Pandora 2012 Annual Report Download - page 66

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Table of Contents
Revenue Recognition
We recognize revenue when four basic criteria are met: (1) persuasive evidence exists of an arrangement with the customer reflecting the terms and
conditions under which the products or services will be provided; (2) delivery has occurred or services have been provided; (3) the fee is fixed or
determinable; and (4) collection is reasonably assured. We consider a signed agreement, a binding insertion order or other similar documentation to be
persuasive evidence of an arrangement. Collectability is assessed based on a number of factors, including transaction history and the creditworthiness of a
customer. If it is determined that collection is not reasonably assured, revenue is not recognized until collection becomes reasonably assured, which is
generally upon receipt of cash. We record cash received in advance of revenue recognition as deferred revenue.
Advertising Revenue
We generate the majority of our revenue through the delivery of advertising impressions sold on a cost per thousand, or CPM, basis. We generally
recognize revenue based on delivery information from our campaign trafficking systems. We record revenue from these performance-based actions when we
receive third-party verification reports supporting the number of actions performed in the period. We generally have audit rights to the underlying data
summarized in these reports.
Subscription Services and Other Revenue
Subscription revenue is generated through the sale of a premium version of the Pandora service which currently includes higher audio quality and
advertisement-free access. Subscription revenue is recognized on a straight-line basis over the length of the subscription period.
Until September 2011, a small portion of subscription revenue was also generated from usage-based fees when a listener who did not have access to a
premium version of the Pandora service reached a maximum number of listening hours on traditional computers in a given month. The listener was required
to pay a nominal fee to continue the advertising-supported listening experience on traditional computers for the remainder of the month. Revenue from usage-
based fees was recognized in the month the maximum number of listening hours was exceeded. In September 2011, we effectively eliminated the 40 hour per
month listening cap on desktop and laptop computers by increasing the cap to 320 hours of listening per month, which almost none of our listeners exceed.
Revenue Recognition for Multiple-Element Arrangements
We enter into arrangements with customers to sell advertising packages that include different media placements or ad services that are delivered at the
same time, or within close proximity of one another. Because we had not yet established the fair value for each element and our agreements contain mid-
campaign cancellation clauses, advertising sales revenue prior to February 1, 2011 was recognized as the lowest of (1) revenue calculated on a time-based
straight-line basis over the term of the contract, (2) revenue calculated on a proportional performance basis, based on CPM for the entire campaign multiplied
by the number of impressions delivered to date and (3) revenue based on the delivered media and price as specified on the applicable insertion order.
Significant creative or engineering professional services provided adjunct to a campaign are not considered to have standalone value. As a result, we
recognized revenue for all elements of multiple-element arrangements as a single unit of accounting over the delivery period.
Beginning on February 1, 2011, we adopted new authoritative guidance on multiple element arrangements using the prospective method for all
arrangements entered into or materially modified from the date of adoption. Under this new guidance we allocate arrangement consideration in multiple-
deliverable revenue arrangements at the inception of an arrangement to all deliverables or those packages in which all components of the package are
delivered at the same time, based on the relative selling price method in accordance with the selling price hierarchy, which includes: (1) vendor-specific
objective evidence, or VSOE, if available; (2) third-party evidence, or TPE, if VSOE is not available; and (3) best estimate of selling price, or BESP, if neither
VSOE nor TPE is available. BESP is generally used to allocate the selling price to deliverables in our multiple element arrangements. We determine BESP for
deliverables by considering multiple factors including, but not limited to, prices we charge for similar offerings, sales volume, market conditions, competitive
landscape and pricing practices. We recognize the relative
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