buying music,” says Westergren—making Pandora the number-one referring affiliate of both iTunes and Amazon’s MP3 store.
The company’s recent climb toward profitability comes after a long drought. From the company’s founding in January 2000 to the launch of the streaming radio service in November 2005, the startup had almost no revenues, Westergren recounts. With the Music Genome Project, “we were building what we thought would be a music recommendation technology that we would license to other companies,” he lsays. But there weren’t any takers, and by the end of the end of 2001, the company was broke.
For the next three years, most of the staff worked without salaries. Then, in 2004, after 347 consecutive unsuccessful pitches to venture capital companies and other investors (which has got to be some kind of record), the company got lucky, winning $7.8 million in funding from Labrador Ventures, Selby Venture Partners, WaldenVC, and angel investors. (That was followed by a $12 million Series C round that brought in Crosslink Capital and a Series D that involved Hearst Corporation, JP Morgan and Piper Jaffray; the company has collected more than $22 million all told.) But 2004 was when “we kind of got resurrected,” Westergren says. By that time, “broadband had grown so much that streaming audio was becoming viable mass market opportunity, and that’s when we turned into a radio service. So the last couple of years have really been a Cinderella story for me, because we were for all intents and purposes out of business for a long time, and we shouldn’t have survived, but now we’re all having a whale of a time.”
But the good times almost came crashing to a halt earlier this year. Westergren shared his version of the recent battle in Washington, D.C., over changes in music-royalty rates that threatened to put an end to Pandora and most other Internet radio stations. “It’s a bit of a long saga, but Internet radio stations are required to pay both a publishing and a performance fee for every song we stream,” Westergren explains. “The publishing fee is about 3.5 percent across all forms of radio—broadcast, satellite, and Internet. But the performance fee is actually determined by an arbitration panel at the copyright office in Washington. And a year and a half a go, this committee met and ruled to almost triple our performance rates. Overnight, it basically blew up our business model.
“So we were getting ready to shut the whole service down, as it would have been too expensive to run. We decided as a Hail Mary to e-mail everyone and ask them to contact their Congressperson and urge them to stand up and prevent this from happening. Capitol Hill received 400,000 faxes and e-mails in three days and eventually over two million.
“It was so overwhelming that Congress intervened and forced a renegotiation, which, as we speak, is continuing. That’s going to result in a much-reduced performance fee that will allow us to continue…It was a pretty scary time for us, but thanks to this grassroots mobilization, we survived that. So, thanks for calling! It made a huge difference.”
One person in the audience at the Apple Store asked Westergren to name his favorite Pandora station. “Ben Folds,” he said unhesitatingly. “Heavy-hitting piano stuff with interesting vocals and harmony. That’s sort of my sweet spot.”
So I listened to some Folds yesterday while I was writing this piece. I can’t say his whimsical style really struck my fancy. But that’s okay: everyone has a different musical genome, and Pandora has 600,000 other songs and counting for me to choose from.
