Pandora Gets On-Demand Music Rights to Tackle Spotify, Apple

  • Sony Music, Universal Music agree to new song licensing deals
  • Pact with Merlin Network included; still no accord with Warner

Pandora Media Inc. acquired licenses to music from three of the world’s largest rights holders, paving the way for two new subscription services to help the biggest online radio service challenge providers including Spotify and Apple Music.

Sony Music and Universal Music, the two largest labels, and Merlin Network, which represents more than 20,000 independents, have agreed to the licenses, Pandora said in a statement Tuesday. The Oakland, California-based company is continuing to hold talks with Warner Music, the third-biggest, and hopes to have an agreement by the time the new services start.

The deals for domestic rights ensure Pandora can introduce two new services it has been developing: an advertising-free radio service called Pandora Plus and an on-demand service akin to one offered by rival Spotify. The company has said it plans to begin selling both to users before the end of the year.

By letting users select songs on demand, replay them and customize playlists, Pandora hopes to attract listeners and prevent existing customers from defecting to competing products like YouTube and Spotify.

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Pandora said in July it had 78.1 million active listeners as of June 30. While that is enough to make Pandora the world’s largest online radio service, the company’s user base shrank over the past year. At the same time, newer services Spotify and Apple Music attracted millions of new customers.

Record labels have welcomed any company looking to convert free users into paying customers and the licensing deals with Pandora end years of fighting over rates in court. The streaming company has previously paid for recordings under statutory rates established by the Copyright Royalty Board.

Now Pandora has direct deals with its main suppliers, including more than 30 other independent labels and distributors.

The company’s shares were raised to buy from neutral on Monday by Robert Peck, an analyst at SunTrust, who cited prospects for licensing deals and new products. Peck said new interactive services would lower churn, boost sales by 15 percent and improve the company’s profit margins. Advertising accounted for 80.2 percent of Pandora’s sales last year.

Chief Executive Officer Tim Westergren said on a call with investors that Pandora hopes to have Warner Music on board soon.

Warner Talks

“Obviously our intention and our desire is to launch with them,” Westergren said. “That’s important to move on to do that. We’re having very constructive conversations and we certainly hope to have that done in time.”

With the acquisition of music rights in the U.S., Pandora executives said they’ve established a framework that can be replicated in other countries. Officials said on the call Pandora will continue to operate in Australia and New Zealand as it weighs how to expand further outside the U.S.

“We’re going to bring these products to market in the United States and really flush out our go-to-market strategy in the largest market in the world for music,” said Chief Financial Officer Mike Herring. “That sets us up well to expand internationally over time.

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