CHART HEAT

THE-DREAM

SHINEDOWN

KANYE WEST

EMINEM

EXCLUSIVE!EDGAR BRONFMAN JR., LYOR COHEN AND THEREMAKING OF WARNER MUSIC By Fred Goodman

Walmart’sRackjobber:‘SAVE THE CD!’

RADIO

®

MIDYEAR SOUNDSCAN REPORTTOP ARTISTS, LABELS, DIGITAL SONGS

CHART HEAT

THE-DREAM

SHINEDOWN

KANYE WEST

EMINEM

RADIOKILLAEXCLUSIVE!

EDGAR BRONFMAN JR., LYORCOHEN AND THE REMAKING

OF WARNER MUSIC By Fred Goodman

Walmart’s Rackjobber:‘SAVE THE CD!’

PANDORA FOUNDER TIM WESTERGREN ON HIS GRAND

PLAN TO LAND 2 BILLION USERS

JUL

17

2010

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14 | BILLBOARD | JULY 17, 2010

A little piano music: Pandorafounder TIM WESTERGREN

THINKINGOUTSIDE

THEBOX

Thanks To Innovative Promotional Deals With Artists,Internet Radio Leader Pandora Hopes To Boost

Audience Share—And Revenue

BY ANTONY BRUNOPHOTOGRAPH BY ERIN PATRICE O’BRIEN

During a recent taping of the Comedy Central show“The Colbert Report,” host Stephen Colbert tookPandora founder Tim Westergren to task for thename of his Internet radio service. ! “Why Pandora?”Colbert asked, reminding him that Pandora’s boxfrom Greek mythology released evil into the world.“Is that what the Internet is? You click open the boxand evil comes out your speakers?” ! “Surprises comeout,” Westergren responded, “and at the bottom ofthat box was hope.” ! To be sure, Pandora is full ofsurprises and hope. For almost 10 years, Pandoraoperated on the verge of collapse. In the early years,while it labored to build the Music Genome Projectthat powers its music recommendation engine,Pandora struggled to find both a business modeland funding, to the point where it had to askemployees to work without pay for almost two years.

JULY 17, 2010 | www.billboard.biz | 17

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Then came the infamous March 2007 Copy-right Royalty Board (CRB) decision that raisedthe performance royalty rates for Internet radioto a degree that Westergren said would putPandora out of business. It led to a two-yearfight to reduce those rates, cumulating in acompromise reached last July.

Today, Pandora is for the first time on solidfooting. It’s about to reach the milestone of 60million registered users and reported its firstprofitable quarter at the end of last year. At anygiven time, there are 500 simultaneous tar-geted advertising campaigns on Pandora, with45 of the nation’s top 50 advertisers spendingmoney on the site. And the company is nowexpanding into automobiles and TV sets in aneffort to turn Internet radio from the redheadedstepchild of the radio industry into a legiti-mate competitor.

“In the last year, I feel like we’ve finallycracked the nut on how to effectively mon-etize a streaming radio service,” Westergrensays. “Our intention is to build a radio busi-ness that looks a lot like the traditional radiobusiness, with a scalable mechanism forselling national and local advertising so wecan do everything from big, branded na-tional campaigns to local pizza joint spe-cials. They can be delivered as graphic ads,as audio ads, as video ads. We’re pitchingbig ad agencies who have historically boughtbroadcast radio and pitching them to shiftthat money to the Web.”

This isn’t mere bravado. Westergren, 44,may be the poster boy for the laid-backstartup executive, but he’s a passionate be-liever that Pandora will one day change the

way the world thinks about radio. His townhall meetings with users nationwide typi-ca l ly draw hundreds of fans whom hequickly charms with his down-to-earth ca-sualness and genuine enthusiasm. Yet asthe CRB copyright dispute proved, he’s notafraid of a fight. Taking on the terrestrialradio establishment may seem like tiltingat windmills, but Westergren’s fervor—which president/CEO Joe Kennedy moldsinto a business plan—has helped build agrowing team of believers.

Pandora hired 70 of its 190 employees lastyear and plans to hire another 70 this year,80%-90% of whom will be in ad sales or salessupport. Its largest office outside its homebase in Oakland, Calif., is in New York, wherea staff of 25 focus exclusively on sales andsupport, with additional offices in Chicago,Dallas, Los Angeles and other cities. For thefirst time in the company’s history, its adsales team outnumbers the music analyststhat keep the Music Genome Project data-base up to date.

REVENUE VS. ROYALTIESDespite all this momentum, it’s not enoughto sustain the kind of growth Westergrenhopes to achieve. Pandora raked in $50 mil-lion in revenue in 2009, which the companyhopes to double by the end of the year. Of that,it paid $30 million in royalties to the musicindustry as agreed to in the CRB rate settle-ment with SoundExchange.

That agreement calls for Pandora to pay ei-ther a per-stream rate for each song it plays or25% of all revenue, whichever is greater. Pan-dora needs to generate 8 cents per user perhour to shift the royalty burden to the revenueshare model. Currently, it’s only bringing in2 cents per user per hour.

“Pandora can’t survive on network adver-tising,” Westergren says. “The site’s too ex-pensive to run because of the licensing. Wehave to command premium rates.”

To do that, Pandora has to rely on more thanits sheer numbers, which—while impressivewhen compared with other digital music serv-ices—pale in comparison to traditional radio.Web measurement firm comScore says 13 mil-lion unique users interact with Pandora everymonth, which Westergren says increases to20 million when taking into account the mo-bile users that comScore doesn’t track. That’sonly about 1% of the audience that traditionalradio commands.

Instead, Pandora is relying on its unique po-sition as a source of music discovery. Pandorausers enter the name of an artist or song theylike, and Pandora’s technology builds a customradio station around that “seed.” Users can fur-

ther fine-tune the stream by voting on each songthe service recommends (selecting either“thumbs up” or “thumbs down”). In additionto driving engagement (the company claimsusers interact with the service seven to eighttimes per hour) this activity generates user datathat can be enormously useful to both artistsand advertisers: age, gender, music preferenceand—when paired with information compiledduring the registration process—ZIP code.

ARTIST ENGAGEMENTPandora’s strategy is to work more directlywith artists, convincing them to provide ex-clusive content to the site that Pandora hostsand sells to sponsors at premium rates. Thefirst iteration of this came last year with theDave Matthews Band, which hosted a listen-ing party on Pandora. Sponsored by Brita, Pan-dora streamed the group’s “Big Whiskey andthe Groogrux King” album for a week beforestreet date from a special landing page on Pan-dora. It also sent a message to all users whoeither seeded or voted positively for a DMBsong, alerting them of the stream.

According to manager Bruce Flohr at RedLight Management, the promotion resultedin more than a half a million streams, with8,000 linking through to buy the album oniTunes. The band later teamed with Pandoraagain to drive awareness of its tour, filminginterviews with Matthews discussing his greentouring initiative, also sponsored by Brita. Alltold, the entire campaign resulted in morethan 21 million impressions.

“It was designed to make sure our fans heardthe record in an environment where they were

getting turned on to music,” Flohr says. “It’sharder and harder to find things that move theneedle in this business. If done correctly, Pan-dora moves that needle.”

More artist managers and label executiveshave begun to share that point of view. LastDecember, Pandora posted several video in-terviews with John Mayer discussing his mu-sical influences along with a customizedplaylist of his favorite songs. Pandora broughtin AT&T as a sponsor, and the campaign gen-erated 81 million impressions between thetwo, according to Mick Management founderMichael McDonald.

“There was more exposure from this thanany of [his] other campaigns,” he says. “Ina world where things are fragmented, it’sdifficult to find people. So their targetingworks. These new models and new ways ofreaching people are the ways we’re going tosurvive going forward.”

Pandora now has close to 20 similar cam-paigns either completed, active or in the worksfor this year, featuring such acts as Jack John-son, Jewel, Miley Cyrus, Switchfoot, MirandaLambert, the Walkmen, Mason Jennings andRogue Wave. The campaigns can include anycombination of a prerelease listening party, aseries of video interviews or a custom mixtape.

These customized sponsorships are de-signed to increase the amount of revenue Pan-dora makes, and the music industry simplyshares in the gross. Additionally, they subsi-dize multiweek promotional campaigns forparticipating artists’ music at a cost few labelscan match on a service that managers say isone of the best platforms for reaching fans.

“People are going there to hear new music,”Brushfire Records GM Josh Nicotra says. “Ifyou’re someone who’s trying to market music,that’s exactly the crowd you want to put yourrecords in front of.”

Matt Ostrower, senior manager of artistdevelopment, handles the outreach to artists,taking upwards of 50 calls and meetings perweek to match the various album, single andtour schedules against advertising cam-paigns. Aimee Higgins, VP of strategy, plan-ning and advertising, works with the brandson developing creative campaigns to buildaround this content.

And participating brands couldn’t be hap-pier. Brita, for example, has since transitionedits involvement with the Dave Matthews Bandfrom Pandora to participating directly as asponsor of the group’s tour.

That’s an important shift because at leastfor now, artists and labels don’t make anyextra money if they participate in thesesponsored campaigns, other than their cutof the CRB royalty payments Pandora makesto SoundExchange.

The $30 million in performance royaltiespaid by Pandora last year represents 60% ofits revenue. Compare that with satelliteradio, which pays 15% of royalties for thesame content, and terrestrial radio, whichpays nothing.

“For the first time, artists are going to getto participate in the radio advertising revenuebusiness,” Westergren says. “It’s a huge busi-ness that has been walled off for musicians.”

Westergren has emerged as a vocal sup-porter of the Performance Royalty Act,which would force terrestrial radio broad-

casters to pay performance royalties for thefirst time. While beneficial for labels andartists, such a requirement would also helpput Pandora and traditional radio on moreequal footing.

BANDS AND FANSLooking forward, Westergren hopes to turnPandora into a platform for artists to commu-nicate with fans more directly and extend theirrelationship to the real world.

“There will come a time on Pandora thatyou’ll be able to log in as a musician and youcan plot your music,” he told a crowd of Pan-dora users at a recent town hall meeting inDenver. “You can tell where to drive your van,and tell your fans that you’re coming. We canreally help build a musical middle class. Thereare going to be 2 billion people on Pandoraone day, and we’re going to plug artists by the

tens of thousands into that.”The first test of this strategy took place last

year with singer/songwriter Aimee Mann.She scheduled a free concert at the Largo inLos Angeles, sponsored by Visa, and tappedPandora as the sole means to get the word out.Pandora sent an e-mail to users who livedwithin driving distance of the venue and hadeither seeded a Pandora station based onMann’s music or who had voted positively on

one of her songs. The result? More than 300fans turned out, filling the venue to capacity.

“When we’re 50 times the size we are now,”Westergren says, “our ability to do that willbe mind-boggling.”

DRIVE TIMETo achieve that kind of scale requires expand-ing to new platforms, particularly to TV andthe automobile. Most of Pandora’s daily traf-fic—about 60%—still comes from computers,according to the company. Of the other 40%,the majority comes from mobile phones (3%comes through its early forays into Internet-connected TVs).

The biggest potential rests in the car. Pan-dora has the opportunity to change the waypeople perceive radio much like DVRs changedthe way people view their TV. Once users dis-cover the ability to skip a song they don’t likeon Pandora while driving, the model could bepermanently altered.

Pandora already has a deal with Ford to in-clude the service in cars carrying its Sync en-tertainment system and has deals to makePandora-capable after-market car stereos fromPioneer and Alpine.

Once on those platforms, Pandora can offereven more advertising and sponsorship op-portunities. An integrated multiplatformcampaign could feature audio ads on the mo-bile phone and car, video ads on TV and in-teractive ads on the computer, all tied todifferent types of artist content developed foreach platform.

Making all that work in a way that will sat-isfy brands, artists and consumers will be thetrick to Pandora’s success going forward.

“They know they’re onto something re-ally special, and they just want to do thework,” Red Light’s Flohr says. “Their mainconcern is their customer. Not the brands,and to an extent not even the bands. Theirmain focus is on the customer, and that’swhy it’s working.” ••••

THREE’SCOMPANYAs the public face of Pandora,founder Tim Westergren gets mostof the company’s press. But he’s thefirst to credit Pandora’s success tothe efforts of the less-heralded exec-utives implementing his strategy.Below are the key Pandora employ-ees the music industry needs toknow most.

JOHN TRIMBLEChief Revenue OfficerA digital sales veteran with prior stintsat Fox Interactive Media and GlamMedia, Trimble is responsible for all ofPandora’s ad-sales ef-forts, and all salesteams report tohim. He designedthe program link-ing brands toartists in an effortto command thepremium ad ratesneeded to pay Pan-dora’s music licensing costs.He’s now focusing on how to translatethose efforts to TV and the automobile.

AIMEE HIGGINSVP of Strategy, Planning andAdvertisingHiggins formerly ran the creative serv-ices team for Fox Interac-tive Media in tan-dem with Trimble.While Trimble’sthe media expert,Higgins is the cre-ative force imple-mentingbrand/artist part-nerships. She workswith brands to create cus-tom messaging packaged around Pan-dora’s music and artist relationships onthe service’s many platforms.

MATT OSTROWERSenior Manager of ArtistDevelopmentA former music industry publicist andnew-media marketingexecutive, Ostrower isthe man on theground workingwith multipleartists daily to findways for them tobest utilize Pan-dora. Whether that’shosting an album pre-view, filming behind-the-scenes interviews or creating an artist-inspired mixtape, Ostrower is theday-to-day contact creating the contentthat the sales team takes to potentialsponsors. —AB

She’s cheer captain and . . .:TAYLOR SWIFT and TIM

WESTERGREN May 4 at Time’s100 Most Influential People inthe World dinner in New York.

Radio gaga: TIM WESTERGRENat the company headquarters inOakland, Calif., and appearing on“The Colbert Report” (below).

‘PANDORACAN’T SURVIVEON NETWORKADVERTISING.

WE HAVE TO COMMAND

PREMIUMRATES.’

—TIM WESTERGREN

BEHIND THE‘THUMBS UP’

Like Dave Matthews? Here are eight acts Pandora says you’ll also enjoy,and, according to its Music Genome Project, precisely why.

SEED ARTISTDave Matthews Band

MATCHING ARTISTS / Genome Reasons / Matching Songs

JACKJOHNSONSyncopated

acoustic rhythmguitars, vocal

match (breathy)“Upside Down”

BLUESTRAVELER

Harmonicvamping,

improvisationalapproach

“Hook”

JOHN MAYERFingerpicked

acoustic rhythmguitar, vocal

match (breathy,some falsetto)“Why Georgia”

ISRAEL “IZ”KAMAKAWIWO

’OLEAcoustic rhythmguitar, breathy

vocal“Over theRainbow”

O.A.R. Long song form,

saxophoneimprov, acousticinstrumentation,

harmonicvamping

“That Was a CrazyGame of Poker (Live 2010)”

MATTNATHANSON

Vocal match(breathy, gritty),acoustic guitar

picking “More Than This (Live)”

CHRIS WHITLEYVocal match

(breathy, gritty),acoustic guitar

“Breaking Your Fall”

RYAN CABRERASyncopated

acoustic guitar“Always ComeBack to You”

16 | BILLBOARD | JULY 17, 2010