Pandora 2016 Annual Report Download - page 65

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For the two months ended December 31, 2015, cost of revenue—ticketing service was $7.1 million and consisted of $4.4
million in revenue share costs, $1.7 million in credit card fees and other cost of revenue and $1.0 million in intangible
amortization of developed technology.
Gross Profit
€
Eleven Months
Ended€
€December 31,
Twelve Months
Ended€
€December 31,
Twelve Months Ended€
€December 31,
2013 2014 $€Change 2014 2015 $€Change
(in€thousands) (in€thousands)
Gross profit
Total revenue $600,233 $920,802 $320,569 $920,802 $1,164,043 $243,241
Total cost of revenue 357,083 508,004 150,921 508,004 697,341 189,337
Gross profit $243,150 $412,798 $169,648 $412,798 $466,702 $53,904
Gross margin 41%45%45%40%
€
For the twelve months ended December€31, 2015 compared to 2014, gross profit increased by $53.9 million or 13%,
primarily due to an increase in advertising revenue as a result of an increase in the average price per ad sold and an increase in
the number of ads sold. Gross margin decreased from 45% to 40% as the growth in content acquisition costs outpaced the
growth in revenue primarily due to the increase of $65.4 million related to pre-1972 sound recordings settlement, the increase
of $28.2 million related to publisher royalty rate increases and scheduled sound-recording royalty rate increases of 8%.
For the twelve months ended December 31, 2014 compared to the eleven months ended December 31, 2013, gross profit
increased by $169.6 million or 70%, primarily due to an increase in advertising revenue as a result of an increase in the average
price per ad sold and an increase in the number of ads sold. In addition, the remaining increase in gross profit was due to
the€twelve months ended€December€31, 2014€having one additional month as compared to the€eleven months ended December
31, 2013. Gross margin increased from€41%€to€45%€as the growth in revenue outpaced the growth in content acquisition costs
primarily due to an increase in advertising revenue and the effect of measures we have adopted to manage the growth of mobile
content acquisition costs while minimizing adverse effects on the listener experience, such as adjusting the number of times
users can skip songs during a given listening session, as well as optimizing time-based thresholds whereby music will stop
playing after a certain length of user inactivity with the service. The increase in gross margin was also due to an increase in
subscription and other revenue driven by a $14.2 million increase in connection with the one-time recognition of the
accumulation of deferred revenue related to certain subscriptions purchased through mobile app stores. Refer to “Deferred
Revenue” above for further details regarding these mobile subscriptions.
Product Development
€
Eleven Months
Ended€
€December 31,
Twelve Months
Ended€
€December 31,
Twelve Months Ended€
€December 31,
2013 2014 $€Change 2014 2015 $€Change
(in€thousands) (in€thousands)
Product development $31,294 $53,153 $21,859 $53,153 $84,581 $31,428
€
Product development consists primarily of employee-related and facilities and equipment costs, including salaries and
benefits related to employees in software engineering, music analysis and product management departments, information
technology and costs associated with supporting consumer connected-device manufacturers in implementing our service in
their products. We incur product development expenses primarily for improvements to our website and the Pandora app,
development of new advertising products and development and enhancement of our personalized station generating system. We
have generally expensed product development as incurred. Certain website development and internal use software development
costs are capitalized when specific criteria are met. In such cases, the capitalized amounts are amortized over the useful life of
the related application once the application is placed in service. We intend to substantially increase investments in developing
new products and enhancing the functionality of our existing products.
€
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