Opening Pandora's Box

Problem/Issue Statement

Tim Westergren, chief strategist and founder of Pandora.com was at a crossroads in December of 2007.  Westergren was facing the issue of how to balance the interests of its various venture capitalist investors while staying true to his dreams for the Pandora. At the company’s current growth rate, it would be out of cash by the end of the following year (2008). To compound the cash flow problem, Pandora also faced a serious threat on the licensing costs. The question is presented:  does Westergren take the conservative route or the aggressive route in hopes of raising capital and growing the customer base?  

There are two possible routes for Westergren and Pandora: (1) pull back on growth levers and raise just enough capital to stay afloat for long enough to reach an exit or (2) put the “pedal to the metal” through viral growth, be aggressive for SEM, hire personnel and exploit the first mover advantage, raising a more significant amount of capital with the ultimate hopes of an IPO.

The symptoms of Pandora’s three main problems are as follow: 

• The company did not have a positive cash flow and the company was not profitable yet. Due to this, Westergren hoped his investors would remain with the company. If investors walk, this will pose a major threat to the company’s future.
• The company was facing fierce competition within the music industry especially due to the increasing licensing costs and royalty fees which could further hinder the company’s positive cash flow. The Copyright Royalty Board were expected triple the royalty rates to be paid by Internet radio stations.
• Pandora was also dealing with market trends where Internet sites were being sold to companies like Google, Microsoft and News Corporation.
• Since Pandora is being true to Westergren’s vision, the company is not advertising to try to solicit new customers.
• Westergren’s lack of knowledge of the retail world caused Pandora to hire Joe Kennedy as the CEO.

The scope of the problem entails Pandora, the 100 employees, investors, venture capitalists and approximately 5.5 million users worldwide according to Exhibit 3 of the Case Study. Either solution would greatly affect all stakeholders involved either positively or negatively. Depending on the outcome of the company, this could also set a precedent either negatively or positively for Internet radio stations.

Situation Assessment 

In 2003, Pandora began with the Music Genome Project, a music discovery engine to help connect listeners with artists. Each song was entered into the music library was dissected by analysts to determine the musical DNA.  Pandora began as a back end music recommendation engine for the likes of AOL and Best Buy. However in 2004, with the help of newly hired CEO, Joe Kennedy and additional $8 million in financing, Pandora changed its strategy to become Pandora Media, an internet radio service that allowed users to state their preferences and find similar music according to those preferences.  The strategy was now direct to customers. By 2007, Pandora had 5 million registered users, online hours were growing 50% year on year and an increasing popularity of Internet Radio.  Since growth is in the forecasted future, Pandora needs to decide on how it is going to raise capital either conservatively or aggressively to accommodate for the pending growth phase.

The decision criteria for both possible courses of action:

Advertising:  How can Pandora attract new companies to advertise on its Internet radio station? Since ad revenue was 93% of the total revenue generate, Pandora needs to focus on this asset explicitly.

Customers: How can Pandora increase the customer base?  If Pandora could spread existing fixed costs over a larger customer base, the more the economics would improve. A larger user base would also increase the CPM (cost per thousand impressions). Word of mouth and viral marketing is not an aggressive means of advertising and the company may need to adjust their strategy.

Future: Pandora needs to focus on scaling up to accommodate for a growing customer market and expand into new mediums such as mobile, hardware solutions.  

List of Plausible Alternative Courses of Action

There are three courses of action identified in case study and both options address the main problem in different ways:

1) Conservative Route: Continue with same strategy of gaining capital and growing customer base

• Pandora can raise capital through its already established base of investors and venture capitalists. This will address the need for capital however on a short term basis until investors are not willing to contribute any longer or until the company exists the market.
• Continue same advertising strategy for customers.  This would rely heavily on word of mouth and “viral growth”. Its’ current marketing strategy of viral growth has proven successful considering the growth of 5.5 million customers however, this means of gaining new customers is limiting and the company cannot sustain growth with this means. This would only be sustainable as long as customers are spreading the word.
• Continue relying on companies to purchase ad space or air time to make up 93% of company revenue.  
• Continue offering customers a free subscription with advertising and a paid subscription without advertising.
• Assess the future of the company and determine if exiting (selling the company) would be a smart decision before the company is bankrupt.
• This solution addresses raising capital in the short term for a short amount of time.  This solution does not have any longevity and this is not a sustainable option for long term growth.  The customer base only increases through word of mouth marketing and is limiting for the future.

2) Aggressive Route: Increase capital by generate additional revenue from advertising

• Pandora can raise capital through its already established base of investors and venture capitalists. In addition, the company can seek out new investors by driving the point that the company is on the brink of significant growth as seen in the dramatic customer base and user hours.
• The company can still utilize the viral growth but through a more effective means such as paid advertising.  The company can use banner ads, video ads and audio ads to promote the internet radio station.  
• Pandora needs to grow the customer basis to increase advertising from companies. Since 93% of the revenue is generated from paid advertisers this needs to be leveraged. Once capital is raised, the company can invest additional marketing means such as concerts or sponsoring a concert tour.
• Pandora can increase the ad space on the website which could help form strategic partnerships with varying advertisers (concert venues, arenas, bands). By adding more ad space, it will increase revenues on customer click-through rate and in turn will generate greater revenue for Pandora. The increased ad space, could certainly slow the growth rate of subscribers who are looking for a service with strictly music. 
• The company should also look to the future to mobile devices and offering hardware solutions. The company can offer a music player with a subscription fee.

3) Combination of two solutions: balance of increased advertising space, offer premium ad-free option and increase paid advertising of Pandora

• Pandora can increase the advertising space for the free subscription users. The company can combat a negative backlash against this by requesting customer information through surveys including demographics and customer feedback on preferences. Pandora can leverage this information from its 5.5 million customer base to increase advertising revenues.
• Pandora can offer a premium ad-free exclusive content option to customers. This option would alienate certain customers and could possibly slow the growth as well.  However, to counteract this, Pandora would generate revenues through subscription fees as well as increasing advertising. If the premium subscription fee was $5.00 per month over $5 million users, Pandora could generate an additional $25 million. The premium service would be ad-free and an unlimited number of click-throughs on streaming songs. It would also include the ability to create playlists and customers would have access to premium content. Pandora would have to leverage it music library and brand name to attract as many subscriptions as possible.

 Evaluation of Alternatives

When evaluating the courses of action, it is important to analyze which option will align with the strategy of the company, raise capital, prepare for the future and ultimately grow the company.  As stated above, the aggressive option and combination of the solutions addresses all of the decision criteria from paid advertising, to increasing capital and the customer base and preparing for the future.  However, maintaining the current strategy and taking the conservative route has proven to be an effective means of growing the company.  The company will incur additional operating costs including employee salaries and overhead costs. The growth of the company is key since more customers equals more users to advertise to, which leads to more paid advertisers and more revenue. 

The evaluation relates to the decision criteria developed because it analyzes the ways to increase capital, the customer base and prepare for the future growth of the company.  All three solutions need to be analyzed to determine which is the most logical for the company to implement. Does Pandora want to increase ad space, offer a premium ad-free subscription or request additional customer information to be leverage with advertisers? The benefits and drawbacks to the courses of action need to be determined. From that decision, the rest of the decision criteria can be evaluated. 

Pandora cannot be imaginative in this decision. Real risk is presented with maintaining the current word of mouth strategy to increase the customer base and relying heavily on investors to raise capital. However, changing the ad space and subscriptions for customers can slow growth.   The evaluation of alternatives needs to be realistic since it will be affecting investors, customers and the future of the Pandora.

 Recommendation 

After reviewing the courses of action, I recommend to Pandora a combination of the solutions.  There is an endless number of strategies or combinations of strategies Pandora could implement in order to increase capital/revenue, the customer base and prepare for the future. As stated in the solutions above, Pandora should move toward increasing the ad space available to the free subscription customers while offering a premium subscription for a monthly fee with zero advertising. Pandora could leverage the customer information obtained through surveys to generate additional revenue from advertisers.  This will enable advertisers to tailor ads to certain demographics and preferences. Pandora should adjust its own advertising through paid advertisements in banner ads, audio ads and placements ad on complimentary websites. The word of mouth advertising is not a viable option if Pandora wants to continue growing at an accelerated pace. Another recommendation for Pandora is to continue seeking out additional venture capitalists by stressing the pending growth of the company and Internet radio. This may intrigue investors and could lead to additional revenue. Lastly, Pandora should leverage its relationships and raise revenues with unknown or upcoming artists and bands by offering placement ads by adding the artist’s music on the service as one of the few ways in reaching the customer base. 

Presentation 

If I were presenting as a consultant to the class, I would state that I have been commissioned to identify the benefits and drawbacks involved with various ways of raising capital, increasing revenue and the customer base and preparing for the future.  I would discuss the current strategy’s successful means of gaining a customer base of 5.5 million but this is not a sustainable means of growing the company. I would address various ways of generating additional revenue from advertisers through increased ad space.

Visual aids to be used in presentation:

PowerPoint presentation for the three possible solutions

Decision criteria for Pandora; and

The pros and cons of all the alternatives

I would “sell” the combinations of the two solutions by stressing the importance of increasing the customer base means additional advertising dollars which leads to additional revenue. All of these factors leads to future growth and the ultimate goal of an IPO.