Leading Internet radio service, Pandora ( P ) recently struck a licensing agreement with international music rights management company, BMG. The deal will enable Pandora to access to BMG's catalog of works from the likes of The American Society of Composers, Authors and Publishers (ASCAP) and Broadcast Music., Inc. (BMI). Shares of Pandora were up 3.3% (84 cents) following the news.
BMG is a subsidiary of Germany-based conglomerate, Bertelsmann. The agency still remains an integral part of ASCAP and BMI but this deal with Pandora will fetch it a higher royalty rate than otherwise.
We believe that this collaboration will help Pandora to further expand its listener base. The company has been striving to expand its music library by partnering with different agencies. Recently, Pandora struck a similar deal with Merlin, a rights agency representing more than 20,000 independent record companies.
Of late, Pandora's biggest worry has been the slowdown in its user growth. At the end of the second quarter 2014, the company had 76.4 million active users. Pandora aims to reach to100 million listeners over the next couple of years.
We believe that Pandora's popular service, driven by its effective discovery engine and a well-established infrastructure place it well to compete against the likes of Apple ( AAPL ), Google ( GOOGL ), Spotify, and Sirius XM ( SIRI ). Moreover, improving monetization and strong mobile growth are positives for the company.
We believe that Pandora will benefit from growing listening hours, market share gains and introduction of the new music recommendation unit called Promoted Stations. These stations will feature sponsor-branded listening stations that will work especially well on mobiles. Mobiles accounted for about 80% of Pandora's overall listening hours and 74% of the company's last-quarter revenues.
However, rising costs related to licensing will remain a headwind in the near term. Moreover, higher operating expenses are expected to hurt profitability in the near term.
Currently, Pandora has a Zacks Rank #3 (Hold).
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.