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ETV Trinity 07 Entrepreneur Interview

By Mario Hall,2014-07-09 12:31
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ETV Trinity 07 Entrepreneur Interview ...

    ETV Trinity ’07 Entrepreneur Interview :

    Tim Westergren, Pandora.com

I hereby certify that the following piece of work complies with the Own Work

    Declaration form already issued and with the University’s Rules and Regulations

    relating to plagiarism and collusion, as listed in the Essential Information for

    Students and the MBA Course Handbook.

    Student ID: 8268

Introduction

    Tim Westergren is founder and CEO of Pandora.com, an internet based music 1recommendation and radio service. I will conduct a R.A.C.E. framework analysis of

    Pandora chronologically, as R.A.C.E elements map well to clearly definable periods

    of Pandora‟s history.

     Pandora Timeline 1988 - Present

I have divided my report into 4 phases: (1) A Basis For Recognition, (2) Recognition,

    Appropriation and Control, (3) B2B Flop and Exploitation, and (4) B2C Success and

    Exploitation. Regardless of recent media attention, I treat Pandora‟s recent regulatory conflict as a sub component of it‟s B2C phase.

Despite travelling extensively for business and in support of a grass roots campaign to

    reverse regulatory rulings by the US Copyright Royalty Board, Tim was kind enough

    to take an hour to speak with me from his London hotel room. I wish to express my

    gratitude to him, and to Michele Husak, Director of Communications at Pandora, for

    their support in facilitating this interview. All quotations are taken from my phone

    interview with Tim Westergren, 19.05.07, unless otherwise noted.

    Technical and Business Model

    How Pandora Works

    Pandora is a website that allows users to create and listen to multiple personalized

    internet radio stations. Users create stations by searching for songs or artists they like

    in the Pandora database. If found, Pandora uses the Music Genome Project (hereafter

    MGP) to find similar songs and artists, which are then played over the personalized

     1 Recognize, Appropriate, Control, Exploit

station. As a user listens to a station, they are able to rate each song positively by

    clicking a “thumbs up” icon, or negatively by clicking a “thumbs down” icon. This

    data is then used to refine the list of songs from which the MGP chooses subsequent

    songs for the user. In this manner, a user is able to find new music similar to their

    existing tastes, gaining exposure to unknown artists and major recording stars

    equally… an impossibility in traditional radio.

    How MGP Works

    The MGP relies on a genre specific “genome” of several hundred song characteristics

    (genes) to classify a given song. Examples of genes would include Blues Roots,

    Gravely Female Vocalist, Grunge Recording Qualities or Flat Out Funky Grooves.

    Musical experts employed at the MGP listen to each song for 20 to 30 minutes to

    determine each gene of the song on a scale of 1 to 5. The genotypes of songs a user

    rates favourably are used to calculate a user preferences vector. This vector is used to

    query the MGP for a ranked list of song recommendations.

    How Pandora Makes Money

    Pandora has two user based revenue streams: ad supported, and ad-free subscriptions

    for $36/year.

    History

    Phase 1: A Basis For Recognition (1988 2000)

The Pandora and MGP concepts ultimately arose out of Westergren‟s passion for

    music and musicians, and his experience using a technical tool of the film composer‟s

    trade.

Westergren‟s background in the field extends at the very least to 1988, when he

    received his BA in Computer Acoustics and Recording Technology from Stanford

    University. Following this, his career included stints as a musician, recording artist,

    producer, and studio owner, providing him with experience in the field and a deep

    respect for musicians. Later in this phase, he worked as a film composer. The

    technical process by which film composers identify suitable music for a score

    provided the basis for what would later become the MGP: iteratively swapping songs

    (mixed tapes, CDs, online, etc.), getting feedback, picking new songs based on

    relatedness, and swapping again. After several rounds of this, a composer is able

    narrow down and “glean the tastes” of a director. The experiences of this phase gave him the background necessary to recognize the Pandora opportunity.

Phase 2: Recognition, Appropriation, and Control (2000)

In 2000, Westergren‟s motivations for starting a new business solidified, instigating

    conversations with a B-School educated friend on how to start a business, ultimately

    resulting in the technical and cultural establishment of Pandora, and a first round of

    funding.

Westergren recognized that a resource such as the MGP, combined with a delivery

    mechanism, could “transform the music business” by giving listeners a new way to discover new music, and “support the rise of a musician middle class” by giving independent musicians a means of getting their music to a much wider audience. 2These motivations formed the basis for Pandora. Further noting the “all time low of relationships between music fans and record labels, Westergren recognized a need and opportunity to build positive relationships between music fans and his business.

Conversations with college friend John Kraft (MBA, Stanford Technology Group,

    Clone Interactive) convinced Westergren of the need to more fully recognize the opportunity via a formal business plan. These conversations also let to the

    appropriation of Kraft as a starter CEO. As founder of the Stanford Technology

    Group (sold to Informix in 1995), Kraft brought tested entrepreneurial experience to

    the team.

    Establishing Pandora, the MGP, and filing patents on it‟s technology, Westergren exerted control over Pandora‟s intellectual property. However, the value of this IP

    should not be overestimated. Per Westergren, the algorithms are not complex, and 3the notion of services which relate songs to one another is not unique. According to Westergren, Pandora‟s significant sources of competitive advantage lie in its culture,

    its first mover status, and its constantly growing database of user preferences, not in

    irreproducible technical innovations. In Westergren‟s opinion, “the best investors invest in people, and an idea in the broadest sense, not a business model”, and this view runs parallel to his view on staffing. The most critical component he seeks in

    new staff is not exact fit to role, but rather intelligence, work ethic, and above all

    respect for musicians. The latter element he holds as Pandora‟s “most holy tenet, reflecting his personal attitudes toward musicians. However, Westergren also stresses

    the importance of positive relationships with users in the Pandora culture. By

    selecting new hires that are predisposed to these values, Pandora‟s staffing strategy helps to maintain control through internal culture as the business scales up.

A first round of investment was secured in March 2000. Working through personal

    networks to locate prominent investors such as Guy Kawasaki (garage.com) and John

     2 Westergren refers to the rise of file sharing and subsequent record label initiated lawsuits against

    customers as evidence of the “broken-ness” of the industry. 3 Itunes, last.fm, Ilike, etc.

    Rogers (Rogers Investment Group), Pandora appropriated an initial infusion of what would shortly become their most difficult to obtain resource: cash. Within the month,

    the dotcom bust would make any hope of further cash infusions hopelessly remote.

    Phase 3: B2B Flop and Exploitation (2000 2004)

The first four years of Pandora‟s existence provided few opportunities for exploitation.

    Initial plans of licensing their technology to retail outlets, Yahoo! music, and other

    B2B customers proved unprofitable, resulting in a dismal two year period during

    which salaries went unpaid. Westergren states with some degree of lingering

    incredulity that he finally managed to find” a second infusion of cash In 2004. This appropriation was followed shortly by a change of CEO, ending what I have termed

    the „B2B flop period.

    Phase 4: B2C Success and Exploitation (2004 present)

     ndFollowing the 2 cash infusion and a subsequent strategy change, Pandora

    experienced growth, regulatory challenges, and a massive show of user support via a

    grassroots political campaign. Yet, prospects of exploitation remain elusive.

The new CEO, Joe Kennedy (eLoans, Saturn), began his tenure by leading the

    executive team through a strategy review. Because of the wider availability of

    broadband, a business model based on streaming audio to home users became feasible.

    Pandora switched to a B2C model, thus removing the barrier to exploitation posed by

    the failing B2B model. This also presented Pandora with an opportunity to fill a void

    that the existing music industry could not or would not fill, by creating a direct and

    positive relationship with consumers. The period of 2004-2007 saw the rise of

    Pandora to prominence in the online broadcasting industry, building up a user base of

    ~7 million, a station count of ~50 million, and a DNA catalogued song count in

    excess of 500,000. While still not profitable, Westergren foresees profitability for

    Pandora within the next two years… exploitation is finally within the realm of possibility.

With regard to plans for harvesting value, Westergren states that "a misperception

    about businesses is that they actually have a plan", and that he is “not a big believer in strategy being based on a fixed and known path”. With profitability still in the

distance, it may be premature for Pandora to consider exploitation, particularly in 4 recently about light of recent regulatory challenges. A great deal has been written

    the US Copyright Royalty Board (hereafter CRB), and its recent ruling regarding

    internet broadcasters. However, the practical effect of recent rulings, if upheld, would

    be to charge Pandora ~$5 Billion per year in royalties! Vastly exceeding revenues,

    this measure would force the immediate closure of Pandora.

Banding together with other internet broadcasters, Pandora has spearheaded a

    campaign to persuade the US Congress to overturn the ruling. With support from 7

    million Pandora users and 60 congressmen, emergency legislation has been

    introduced by senators to temporarily block the ruling. With broader congressional

    backing, this change may become permanent. Westergren ties this massive

    outpouring of support to Pandora‟s positive relationships with users and reverent treatment of musicians. He observes that a similar attempt to gain support for a major 5record label at this point in time would be almost unthinkable. The final outcome of

    this most recent barrier to exploitation remains to be seen. Lessons Across the RACE Framework

    From the perspective of recognition, there are several key lessons from the Pandora case. Firstly, processes specific to a certain audience or field, such as film score song

    swapping, may be successfully repurposed to a larger audience in a different field.

    Secondly, deep experience in a given field, such as Westergren‟s experience in the

    music business, is of value when forming a venture to address that business. Thirdly,

    an industry with a poor relationship with its customers may present an opportunity for

    recognition by a new player.

With regard to appropriation, the key lessons from the Pandora story are that personal

    networks are viable means of securing funding, and also that depending on business

    cycles, funding may be relatively more or less feasible.

Another lesson gained from Pandora is that while some degree of control may be

    achieved by securing IP through structural means (patents), it may not be meaningful

    without other controlling factors. Pandora‟s strong requirements with regard to the character of new hires allow for maintenance of their critical user and musician

    centric culture through selection. This factor has clearly played a role in recent

    regulatory conflicts.

    According to Westergren, exploitation may not be an immediate strategic consideration in every business. In my view, this is reasonable given his analysis of

    business strategy as an emergent phenomenon. However, I cannot rule out the

    possibility that this is also reflective of Pandora‟s current place in the business

    lifecycle: they simply aren‟t at a point where exploiting the investment is a possibility.

     4 Anxious Times for Internet Radio, The Wall Street Journal, March 12, 2007;

    Music Radio On The Internet Faces Thorny Royalty Issues, The New York Times, May 14, 2007;

    Web Radio Stations Sing the Blues to Congress, The Washington Post, May 19, 2007 5 i.e. file sharing, lawsuits against customers, “broken-ness”, etc.

Elements Unique to Internet Radio Entrepreneurship

    Despite the technology, patents, regulatory issues, etc., Westergren views the high

    degree of personal connection with users to be the unique element of entrepreneurship

    in Pandora‟s field. He feels that Pandora‟s passion for music and musicians resonates with their customers, generating personal connection, and thus, loyalty. The positive

    aspects of this may be seen in the massive support recently demonstrated by

    Pandora‟s user base. However, this connection represents a double edged sword: personal connections may turn bitter. Westergren highlights this in the plight of US

    record labels. He feels that consumers have the impression that record labels don‟t care about musicians, music or consumers. Therefore consumers don‟t care about

    labels, and have no issue with stealing music via file-sharing. In reaction, labels sue

    their own customers, generating greater animosity and thereby feeding a vicious circle.

    Westergren summarizes this bleakly: nobody gives a shit about file-sharing, because no one cares about record labels because record labels don't care [about consumers] and it shows”.

    Conclusion

    Despite Pandora‟s innovative technical concept and recent tenure in the political

    spotlight, it presents a classic story of entrepreneurship: an innovator learns a skill in

    one field, recognizes its applicability to another, and appropriates resources to launch

    a venture, controlling the venture via organizational culture. The most interesting

    element of this story is that Pandora‟s culture has given rise to customers who care so deeply about it. One must wonder if Pandora’s ultra-supportive customer base derives strictly from their customer and musician centric culture, or if this level of

    customer loyalty is an artefact of the Web2.0 sphere, where users invest in and

    identify strongly with the services they use. Perhaps one day this level of customer loyalty will also become a classic story.

    Appendix 1: General Sources

    Pandora corporate website: http://www.pandora.com/corporate/team

Wikipedia articles:

    http://en.wikipedia.org/wiki/Music_Genome_Project, http://en.wikipedia.org/wiki/Pandora_%28music_service%29

Phone Interview: Tim Westergren, 19.05.07

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