By RYAN NAKASHIMA, Associated Press
LOS ANGELES (AP) — Pandora's new CEO Brian McAndrews is a rock star of the digital advertising world. He's best known for supercharging growth at digital marketing company aQuantive before its $6.3 billion sale to Microsoft. But as he takes the helm at Pandora, a daunting task awaits. The new tune-spinner-in-chief will need to oversee the renegotiation of the royalty fees the company pays to artists and recording labels.
What sounds like a mundane legal tussle could be a make-or-break moment for Pandora. The company's Internet radio service is wildly popular and continues to grow despite an expanding landscape of competitors. It has 72.1 million monthly users, and some 2.5 million people have activated Pandora in their car dashboards. Since the beginning of the year, Pandora's stock is up more than 150 percent.
Even so, royalty fees are the Internet radio giant's biggest drag on profits. For each song the service streams to listeners, the company pays a fraction of a penny in royalties, a rate that will rise each year through 2015. Last year, more than half of Pandora's $427 million in revenue went toward royalty payments, and costs are growing with every song its service plays.
If Pandora doesn't prevail in its negotiations, the company may need to increase the number of ads it presents to listeners or raise subscription fees in order to turn an elusive profit. But doing so could turn off listeners and hurt its ability to compete with services such as Apple's iTunes Radio, which launches next week.
McAndrews' appointment as CEO on Wednesday sent Pandora's stock up 12 percent to $23.97 on Thursday.
The 54-year-old executive told The Associated Press that the royalty fight is "a ways off" and that he'll rely on the counsel of co-founder Tim Westergren and outgoing CEO Joe Kennedy.
"I'm confident we'll be prepared and do the right thing," he said.
"I do share Pandora's longstanding belief that musicians should be fairly compensated for their work," McAndrews said, adding that the existing patchwork of laws was "created piecemeal over decades" and "doesn't serve any one very well."
Pandora's royalty costs are the main reason it posted another net loss in the quarter through July, of $7.8 million, despite revenue that rose 55 percent to $157.4 million.
It has been difficult for Pandora to rein in royalty costs. In February, Pandora restricted listeners to 40 hours of free mobile listening per month, in an attempt to cap royalties driven by its heaviest users. But after listener hours began falling, it reversed the move in August.
Analysts are concerned about the bind Pandora is in.
"They're kind of stuck in this situation where they can't get to profitability from growing their users. They need to get to profitability from giving their users less content," said Rich Tullo, an analyst with financial services firm Albert Fried & Co. "That's a kind of tough position to be in as a company."
What's different about the upcoming fee negotiations is that Pandora's survival is no longer in doubt. Analysts expect that in the fiscal year through January, Pandora will post its first positive earnings per share — 3 cents after excluding special items — since it became a publicly traded company in the summer of 2011.
Despite its narrow profitability, some artists believe they haven't been compensated enough for their contributions to Pandora's success. Many of them want a bigger share of the riches music streaming is generating.
Pandora's revenue is more than 20 times what it was in 2009, the last time it reached a deal with the recording industry.
David Lowery, frontman for the alternative rock band Cracker, blogged in June that he could make more from the sale of a single T-shirt than the $16.89 Pandora paid him for a million plays of the band's 1993 hit "Low" in the final three months of last year.
While he acknowledges he made $50,000 in royalties last year across all streaming and sales formats, Lowery told The Associated Press his fight is about the future, because services like Pandora are displacing other forms of listening.
"If we don't get the webcasting rights right for songwriters, we're screwed," Lowery said.
Pandora has tried numerous tactics to drive royalty costs down. In June, it bought a South Dakota radio station to qualify for the lower fees charged to station owners. The company also backed a now-defunct bill in Congress that would have lowered its rates. Each move has been met with strong opposition from the music industry.