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Pandora Price Target Cut On Rising Royalties, Costs

Pandora Media (NYSE:P) stock fell Thursday after the leading online music company got a price target cut from Macquarie, which cited rising royalties and other costs for the Oakland, Calif-based company.

Pandora stock fell 2% in the shortened session in the stock market today, under 14. Pandora stock has fallen 22% this year on Wall Street’s concerns about competition and user growth.

“New royalty assumptions and increased costs bring our estimates lower,” wrote Macquarie analyst Amy Yong in a research note, in which she cut Pandora’s price target to 17 from 19. “Pandora has inked multiyear agreements with major labels in the U.S. covering 60% market share of all publishers. We estimate total content costs of $765 million in 2016, stepping up 10% per annum through 2020.”

On the revenue side, Pandora’s Ticketfly business will contribute $506 million to revenue and $91 million to EBITDA (earnings before interest, taxes, depreciation and amortization), Yong said.

Pandora bought Ticketfly for $450 million in October, vaulting the online music-streaming leader into the live-event and ticket sales business in its bid to take on rivals including Apple (NASDAQ:AAPL) Music and Spotify.

Overseas expansion will likely take center stage in 2016. “Next up, we think management will focus on other regions, beginning with the all-important U.K., a $1.3 billion market,” said Yong, who said Pandora’s biggest rival outside the U.S. is Spotify, which has a presence in more than 60 markets.

Besides the U.S., Pandora operates only in Australia and New Zealand, launching in those markets in 2012. Pandora must pay to acquire music rights country by country, which can significantly add to its already heavy spending on music-acquisition costs.

Through several agreements reached the past two years, Pandora is now aligned with music superstars including Justin Bieber, Lady Gaga, Taylor Swift and Adele. The company has inked deals with labels including Sony/ATV, Warner/Chappell, Universal Music Publishing Group, SONGS, Atlas and Downtown Music Publishing, said Yong.

The latest deal came on Tuesday, when Pandora announced multiyear licensing deals with ASCAP and BMI, two major trade groups that between them own the music publishing rights to 20 million songs.

Some of Pandora’s costs will ease now that the company has completed the build out of its sales and marketing staff, says Yong. But Macquarie is modeling increased employee costs of $15 million per year for Rdio, the Web streaming service that Pandora gotfinal approval to buy on Wednesday, for $75 million.

Pandora stock has sagged since the June launch of Apple Music — a service combining paid subscription music streaming with a 24/7 live global Internet radio station. While Pandora remains the Internet streaming leader, with 78.1 million monthly active users in Q3, its market share is falling as competition grows.

Besides Apple Music and Spotify, Pandora is in a heated battle with rivals including Amazon.com‘s (NASDAQ:AMZN) Prime Music and Google Play Music, owned by Google, a division of Alphabet (NASDAQ:GOOGL), and iHeartRadio.

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