In December, 2007, Tim Westergren, founder and chief strategist of
Pandora was stuck at a crossroads; he was struggling to balance the interests
of investors while staying true to his dream for Pandora. At the Company’s current growth rate, they
were going to run out of cash by the end of the following year. Westergren had a big decision in front of him
– should he take a more conservative path, pull back on growth and raise just
enough money to stay afloat for long enough to reach an exit; or should he go
full throttle through viral growth and exploit the first mover advantage,
raising a more significant amount of capital with the hopes of a possible
future IPO?
Situation
Assessment
Westergren and two friends began Pandora with the Music Genome Project, a
music discovery engine to help connect listeners with artists. Each song that was entered into the music
library would be dissected by analysts to determine its “musical DNA.” This was how the Pandora team would be able
to determine what music listeners liked and recommend future titles/artists
based on each individuals preference.
Pandora began as a back end music recommendation engine for the likes of
AOL and Best Buy, but in 2004, after receiving some additional financing, the
Company changed strategies and became Pandora.com, an internet radio service that
allowed users to state their preferences and find similar music that they may
like based on those preferences. Internet radio had growing popularity, in
January of 2007, Pandora.com had roughly 5 million registered users (5 million
according to Exhibit 3, however it would appear to be more like 6 or 7 million
from the text).
Then in March 2007, the Copyright Royalty Board instituted a major
increase in royalties to be paid by internet radio stations for streaming music
during 2007 – 2010. Westergren felt that
the new rates would “kill all internet radio stations, including Pandora.” In
response to the CRB, Westergren sent a letter to all listeners requesting their
help and asking them to sign petitions to urge Congress to take action to save
internet radio.
Here is a snapshot of the music industry as a whole in 2007:
- CD’s were quickly becoming a thing of the past, prices were increasing and consumers were less willing to spend money for an entire CD when all they really wanted was 1 or 2 songs.
- Radio – while still a mainstay medium was seeing declining trends due to satellite radio and other emerging technologies of the time such as digital devices (iPods) and internet radio.
- Satellite radio was going through a transformation with the potential merger of XM and Sirius after both companies had a combined loss of $6B.
- Digital music had the highest trends with digital sales nearly doubling in 2005 and downloads projected to grow at compound annual growth rate of 16% by 2011. Rather than buy entire CDs, consumers could go to iTunes and purchase individual songs for just $0.99.
Recommendation
Looking at the
landscape of the music industry, if Westergren and his team are able to raise
sufficient capital, I feel that the risk is worth the reward of “putting the
pedal to the metal” so to speak. The
industry is in the midst of transformation, listeners are no longer buying CD’s
and they do not seem to be happy with their existing radio offerings. More and more people are switching to
satellite radio and why not then switch over to internet radio and to a “station”
that has such a broad offering of music with customizable stations. We are moving into a digital age where
consumers want to be able to customize as much as of their consumption as
possible, why not offer customizable radio?
Presentation
My presentation to potential investors would emphasize the current state
of the music industry and the declining trends in other mediums. It is important to point out all of the
things that people are currently unhappy with in the current environment and
point to ways that Pandora resolves these issues. A lack of “good music” on the radio? Pandora provides customized stations based on
user preferences. Unhappy with current
advertising on your local radio station?
Pandora advertising is almost discrete in nature and very non
obtrusive. Don’t want to pay for
satellite radio? Pandora is a free
service; all you have to do is register.
It would also be important to show in the presentation, the increasing
trend of registered users to the Pandora site as well as Pandora’s impact on
the overall market. Musicians/Artists
are pleased with the exposure that they are able to get on Pandora as opposed
to the lack thereof on local/satellite radio.
Pandora also complements retailers with links to purchase songs if users
like them – say you like the latest Bon Jovi song, you can buy it for only $0.99
on iTunes. It is reported that 34% of
registered Pandora users actually spent more money on music after switching
over to Pandora and finding new songs or artists that they liked and wanted to
hear on their iPods as well.
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