Radio

The Story of How Pandora Radio Almost Died

I love the Pandora Radio app on my iphone.  I listen to music most of the day – in my room or around the house, in my car, outside walking around – and this is possible only because of internet connected mobile devices.  Pandora Radio just recently went public on the NYSE and looks to have a strong future.  It wasn’t always so bright, this is a story of persistence and hanging on by a thread.   MG Siegler of Techcrunch had a great write-up on Pandora the day of their IPO, I think it’s so I will re-post it below.  I like it because you get a sense these founders would not give up on their vision and persevered through much trial and tribulation.

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Pandora was founded in 2000, but it wasn’t known as “Pandora” at the time. Instead, the company was focused on their Music Genome Project, which aimed to extract the DNA from music, as it were, and find commonalities to perfect recommendations. When Conrad joined in 2004, the company was known as Savage Beast — yes, a truly awful name that invokes Savage Garden. In fact, here’s an early blog post from Conrad about Savage Beast that he probably won’t be pleased with me sharing.

When Conrad came on board, the company had just taken its first real venture capital investment (from Walden Ventures) and Joe Kennedy had just been hired as CEO. The idea was to transform the Music Genome Project from a cool piece of technology that was licensed out to the likes of Best Buy, and (our parent) AOL, among others, to a consumer-facing product. That effort began in December 2004, with design work leading up to that. By the late summer of 2005, the product was ready to go.

And here’s where things get really interesting.

“TechCrunch is a part of this,” Conrad says. “We launched, and the first Barcamp was the following Saturday. I got out of bed that morning and almost didn’t go. But at the last minute, I threw my laptop in the car and drove to Palo Alto,” he says. “By luck, Mike was in the room.”

He means, of course, Mike Arrington.

“He got up when it was over, went to a Starbucks, I think, and wrote a post about Pandora. That was the starter pistol for our early growth,” Conrad says. And thanks to the magic of the Internet, you too can see that post from August 20, 2005 right here (note the part where Arrington tries to give out invites from his personal email address, then gives up due to massive interest).

Conrad notes that TechCrunch itself was “about 45 days old” at that point. And he fondly remembers Arrington being annoyed with him that the Pandora launch wasn’t given to him as an exclusive. “At that point, he was just some blogger to me,” Conrad says with a laugh.

But that didn’t stop Conrad from showing up at Arrington’s house over the next several months for the BBQs Arrington used to host in his backyard. Conrad recalls that Pandora music streaming from his laptop would often be the musical entertainment for the evening “while we stood around his little campfire”.

From that point on, Pandora “grew at a pace that exceeded my expectations,” Conrad says noting that millions of users were coming on in just the opening years.

But then the CRB decided the royalties for this new form of radio, Internet radio, needed to be set. Conrad notes that after Pandora was live for about a year and a half, those rates were revealed — and they weren’t good. “It was economically unsound,” he says. “And it wasn’t just us that was affected; Yahoo, AOL, Microsoft, and a lot of smaller guys too.” At that point, Pandora entered into a two-year-long process of negotiating with the record labels over royalties that led to the situation described at the beginning of this post. “This was a complicated period for us,” Conrad says.

But there was also a ray of hope that emerged during this time. The App Store.

Conrad notes that when the iPhone OS 3 (remember, it wasn’t “iOS” at the time) launched in the summer of 2008 and brought the third-party-friendly App Store for the first time, everything changed. “Broadly, the smartphone category accelerated everything for us,” he says, noting that the App Store was the catalyst.

“What we’re really trying to do is re-invent radio. It was consumed everywhere, but least of all at work, and the web browser changed that,” Conrad says. “But the mobile devices took it out of the browser and out into the world,” he continues. Now over half of Pandora’s usage comes on smartphone devices, he says. And that’s incredible since Pandora had been on feature phones for about a year prior to the App Store, but it wasn’t going anywhere. With the iPhone, “the consumer expectation of what they could do with their phone changed drastically,” he says.

Conrad also points out that Nielsen had a recent study which put Pandora in the top five apps in terms of usage on major devices — iPhone, iPad, Android, Blackberry. He believes they’re the only company in the top five on each of those devices.

So the App Store helped Pandora’s mood in an otherwise bleak time. “The timelines do overlap in an interesting way,” Conrad says. But at the same time, he says that he was never too concerned for Pandora having to completely shut down. “The [royalty] rates were so irrational that we were very confident through the period that we would come to a compromise with the rights’ holders,” he says. At the same time, he credits the “incredible outpouring of support from our listeners” as the thing that really motivated Congress to start looking into the situation.

“It was frustrating that it went on for so long, but we thought rationality would prevail,” Conrad says. And even after “RIP, Good Times”, hit in late 2008, he wasn’t too worried because “we focused on the monetization of the product from the beginning.” “Other companies were behind the eight ball, but we were starting to see the rewards from that attention to revenue,” he says.

And then in the middle of 2009, the clouds broke. Pandora (and other Internet radio services) reached an agreement that would lower royalties to the point where the business could work. “Pandora is finally on safe ground with a long-term agreement for survivable royalty rates,” Conrad told us at the time.

“A real period of growth started then.” And today, Pandora has over 94 million registered users.

Story courtesy of Techcrunch