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Analyst Blog

Internet radio service provider Pandora recently announced that it would raise the fees for its ad-free service by $1.00 to almost $4.99 per month from May onward.

Reportedly, this move was initiated by the company in order to cover the continuously increasing cost of licensing tunes. The amount paid as royalties to artists has increased 53.0% over the last five years and is expected to go up by another 9.0% in 2015.

In such a scenario, Pandora found no other way of retrieving costs than to raise its fees. This announcement comes on the heels of a federal judge’s ruling, which stopped Pandora from lowering the current royalty rate of 1.85% to 1.70%, which it pays to songwriters to license their music.

Pandora is doing away with its $36.0 annual subscription. Instead, yearly subscribers will now move to a monthly $3.99 loyalty plan once their membership expires. This new plan would add up to an amount much higher than what existing members had been paying so far and thus prove to be costly for them.

The company, however, claimed that only 3.3 million users out of a total of 250 million users will get affected by the price hike. Moreover, Pandora will continue offering its highly individualized programmable music stations for free, with advertisements.

This hike in rates may adversely affect the subscription base of the company amidst stiff competition from the likes of rivals like Apple , Spotify, Google and Sirius XM which in turn may lead to reduction in growth and profitability of the company going forward.

Pandora enjoys a first mover’s advantage in the music streaming industry. We believe that the company already has a popular service, driven by its effective discovery engine and a well-established infrastructure.

Currently, Pandora has a Zacks Rank # 3 (Hold).

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