Pandora 2012 Annual Report Download - page 31

Table of Contents
transmission methods of our service, we could lose our eligibility to operate under the statutory licenses. Our ability to avoid negotiating separate agreements
with the many copyright owners of sound recordings depends on these two statutory licenses, and if we were to no longer qualify for operation under, or
violate the provisions of the statutory licenses, we could be subject to significant liability for copyright infringement and may no longer be able to operate
under our existing licensing regime. For our fiscal year ended January 31, 2012 we incurred SoundExchange related content acquisition costs representing
49.7% of our total revenue for that period.
The rates to be paid for the streaming of sound recordings pursuant to the statutory licenses can be established by either negotiation or through a rate
proceeding conducted by the CRB, a tribunal established within the U.S. Library of Congress. In 2007, the CRB set royalty rates for the online streaming of
sound recordings for 2006 through 2010 that were so high that the cost for streaming sound recordings alone would have been unsustainable under our current
business model. In response to the lobbying efforts of internet webcasters, including us, Congress passed the Webcaster Settlement Acts of 2008 and 2009,
which permitted webcasters and SoundExchange, the sole entity designated by the CRB to collect and distribute the statutory royalties paid by internet
webcasters such as us, to negotiate alternative rates to those established by the CRB for the years 2006 through 2015. In July 2009, certain webcasters reached
an agreement with SoundExchange, establishing a more favorable royalty structure that we have elected to accept and that by its terms will apply through
2015. We do not know what rates will be available to us following that period and there is no guarantee that the royalty structure that emerged from the
negotiations with SoundExchange pursuant to the Webcaster Settlement Acts will be available after 2015. The CRB, which still has rate-making authority
over us upon expiration of our agreement with SoundExchange, has consistently established royalty rates that would, if paid by us, consume an unsustainable
percentage of our revenue. If we are unable to reach a new agreement with SoundExchange for the period after 2015, our operating costs may significantly
increase, which could harm our financial condition and inhibit the implementation of our business plan.
In addition, the royalties that we pay to SoundExchange for the streaming of sound recordings are calculated using a per performance rate. While we
believe that the mechanisms we use to track performances are sufficient to ensure that we are accurately reporting and paying royalties, our ability to do so
depends in part on our ability to maintain these mechanisms as new devices are introduced and incumbent technologies evolve. Any understatement or
overstatement of performances could result in our paying lower or higher royalties to SoundExchange than we actually owed, which could in turn affect our
financial condition and results of operations.
We depend upon third-party licenses for musical works and a change to or loss of these licenses could increase our operating costs or adversely affect our
ability to retain and expand our listener base, and therefore could adversely affect our business.
To secure the rights to stream 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. Those who own copyrights in musical works are vigilant in protecting their rights and seek
royalties that are very high in relation to the revenue that can be generated from the public performance of such works. 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 stream musical works or if we cannot do so on terms that are acceptable to us, our ability to stream music
content to our listeners, and consequently our ability to attract and retain advertisers, will be adversely impacted.
In order to stream musical works embodied in sound recordings over the internet, we must obtain public performance licenses and pay license fees to
three performing rights organizations: ASCAP, BMI and SESAC. These organizations represent the rights of songwriters and music publishers, negotiate with
copyright users such as us, collect royalties and distribute those royalties to the copyright owners they represent. Performing rights organizations have the
right to audit our playlists and 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 the amounts involved could be material. We currently operate under negotiated agreements
with BMI and SESAC, however, these agreements are subject to termination by either party in accordance with their terms at the end of each calendar year,
with respect to BMI, and at the end of each yearly term, with respect to SESAC, and there is no guarantee that the associated royalty rates available to us now
will be available to us in the future. BMI, pursuant to a consent decree entered into with the U.S. Department of Justice, cannot refuse to grant us licenses for
the public performance of musical works represented by BMI but the rates to be paid to BMI can be set,
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