Case Prep and Reflection: Opening Pandora Box

Problem/Issue Statement

In December of 2007, Tim Westergren, the founder of Pandora.com was at the point were he is forced to make a decision about finding a balance between keeping the interests of investors and staying true to his dreams for pandora.  At the rate that the company was growing, they will be running out of cash by the end of the next year(2008). He also has to think about the additional problem which is licensing cost.

Westergren’s big decision to make is to choose between

1)Take a more conservative path, put a delay on growth, and raise enough money to stay afloat for long enough to reach an exit.

2)Put the “pedal to the metal” - fan the flames of viral growth, top the SEM, increase hiring, and take advantage of the first-mover advantage.  Then the company would count on raising a very large round of financing, hoping it could command a heady valuation and set its sights much higher -- including a prospective IPO.

Situation assessment

Situation assessment

Pandora was began by Westegren and two friends with the Music Genome Project. Music Genome Project is  a music discovery engine that connects listeners with artist.  Each song that was entered into the music library would be dissected by analysts to determine its “musical DNA.”  This was how the Pandora team would be able to determine what the listeners liked and help them with better recommendation in regards to the  titles/artists based on the individual's preference.

Pandora was started as a  music recommendation engine up until the year 2004 after it recieved more financing. Its strategies were changed and it was renamed Pandora.com, an internet radio service where users can listened to their preferred music or music similar to it

In january 2007, with the growing internet radio market, Pandora had acquired about 5 million registered users.

In March 2007, there was an increase in royalties to be paid by internet radio stations for streaming music ranging from the year 2007 to 2010. Westergren felt that the new rates would “kill all internet radio stations, including Pandora.”   In response to the CRB, Westergren sent a letter to all listeners requesting their help and asking them to sign petitions to urge Congress to take action to save internet radio.

List of Plausible Alternatives and Evaluation of Alternatives

1. Spend more conservatively - Due to its advertising growth model, the company is grwoing rapidly but this might require them to spend more conservatively to save more cash. To achieve this, they would ultimately pull back on their growth levers such as SEM and their overall spending. In addition, slow down its headcount growth. This option would help Pandora to save more cash which can be used in future financing. However, the disadvantage would be that Venture Capitalist would be disappointed which is what Westergren is trying to avoid.

2. "Pedal to the Medal" - This alternative is more aggressive because Pandora would fan the flames of viral growth, top out SEM, hire aggressively, and ultimately take advantage of the 1st mover advantage. This would really keep venture capitalists happy but it would put the company in an more unfortunate financial situation because they would exhaust its cash much more quickly.

3. Exit- This is the last alternative, which would be to raise the minimal amount of new investment to reach an exit through acquisition. This option would allow Westergen to acquire a lot of profit from his ideas without all the stress that comes with running a business but it would also require him to walk away from his dream.

Recommendation

I recommend Pandora.com to choose the second alternative which is to spend m ore aggressively. This is because the company is almost at its success period and just a little more push. This sounds like a terrifying idea in the short run but i believe it would pay even more aggressively in the long run because investors would be happy at the end and will be more encouraged to keep doing business with Pandora.com. It is all about risk and reward which is what business environment is made up of.  Sometime, you have to take risk in taking some route with the expectation of getting an even greater reward in the long run.

Reflection

To the members of the board

After last Tuesday night’s presentation by the consulting team, it is still clear to me that we should take the “pedal to the metal” alternative. The experts came up with various ways by which we can drive up revenue. Some of the ways include how the company can form strategic relationships with complimenting music companies and also independent artists.  The market for independent artist has been growing rapidly and makes up about 40 percent of the music industry. So that provides a good opportunity for Pandora.com to take advantage of by charging the artist for their music to be played on its website. This not only adds to the revenue, but also generates more customer base for the company because the artists would generate their own marketing for their fan base.

In addition, if Pandora forms strategic relationships with complimenting companies, they can charge premium for hosting different links on their website such as links to concerts, tour dates, etc

I didn't like the idea of increasing advertising space on the website because this would seem like a big turn off to listeners who visit the website for music, not for them to be bombarded with advertisement. But I also completely agree with the experts’ suggestion that we consider the option of a premium subscription for exclusive content such as creating a personalized playlists, or listen to specific artists of their choice.

My regards,
Lynda Okeke