Pandora 2016 Annual Report Download - page 25

complete withdrawal from any PRO. The decrease in the works licensed by the PROs may require more direct licensing by us
with individual music publishers who could withhold the rights to all of the musical works which they own or administer.
€
If music publishers withdraw all or a portion of their catalogs from PROs, we may no longer be able to obtain licenses
for such publisher’s withdrawn catalogs. Under these circumstances, we would either need to enter into direct licensing
arrangements with such music publishers or remove those musical works from the service, including any sound recordings in
which such musical works are embodied.
It is unclear what specific effect a publisher’s prospective complete withdrawal of rights from a PRO would have on us.
If we are unable to reach an agreement with respect to the repertoire of any music publisher that successfully withdraws all or a
portion of its catalog€from a PRO, or if we are forced to enter into direct licensing agreements with such publishers at rates
higher than those currently set by the PROs, or higher than those set by the respective U.S. District Court having supervisory
authority over ASCAP or BMI, for the performance of musical works, or if there is uncertainty as to what rights are
administered by any particular PRO or publisher, the number of sound recordings that we perform on our service may be
reduced, our content acquisition costs may increase and our ability to retain and expand our listener base could be adversely
affected, any of which could materially and adversely affect our business, financial condition and results of operations.
€
In addition, PROs and musical work copyright owners with whom we have entered into direct licenses have or may have
the right to audit our royalty payments, and any such audit could result in disputes over whether we have paid the proper
royalties. If such a dispute were to occur, we could be required to pay additional royalties and audit fees, and the amounts
involved could materially and adversely affect our business, financial condition and results of operations. SoundExchange
informed us in December€2013 that it intends to audit our payments for the years 2010, 2011, and 2012, but has not yet
commenced these audits. We believe the statute of limitations has run on SoundExchange’s€right to audit our payments for
these years. In January 2016, SoundExchange informed us that it intends to audit our payments for the years 2013 and 2014. As
of February 18, 2016, SoundExchange had not yet commenced these audits.
€
Our inability to obtain accurate and comprehensive information necessary to identify the ownership of musical works may
impact our ability to obtain necessary licenses from the copyright holders, remove musical works or decrease the number of
performances of a particular musical work, subjecting us to potential copyright infringement claims and difficulties in
controlling content acquisition costs.
€
Comprehensive and accurate rightsholder information for the musical works underlying the sound recordings that we
stream is not presently available to us. Without the ability to identify which composers, songwriters or publishers own or
administer musical works, and an ability to determine which musical works correspond to specific sound recordings, it may be
difficult to identify the appropriate rightsholders from which to obtain a license, which could lead to a reduction of sound
recordings available to be streamed on our service, adversely impacting our ability to retain and expand our listener base. Such
a lack of ownership data may also make it difficult to identify the sound recordings that we should remove from our service,
which may subject us to significant liability for copyright infringement.
Our inability to enter into commercially viable direct licenses with record labels for the right to reproduce and publicly
perform sound recordings on our service may delay or prevent our plans to expand our subscription offerings into multiple
tiers, including an on-demand offering, and delay or prevent our international expansion.€€
€
Our largest expense is the royalties we pay for the reproduction and public performance of sound recordings that we
stream on our service. As described in “Business-Content, Copyrights and Royalties-Sound Recordings” from the years
2009-2015 we operated under the Pureplay Settlement, which is an agreement with SoundExchange that provided the rates and
terms of statutory licenses for the reproduction and public performance of sound recordings for commercial webcasters through
the end of 2015.€ On December 16, 2015, the Copyright Royalty Board announced the new per performance rates that apply for
commercial webcasters for calendar years 2016 through 2020 (the “Web IV Proceedings”).€We intend to expand our
subscription offerings into multiple tiers, including an on-demand offering, and make our offerings available in new geographic
areas. The statutory license, and the rates provided under the Web IV Proceedings, do not extend to cover these new product
offerings or geographies outside of the United States and its territories, and, therefore, we must obtain direct licenses with
record labels for the right to reproduce and publicly perform sound recordings for these offerings and new geographies. There
is no guarantee that such licenses will be available to us on terms that are commercially viable for our long-term success and
sustainability. If we are unable to secure and maintain these rights from the record labels or if we cannot do so on terms that are
acceptable to us, our ability to launch new product offerings and to continue our international expansion efforts will be delayed
and our content acquisition costs could materially increase.
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