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posted: 6/15/2013 8:01 AM

Pandora buys station to get radio content rates

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By Bloomberg News

LOS ANGELES -- Pandora Media Inc., the biggest online radio service, has bought a station in South Dakota to gain the same access to music and rates as terrestrial competitors.

Buying KXMZ-FM in Rapid City qualifies Pandora for the same rights and prices enjoyed by competitors such as Clear Channel Communications Inc., CBS Corp. and Cumulus Media Inc., Pandora's assistant general counsel, Christopher Harrison, said in a letter posted on TheHill.com., a Washington news website. The acquisition may lead to cost savings of less than 1 percent of revenue, Pandora said Tuesday in a regulatory filing. Terms of the deal weren't disclosed.

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Pandora pays agencies such as the American Society of Composers, Authors and Publishers and Broadcast Music Inc., which represent artists and rights holders, to use songs for its service. The company has been seeking better terms in court and in Congress. Competitors such as Clear Channel's iHeart Radio receive lower rates from Ascap and BMI because they're owned by radio broadcasters, Pandora said.

Station owners and their Web-based properties such as Clear Channel's iHeart Radio benefit from a January 2012 agreement between their negotiating body, the Radio Music License Committee, Ascap and BMI, according to Pandora, which has failed to obtain the same terms.

"This acquisition allows us to qualify for the same RMLC license as our competitors," including 16 of the 20 biggest Internet radio services, Harrison wrote.

Pandora, based in Oakland, Calif., is set to begin arbitration with the music industry at the end of the year to set rates that would start in 2016. The company supports federal legislation that would lead to lower royalty payments, and it filed a lawsuit in November 2012 seeking lower fees from Ascap.

Pandora and other online radio services paid 0.11 cent per song in 2012, a fee that will rise to 0.14 cent in 2015.

Sony/ATV Music Publishing and other music publishers have sought higher content rates from Pandora than from radio stations, based on its exclusion from the RMLC deal, according to the company.

Pandora is attempting to underpay rights holders with the radio-station purchase, Ascap said in a statement, according to CNN Money.

"Internet and traditional AM/FM radio services are very different businesses with different formats," Ascap said, according to the channel's website.

Pandora, which has more than 200 million registered users, will broadcast a "personalized experience to the community" in Rapid City, where more than 42,000 residents already use its service, according to its letter.

Pandora's content costs increase with each new user. Content, the company's biggest expense, totaled $82.9 million in the quarter ended in April, or about 66 percent of revenue.

The purchase of KXMZ-FM follows Apple's announcement this week of a competing Web-radio service. Pandora has tied other measures to contain its royalty costs, including a 40-hour monthly listening cap on mobile devices instituted this year.

Pandora fell 1.8 percent to $15.08 at 12:15 p.m. in New York trading. Through yesterday, the shares had climbed 67 percent this year, compared with a 14 percent gain for the Russell 1000 Index.

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