Pandora Case Prep

Pandora Case Preparation

 

Problem

It all began in 1999 when Tim Westergren launched his company, then titled Savage Beast, as a music discovery engine to connect listeners with artists. The engine was dubbed as the Music Genome Project where it required that each song placed in the library be dissected, first, by analysts who spent approximately 20-30 minutes codifying as many as 400 different attributes to determine a song’s “musical DNA.” The DNA was used to match a song to its “musical neighbor”, where users could find similar songs that could create a particular mood. Initially this concept was sold to online and offline music stores. The Music Genome served as the back-end to online music experiences offered by America Online (AOL) and Barnes & Noble, in addition to powering kiosks in offline record stores like Tower Records, Best Buy, and Borders.

Due to the company’s economic situation, Westergren was forced to devise a plan to keep the company afloat and complete the music library to increase its value. In March 2004, Westergren was able to raise a Series B round, second round financing for a business by private equity investors or venture capitalists, led by Walden Venture Capital in San Francisco. During this process, Westergren and the board decided that it would be best to hire a new CEO. The new CEO, Joe Kennedy, proposed that that the company change its strategy to become a direct-to-consumer Internet radio service. It was then that Pandora.com was born. This provided a free, highly customized online radio station powered by the Music Genome.

In December of 2007 found himself facing a similar issue that he faced in 2004. Pandora.com user base has grown to 8 million, online hours were growing 50% year on year, and although cash-flow has not reached a positive level, trajectory reports indicate that it could reach a positive cash-flow in two years. Westergren was grappling with satisfying the interest of the investors while staying true to his own dreams for the company. The choices he is faced with are: 1) Taking a more conservative path by reducing the growth levers on SEM and general market spend, slow headcount growth, and raise minimal amount of new investment to reach an exit through possible acquisition? 2) Or, take an aggressive approach by topping out the SEM, hire aggressively, and take advantage of the first-mover advantage? This would lead to the company having the ability to raise a large round of financing to command a heavy valuation to lead to a prospective IPO.

Situation Assessment

When Pandora was founded, the company used its capability to provide back-end music recommendations to other companies. Shortly after the Series B closing, the company also shifted its strategy to focus its efforts on being a customizable Internet radio service. The service would give users the ability to make preferential choices on types of music or artist and then match those selections to songs in Pandora’s library and stream them to the user’s PC.

In September 2005 launched its highly-customizable online radio station and the following May Pandora had a user base of 6.5 million registered users. In March 2007, the Copyright Royalty Board increased royalty rates for Internet radio stations from $0.0117/hour to $.03/hour. Westegren believe that rates like this would “kill” Internet radio sites including Pandora.

Alternatives

Westergren was faced with two choices to decide from. His choices are:

1) Taking a more conservative path by reducing the growth levers on SEM and general market spend, slow headcount growth, and raise minimal amount of new investment to reach an exit through possible acquisition?

2) Or, take an aggressive approach by topping out the SEM, hire aggressively, and take advantage of the first-mover advantage? This would lead to the company having the ability to raise a large round of financing to command a heavy valuation to lead to a prospective IPO.

Recommendation

As the C-Level, I would consider option one as the path for Pandora. As we see, technology is beginning to grow as the years progress. With the music industry suffering from CD sales, having digital music will become more common than going to purchase a CD. Shifting towards the ability to offer users a download option would go completely against the business model that Pandora has established. I would not discount radio, although it is becoming a dying breed and listeners want more music versus talk radio. We need to be conservative with our decisions that would keep us afloat until we can potential sell to a reputable company that will utilize the music genome project in a capacity that Pandora may never reach. Taking an aggressive stance would move Westergren away from what he loves to do thus ultimately leading to a change in the business model to compete with competitors. Granted this could lead to an IPO, but this isn’t certain given how music is played and the source that it comes from. Therefore, a conservative stance would drive Pandora to a possible acquisition by another company to provide users a greater music experience.