Pandora Forecasts Music Costs to Shrink to 40% of Revenue

Pandora Media Inc. (P), grappling with rising music costs, expects the royalties it pays to artists and record labels to decline to 40 percent of revenue from about 60 percent now, Chief Financial Officer Mike Herring said.

The company, the biggest Internet radio provider, expects to reach that target over the next few years, Herring said today at an investor conference sponsored by Roth Capital Partners in Dana Point, California.

The company is tackling royalty rates and seeking to boost the revenue it gets from advertising. With targeted ads and interactive features, Pandora is able to levy a premium over radio spots, Herring said. The company is working to close the gap between its ad revenue, now at about 1 percent of the radio industry’s total, and its 8.5 percent listener share, he said.

“It’s a long road,” Herring said.

Pandora, based in Oakland, California, fell 0.7 percent to $13.72 at the close in New York. The stock has climbed 49 percent this year.

On March 7, the company reported better-than-expected fourth-quarter results and said Chief Executive Officer Joe Kennedy would be leaving.

Music costs amounted to 61 percent of the company’s $125.1 million in revenue during the quarter ended Jan. 31, the company said. That compares with 59 percent a year earlier.

Pandora is gearing up for “a long debate” on setting royalties for 2016 and beyond, Herring said. A two-year arbitration process to set new rates begins in January.

To contact the reporter on this story: Andy Fixmer in Los Angeles at afixmer@bloomberg.net

To contact the editor responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net