Peter Kafka

Recent Posts by Peter Kafka

Web Radio Darling Pandora Slips the Noose, But at a Cost: Heavy Users Have to Pay. Next Up: A Big Funding Round?

clint-escapesWeb radio darling Pandora has good news for its users: We’re saved! And a slightly different message for its heaviest users: Pay up.

Both messages are a result of long and tortured negotiations with record labels that have finally come to a close with a deal Pandora says it can live with, though it’s different than the one founder Tim Westergren said the site had nailed down in November. The flip side is that the service will now require users who listen to the service for 40 hours a month to pay 99 cents if they want to hear any more tunes that month.

And the big picture is that Pandora, which has been warning of its doom if it was required to pay steeper royalty rates, can switch gears and brag about its growth. Westergren tells me the service is motoring at a great clip–he says it is on track to generate $40 million in revenue this year, almost all of it from advertising, up from $19 million in 2008–and it can now accelerate.

“I think that this is going to have a really huge impact,” he says. “We’ve been talking about going out of business for the last two years, and that’s not good for growth.”

The new arrangement might also convince investors to cut the service a big check. Earlier this year, multiple sources told me Pandora was looking to raise a very big round, perhaps in the $40 million range, and was talking to private equity shops about a deal. Westergren wouldn’t talk to me about fund raising, but it’s fair to assume that his company looks more attractive now than it did in January.

As for the deal itself, I’ll spare you the details, but in essence it’s a straightforward rate cut. The deal requires a lower per-song fee than Pandora and other Webcasters were supposed to pay under the terms the Copyright Royalty Board signed off on in 2007. It’s retroactive to 2006 and calls for an increase every year up through 2015.

The new deal means Pandora will be spending more than 25% of its revenue on royalties, but it will still be paying less than it would have under the old rules. Under the original terms, for instance, Pandora was supposed to shell out 14 hundredths of a penny ($.0014) per song streamed, per listener. Now it won’t pay that rate until 2015. Meanwhile tiny sites with less than $1.25 million in annual revenue will have a different structure.

The downside is that the deal will require Pandora to tax its heaviest users since it is still paying a per-song fee. “There’s a very small percent of listeners who are using it a ton, and that’s great, except when you’re paying per song,” Westergren says. He estimates the 99-cent fee will apply to a a “single digit” percentage of its 11.5 million monthly users.

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