Pandora Media Inc. (P) Just Took A Step Closer To Launching A Spotify Competitor

Pandora is officially one step closer to launching a Spotify competitor. The digital radio giant announced Monday that it had partnered with Music Reports, a copyright administration company, to handle royalty payments it would owe songwriters and music publishers for on-demand streams. Music Reports will also help Pandora secure the licenses necessary to pay those publishers.

“This is another huge step forward for music licensing in the United States,” Music Reports Vice President and General Counsel Bill Colitre said in a statement Monday. “Music Reports is in a unique position to reach every active publisher in the market, ensuring Pandora can offer them all the opportunity to participate in these new services, on the same terms.”

Pandora has made no secret of the fact that it wants to grow into something more than an ad-supported digital radio service. Late last year, the company made a pair of acquisitions meant to add new streams of revenue: It bought Ticketfly, an independent ticketing company, for $450 million, and it also acquired the intellectual property assets and technology that girded Rdio, a Spotify-like service that filed for bankruptcy last fall.

Shortly after it made the acquisition, then-CEO Brian McAndrews told analysts he had every intention of launching an on-demand service by the end of 2016. “We’re unifying the listening experience under a single roof,” McAndrews said during a conference call last November.

While McAndrews has since left the company, his replacement, Pandora founder Tim Westergren, has continued pushing the on-demand product forward. Westergren is doing so because Pandora’s core product has grown about as much as it can: User growth has essentially plateaued, at 80 million monthly users, and even at that scale, the company has yet to turn a profit. In addition, Pandora cannot export its radio product widely because of key differences in copyright law.

An on-demand product, however, could easily be brought overseas, an opportunity that Rdio and its competitors have embraced. Both Spotify and Tidal are active in more than 50 countries, Apple Music is in over 100 and Deezer, an on-demand streaming service based in France, is available in more than 160.

But building an on-demand service comes with its own challenges. In addition to stiff competition from the aforementioned companies, on-demand music streams generate two separate kinds of royalties, and a separate apparatus for royalty payments needs to be in place.

Failing to do so can land a company in hot water. Spotify, which contracted with the mechanical royalties administrator Harry Fox Agency to secure permissions from songwriters and publishers before it launched its own service in the United States, was hit with a $150 million putative class lawsuit claiming that Spotify failed to secure the licenses necessary to stream certain artists' songs on demand.

By dotting the i's and crossing the t's necessary to avoid a similar problem, Pandora is sending the right signals not only to the music industry, but to the small list of companies that might consider buying it; rumors that the company is considering a sale have pushed its stock up more than 30 percent over the past month.