Pandora Media's Management Presents at Telsey Advisory Group 4th Annual Fall Consumer Conference (Transcript)

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Pandora Media, Inc. (NYSE:P)

Telsey Advisory Group 4th Annual Fall Consumer Conference Call

September 25, 2013 09:05 ET

Executives

Dominic Paschel - Vice President, Corporate Finance and Investor Relations

Analysts

James Cakmak - Telsey Advisory Group

James Cakmak - Telsey Advisory Group

So good morning everyone. My name is James Cakmak. I cover internet at Telsey Advisory Group. I am very pleased to have Dominic Paschel with us today Investor Relations with Pandora and thank you for joining us.

Dominic Paschel - Vice President, Corporate Finance and Investor Relations

Great, thanks James.

James Cakmak - Telsey Advisory Group

So Pandora is a pioneer and industry leader in digital music services. I think we have all probably experienced Pandora at some point on our mobile phones or tablets or desktop. And so I just wanted to take a step back and kind of look at the market opportunity right now. Everyone I think of course everyone listens to the radio, so where are we right now in terms of the addressable markets where does Pandora stand and where you think rates could potentially go?

Dominic Paschel - Vice President, Corporate Finance and Investor Relations

Yes. And Pandora’s core mission has been for the last 10 years essentially to redefine radio. When you think of the different mediums of media, radio is perhaps one of the last to fill the full impact of the internet and oftentimes you get the question of well why now, why is it the right opportunity. And if you think about it, it makes logical sense in the sense that only today is internet connectivity becoming as pervasive as radio waves. And so when you look at the four kind of key tenants of what has made radio so successful today whereas James you said most everyone still listens to radio though specific stats are 93% of the U.S. population listens to radio on a weekly basis. That’s upwards of 240 million people in the United States that listen on average 56 hours per month.

And so when you look at why that is now the addressable market has come to be internet radio, I think the Los Angeles Times wrote about it yesterday in terms of research that was recently issued of just more and more people are connecting via internet to internet streaming radio. In particular, we look at a very large opportunity to just intermediate the traditional players, the legacy players that have been around for decades such as Clear Channel, Cumulus, Citadel, CBS and that has been our core is to bring the values of the internet in the sense of personalization, customization and marry that with the benefits of radio, which is free ad supported to the consumer, zero work ubiquity and ultimately discovery.

James Cakmak - Telsey Advisory Group

So you talked about ubiquity, so where is Pandora right now, I mean, I can get it online devices, I am beginning to starting to see it in cars, I even heard about them in Jacuzzis.

Dominic Paschel - Vice President, Corporate Finance and Investor Relations

Right.

James Cakmak - Telsey Advisory Group

So like where is Pandora, I mean, what’s the reach point of it?

Dominic Paschel - Vice President, Corporate Finance and Investor Relations

Yes. And that’s the other beauty of the internet it’s also bringing radio to places where you historically wouldn’t have gotten radio. I mean, I am listening to it 35,000 feet up on Virgin America. You can listen to it going under the bay with bar, in places where you wouldn’t get radio waves. And some distribution in ubiquity is very important to bringing internet radio to everywhere you would normally consume it. So Pandora is available on more than 1000 different devices have practically any consumer electronics device with some form of internet connectivity or chip essentially requires Pandora in order to make it successful.

A good example of that is when you look at Microsoft we are available on the Windows Phone 8. Steve Ballmer himself came and asked Pandora to develop on that. When you look at Google Chromecast, we are one of the two select partners to launch on Google Chromecast. Pandora is available on more than 100 different models that are hitting showroom for us. Three years ago, we were just on three cars we were on the Mercedes S-Class, the Ford Escape and the Mini Cooper. And within less than a 3-year period, we are now available on a third of all cars that are going to be sold in the United States this year. It’s kind of crazy. You turn any television program you will likely get a car commercial with Pandora front and center being profiled in a way that car automakers are using Pandora to help differentiate and to sell their vehicles. And what was once a competitive advantage is now quickly becoming a competitive disadvantage should you not have Pandora in your device, in your vehicle. So it’s very unique kind of generational shift we are seeing. And I think we are benefiting from that based on the ubiquity. It highlights the fact that we need to be cross-platform. You can't be in a closed environment.

James Cakmak - Telsey Advisory Group

So I guess one of the differences with Pandora versus terrestrial radio is the personalization aspect is one of the experience versus from a lean back listener on a regular radio station, so can you just talk a little bit about how data is driving the content that we are listening to. And then you have talked about in the past that the social was not as critical to Pandora and because it is much more of a personal experience and now you are starting to see connection with Facebook and so what is the social overlay going to look like for Pandora?

Dominic Paschel - Vice President, Corporate Finance and Investor Relations

Sure. So I will start with the first part, which is kind of like the personalization aspect. And oftentimes I think one of the most underappreciated aspects is really around Pandora’s algorithms. We spend a tremendous amount of time, intellectual property creating these algorithms in a way that we want to make it seem very seamless and easy to use a consumer, but the reality is and why Pandora has more than 70% market share of internet radio, it’s the playlist, it’s the technology, it’s the algorithms that ultimately know to serve you the next best song that you will likely hear. So up on the screen we have I think I have put in today’s top hit station as one of our top stations. Obviously, Lady Gaga’s Applause is doing quite well right now, anybody would know that and they can actually input that in there, but what the algorithms help even on the very popular stations with Pandora is we need to figure out the right component of serendipity, the right component of discovery, familiarity and repetition.

And so my algorithms for Pandora me on what I am listening to today’s top hits usually I would not at a 10 times from a brand new kind of top hit song and I want to hear it over and over and over and over the way you trust a radio to condition you to like hearing the top song, but it also recognizes the fact that after 4 weeks, I will start to skip it more, because of that personality where okay I am sick of it, I am tired of it. But you have to look even beyond today’s top hit station and go to a walk at the moon station or go to a lord station and that’s where the power of Pandora is really revealed in the sense that we map out the DNA of every song on Pandora. So we have characterized anywhere from 280 to 450 attributes that helps define a song and these play into how the algorithms will serve up the new piece of music that you may not have ever heard before. And that was really Pandora 1.0, that’s where base of the technology began more than 10 years ago.

Today, the power of Pandora really resides in the, forget the buzz term, but the big data. The data that we have from you as users, we can cohort different types of users based on location, based on age, gender, all of that plays into knowing the song that we serve up next to you. An example what our CTO likes to use. We Are Young by Fun, if you were to look at that song 24 months ago maybe at this point, I think it’s probably 36 months ago, someone who would have searched for we are for the band young might have been a New York SoHo hipster right. And so when they seeded that station through a artist or through a song, there is one expectation that, that user would have from the seed in that algorithm, fast forward to I don’t know 6 months after that when it was first used in the Super Bowl, you would have a different subset of users and expectations that are looking for that song or that artist at that point more mainstream. And then fast forward six months after that you would have, We Are Young covered on Glee. And so you have geeks that are working for that, a different subset of users. Now, the algorithms have to maintain those three different bonsai trees for an analogy in a way that most other music services really don’t approach it with that sophistication. And James to your question on the social side, it actually pushed back on one of your observations that only recently are we doing kind of the Facebook integrations. Pandora was actually one of these first – it was the first music partner with Facebook nearly 4 years ago, with Facebook Connect, and so we would have the option to share what song or station you were listening to and that’s been maintained over the last 4 years.

A little over 2 years ago when F8 took place in San Francisco I think it was notable that Pandora was absent from the concept known as frictionless feet. And that was on a deliberate rationale which was that our users wouldn’t have the ability to opt out of it meaning their listening habits would be funneled through it regardless. And we had a different perspective based on our data that we had dreamed from being a partner with there and so long ago with Facebook Connect which is that not everyone wants to share their music consumption, their songs. We believe music is highly personal and so reasonably though I think their view has come to our view which is you can share if you elect to. And so people who follow me on Facebook or Twitter know that I am probably an over sharer, but I am not that generation. And so – but those who do not want to share they don’t have to and that’s kind of the over social aspect. But then when you look at kind of the data again there is huge social component to your musical graph that inspires and informs our algorithms in a way that I think a lot of people don’t consider Pandora as social, but we do.

James Cakmak - Telsey Advisory Group

So I think we can all appreciate what Pandora has been able to accomplish to-date and you outlined it pretty well. I think a lot of the questions on the people’s mind now, so those were the soft tools. The iTunes radio that’s driven by your neck is part of our – has been down your neck, and you have all these other niche players out there, so I guess the question is are you toast, one. And I guess if you could address iTunes radio first and then talk about the other players?

Dominic Paschel - Vice President, Corporate Finance and Investor Relations

Yes and just up-leveling everyone here a bit the last 2 years that I have been hoping articulate Pandora story and it still surprises people to understand kind of the consumption pattern of the consumer which is that most listening takes place in a lean-back environment where you are multi-tasking or doing something else and that’s what radio has served the purpose, that’s about 80% of all audio consumption takes place where you are not actively controlling on demand what you want to hear. About 20% takes place in kind of the lean-forward environment where you create a playlist in others. It was a lot easier historically to differentiate the two, because they physically were different right. And you had radio and you had binal records, you had radio and you had A tracks, you had radio cassette tapes, radio CDs.

But in the digital world I think it’s a lot harder digits and it’s clearly physically it’s harder you just don’t differentiate. But the U.S. consumers’ consumption still very much maintains kind of that I guess dual consumption pattern. And so there is still 80% that’s being done in a radio like setting. Most of this the service as you hear about that are viewed as “competitive” they are generally speaking to scratch the edge of knowing what you want to hear creating a playlist and those are the ones that have existed for 10 years like Rhapsody, MOG, Rdio and Spotify, even social services like Grooveshark and Turntable FM. Those oftentimes get a lot of play in terms of the space being crowded. But I think we view our true competitors as Clear Channel, as the folks whose consumption we continue to eat into and whose market we want to address in terms of $15 billion opportunity and we ultimately want to line our market share with that wallet share.

When you look at a lot of the on-demand services anything from iTunes to Spotify, often times they use radio as an on-web to get the consumer to do something else to buy music to have us as a subscription funnel for Spotify and they are radios of feature. And that’s something that is a lot different in Pandora’s world. We are not – we don’t view radio as an on-web anywhere. We view radio as the highway as the freeway as the bigger opportunity.

Now I think some of the statistics that came out with iRadio is that it’s interesting. I think our perspective is still too early to tell in terms of any impact on usage. I think Tim yesterday was quoted saying modest impact and I would like to qualify that in the sense of there is the data released not suggestive of anything yet. And so we don’t want to proclaim victory too early or any impact where there may not be. But the one thing that has been consistent over the last 8 years is that despite new entrants or viewed competitors, the data suggests one thing that Pandora is the only one that has been able to slow Pandora down.

James Cakmak - Telsey Advisory Group

I think mobile and display efforts, advertising efforts is one of the things that I think is under appreciated, so can you talk about how I guess Pandora is positioned in the mobile and display market and the recent trends that we have been seeing?

Dominic Paschel - Vice President, Corporate Finance and Investor Relations

Right. So we are one company with 7% market share in one country and we are the third largest generator of global mobile revenue. So we are on a run rate nearing $0.5 billion in terms of mobile revenues. We would like to think we are somewhat of a thought leader in terms of the mobile ad products that Pandora provides this week notably is aside from the traffic with the UN, it’s also Ad Week here in New York and so there is a lot of great things that our team is doing in the city with advertisers in terms of helping them understand kind of the benefits and uniqueness that Pandora provides. Often times you hear a lot about the development of the mobile ad medium. And I think that’s true in the digital space. So for the likes of Facebook for Yahoo!, Google, etcetera there is a shift taking place there. I would argue that Pandora has one unique benefit that none of the others do which is that while that market develops Pandora is investing in going after an established market that is inherently been mobile for 80 years and that’s radio.

And on this random should be a fact here, but first the car radio was put in by the Galvin Brothers in 1930 ever since then radio has been mobile. And so we don’t have to differentiate between mobile versus desktop with radio buyers, ultimately they want scale and Pandora provides that with now 7.5% of all radio in the country. We are the largest provider of radio or the rather the largest radio station in every major local market out there DMA or MSA. In New York we are bigger than Z100, so we love that. We will continue to help trend and be a thought leader for mobile ad products such as the medium that allows for unique things we can quit the calendar when you get like an ad for AAs or if you get a Southwest Airlines ad on your mobile device and you can submit to your email that we have to be to get their weekly or special alerts. If you want to do when you hear state format and you are so inspired you can click the call immediately. There is a lot of whole new ad products you can do in this medium and I think we are going to help to set some of those.

James Cakmak - Telsey Advisory Group

So the financial outlook is obviously a sticking point because your content costs are also high you’ve already did a – done fairly on disadvantage there in the market. So can you just talk about some of the drivers in the model how to use this 20% long-term margin, things you would have to get there what’s the time to get for you to make money?

Dominic Paschel - Vice President, Corporate Finance and Investor Relations

Right. So pointing out James’ observation of the unfair burden that Pandora does carry, it’s nonetheless one that our target model to some degree factors in. We pay two types of royalties, we pay a performance royalty, which is on a per track per play basis that accounts for approximately 92% of our cost of content. We also pay a music publishing royalty to the likes of ASCAP, BMI and others, and that’s for the music lyrics and that’s a percent of revenue that’s about 3.5% of revenue. In total, last year that accounted for 61% of revenue. Pandora paid nearly every – paid 25% of global radio royalties throughout the world again one country and one company just kind of crazy. Nonetheless, we believe that we can – our target model is predicated in the belief that those rates actually to some degree remain at the levels they are at, which is other data points would argue that we are paying too much when you look at some of the market rate transactions that have been set by Clear Channel, Apple and others. But it’s one that where the leverage in the model so to speak isn’t necessarily on the LTM or the licensing cost per 1000 hours, but really is around the RPM.

So the more we are successful in terms of radio ad sales as well as the digital side continued success in digital, our RPM should continue to rise in which we get to a level where RPMs at around $50 to $55 allowed for us to reach our target model. That being said in the near term, even if RPMs do rise to those levels the opportunity is so large that we are going to continue to get gross margin leverage, but our plan is to continue to reinvest that into local markets and to whether there is a return that would drive shareholder value.

James Cakmak - Telsey Advisory Group

So to drive that growth on the top line, obviously there are pretty sales efforts, so can you talk about the trends in your sales force and the productivity and efficiencies in there and then maybe the dynamics between local versus national?

Dominic Paschel - Vice President, Corporate Finance and Investor Relations

Right. And so local again I mentioned you need scale to get to. And so our local strategy, which is akin to our radio strategy, would be kind of five parts, four of which are now effectively completed. First part was to get undisputed market leadership. We have that with more than 7.5% of radio. Second, would get that measured and so the measurement component took place with a firm known as Triton. It’s interesting because I think the FCC approved the Nielsen acquisition of Arbitron yesterday. So that will be – we are very eager to have cross platform measurement. And so I think the Nielson folks have indicated that they fully intend upon covering and measuring internet radio, which will be great. The third step was effectively getting that integration within the systems that radio buyers use. You often hear us talk about them as Mediaocean and Strata. The fourth part was Pandora now investing in the sales team, which we have started to do over the last 6 months from a local market standpoint. And kind of the fifth kind of key piece of the puzzle would be just inertia, so getting radio buyers to buy WPAN or KPAN when they look up their target audience in these systems and so the efforts there are growing quite well. We are again hiring the number one, two and three reps in each MSA of the 29 markets we are in. And so I would say that stay tuned in terms of some of the key metrics that are associated with the return on that investment.

James Cakmak - Telsey Advisory Group

Can you talk a little bit about on Pandora versus to the terrestrial radio and can you imagine a scenario where we have increased the load just kind of create another engine value expanding the inventory?

Dominic Paschel - Vice President, Corporate Finance and Investor Relations

Right, so in this room like how would you listen to terrestrial radio I am just curious? Okay, not as many, but most likely 89% of listeners that listen when they get a commercial they change stations within the first commercial and so that’s because radio now does an ad load of somewhere between 13 minutes and 15 minutes per hour which is crazy. Pandora, the way we currently operate we have an ad load of about 2.5 audio spots on average and those spots are 15 or 30 seconds spots, we don’t do 60. That will naturally rise, but we don’t believe that we will have to ever rise to the level of terrestrial radio. We haven’t drawn a line on the sand on where that is, but if you again go back to our target model of $50 RPMs that would imply that at a CPM for an audio out of somewhere between $8 and $12 in a pure audio environment, which will be the car, because we won’t have digital ads, we won’t have deal ads to distract the driver. In that audio environment that would require somewhere between 5 or 6 audio spots, which when you look at that at 30 seconds would be three minutes or less worth of ads. I am not saying that’s necessarily where the line in the sand is, but in order to achieve our target model, clearly it doesn’t require dramatic user experience or dramatic ad load experience that would ruin the user experience.

James Cakmak - Telsey Advisory Group

So what are the big things right now in advertising and in mobile as well as the shift to programmatic and so can you talk about Pandora’s position in that are you optimized for that?

Dominic Paschel - Vice President, Corporate Finance and Investor Relations

Yes, that’s a key topic this week at Adweek in terms of programmatic, in terms of RTB, real-time bidding, I think there is room for Pandora to optimize there for sure in terms of how we deal with our remnant inventory, but a core strategy at Pandora has been to sell more and more of our inventory direct. There is no such thing as a remnant audio ad network, because there is no one who has unique access to your auditory abilities the way Pandora does. I think we will continue to evaluate how programmatic and how RTB kind of play into our overall strategy, primarily though the focus is to go direct right now. And I think you will continue to see that. I think Brian McAndrews, our new Chairman and CEO will obviously have some unique some kind of unique observations and history that he can bring to Pandora given the fact that (indiscernible) that I think will be beneficial to the sales strategy.

James Cakmak - Telsey Advisory Group

International is obviously an area of opportunity for you guys, there is some presence in New Zealand and Australia, can you just talk about that opportunity how feasible is that?

Dominic Paschel - Vice President, Corporate Finance and Investor Relations

So our goal is like when you look at it what are what we want to achieve this crazy dream, it’s a little to be global to have a billion users. In fact, the data suggests that we would be nearing a billion users at this point in our company’s history had we not started to block IP addresses. And we started to do that in 2007. All you needed you could access Pandora as long as you had a fictitious zip code and you could get it. Everyone always laughs when I tell them that our most common zip code during that period of time was 90210 just because a lot of people in the U.S. knew that to be the case. And so we started blocking IP addresses to comply with copyright. The way we the compulsory licenses that exist in the U.S. under SoundExchange that are paid through rather by SoundExchange and the other rights holders they also exist in virtually every other developed market.

Now, they are not global, they are generally speaking territory or geography by geography. And so we have engaged with the number of those. Australia and New Zealand were the first two that actually made sense to enter. We do not want to enter into a geography if we have to pay on a per track per play basis that’s what we had do in the U.S and it took 10 years for us to scale that model with losses that you have obviously seen. We do not want that to be the case internationally. And so with Australia and New Zealand, it’s a percent of revenue and we can grow business in that regard. Our success there although we haven’t given out any specific metrics, we have characterized it to say that we are ahead of where we were population adjusted at the same point in the U.S. growth curve, which is great, you almost expect that there because the product is 5 years better than it was when we were last in Australia and New Zealand. We don’t announce new geographies ahead of when we actually open the doors or unblock the IP addresses, but we definitely have aspirations to continue to roll out in new geographies where it makes economic sense.

James Cakmak - Telsey Advisory Group

So you just completed a secondary, can you talk about a little while now of the timing?

Dominic Paschel - Vice President, Corporate Finance and Investor Relations

Sure. Primarily for the size of business we are doing $150 million to $200 million quarters now, we are just relatively under capitalized. There is nothing in particular we have earmarked from an M&A perspective. And we generally we haven’t been acquisitive. We would look at maybe tuck-in niche technologies or even market entry strategies, but there is nothing game changing that we currently see that we need. Pandora again is actually reinvesting a lot of gross margin leverage into the R&D side where we think we did about 4% to 5% of revenue. We would like that to get to our target model of 7%. But I think the money in the bank actually gives us cushion for should we need anything. Also we’ve never really done direct deals with labels, but it’s an interesting concept that there could be potential for if they make economic sense and that’s where cash could also come in handy.

James Cakmak - Telsey Advisory Group

So talking about the investments in R&D, so where are areas that you can improve?

Dominic Paschel - Vice President, Corporate Finance and Investor Relations

Yes. Well, we are always looking to obviously because the revenue side of things, we are always looking to do new ad products or improve upon the ad experience or the consumer experience. From a product standpoint, I think we purposely – there is not a lot of change in the UI partially because we want to be, we want to appeal the 240 people in the United States and every time you change a toggle or add a toggle the more complex it becomes, the more you reduce your addressable market. I need my 65-year-old mum to be able to know how to use Pandora, whereas some that are new based or otherwise complicated reduces your the meantime to music and that’s always been Pandora’s goal is to reduce the meantime to music.

There is interesting – we don’t like to give a lot of insight in terms of where the product is headed, but I think there was an interview that (indiscernible) did with our CTO recently, Tom Conrad that actually speaks to some of the unique concepts of how we view it. And so going back to social for example, what if social actually was more of a concept and around you are hosting a dinner party or and you have like four people that have Pandora right, yet maybe also you created a similar station and so it knows that. So when you enter into a room and kind of your Sonos device starts to play music that you both like or you have summed up. And so there are some interesting concepts there on where music can head. And so I think those are kind of the out-of-the-box ideas that we are trying to consider in terms of where music and where radio has next in terms of put that technology.

James Cakmak - Telsey Advisory Group

And as we will open it now for questions if there is any?

Question-and-Answer Session

Unidentified Analyst

(Question Inaudible)

Dominic Paschel

So the question was for present in non-English speaking populations? No, we are only currently we can, it’s not a language issue, given that we actually have one of the most expensive collections of international musics like – so I talked about the 450 attributes. Indian Raga music has 458 attributes, we’ve a huge Latin base of music as well that’s very popular in the United States. So it’s not so much of a music issue to more of a licensing structure. So to the extent that we can arbitrate or negotiate deals that would allow for us to enter into new geographies at reasonable rates, we are all about it.

Unidentified Analyst

(Question Inaudible)

Dominic Paschel

Production.

Unidentified Analyst

(Question Inaudible)

Dominic Paschel

Really, okay. I do it similarly as where we can definitely improve on…

Unidentified Analyst

(Question Inaudible)

Dominic Paschel

You don’t – is there any okay. Well I will make sure to tell our QA some things.

Unidentified Analyst

(Question Inaudible)

Dominic Paschel

For the webcast, it has to do with your content cost as well as well I like to think of this business, the musical supply chain. So the first part is, if and when you’re clear you’ve hurdles with the artists and so it’s somewhere in the culture in December to add the cap and I hope to think it well.

Unidentified Analyst

And then when you go into 2015 to renegotiate with SoundExchange, do you think it’s possible to get to a cost structure that is based more on a fixed flat fee that hopefully provides the guidance for operating leverage and if so what does that contract look like, what does that licensing environment look like. And I guess maybe even third part, if you can get to that say foreign exchange that provides you a better platform to go international and talk to (indiscernible)?

Dominic Paschel

Right. So in the first part with ASCAP notable event happened last week where Pandora won a summoning judgment which basically you can read about it in southern district of Manhattan the district court issued it, basically agreed with Pandora saying that ASCAP and members of ASCAP were performing in a way that violated the consent decree that they entered into. And so that behavior was not essentially loud. Because on this is a common characteristic, there are the rules and then there are the rules for Pandora, rules that are generally put us with disadvantage. And so that's not cool. And so from the ASCAP side generally speaking I think we are in a good position there. And we will let that play out.

When it comes to the re-arbitrations, it’s a 2 year process that will kick off in January of 2014. It is with decision that will come down from the Copyright Royalty Board that will be issued in the December of 2015 for its ‘16 through 2020. And this isn’t kind of scary process, it’s the process that Sirius XM recently went through you can actually probably look at notes that Telsey has in terms of the decision and how it came out against expectations etcetera. But it’s a copyright process that will take place three judges, all there are new. We believe this will be an economically rational outcome to the proceedings and to be known as webcast report, webcast of one, two and three the benefit we have now that they didn't have then were market rate benchmarks. We never had those before. But now we have deals directly would have been done by Clear Channel and most notably by Apple.

There is an article we reference people to in Rockonomics that actually walks through the puts and takes as it relates to the Apple deal at least with independent labels. And I would recommend you read that to understand kind of how that could potentially benefit Pandora. But ultimately the interesting thing is what has booked with us internationally the third part of your question has been the fact that most – throughout the developed world radio pays a single digit, mid-single digit percent of revenue. And that’s the global standard for the most part, whereas in the U.S. you are right people of other geographies look back and say hey we like that per track, per pay thing you are playing in the U.S. we want that too. And so that’s always been kind of a standard that we don’t like, but that’s not the standard, it’s kind of the Blue Bird over here. And so it could potentially benefit. If depending on how rates are arbitrated and the outcome, I would argue that in the U.S. we are not necessarily married to the fact that it has to be a percent of revenue at this point. The interesting thing to notice that the fact that its per track, per play actually creates a barrier to entry.

Unidentified Analyst

In reference to a point you made earlier, what is the nature of your relationship with the major labels now and what has prevented you from pursuing direct deals in the past?

Dominic Paschel

Yes. So what is the nature of our relationship with the labels? I mean writing them checks for $0.25 billion last year. And I mean literally I think at this point, we account for more than half of sound exchanges quarterly revenue for one company, so oftentimes in the press if you proceed is very contentious between artists and such. I would argue that it’s a new ecosystem. There is obviously public positioning and jockeying that takes place. I think when you talk to a lot of independent artists and they say, wow, I got ad at the Pandora like that’s huge for them, that’s notable event for them. There are more than 2,000 artists that we pay checks to and it’s climbing more than $10,000 a year. We have more than 10,000 artists, I think that get paid more than 250,000 spends in the medium being around 750,000 spends. So we provide really the long tail exposure the most artists will never get in any other form of radio even in the on-demand world, where they wouldn’t have this type of exposure when we are giving them exposure to upload 200 million registered users, that’s huge. Now, we haven’t pursued any direct deals with the labels necessarily, because we found comfort and security within the compulsory license as crazy as that sounds.

The reason why is oftentimes in the on-demand space those label deals have to be renegotiated after every 2 years, and we had one of notable we see ones describe it as kind of an organ donor ecosystem meaning anytime you created value every 2 years they would come along and extract it or to some degree there is always a stalemate or they would pull their content. You kind of see this that play with Netflix and others, the Netflix actually had a very similar compulsory license with the first sale document when they had DVDs. And so for Pandora at this point, I think as we become generate of even more and more revenues for the labels, you can’t really ignore us and it doesn’t preclude any direct deal, it just means that at this point we like the financial security of knowing what the 5-year plan is from the royalty rates and the fact that there is a law that governs how those rates are set.

James Cakmak - Telsey Advisory Group

Okay. I will ask one last one so despite there is huge proliferation of devices and the connectivity essentially by listening hours on digital was extremely well as why you think it’s so low and how do we – and how fast do we get to more clarity for terrestrial?

Dominic Paschel

Yes, I mean, you almost tied back to the question and talked about the labels a minute ago, which is if you are an artist or labeled you would almost want Pandora to take more and more market share from radio faster. And Tim likes to say some of this should almost have artist, should almost have a got milk commercial or campaign, but Pandora got internet radio because they actually get paid from us whereas the terrestrial radio they don’t. And so we don’t assume the benefit the artist speaker systems actually can work at a faster rate over the internet radio. And I think there is sticking point of this connectivity internet availability device, so either at times when we are only on desktop, the service would light up at 7 AM East Coast and wind down around 7 o’clock on a Friday West Coast, but now that you have all these devices, I think we talked a lot about mobile right now in 2 years, it’s all going to be about the internet of things, so exciting times ahead in terms of advertising potential on HTML5 SmartTVs, and Pandora have a very unique market opportunity there, but it’s literally about distribution.

And one thing that I was asking and what I want about is how many relates to Apple in particular, how many of your users use cross platform? Literally in the last 12 months nearly half of all of our iOS users use Pandora on a non-iOS device meaning they want to take their curative stations to their PC or to their Sonos device or to their Samsung TV and that’s what kind of Pandora provides for and that’s actually is the future of radio where that accelerates to move to digital and then at radio in particular is just literally device and connectivity. That’s the only thing stopping you at this point.

James Cakmak - Telsey Advisory Group

Great, well thank you very much.

Dominic Paschel - Vice President, Corporate Finance and Investor Relations

Awesome, thank you guys.

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