Business Matters: Pandora Finds Big Royalty Savings in Australia and New Zealand

Business Matters: If Big Radio Had Pandora's Royalty Rate, It Would Owe Billions

Business Matters: If Big Radio Had Pandora's Royalty Rate, It Would Owe Billions

Pandora doesn't get much revenue from Australia and New Zealand, but it's content costs in those markets are just a fraction of those in the U.S.

Content costs as a percent of revenue will not exceed 25% in Australia and New Zealand, Pandora CEO Joe Kennedy said Monday at the Citi Global Internet, Media & Telecommunications Conference. Those rates are "conducive to the creation of long-term value" in those markets, he said. The service launched in both markets in December.

Joe Kennedy, Pandora Chief: We're Not Afraid of Competition From Apple

Pandora faces a more difficult financial situation in the U.S. Content costs were 68.4% of revenue for the 9 months ending October 31 and 61.8% for the 3 months ending October 31. Performance royalties, as a percent of revenue, have been rising as more Pandora listening occurs on mobile devices. Like other companies, Pandora is currently better at monetizing the desktop experience than the mobile experience even though users have switched to mobile.

The company's high cost of content is an ongoing point of criticism. Venrock's David Pakman appeared on Bloomberg television Tuesday morning and warned investors of the economics behind digital music services. "It's hard to sustain yourself," he said. (Pakman effectively said the same thing when he testified at the Congressional hearing on Internet royalties in November.) Shares of Pandora were down as much as 4% in earning trading and were down 3% in the late afternoon.

Why the difference between the U.S. and the markets down under? In the U.S. the company pays fixed per-stream royalties that are set by a three-panel board of judges. In the U.S. webcasters get to use a compulsory performance license -- no permission is needed from record labels -- but must pay the statutory royalties. In other countries, a webcaster must negotiate with rights owners. In Australia and New Zealand Pandora was able to deal directly with performing rights organizations that represent record labels.

Pandora doesn't expect to receive similar deals right away. Kennedy described the company as "patiently optimistic" as it seeks other markets for expansion. "We stand ready to move aggressively in markets as we see the right economic conditions coming together."