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Bank Of America Examines Possible Pandora On-Demand Service

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Bank Of America Examines Possible Pandora On-Demand Service

Bank of America Merrill Lynch raised its price target on Pandora Media Inc (NYSE: P) by $2 to $14 after the Wall Street Journal reported that Pandora is a near a deal with record labels and could launch its on-demand subscription service as early as next month.

A Few Specifics

The deal will cover both U.S. and international areas, and the report indicated that Pandora plans to focus on English-speaking countries initially.

The report added that Pandora will offer two tiers of service at $5 and $10 and will improve its current $5 service with more song skips and potentially offline listening.

"An early deal would be a positive as the Street was expecting an early 2017 launch and, depending on deal economics, could both reaccelerate revenue growth and improve margin leverage," analyst Nat Schindler wrote in a note.

Schindler, who has a Neutral rating on the stock, said the key question will be the cost of royalties. Spotify releases annual filings and is paying roughly 80 percent of revenue to licensing and at $2 billion in revenue is not profitable.

"We think P could be profitable given similar economics due to their ability to market the service to their existing 100 million quarterly user base through no cost email advertising and house ads on their core radio style service," Schindler highlighted.

Related Link: Apple Music Releases New Frank Ocean Album As Pandora Plans To Launch On-Demand Service

Furthermore, the analyst noted that Pandora may be able to negotiate better terms due its promotional capabilities and industry goodwill.

The WSJ indicated that Pandora plans to launch the service in the United States followed by English-speaking countries internationally (e.g., U.K., Canada, Australia and New Zealand).

On the international arena, Pandora will face stiff rivalry from Spotify and Apple Inc. (NASDAQ: AAPL) if Pandora launches service. But, the international opportunity could restart growth if Pandora "1) grow the listener base (flat in U.S.); 2) drive monetization outside of ads; and 3) expand market opportunity for P services."

Headwinds

"One key aspect under negotiation is whether P will be allowed to launch a free streaming tier which will be key for P user acquisition int'lly," Schindler added.

At time of writing, Pandora was up 2.51 percent on the day at $13.69.

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Latest Ratings for P

DateFirmActionFromTo
Nov 2018DowngradesBuyHold
Oct 2018DowngradesBuyNeutral
Oct 2018DowngradesOutperformMarket Perform

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