U.S. Markets open in 6 hrs 47 mins

Pandora shares jump after government hikes music royalty fees

Aaron Pressman

Shares of online music service Pandora Media (P) jumped 20% after a government panel raised rates for streaming music less than some record labels had sought.

The Copyright Royalty Board, which sets fees online streaming services must pay, decided that companies like Pandora should pay $0.0017 per song per listener for advertising supported services starting in 2016. The rate will last for five years with annual adjustments for inflation. Pandora is paying $0.0014 this year, but major labels and others in the music industry had asked the royalty board to set the fee at $0.0025 or higher.

"This decision provides much-needed certainty for both Pandora and the music industry," Brian McAndrews, Pandora's CEO, said in a statement. "We are moving full-steam ahead with our ambitious plan to continue to build the world’s most powerful music discovery platform."

News of the decision, which included a higher rate for subscription-based services, initially sent shares of Pandora into a tailspin, down 25% to $10 in after-hours trading. But the shares quickly recovered and rose to more than $16, a 60% turn around to a level that represented a 20% gain from the stock's closing price.

The rollercoaster stock was as high as $22 in early October until Pandora's last earnings report showed a contracting user base and investors panicked. Increasing competition from Apple (AAPL), Google (GOOGL) and Amazon (AMZN), among others, appears to be taking a toll.

The fees apply to so-called webcasters which offer radio-like services online, including Pandora, iHeartRadio and Shoutcast. The government-mandated royalty rate doesn't apply to interactive services that let listeners choose each song, such as Spotify, Apple Music and Deezer. Those services must negotiate rates with each each record label directly.

In recent months, Pandora had been preparing for an adverse ruling by also negotiating individual deals directly with the labels, a strategy it had avoided for years. The company announced a deal with Warner/Chappell Music on Tuesday, which followed an agreement with Sony/ATV, the world's largest music publisher, last month.

The online radio leader, with 80 million users, has also sought to diversify into other music-related areas. Pandora announced last month that it would pay $75 million for most of the assets of bankrupt Rdio, a Spotify-like service that never caught on with listeners. In October, Pandora agreed to acquire live event ticketing service TicketFly for $450 million.

Rumors that the board would side with Pandora helped drive its stock price up to the $22 level in October. Under the mandatory licensing system, Pandora hasn't had to enter into individual negotiations with each label for its online radio service. But if the board had sided with the labels, Pandora would likely have had to negotiate lower rates on a case-by-case basis.