Pandora 2016 Annual Report Download - page 26

We plan to operate our expanded subscription offerings under a compulsory license for “mechanical royalties” which could
change or cease to exist, therefore hindering our ability to launch new product offerings.
€
We intend to expand our subscription offerings into multiple tiers, including an on-demand offering, and we expect that
such offerings may require that we pay mechanical royalties to music publishers for the reproduction and distribution of
musical works under the compulsory license made available by Section 115 of the Copyright Act.€There can be no assurance
that this compulsory license will remain available to us for use at the current rates, or at all.
The Copyright Royalty Board commenced a proceeding to set the rates for a compulsory license for mechanical royalties
for calendar years 2018 to 2022 (the “115 Proceedings”) in 2016, and we have filed a petition to participate in the 115
Proceedings.€ There can be no assurances that the rates established by the CRB for periods following 2018 will not exceed the
rates currently in place.€ If the CRB sets rates that exceed the rates that are currently in place, our content acquisition costs may
significantly increase, which could materially harm our financial condition and hinder our ability to provide subscription
offerings in multiple tiers, including an on-demand offering.
€
Assertions by third parties of violations under state law with respect to the public performance and reproduction of pre-1972
sound recordings could result in significant costs and substantially harm our business and operating results.
€
As described in “Business Content—Copyrights and Royalties—Sound Recordings”, sound recordings made on or after
February€15, 1972 fall within the scope of federal copyright protection. Subject to our ongoing compliance with numerous
federal statutory conditions and regulatory requirements for a non-interactive service, we are permitted to operate our radio
service under a statutory license that allows the streaming in the U.S. of any such sound recording lawfully released to the
public and permits us to make reproductions of such sound recordings on computer servers pursuant to a separate statutory
license designed to facilitate the making of such transmissions.
€
By contrast, protection of sound recordings created prior to February€15, 1972 (“pre-1972 sound recordings”) remains
governed by a patchwork of state statutory and common laws. Copyright owners of pre-1972 sound recordings have
commenced litigation against us in New York, California,€Illinois, and New Jersey alleging violations of state statutory and
common laws arising from the reproduction and public performance of pre-1972 sound recordings. Despite settling one such
suit with the major record labels in October 2015, we still face a number of class-action suits brought by various plaintiffs who
seek, among other things, restitution, disgorgement of profits, and punitive damages as well as injunctive relief prohibiting
further violation of those copyright owners’ alleged exclusive rights.
€
Litigation has been brought previously against Sirius XM Radio€Inc. (“Sirius”) for similar claims by a number of
different plaintiffs, and a federal district court and a state court in California recently ruled against Sirius for violating exclusive
public performance rights in California. In addition, a federal district court in New York has found Sirius liable for similar
claims in New York. Those same plaintiffs are amongst those that have initiated litigation against us, alleging similar violations
of exclusive rights under California and New York law. If we are found liable for the violation of the exclusive rights of any
pre-1972 sound recording copyright owners, then we could be subject to liability, the amount of which could be significant.
Similarly, any settlements of the remaining litigation could require substantial payments. The settlement we did enter into only
extends to the end of 2016. There is no assurance we will be able to enter into a new license with respect to the works covered
under our settlement for periods after 2016 on reasonable terns, or at all. If we are required to obtain licenses from individual
sound recording copyright owners for the reproduction and public performance of pre-1972 sound recordings, then the time,
effort and cost of securing such licenses directly from all owners of sound recordings used on our service could be significant
and could harm our business and operating results. If we are required to obtain licenses for pre-1972 sound recordings to avoid
liability and are unable to secure such licenses, then we may have to remove pre-1972 sound recordings from our service,
which could harm our ability to attract and retain users.
If we are unable to maintain revenue growth from our advertising products, particularly in mobile advertising, our results
of operations will be materially adversely affected.
€
Our number of listener hours on mobile devices comprised approximately 85% of our total listener hours in 2015, and
we expect that mobile listener hours will continue to grow more quickly than computer listener hours. The percentage of
advertising spending allocated to digital advertising on mobile devices still lags behind that allocated to traditional online
advertising. According to eMarketer, the percentage of U.S. advertising spending allocated to advertising on mobile devices
was approximately 16% in 2015, compared to approximately 32% for all online advertising. We must therefore continue to
convince advertisers of the capabilities of mobile digital advertising opportunities so that they migrate their advertising spend
toward demographics and ad solutions that more effectively utilize mobile inventory.
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