Pandora 2012 Annual Report Download - page 53

Table of Contents
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes
thereto included elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results may differ substantially from those referred to herein due to a number of factors, including but not limited to those discussed
below and elsewhere in this report, particularly in the sections entitled "Special Note Regarding Forward-Looking Statements and Industry Data" and "Risk
Factors."
Overview
Pandora is the leader in internet radio in the United States, offering a personalized experience for each of our listeners. We have pioneered a new form
of radio – one that uses intrinsic qualities of music to initially create stations and then adapts playlists in real-time based on the individual feedback of each
listener. In January 2012, we had over 125 million registered users, which we define as the total number of accounts that have been created for our service at
period end, and we added two new registered users every second on average. For the fiscal year ended January 31, 2012, we streamed 8.2 billon hours of radio
and as of January 31, 2012, we had 47 million active users. According to a January 2012 report by Triton, we are one of the top 20 internet radio stations and
networks in the United States and we have more than a 69% share of internet radio. Since we launched the Pandora service in 2005, our listeners have created
over 2.4 billion stations.
We derive the substantial majority of our revenue from the sale of display, audio and video advertising for delivery across our traditional computer-
based, mobile and other connected device platforms. We also offer a paid subscription service to listeners, which we call Pandora One. While historically our
revenue growth has been principally attributable to selling display advertising through our traditional computer-based platform, the rapid adoption of our
service on mobile and other connected devices is changing this mix. This expansion of our services also presents an opportunity for us to reach our audience
anytime, anywhere they enjoy music, and therefore offer additional distribution channels to current and potential advertisers for delivery of their advertising
messages.
Growth in our active users and distribution platforms has fueled a corresponding growth in listener hours. Our total number of listener hours is a key
driver for both revenue generation opportunities and content acquisition expenses, which are the largest component of our operating expenses:
• Revenue. Listener hours define the number of opportunities we have to sell advertisements, which we refer to as inventory. Our ability to attract
advertisers depends in large part on our ability to offer sufficient inventory within desired demographics. In turn, our ability to generate revenue
depends on the extent to which we are able to sell the inventory we have.
• Content Acquisition Expenses. Listener hours drive substantially all of our content acquisition expenses. With respect to each sound recording
streamed to each listener, we pay royalties to the copyright owners both of sound recordings and of the underlying musical works, and we record
these royalties as content acquisition expenses. Under U.S. law, we are guaranteed the right to stream any lawfully released sound recordings, and
royalties are negotiated with and paid through performance rights organizations such as SoundExchange for sound recordings and BMI, ASCAP,
and SESAC, for musical works. Royalties are calculated using negotiated rates documented in master royalty agreements and based on sound
recordings streamed, revenue earned or other usage measures. If we cannot agree on royalty rates, the dispute will be resolved by the Copyright
Royalty Board, or CRB, in the case of SoundExchange, and by the rate court in the case of BMI and ASCAP. 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. Rather, pursuant to industry-wide custom and practice, this content is performed absent a specific
license from any such performing rights organization, however we pay royalties to SoundExchange at federally negotiated rates for the right to
stream this spoken word comedy content.
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