Report: Don't Expect Pandora Buying Spree

The leading online radio service took its first step offline Tuesday, but don't expect Pandora to make many more steps in the direction of traditional airwaves.

The company agreed to purchase KXMZ-FM, a Rapid City, S.D., terrestrial radio station. Its first foray into traditional radio broadcasting, the move has little to do with strategic shift and everything to do with royalty costs, according to cnet.com.

Pandora pays two royalty streams, one for actual sound recordings and another to composers for publishing rights. The sound recording fees make up the lion's share of its content costs. But by buying a terrestrial station, Pandora piggybacks onto a settlement that gives better rates on that smaller fee stream.

That's because a settlement last year put to rest a long dispute between radio operators and one of the big entities that represents publishers -- known as ASCAP -- by rolling back rates for terrestrial stations and their digital arms too. It let, for example, radio giant Clear Channel enjoy the lower rates at its iHeartRadio online offering because it had terrestrial stations as well.

By buying a single radio station in South Dakota, Pandora can qualify for the lower rates.

But don't expect Pandora to be snatching up stations en masse. Buying more stations won't bring Pandora any greater cost benefits.

And Pandora's costs savings will be small. The preferential royalty rates are expected to snag savings worth less than 1 percent of its revenue versus the rates it is currently paying. Based on last year's top line, that equates to less than $5 million.

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