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Will More Expensive Pandora Internet Radio Subscriptions Hurt the Stock?

By Tim Beyers – Mar 21, 2014 at 9:38PM

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To pay ever-increasing royalty rates, executives raise prices on the most valuable users of Pandora Internet Radio.

Pandora Media (P) isn't any more immune to growing pains than other businesses in its sector. As such, it shouldn't be surprising to see the company boosting prices on its most valuable Pandora Internet Radio subscribers to cover rising royalty payments to artists. The stock is nevertheless down nearly 4% since the news broke. Fool contributor Tim Beyers explains the implications in the following video.

Specifically, the company is ending annual subscriptions, and asking new members to pay $4.99 monthly for One, the ad-free version of Pandora Internet Radio. Existing members will be grandfathered in at $3.99, while those who've paid annually in the past will be asked to begin paying monthly when their year is up.

Can investors expect the rate changes to impact profits? Unlikely, Tim says. Premium subscribers to Pandora Internet Radio accounted for 18.7% of revenue in the most recent quarter, and that's with the segment's contribution more than doubling year over year -- from $10.3 million to $25.7 million.

Tim sees the move not so much as a reaction, but as proper planning. In a blog post, the company said that royalty rates are up 53% during the past five years and are on pace to rise another 9% in 2015. Raising prices for ad-free Pandora Internet Radio now should allow the company to avoid the fate of the airline industry, which has found it difficult to boost fares despite rising fuel costs.

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Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's web home and portfolio holdings or connect with him on Google+Tumblr, or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool recommends Pandora Media. The Motley Fool owns shares of Pandora Media. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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