Pandora CEO exit could shake up streaming

A shakeup at Pandora could mean big changes for users of the online radio service.

CEO Joe Kennedy is quitting the company despite increasing revenue and subscriptions in the fourth quarter of last year.

Kennedy’s exit came as a surprise. He joined the company in 2004 and guided its trajectory from a newly launched Web service to the second most popular iOS app after Facebook, gathering 67 million active users along the way.

But, like most digital companies, Pandora is struggling to turn all that attention into profit growth while keeping customers happy and without raising prices. Its ad-supported service is free; an ad-free version is $4 per month, or $36 a year.

Pandora’s challenge is to boost mobile advertising revenue and cut costs in the face of rising music licensing fees. The service last week brought back a 40-hour-per-month cap on mobile streaming, citing a spike in per-track royalty rates. In a blog post announcing the cap, founder Tim Westergren said rates have jumped more than 25 percent in the last three years and are expected to increase 16 percent over the next two.

More money, more problems

Licensing fees are necessary for music subscription sites, but those royalty rates are cutting into profits. Pandora’s content costs, which include royalties, jumped 59 percent in the fourth quarter of last year to $76.7 million. Subscriptions and ad revenue also increased, but still Pandora reported a $14.6 million loss.

Even Apple is reportedly running into roadblocks with content licensing for its rumored Internet radio service, nicknamed iRadio (by everyone but Apple, that is). Should it launch, the service is expected to become a key rival to Pandora, but some reports indicate iRadio won’t arrive until this summer or later.

According to the New York Times, the trouble lies with Sony/ATV. The company withdrew from the organizations such as the American Society of Composers, Authors and Publishers (ASCAP) that typically negotiate with media streaming services for bulk licensing rights. Pandora and its ilk must now negotiate directly with Sony/ATV; for Pandora, those negotiations led to a 25 percent jump in royalty rates.

License to stream

The New York Post on Thursday reported that Apple is trying to negotiate lower rates for songs than its competitors. Each service pays a different amount, because rates for Internet radio services are required to be at least 25 percent of the service’s annual revenue. Pandora in 2011 spent 50 percent of its revenue on royalties. According to the Post, Apple is rumored to be aiming for 6 cents per 100 songs, which is reportedly half of what Pandora pays.

Pandora last year joined efforts to push through royalty rate reform in Congress, but the legislation died and isn’t expected to be reintroduced.

Content streaming is a pricy business all-around. Netflix’s licensing bill over the next five years is expected to top $5 billion. The company has vowed not to raise prices, after the separation of its DVD and streaming plans caused a public outcry. But can subscriptions make up for the steep costs of content?

Netflix reported a $7.9 million profit in the fourth quarter of last year, indicating that streaming services can be moneymakers.

With Kennedy departing Pandora, expect that company to install a successor who will capitalize on the service’s growing mobile audience. Whether that entails more ads, better targeted ads, or increased prices remains to be seen.

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