From Inc Magazine: "Tim Westergren is due to take the stage in an hour, yet he seems half asleep... He ambles around the auditorium he's rented at the San Francisco Museum of Modern Art while the staff of Pandora, the online radio company he founded, buzzes around him...

"Pandora has been around in one form or another since 1999 and has spent most of its existence on the brink of shutting down. Yet Westergren has always found a way to rescue his company and infuse it with new hope, new direction...

"Finally, at 6:45, the doors open and Westergren, 41, snaps to life. Most companies have customers. Pandora has fans. Nearly 300 of them stream in to hear what Westergren has to say...

"He's in a common enough position. He's trying to make a real business of this product he passionately believes in, but he's never quite gotten his baby out of start-up mode. Still, after eight years of being tossed around, Westergren isn't talking about just making Pandora turn the corner. He wants to make it huge...

Trials of a start-up
"It's undeniably cool and completely addictive, but Pandora has never quite found its footing as a business. Indeed, the company has been through an almost unbelievable number of setbacks, a series of blows that would make the most determined entrepreneur throw in the towel. Westergren has run out of money, which forced to him to lay off his entire staff (except for those willing to work for free). He's been rejected some 350 times by venture capitalists. He has faced bankruptcy, haggled with anxious creditors, and been sued by employees. Deal after deal has fallen through at the last minute.

"Yet somehow Westergren has managed to amass more than eight million very enthusiastic listeners, advertisers like Microsoft and Lexus, and a database of some 500,000 songs. Over the years, he's raised more than $30 million in funding, most recently an undisclosed amount from Hearst Interactive Media, the media company's venture capital arm, in 2006...

"Westergren started composing scores for low-budget independent films, and that's when he began thinking differently about music. He'd ask directors about the sounds they were searching for and listen as otherwise articulate, creative people struggled to find the right words, usually falling back on descriptions like 'something like Natalie Merchant, but more scary.' Sitting at his piano, trying to evoke a frightening Natalie Merchant, Westergren thought about what terms such as 'scarier' and 'darker' and 'happier' meant in purely musical terms...

CONTINUED AFTER BREAK...

RAIN is brought to you today by:

Jones TM, based in Dallas, has been around since the 1960s and is the world's leading creator and provider of products and services for the broadcast industry. Jones TM creates, produces, and distributes music-based products for broadcasters, webcasters and other media. Programming services include HitDisc and GoldDisc. Jones also has a wide range of production & imaging libraries like Steam, Short Bus Radio, Audio Architecture, and Imagio; plus commercial jingles and IDs, prep services, the Daily Service, and more. Visit www.JonesTM.com or call 972-406-6800 for more information.

CONTINUED FROM ABOVE THE BREAK
Business branches out
"The question was how to make money with this thing. In 2000, Westergren pitched the company as an e-commerce site that would recommend music based on the genome, and in March he raised $1.5 million in venture capital... Westergren set out to license the genome to other sites as a recommendation engine, but after more than a year his efforts resulted only in a meager $20,000 development fee from Barnes & Noble.com. His next idea was to put the technology into in-store kiosks at music retailers. At the end of 2002, Westergren reached a licensing deal with AOL Music, and Best Buy chose Pandora over 15 competitors to run a trial kiosk program. Both deals stretched payments out over a few years...

"The Best Buy trial was also showing good results, and Westergren convinced Walden Venture Capital to lead an $8 million round in 2004. The money meant that Westergren could hand out salary checks for $60,000 or $80,000 to employees who had been working for free. Meanwhile, he and the board decided to bring in a new CEO. They tapped Joe Kennedy, a former Saturn executive, in spring 2005... Having exhausted their business-to-business ideas, Kennedy and Westergren turned to the consumer market, where online radio was an obvious option. The company decided to develop a website offering personalized radio stations and charge $36 a year for subscriptions...

"Pandora launched in September 2005. After a quiet rollout to friends and family, the company had to double capacity three times in the first week... E-mails poured in, gushing about how cool it was...

"Pandora scrapped the subscription model and decided to make money via advertisements on its site... Soon the company was doubling the number of listeners every month. Investors liked the new model and gave the company another $12 million. 'That was the most enjoyable year of my adult life,' Westergren says. Pandora was working at last. But just over a year later, it would be in crisis mode again.

The royalty wrench in Pandora's plans
"Westergren was taking a bus to work on March 2 when his Treo buzzed with a news alert. He read it and called Joe Kennedy right away, frantic. The Copyright Royalty Board.. had changed the amounts that Internet radio stations had to pay... The new fees would triple Pandora's costs and Westergren and Kennedy debated shutting down immediately. At the new rates, says Kennedy, 'the business model falls apart,'...

"At an emergency meeting, some board members argued that the company should fight the rates; others suggested striking separate deals with the record labels themselves, which was deemed unrealistic...

"Westergren realized he had a huge weapon in his arsenal: his customers. Westergren sends a welcome e-mail to everyone that signs up. It's an automated e-mail from an alias address, but whenever anyone replies, he replies back...

"That work turning customers into fans, Westergren realized, meant he could rally them behind the royalty rate issue. So he sent an e-mail to all the Pandora listeners that identified their representative and senator and asked them to write in. Pandorans responded. Westergren estimates that about one million e-mails, phone calls, or faxes were made or sent by Pandora listeners...

"[Washington Rep. Jay Inslee] and Illinois Representative Don Manzullo drafted a bill that brought Internet radio rates in line with those of satellite stations; in the Senate, Sam Brownback and Ron Wyden sponsored a companion bill. 'I said, "Oh, my gosh, this is a bombshell ready to explode with the small radio stations,"' says Manzullo. The legislation has been referred to committee."

Read the entire cover story at Inc. Magazine online.

Advertisement