said.

The foreign expansion could jump start growth for Pandora, which has seen its listenership plateau in recent years at about 80 million active monthly users. Most listeners use Pandora’s free tier, with about 4 million subscribing to an ad-free version of its service, Pandora One, for $ 5 a month.

Neither of Pandora’s current offerings allows users to select specific songs to listen to; instead users pick a custom “station” that includes music similar to their initial choice.

The slowdown in user growth has rattled investors. Shares, which were trading around $ 20 last fall, fell 35% in November when the company announced a dip in listenership from the prior quarter, and haven’t recovered much since. Shares closed at $ 12.93 on Thursday in New York. A $ 90 million settlement Pandora paid late last year to the record labels involving its use of music recorded before 1972 also sent the stock down.

When it launches in more markets abroad this fall, Pandora is planning to create more ways for advertisers to make their pitches on its free tier, while offering a $ 10-a-month service as well that would give subscribers unlimited access to tens of millions of tracks, much like Spotify AB, and Apple Inc. AAPL -0.13 % ’s Apple Music. It also is planning to augment its existing $ 5 ad-free tier with perks such as the ability to skip more songs and listen to music offline, said the people familiar with the matter.

While competing with the likes of Spotify, Apple and other $ 10-a-month service providers may be difficult, some music-industry executives believe that Pandora’s planned $ 5-a-month tier presents a bigger opportunity for the business, potentially unlocking new revenue from consumers who want a bit more control over their listening experience but wouldn’t pay $ 10 a month.

The major record labels’ willingness to let Pandora use their music overseas and in new ways marks a dramatic shift. In recent years, many label executives have shunned Pandora for paying them far lower rates per user than services such as Spotify under the terms of their compulsory government licenses, while competing with such services for music fans’ time and attention.

Even though Pandora’s 2-million-song catalog is a fraction of Spotify’s and it hasn’t offered on-demand tunes, some record-label executives have worried that many U.S. consumers don’t know the difference between the two types of music services.

“There’s a lack of clarity around what paid-premium services offer,” said MusicWatch Inc. analyst Russ Crupnick, adding that these businesses have missed opportunities to educate mainstream consumers.

Jay Z‘s Tidal, for example, launched last year with the promotional backing of nearly 20 superstar artists. Their pitch to the public, however, focused on how Tidal supposedly would compensate artists more generously than competitors, rather than on how the service actually worked, Mr. Crupnick said.

Still, there is some crossover: Roughly half of the paying subscribers to Apple Music and Spotify in the U.S. also listen to Pandora, according to Mr. Crupnick’s research. He estimates there are a total of about 15 million to 16 million paying music-streaming subscribers in the U.S., while there were 68 million total subscribers world-wide in 2015, according to the International Federation of the Phonographic Industry.

With its global revenue down 60% since 2000, the recorded-music industry is hoping that paid-streaming services will grow fast enough to make up for declining CD and download sales. Subscription streaming generated $ 2 billion of the industry’s $ 15 billion total revenue, according to the IFPI.

Pandora’s impending licensing deals with the industry could complicate matters for companies that have been considering buying the internet radio giant. Liberty Media Corp.’s chief executive, Greg Maffei, floated an informal offer to acquire it earlier this year, said people familiar with the matter.

While the new agreements will broaden Pandora’s reach, they also could increase Pandora’s already high content costs, which contributed to its $ 170 million net loss on revenue of $ 1.2 billion last year.

Write to Hannah Karp at [email protected]


WSJ.com: US Business

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