Pandora.com provided a
highly customizable online radio service tailored to listeners' musical
preferences and had registered explosive growth since its September 2005
launch. But proposed changes in royalty rates threatened to kill off many
Internet radio sites, including Pandora. Explores Pandora's business model and
whether it can evolve to remain viable.
Case takes place in 2007
At the current growth rate the company would exhaust its
cash by the end of the following year. The company’s trajectory indicated that
it could reach positive cash flows within two years. User base had grown to 8
million and online hours were growing 50%. The direction of the company was in
question. How to balance the interests of various venture capitalists while
also staying true to Pandora’s foundational dream.
In 2004 Westergren raised a “B” round of financing for
Pandora.com as the company was in dire straits. Pandora was originally founded
as a project to categorize music by is musical DNA, a complex collection of
attributes such as rhythm, form, instrumentation, orchestration, lyrics,
vocals, and many others. The business model needed money as the capability
still needed time to develop. The Series B financing raised eight million
dollars.
When it was first founded, Pandora had used its capability
to provide a back-end music recommendation engine for other companies like Best
Buy and AOL.com. After closing the second round of financing, the company
change strategy radically to become a customizable Internet radio service that
would let listeners state their preference for types of music or favorite
artists, and then match those tastes to other songs in Pandora’s library and
stream them to users personal computers.
Music Genome Project –
Westergren
was originally a musician touring as a keyboard player with an acoustic rock
band. He gave that up in the late 1990’s and became a film composer in LA.
Touring as a musician was difficult to eke out a living.
The
birth of the Music Genome Project was while he was a composer. The job to
figure out somebody else’s musical tastes and translate that into musical
elements so you can compose something they’ll like was something he was doing
for a while. The project was just an effort to codify that.
Westergren
and two friends set up shop in San Francisco to build the music discovery
engine to help connect listeners with artists. This engine required that each
song that was placed in the library would be dissected, first, by analysts who
spent 20-30 minutes codifying as many as 400 different attributes to determine a
song’s musical DNA.
Marketing:
Pandora grew its customer base purely through word of mouth,
or so called viral marketing. The company hadn’t spent any money on marketing.
Along, with user growth, the library had swelled and Pandora had accumulated
more and more data about user preferences – a classic network effect.
Music Industry:
Pandora’s goal was to create a new way for musicians and
listeners to find each other. Historically, this role had been filled by record
labels, which owned the entire value network for music discovery, recording,
and marketing / promotions.
Pandora Reflection
The direction of Pandora’s future is something we have to question
as investors. TANK Consulting did a good job capturing the essence of what we
were observing. However, they didn’t stress the Genome Project during the
presentation. It was more of an inferred understanding. Just to remove any
doubt of the understanding, the following is our own detail:
https://www.pandora.com/about/mgp
We believe that each individual has a
unique relationship with music – no one else has tastes exactly like yours. So
delivering a great radio experience to each and every listener requires an
incredibly broad and deep understanding of music. That's why Pandora is based
on the Music Genome Project, the most sophisticated taxonomy of musical
information ever collected. It represents over ten years of analysis by our
trained team of musicologists, and spans everything from this past Tuesday's
new releases all the way back to the Renaissance and Classical music.
Each song in the Music Genome
Project is analyzed using up to 450 distinct musical characteristics by a
trained music analyst. These attributes capture not only the musical identity
of a song, but also the many significant qualities that are relevant to
understanding the musical preferences of listeners. The typical music analyst
working on the Music Genome Project has a four-year degree in music theory,
composition or performance, has passed through a selective screening process
and has completed intensive training in the Music Genome's rigorous and precise
methodology. To qualify for the work, analysts must have a firm grounding in
music theory, including familiarity with a wide range of styles and sounds.
The Music Genome Project's
database is built using a methodology that includes the use of precisely
defined terminology, a consistent frame of reference, redundant analysis, and
ongoing quality control to ensure that data integrity remains reliably high.
Pandora does not use machine-listening or other forms of automated data
extraction.
The Music Genome Project is
updated on a continual basis with the latest releases, emerging artists, and an
ever-deepening collection of catalogue titles.
By utilizing the wealth of
musicological information stored in the Music Genome Project, Pandora
recognizes and responds to each individual's tastes. The result is a much more
personalized radio experience - stations that play music you'll love - and
nothing else.
The Genome Project is something that I wanted to stress
because as an investor this is something that we need to emphasize. I believe
that the market is saturated. Additionally, as someone who is known as musically
challenged, my opinion is one that wasn’t brought up by the consultants. It is
essentially a different path of alternative 3. Rather than liquidating we
should reach a next level of funding and sell the company. Our financials at
this point in time aren’t strong enough to suggest that we should pour more
money with the intent to make a lifelong investment. With projected positive
cash flows in two years we should recognize that either we see a return or the
founder finds an alternative to his dream. Liquidating isn’t an option because
as the consultants highlighted there is a cost to liquidation. We can, however,
gain enough of a momentum and then seek a buyout. This will provide a return to
those of us who invested a lot and Westegren can stay on the project if desired
if he wants some part of his dream to remain.
