Pandora is taking on Spotify and Apple -- and wants to go global

A banner for Pandora Media, the online-radio company, hangs in front of the New York Stock Exchange.
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Now that Pandora has put most of the pieces in place for an on-demand music service, the streaming radio provider has to address perhaps its biggest hurdle: Going global.

On Tuesday, Pandora announced licensing deals with Sony Music Group and Universal Music Group, leaving Warner Music Group as the last holdout among the major labels. The company also agreed to a deal with music rights agency Merlin Network as well as more than 30 independent labels and distributors.

The licensing agreements pave the way for Pandora to take on Spotify and Apple in the on-demand subscription market, moving the company beyond advertising-supported online radio.

But the deals only cover the U.S., underscoring Pandora's principal challenge in expanding its business. While Internet leaders like Alphabet, Facebook and now count on international markets for a substantial percentage of revenue, Pandora has been restricted almost entirely to the U.S. over the past decade.

To date, Pandora has paid royalties under the Digital Millennium Copyright Act (DMCA), which exclusively covers the U.S. The only other countries where the company has forged agreements for paying rights holders are Australia and New Zealand.

Now that Pandora is negotiating directly with the labels, the company expects that consumers in other countries will eventually get to sign up.

Pandora shares

"We're going to bring these products to market in the United States and really flush out our go-to-market strategy in the largest market in the world for music," said Michael Herring, Pandora's chief financial officer, in a conference call on Tuesday. "That sets up well to expand internationally over time."

Pandora is expected to introduce a $10 monthly subscription service in the fourth quarter, allowing users to listen to their preferred artists and songs from smartphones. That will sit alongside Pandora's free ad-supported radio service that serves up songs based on a user's tastes and preferences and the company's ad-free streaming service for $5 a month.

While Warner wasn't included in Tuesday's announcement, Pandora said it's having "constructive conversations" with the label and hopes to have an agreement in place before launch. Warner's artists include Green Day, Neil Young and Wiz Khalifa.

Pandora has been a tough story for investors because royalty costs plus competition have made it impossible for the company to turn a profit. The stock is down 24 percent in the past year, even after a 42 percent rally over the last six months.

The shares fell 0.8 percent to $14.17 as of mid-day on Tuesday. Pandora's net loss widened in the first half of 2016 to $191.4 million from $64.1 million a year earlier.

Tim Westergren, founder of Pandora.
Source: Pandora

Activist investor Corvex Management is pushing Pandora to sell itself. The hedge fund wrote a letter to Pandora in May, disclosing a stake of about 10 percent in the company and arguing that Pandora "may be pursuing a costly and uncertain business plan."

Pandora founder Tim Westergren took over the CEO role in March and has shown a strong preference for staying independent. In addition to aggressively investing in a new business model, Westergren orchestrated the $450 million acquisition of Ticketfly late last year to push Pandora deeper into live events.

But Westergren knows he needs listeners overseas. The company has more than 78 million active listeners, a number that actually shrank slightly in the second quarter.

With the number of smartphone users expected to top 2 billion across the globe this year, Pandora currently has access to just a fraction of them.