Pandora (NYSE:P) has announced that for the first time it will offer up its services outside the United States. The chosen countries are Australia and New Zealand. While expansion for Pandora may seem counter-intuitive given that it has an issue reporting a profit, this move may make great business sense for the company. The main reason being that royalty rates differ from country to country.
In New Zealand Pandora will pay royalty rates of less than 25%. That type of payment structure should allow the service to make money in that nation, albeit the scale (#30 in the world) is substantially less than in the United States. Still, for Pandora, any revenue should be considered a good move.
Australia is a feather in the cap of Pandora because it stands number 6 in the world with music sales. The company did not release the royalty rate it will be paying in Australia. If it is less than the current 50% or so of revenue Pandora is paying in the United States it would also represent a small victory.
The announcement comes amidst an ongoing battle in the United States regarding streaming royalties paid by Pandora. The Copyright Royalty Board has set what seems to be rates that make the Pandora business model a challenge.
Pandora derives most of its revenue from advertising. The company warned that its Q4 may not be as good as analysts hoped for. Pandora cited the fiscal cliff and advertisers not opening up more ad spending as the chief reason for a worsened outlook.
Long ago I wrote that Pandora is a small monthly fee away from becoming a monster in the financials. A modest $1.50 per month ($18 per year) from consumers would make Pandora extremely profitable. Sirius XM (NASDAQ:SIRI) charges consumers a "Music Royalty Fee" to help offset the costs of royalties and place more of the burden on consumers. The scary concept about Pandora doing the same would be shrinkage in its audience, something that advertisers do not like to see. Pandora is lobbying hard to get better royalty rates through the Internet Radio Fairness Act. If that effort does not succeed, Pandora may well need to shift its business model in a new direction. In the mean time, the expansion seems to be a positive for the marketing side of the Pandora business. Whether the expansion will be accretive to the bottom line will take time to assess.
Disclosure: I am long SIRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have no position in Pandora