Analyst: Here’s How Pandora’s Free Listening Cap Will Affect the Stock

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The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

In a blog post on Wednesday, Tim Westergren, Pandora’s (NYSE:P) Chief Strategy Officer and Founder, announced that the company will implement a 40-hour-per-month cap on free mobile listening in the U.S. beginning in March. The cap is intended to address rising per-track royalty rates, which are up more than 25% over the last three years, according to the company.

Rates will be up 9% in 2013, and are expected to increase by an additional 16% over the next two years. By instituting the cap, the company can more effectively manage these costs with minimal listener disruption. Over 75% of total listening hours occur on mobile and other non-traditional devices. Users have three options to avoid the cap: (1) switch from mobile to desktop and laptop computers, (2) pay $0.99 to extend unlimited listening for the rest of the month, or (3) subscribe to Pandora One.

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The cap will likely affect only a small percentage (under 4%) of Pandora’s users. The cap will be applied at the device and account level to prevent users from using another account on the same device. It will not impact desktop, laptop, or Pandora One users, nor will it affect users who listen to Pandora through an automotive integration.

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