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Pandora CEO Roger Lynch Discusses Forthcoming Label Negotiations

UPDATED: Nearly 15 months after Pandora Music joined forces with SiriusXM/Liberty Media, and two years after he joined the company, CEO Roger Lynch sat down at Goldman Sachs Communicopia conference to discuss the company’s progress since he took the helm last year, and the way forward.

After starting off by describing the company to investors as a “pure play on growth of digital audio,” a key element of Lynch’s talk was the company’s forthcoming renegotiations with labels, which he said have been a drain on the company’s finances.

“In order to launch our premium [on-demand] service, Pandora had to do direct deals with labels,” he said, noting that the company had in past years been “at odds with labels” over royalty rates. “It didn’t do direct deals, it relied on statutory rate and unrealistic goals for subscriptions — guarantees greater than number of subscribers. Now, on the two-year anniversary of those deals, we have the chance to renegotiate, and there’s a chance to improve our rates. We won’t get rid of minimum guarantees,” he stressed, “but we’ll be able to adjust them, and on the working-capital side to improve that.”

He noted that the company “previously did big prepayments on deals. Spotify is at the other extreme: they play music, send a report, receive an invoice and then pay it. They also bill their customers in advance —that’s why they have negative EBITDA and positive cashflow. We have a chance to improve that structure. There is significant working-capital improvement to be made here.”

Asked about Liberty’s involvement since its investment in Pandora, Lynch said they’ve been involved “on a board level and as an investor, they have not been involved at an operational level.”

Lynch also broke down some of the “good, long list” of areas in the company he believes he can fix, citing its $145 million acquisition of adtech company AdsWizz as an example of a positive step forward.

He described “ad tech, subscriptions, and rebuilding the marketing department” as areas of opportunity, and also spoke of “using [listener] data in a much more effective way — we use that data well in advertising and in our product, which is why engagement numbers are so high, but didn’t use in in our marketing,” he said. For example, “Our [recently launched] premium-access feature allows listeners to listen on demand, but it’s also a really good feature for marketing department — we can take listening habits and promote directly to listeners based on what they’re listening to.” He noted that option can help advertisers and partners as well as artists.

Asked what else can be improve, he spoke of subscriptions, which he said grew by 67% in the last quarter but “I think there’s still a lot to improve, things like direct customer relationships — a lot of things that aren’t very sexy but are very important.

Yet another area is “to take shares from terrestrial radio, which we’re well positioned to do. It’s a $15 billion advertising market, and while subscription is important,” he noted that tapping into terrestrial’s terrain is key. He also said the company will focus on growing spoken-word content and podcasting, “we’ll be launching the first step in that by the end of year,” and a need to make the product easier to use in automobiles.

After the talk Lynch answered several audience questions. Asked about the company’s opportunities in local content (as opposed to national), he spoke vaguely but optimistically. “In many major markets, we’d generally be the largest radio station,” he said, “And we do have the scale to go into local content. What Pandora did for music discovery is invented music discovery in the digital age – we think we can do that for podcasts. We’ll start with national content but as we build out that capability we’ll go more and more local. To do that you need monetization capability and I think we’re well positioned for that.”

However, asked about the company expanding beyond the U.S., he said and international launch is “not a near-term priority.”

In its most recent earnings report in July, Pandora beat Wall Street targets on sales for the second quarter, and posted a smaller net loss, as the streaming-music provider continued to its grow its subscriber base — but saw overall number of active users drop.

Total Q2 revenue was $384.8 million, an increase of 12% year-over-year (excluding its now-discontinued operations in Australia and New Zealand and Ticketfly, which it sold last fall). Q2 subscription revenue was was $113.7 million, an increase of 67% on a comparable basis. It added 351,000 paying subscribers for Pandora Plus and Pandora Premium in the quarter, to stand at about 6 million at the end of June, up 23% year-over-year.

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