Pandora To Buy Rdio Assets For $75M In Cash, Rdio Files Ch.11, Will Shutter Service

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Wary Of The “Next Warby”

That was fast: just as soon as it was reported that Pandora was in talks to buy Rdio, the two sides have confirmed that an acquisition is indeed taking place. Pandora has acquired “key assets” from Rdio for $75 million in cash, the company has just announced.

But as part of it, the Rdio service as we know it is tanking: the streaming service is filing for bankruptcy.

“The transaction is contingent upon Rdio seeking protection in the United States Bankruptcy Court for the Northern District of California. Upon approval of the proposed transaction by the bankruptcy court, Rdio will be winding down the Rdio-branded service in all markets,” Pandora noted in its statement.

Separately, Rdio said in a blog post that it will shut down in the coming weeks. More immediately, however, Rdio will continue uninterrupted.

In digital music market with constrained economics, we are likely to see yet more consolidation or outright closures.

And with Rdio, there is still a chance that someone could step in right now and buy the company instead of Pandora, Rdio noted in its own statement: “While we are filing for bankruptcy, because the planned sale to Pandora is contingent on such a filing, by law Rdio is required to entertain competitive offers during the bankruptcy process that is being managed for us by Moelis & Company,” it noted.

But, if Pandora’s pland does go ahead, it sounds like Pandora’s plan will be to create its own flavor of on-demand streaming to exist alongside its radio-style service. The assets it is planning to buy include technology and intellectual property. Additionally it’s taking on several members of Rdio’s team, but that will not include Anthony Bay, who is staying on with Rdio to wind down the business, Brian McAndrews confirmed on a conference call about the news today.

“The company expects to offer an expanded Pandora listening experience by late 2016, pending its ability to obtain proper licenses,” Pandora said. That will potentially mean Pandora finally taking its services to a wide range of markets.

During the conference call, Pandora’s McAndrews also outlined why it decided not to try to transfer the Rdio business in any way: “This would have been a drain for us, and [Rdio] is financially challenged,” he said. “Those are the two reasons we did not acquire the business but did buy the technology IP. It will be late 2016 [before we launch] but that’s all we can say at this point.”

But he also made clear that adding more services to radio was an essential part of growing its business. That has also included a big move into live music and concert ticket sales by way of its recent TicketFly acquisition, and the broadcast of popular series Serial. And you have to imagine that buying a robust, existing platform to stream music will be significantly cheaper than building it themselves.

Pandora on the conference call also confirmed that it will not be taking licensing deals as part of the transfer, which is standard in the industry.

But now attention is turning to its negotiations with labels and how they are progressing. Pandora has been working at trying to lower royalty rates on its music plays compared to those of providers on other platforms like satellite. It has had made some steps ahead in this strategy, and is also making headway with songwriter rights holders, too, such as in the deal with Sony ATV earlier this month.

“Whether streaming through radio, on-demand or in-person at live events, Pandora is building the definitive source for fans to discover and celebrate music,” said McAndrews in a prepared statement. “Wherever and however fans want to hear music, we intend to be their go-to destination.”

This was a poor return for Rdio’s investors. The company had raised at least $125 million (although some speculate that it was significantly more) in funding from investors that included Atomico, Mangrove (which eventually sold its stake), and Skype/Kazaa’s Janus Friis (who co-founded Rdio with partner in crime Niklas Zennstrom and Carter Adamson). Radio operator Cumulus also took at 15% stake in Rdio at a $500 million valuation in 2013 in change for radio advertising commitments worth $75 million.

But despite its Skype/Kazaa disruptive pedigree, Rdio had a hard time competing against Spotify and other streaming music companies. We’re not even sure how many Rdio users there were in the end: in the call today McAndrews made clear that those numbers are irrelevant since that service is shutting down, not transferring.

But this is a marriage involving not just one but two businesses challenged to compete against larger rivals: last quarter Pandora missed earnings with an $86 million loss on strong competition from Apple and others.

And in after-hours trading it looks like Pandora’s move has so far made not so much as a dent in the company’s share price. Right now, it’s at $13.45, only 3 cents, or 0.22%, higher than it’s closing price on Monday of $13.42, trading very close to the lower end of Pandora’s 52-week range.

Pandora tried to play down the fact that it’s buying assets from a failing business and insisted that it’s in a “much better position” than Rdio in using those assets to create a streaming business. The company already has some 78 million users, mostly in the U.S., that it’s hoping that it will be able to upsell to whatever Pandora builds next.

Rdio also provided the following statement:

“We are proud to have created an innovative and critically acclaimed global music streaming service. Given the state of the streaming marketplace, we have reached an agreement with Pandora –- a leader in music streaming that shares our passion for delivering the best possible music experience to music fans everywhere –- to purchase key assets from Rdio’s business, including intellectual property and technology.

The companies visions’ share much in common.  Both believe that an ad-supported radio service experience is the right free streaming model. Both believe that a lower entry-priced subscription is a key to growing the market. Pandora is the leader in streaming radio with 80m monthly active listeners.  Rdio is recognized as one of the top global music subscription services. The addition of technology, product, IP and people from Rdio will unlock opportunities for Pandora — including speed to market for their on-demand services, global expansion and direct licensing relationships. The result will be the industry’s best combination of streaming radio and subscription songs on demand.

We’re pleased that many of our employees are being offered roles at Pandora, where they can continue our tradition of great design and innovative engineering on an even larger stage. While we are filing for bankruptcy because the planned sale to Pandora is contingent on such a filing, by law Rdio is required to entertain competitive offers during the bankruptcy process that is being managed for us by Moelis & Company.”

Updated throughout with extra comments from Pandora’s conference call on the deal, and more background on both companies.