One of the biggest challenges facing Brian McAndrews, the new CEO of Pandora, will be renegotiating the royalty rates the Internet radio giant pays to the music industry.
If Pandora doesn't prevail, the outcome could impede the company's growth and hamper its ability to compete with services such as Apple's iTunes Radio, which launches next week.
For each song Pandora streams to listeners it pays a fraction of a penny to recording labels. The companies begin negotiations before the federal Copyright Royalty Board in January and both sides are already digging their heels in.
Just like past disputes, the haggling could drag on for years while the government plays referee. In the end, users might have to listen to more ads between songs or pay more in subscription fees to avoid them.
McAndrews, 54, was appointed Pandora's CEO on Wednesday. He told The Associated Press that the royalty fight is "a ways off" and that he'll rely on the counsel of co-founder Tim Westergren and outgoing CEO Joe Kennedy.
"I'm confident we'll be prepared and do the right thing," he said.
"I do share Pandora's longstanding belief that musicians should be fairly compensated for their work," McAndrews said, adding that the existing patchwork of laws was "created piecemeal over decades" and "doesn't serve any one very well."
Pandora allows users to listen to music on computers, smartphones or other Internet-connected devices. It's free as long as listeners put up with a few ads. For each song Pandora streams, it pays the music industry a royalty fee, which in aggregate amounted to over $200 million last year. The royalty rate is set by the U.S. government.
McAndrews is the former CEO of digital advertising company aQuantive, which was sold to Microsoft for $6.3 billion in 2007. Pandora hired McAndrews in an effort to boost the money it makes from advertising.
While McAndrews said he'd focus on boosting ad revenue, music royalties are Pandora's biggest hurdle to profitability. The fees are the main reason Pandora posted another net loss in the quarter through July, despite revenue rising 55 percent.
Overcoming these costs has proven difficult. In February, Pandora restricted listeners to 40 hours of free mobile listening per month, in an attempt to limit royalty expenses. But it reversed the move in August after listener hours began falling.
Over breakfast in San Francisco's Lower Pacific Heights neighborhood earlier this summer, Westergren outlined his frustration with the cap before the company reversed course. (continued...)
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