Pandora 2012 Annual Report Download - page 32

Table of Contents
in the absence of a negotiated agreement, by the rate court established pursuant to such decree in the U.S. District Court for the Southern District of New
York. SESAC is not subject to a mandatory licensing obligation and could withhold the rights to all of the musical works for which it acts as a licensor on
behalf of songwriters and music publishers. The loss of the musical works represented by SESAC could diminish the appeal of our service to listeners.
In October 2010, we elected to terminate our prior agreement with ASCAP as of December 31, 2010 because we believed that the royalty rates sought
by ASCAP were excessive. Notwithstanding our termination of the agreement, musical works administered by ASCAP are licensed to us pursuant to the
provisions of a consent decree, similar to the BMI consent decree referred to above. The ASCAP consent decree also established a rate court in the U.S.
District Court for the Southern District of New York. The rates to be paid by us will be set either by mutual agreement between us and ASCAP, or by a ruling
from the ASCAP rate court. In September 2011, we changed the method we used to calculate royalties due to ASCAP following the execution of an interim
arrangement for the period commencing January 1, 2011, pending a final determination of new rates. If either we or ASCAP request that the rate court
determine our royalty rate, rate court proceedings can take years to complete and be very costly. In such a case, there would be no guarantee that the rate court
would establish royalty rates more favorable to us than those we previously paid pursuant our terminated agreement with ASCAP or those that we pay
pursuant to our interim arrangement with ASCAP; we could be liable for both increased royalty rates going forward and a potential true-up of royalty
payments in excess of any interim royalties paid for the period following December 31, 2010. For our fiscal year ended January 31, 2012, we incurred BMI,
SESAC and ASCAP related content acquisition costs representing 4.1% of our total revenue for that period.
We do not currently pay so-called "mechanical royalties" to music publishers for the reproduction and distribution of musical works embodied in
transitory copies used to make streams audible to our listeners. Although not currently a matter of dispute, if music publishers were to change their position
and seek to be paid mechanical royalties by us, and a final judgment were entered by a court requiring that payment, our royalty obligations could increase
significantly, which would increase our operating expenses and harm our business and financial interests.
In May 2011, we started streaming spoken word comedy content, for which the underlying literary works are not currently entitled to eligibility for
licensing by any performing rights organization for the United States. While pursuant to industry-wide custom and practice this content is performed absent a
specific license from any such performing rights organization, there can be no assurance that this 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 in the future.
If music publishers withdraw all or a portion of their catalogs from performing rights organizations such as ASCAP or BMI, we may be forced to enter
into direct licensing agreements with these publishers at rates higher than those we currently pay, or may be unable to reach agreement with these
publishers at all, which could adversely affect our business, financial condition and results of operations.
In May 2011, EMI Music Publishing, or EMI, announced its decision to withdraw certain licensing rights from ASCAP that EMI had previously
authorized ASCAP to manage on its behalf. As a result, ASCAP may no longer be able to license the webcasting of songs from EMI's catalog of musical
compositions, and digital music webcasters, such as Pandora, who were previously able to secure licenses from ASCAP for EMI musical compositions may
now have to enter into direct licensing arrangements with EMI. Although we continue to be licensed by ASCAP, it is currently unclear what specific effect
EMI's limited withdrawal from ASCAP will have on us, or whether other publishers may also choose to withdraw all or a portion of their catalogs from the
collection of musical compositions that ASCAP has the authority to license. If we are unable to reach an agreement with respect to the repertoire of EMI or
any other music publisher who withdraws all or a portion of its catalog(s) from ASCAP or other performing rights organizations, or if we are forced to enter
into direct licensing agreements with publishers at rates higher than those currently set by the performing rights organizations (or the U.S. District Court
having supervisory authority over ASCAP and BMI) for the performance of musical works, our ability to stream music content to our listeners may be limited
or our operating costs may significantly increase, which could adversely affect our business, financial condition and results of operations.
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