Pandora to Acquire Pieces of Rdio

Pandora at SXSW 2015.
Robin Marchant/Getty Images for PANDORA Media

General view of Pandora at SXSW 2015.

The subscription market with Spotify, Apple Music, Google Play, Deezer and Rhapsody gets a powerful new entrant.

Pandora announced Monday it will acquire "several key assets" from on-demand streaming service Rdio, allowing the company to expand beyond its roots as an Internet radio company and facilitate international expansion. The deal will cost Pandora $75 million and is contingent on Rdio filing for bankruptcy protection.

Acquiring certain technologies and experienced Rdio personnel will allow Pandora "to accelerate our product strategy significantly," CEO Brian McAndrews said in a conference call Monday afternoon. At $450 million, last month's acquisition of Ticketfly was a far larger deal. But picking up some Rdio assets will have significantly greater repercussions across the global music industry.

Not content to be a free radio service, Pandora wants to also offer a subscription service for listeners that want greater control of their listening experience. Although Pandora will not receive Rdio's licenses in the transaction, it will have the technology and expertise to expand beyond its home market of the United States plus Australia and New Zealand.

Over the years Pandora had repeatedly and pointedly characterized itself as a radio company going after about $18 billion in advertising spent at U.S. radio each year. By its own estimates Pandora had grown to capture 9.5 percent of all radio listening hours in the U.S. But radio generates relatively little revenue per listener. McAndrews characterized the new opportunity as "a multiple times larger" than its current market. 

The next step is acquiring the licenses necessary to launch in new markets. The recent deal with Sony/ATV Music Publishing was the first of many direct licenses Pandora will negotiate. CFO Mike Herring said the company is having "productive conversations" with rights owners. Separately, Monday's press release said the company expects to launch on-demand listening in late 2016 if it can acquire the proper licenses. 

Pandora's once chilly relations with rights owners has warmed since McAndrews took over in late 2013. During his tenure, Pandora has built an industry relations team, launched its Artist Marketing Platform and settled lawsuits by major labels over its performance of pre-1972 recordings for $90 million. Its acquisition of Ticketfly will likely help small and mid-tier artists -- some independent but many on record labels -- that perform at the clubs and theaters Ticketfly counts as clients. 

One big question is how Pandora will compete against early arrivals like Spotify as well as subscription services launched recently by Apple and YouTube. Pandora believes the size of its audience -- 78 million listeners per month -- and the related listening data will allow its subscription service to launch from "a position of strength," as McAndrews put it.

A large radio audience is also supposed to give Pandora's subscription business better financial results. Because it doesn't have to search out new listeners, Pandora believes the lower acquisition costs will balance out the significantly higher content costs. Royalties typically account for 70 percent of subscription services' revenues. Pandora has pushed its royalty burden below 50 percent of revenue.

On-demand subscribers would certainly add to Pandora's top line. The company received $164 million from roughly 3.8 million subscribers in the third quarter (the monthly cost is $3.99 or $4.99 per subscriber depending on when the subscription started). Subscribers' total royalty expense is unknown, but Pandora must pay a higher royalty on subscriber streams than ad-supported streams. The same number of on-demand subscribers would be worth $456 million of revenue and $137 million after rights owners were paid.    

The Pandora board has already approved the deal and it expected to be finalized in the first quarter of 2016. The deal is contingent on Rdio filing for bankruptcy protection and the court's approval of the proposed transaction. Pandora will not acquire Rdio's operations. Rdio CEO Anthony Bay will not join Pandora, instead remaining with the company to help it wind down, according to McAndrews.