Pandora 2016 Annual Report Download - page 103

Download and view the complete annual report

Please find page 103 of the 2016 Pandora annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 124

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124

As of December€31, 2014 and 2015 deferred rent was $15.3 million and $23.9 million.
Purchase Obligations
As of December 31, 2015, we had various non-cancelable minimum payments of $153.3 million, primarily in connection
with the publishing agreements signed in 2015, of which $124.0 million is recoupable against future royalty payments and
$29.3 million of which is not recoupable against future royalty payments, through 2018.
Legal Proceedings
€
We have been in the past, and continue to be, a party to various legal proceedings, which have consumed, and may
continue to consume, financial and managerial resources. We record a liability when we believe that it is both probable that a
loss has been incurred and the amount can be reasonably estimated. Our management periodically evaluates developments that
could affect the amount, if any, of liability that we have previously accrued and make adjustments as appropriate. Determining
both the likelihood and the estimated amount of a loss requires significant judgment, and management’s judgment may be
incorrect. We do not believe the ultimate resolution of any pending legal matters is likely to have a material adverse effect on
our business, financial position, results of operations or cash flows.
RMLC ("Radio Music Licensing Committee")
In June 2013, we entered into an agreement to purchase the assets of KXMZ-FM and in June 2015 the Federal
Communications Commission ("FCC") approved the transfer of the FCC licenses and the acquisition was completed. The
agreement to purchase the assets of KXMZ allowed us to qualify for the RMLC royalty rate of 1.7% of revenue for a license to
the ASCAP and BMI repertoires, before certain deductions, beginning in June 2013. As a result, we recorded cost of revenue -
content acquisition costs at the RMLC royalty rate starting in June 2013, rather than the rate that was set in rate court
proceedings in March 2014 for ASCAP and in May 2015 for BMI.
In September€2015, despite confidence in our legal position that we were entitled to the RMLC royalty rate starting in
June 2013, and as part of our strategy to strengthen our partnership with the music industry, management decided to forgo the
application of the RMLC royalty rate from June 2013 through September 2015. As a result, cost of revenue - content
acquisition costs increased by $28.2 million in the twelve months ended December 31, 2015, of which $23.9 million was
related to a one-time cumulative charge to cost of revenue - content acquisition costs related to spins played from June 2013
through September 30, 2015 in order to align the cumulative cost of revenue - content acquisition costs to the amounts
previously paid at the rates that were set in the rate court proceedings in March 2014 for ASCAP and May 2015 for BMI. We
recorded cost of revenue - content acquisition costs for the performing rights organizations at the rates established by the rate
courts for the three months ended December 31, 2015, and we intend to record such costs at the rates established by our direct
licensing agreements beginning in 2016.
€
Pre-1972 copyright litigation
On April 17, 2014, UMG Recordings, Inc., Sony Music Entertainment, Capitol Records, LLC, Warner Music Group
Corp. and ABKCO Music and Records, Inc. filed suit against Pandora Media Inc. in the Supreme Court of the State of New
York.€The complaint claimed common law copyright infringement and unfair competition arising from allegations that Pandora
owed royalties for the public performance of sound recordings recorded prior to February 15, 1972.
In October 2015, the parties reached an agreement ("pre-1972 settlement") whereby we agreed to pay the plaintiffs a total
of $90 million. The settlement resolves all past claims as to our use of pre-1972 recordings owned or controlled by the plaintiffs
and enables us, without any additional payment, to reproduce, perform and broadcast such recordings in the United States
through December 31, 2016. This agreement was approved by our board of directors and executed on October 21, 2015.
Pursuant to this settlement, we paid the plaintiffs $60 million in October 2015 and the plaintiffs dismissed the case with
prejudice. As a result, cost of revenue - content acquisition costs increased by $65.4 million in the twelve months ended
December 31, 2015, of which $57.9 million was related to a one-time cumulative charge to cost of revenue - content acquisition
costs related to pre-1972 spins played through September 30, 2015. The remaining charge of $24.6 million will be recorded in
cost of revenue - content acquisition costs over the future service period of January 1, 2016 through December 31, 2016 based
on expected streaming of pre-1972 recordings over the period. The pre-72 settlement further requires that we make four
Table of Contents
Pandora Media,€Inc.
Notes to Consolidated Financial Statements - Continued
92