Professional Documents
Culture Documents
struggled to find investors. Meanwhile, the project evolved into a coded library of
thousands of songs3.
Business Model
To monetize the Music Genome Project, Westergren initially licensed his music
discovery engine to facilitate online and offline music stores. Also, the Music Genome
Project was used in AOLs and Barnes and Nobles music portals, in kiosks for Best Buy,
and Borders and Tower Records. The licensing model proved unsuccessful because the
revenues were insufficient to sustain a lucrative business.
In 2004, the new CEO of Pandora, Joe Kennedy, changed the existing business
model and transformed Pandora into a free, direct-to-consumer Internet radio service.
Pandora generates revenues in three ways. Firstly, they have advertisements on their
website and mobile application (Exhibit 1). This stream of revenue came from display
and text ads that accounted for 93% of the companys revenue (they later added audio
ads). Next, they charge users who want ad-free service subscription fees. Finally, they
earn affiliate fees from iTunes and Amazon.com. Pandora is a leading referral site for
music sales for these two online music retailers4. At the end of 2009, Pandora reported its
first profitable quarter and $50 million in annual revenue5.
The company gives advertisers several value propositions. Advertisements have
great visibility as listeners frequently used the sites interface to discover new music.
Also, Pandora gathered information about its users from account registrations (gender,
age, location, etc.) and from their listening preferences. So, advertisements can be highly
targeted to different segments of the population. Pandoras 80 million registered users
tune in on an average of 11.6 hours a month6. The size of their user base and their ability
to keep listeners on the site attract well-paying advertisers.
3 Pozen, Robert and Rosenfeld, Alex, Pandora: Royalties Kill the Web Radio Star? Harvard Business
6 The
Pandoras expenses primarily consist of advertising commissions, streaming
costs, performance royalties, and employee salaries. Between 60 percent to 70 percent of
Pandoras revenue is paid to the nonprofit music industry group SoundExchange to
compensate for the songs it plays7. In aggregation, Pandora raised over $57 million in
venture funding to sustain itself8.
In February 2011, Pandora filed with the SEC to raise up to $100 million in an
initial public offering. For the 12 months ending on October 31, 2010, Pandora had $114
million in sales. Pandoras latest valuation is somewhere in the neighborhood of $300
million pre-money, and its impressive acquisition price is approximately a half-billion9.
10
Pozen,
Robert
and
Rosenfeld,
Alex,
Pandora:
Royalties
Kill
the
Web
Radio
Star?,
Harvard
Business
major competitors were AOL, Live365, MTV, RealNetworks, and Yahoo. Exhibit 2
shows the relative market shares in terms of unique visitors between Quarter 2, 2006 and
Quarter 1, 2007. During this period alone, Pandora increased its market share from 5% to
16%. Yahoo and AOL saw their market share percentages plummet, while Live365s
market share percentages remained relatively stagnant. Other entrants in the web radio
industry included smaller webcasters, non-commercial webcasters, and traditional radio
simulcasters.
In the 2010s, a number of web radios and music discovery services emerged.
Some potential threats for Pandora are Apples Lala, iLike, Grooveshark, Qloud and
CBSs Last.fm. In the year 2010, Pandora exceeded its top competitors in terms of unique
visitors (Exhibit 3) and number of site visits (Exhibit 4). How did Pandora earn such a
dominant role in the web radio industry?
11 Google
Patents,
www.google.com/patents?id=LI54AAAAEBAJ&printsec=abstract&zoom=4&source=gbs_overview_r&ca
d=0#v=onepage&q&f=false, accessed 2nd March 2011.
When Pandora first launched in 2005, they used a freemium model: listeners
acquired 10 hours of free radio upon signup, after which they were asked to pay $36 per
year. According to CTO Tom Conrad, In the first couple weeks we had 100,000 people
come through and the vast majority listened to every last minute of their free ten hours.
However, the vast majority of these listeners did not end up paying for further service. In
November 2005, Pandora moved into their ad- based model and adopted to three tiers of
service: 40 hours/ month of free ad-supported music, $.99/ month for unlimited listening
after 40 hours, and $36/ year for Pandora One (the ad-free version of Pandora which
provides higher quality sound and fewer playing restrictions). As a result, growth
quadrupled overnight, and within three days, Apple called and asked to buy out ad
inventory through December. Pandora makes little off of affiliate fees from track
downloads and a small percentage of Pandora listeners subscribe to Pandora one. Thus,
the majority of their revenue comes from advertising.12
Pandoras multiplatform strategy enabled listeners to easily use the service from
the nearest connected device. This strategy lets consumers enjoy Pandora on smart
phones, mobile devices like the iPad, in-home consumer electronics and cars in addition
to computers. Initially starting with the iPhone application, the Pandora application is
available on over 150 kinds of smart phones and more than 100 consumer electronic
devices.13 Pandora is now one of the most widely used mobile applications (illustrated in
Exhibit 5.14 Furthermore, Pandora developed a Facebook application, a side bar gadget
for Windows Vista, Windows 7 and Google Chrome. The application can also be
downloaded via iTunes. Pandoras integration with these platforms enables it to take
advantage of other prominent networks.
In March 2011, Pandora initiated a Toyota campaign. Pandora launched Toyota
Legends & Icons campaigns on all platforms. This campaign will feature content from
unnamed, internationally popular musicians. Initially the campaign will place ads for the
Toyota Highlander on Pandoras Top 40 station. Each month will bring a new pairing of
12
Gigaom,http://gigaom.com/2010/03/26/case-studies-in-freemium-pandora-dropbox-evernote-automatticnd
2 March 2011.
station and vehicle. Toyotas Entune system, which connects mobile devices to the indash system, will allow the Pandora application to play on the cars touch screen
display.15 Entering the automobile platform will further integrate Pandora into listeners
lives.
Pandoras growth multiplied rapidly after the introduction of its mobile
application. Over half of Pandoras new daily registrations come from mobile apps.
Furthermore, more than 50 percent of Pandoras usage is on mobile devices. Also,
listeners on mobile devices are very engaged with the interface (much more than other
users and spend around 1.5 hours per day) on Pandora. Due to Pandoras compatibility
with multiple platforms and ability to integrate into listeners lives, they are able to
monetize differently on each platform. Pandoras ability to offer hyper-targeted
advertising attracts significant advertisers and makes the company even more profitable.
Pandora has limited listening options; while the simplicity of the product is
attractive, listeners can neither rewind nor repeat songs nor choose the exact song they
want to listen, facing a limited number of song skips. Compared to all other musicstreaming companies, Pandoras library of songs is still quite small. The Music Genome
Project consists of 700,000 tracks, and the company has intentionally filtered out many
albums. Also, Pandora tends to repeat songs more than its competitors.19 Finally, cell
phone providers are starting to limit data plans. This might cause Pandoras mobile usage
to drop significantly.
Conclusion
To continue to attract advertisers, the number of Pandora users must continue to increase.
Pandora needs to expand into international markets. Its applications should ideally
integrate with more platforms. But will webcasters negotiate lower performance royalties
with the Copyright Royalty Board? How can Pandora improve its features and continue
to add songs to the Music Genome Project? What other antics can Pandora use to entice
more listeners and subscribers? Pandoras future relies heavily on the answers to these
questions, its competitors strategies and the decisions of the Copyright Royalty Board.
Pandora has unique products, successful entry into the online radio industry, a
working ad- based model and a multi-platform strategy to garner a loyal, large and
growing user base. In 2010 alone, the company made about $114 million in sales. In
February 2011, the company filed with the SEC to raise up to $100 million in an initial
public offering.20 Currently, Pandora continues to flourish, and its future is perceived
with rational optimism.
19
Vator,
Exhibit 1 Pandoras Ad- Supported Website
Source: pandora.com
Exhibit 2 Market Share by Unique Visitors (%) Between Q2 2006 and Q1 2007
Exhibit 3 Number of Unique Visitors in 2010 for Pandora and its Top Competitors
Source: http://venturebeatprofiles.com/
Exhibit 4 Number of Sites Visited in 2010 for Pandora and its Top Competitors
Source: http://venturebeatprofiles.com/
Exhibit 5 Most Popular Cell Phone Apps on Different Operating Systems
Source: nielsen.com