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How Smart Is Pandora, Really?

NEW YORK ( TheStreet) -- There's never a dull moment in the world of Pandora (P - Get Report). So far in 2013 Pandora has had the angels on its side, its stock gaining as much as 110%.

Remarkably, investors continue to pile money into Pandora even as rival services from Google's (GOOG) All Access and Apple's (AAPL) iTunes Radio have emerged. Unlike previous years, Pandora seems to have developed bullet-proof resistance from concerns that would have otherwise punished the share price.

While I don't disagree that Pandora's management has been pushing all of the right buttons, I wouldn't advise investors to press their luck too much. Rising content costs is still a major issue here. Also, I don't believe that Pandora has effectively addressed its ability to monetize its business model.

That said, I will give Pandora credit for being smart enough to at least think "outside the box" to mitigate the impact of these costs. But how well will it work?

Last week, when I read on that Pandora had acquired KXMZ-FM, a South Dakota radio station, I thought it was a joke. I immediately went to the Securities and Exchange Commission Web site to make certain that it was real. Sure enough, it was. But what would Pandora, an Internet radio company, want with a terrestrial radio station?

Terms of the deal have not been disclosed so I couldn't scrutinize the financials the way I wanted. However, I can say that contrary to popular opinion, this deal had nothing to do with Apple nor, for that matter, was this deal influenced by competitive positioning with Spotify or Slacker or Sirius XM (SIRI). Was it bizarre? Absolutely! It was also pretty darn smart.

Pandora saw this move as a way to combat the American Society of Composers, Authors and Publishers (ASCAP), a no-profit performance-rights organization that protects musical copyrights of its members. ASCAP is able to do this by monitoring public performances of its music -- regardless of how it's broadcast.

Essentially, ASCAP is an overseer of licenses and music royalty rates, ensuring that its members are compensated accordingly. While that's great for the artists and the rights holders, it's painful for companies like Pandora that rely heavily on content, especially when Pandora has to cut a check each time the music plays.
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