Pandora 2016 Annual Report Download - page 24

ITEM 1A.€RISK FACTORS
The risks and uncertainties set forth below, as well as other factors described elsewhere in this Annual Report on
Form€10-K or in other filings by us with the SEC, could adversely affect our business, financial condition, results of operations
and the trading price of our common stock. Additional risks and uncertainties that are not currently known to us or that are not
currently believed by us to be material may also harm our business operations and financial results. Because of the following
factors, as well as other factors affecting our financial condition and operating results, past financial performance should not
be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate
results or trends in future periods.
€
Risks Related to Our Business
We depend upon third-party licenses for the right to publicly perform musical works and a change to these licenses could
materially increase our content acquisition costs.
€
Our content costs, in part, are comprised of the royalties we pay for the public performance of musical works embodied
in the sound recordings that we stream. As described in “Business—Content, Copyrights and Royalties—Musical Works”, to
secure the rights to publicly perform musical works embodied in sound recordings over the internet, we obtain licenses from or
for the benefit of copyright owners and pay royalties to copyright owners or their agents. There is no guarantee that the licenses
available to us now will continue to be available in the future or that such licenses will be available at the royalty rates
associated with the current licenses. If we are unable to secure and maintain rights to publicly perform musical works or if we
cannot do so on terms that are acceptable to us, our ability to perform music content to our listeners, and consequently our
ability to attract and retain both listeners and advertisers, will be adversely affected. For the twelve months ended December€31,
2015, we incurred content acquisition costs for the public performance of musical works representing 6.7% of our total revenue
for that period.
€
As described in “Business—Content, Copyrights and Royalties—Musical Works”, in December 2015, we entered into
new, multi-year direct licenses with ASCAP, BMI and other music publishers which took effect on January 1, 2016 and expire
on December 31, 2018. There is no guarantee that, upon the expiration or earlier termination of these licenses, renewals or
equivalent licenses will be available at acceptable royalty rates in the future or that we will be able to obtain licenses to cover
new products or new features we may wish to add to our products. If we are not able to agree to terms with ASCAP or BMI on
new licenses when our current licenses expire or are terminated, either we or ASCAP or BMI, as the case may be, may petition
the respective U.S. District Court having supervisory authority over ASCAP or BMI to set the terms of the new license. Any
new rate court proceedings may be protracted, expensive and uncertain in outcome. In the event that any new rate court
proceedings are resolved adversely to us, our content acquisition costs could increase significantly, which would materially and
adversely affect our operating results.
€
We do not currently pay so-called “mechanical royalties” to music publishers for the reproduction and distribution of
musical works embodied in server copies or transitory copies used to make streams audible to our listeners. Although not
currently a matter of dispute, if music publishers were to retreat from the publicly stated position of their trade association that
non-interactive streaming does not require the payment of mechanical royalties, and a court entered final judgment requiring
that payment, our royalty obligations could increase significantly, which would increase our operating expenses and harm our
business and financial conditions. While we would vigorously challenge such mechanical royalties as not required by law, our
challenge may be unsuccessful and would in any case involve commitment of substantial time and resources.
€
In addition, we stream spoken word comedy content, for which the underlying literary works are not currently entitled to
eligibility for licensing by any performing rights organization in the United States. Rather, pursuant to industry-wide custom
and practice, this content is performed absent a specific license from any such performing rights organization or individual
rights owners, although royalties are paid to SoundExchange for the public performance of the sound recordings in which such
literary works are embodied. There can be no assurance that this industry custom will not change or that we will not otherwise
become subject to additional licensing costs for spoken word comedy content imposed by performing rights organizations or
individual copyright owners in the future or be subject to damages for copyright infringement.
€
Changes in third-party licenses for the right to publicly perform musical works may reduce the number of sound recordings
available to stream on our service or materially increase our content acquisition costs.
€
The number of works administered by ASCAP, BMI and other performing rights organizations (“PROs”) may fluctuate
over time and may be subject to the withdrawal of certain rights by individual PRO-affiliated music publishers for certain types
of transmissions by certain types of services, such as Pandora, or the loss of repertory entirely in the event of a publisher’s
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