Pandora Founder Predicts Thaw with Labels Following New Features

But he made clear Pandora wouldn’t hesitate to flex its grassroots lobbying muscle again, bragging about fans crippling “the fax infrastructure” of Capitol Hill after the Copyright Royalty Board hiked Internet radio royalty rates in 2007. The company plans to vocally support the “platform parity” Performance Rights Act again this Congress, with Westergren pledging that Internet radio companies would never again “get bullied into” punitive rate structures. But he affirmed that Pandora had no plans to ditch the compulsory-license route, as some peers in customized streaming have done in favor of direct label deals.

Westergren commands a small army, with 1,000 fans turning out for a New York town hall last month and 300 turned away for lack of space, he said. It’s a far cry from the days after the dot-com bubble burst, when the faltering California-based company illegally withheld pay from employees and learned Oakland was “not the place to fuck around with labor laws,” Westergren said: “I was getting ready to move to Mexico” to evade lawsuits. Pandora now has 30 million registered listeners, up from around 5 million when the CRB last set rates, and an average session time of three hours, he said.

Early assumptions that ads couldn’t support Pandora, which started as a subscription service, because listeners would minimize the page have been blown away, Westergren said. Users on average interact with the player by skipping or rating songs seven times an hour, and with each click the ads refresh, he said. Pandora is adding PayPal functionality to simplify its new 99-cent monthly surcharge for excessive streaming, a response to the new rates, and though Westergren didn’t detail the early response of heavy streamers, no one in the otherwise vocal audience complained.

Pandora’s on track to double its revenue this year and pay about half -- $20 million -- in royalties under the new rates, 70 percent of that going to independent musicians with little terrestrial airplay, Westergren said. The company is confident in the taste of its musicologists who manually analyze the elements of every song to create customized playlists -- 90 percent of the roughly 750,000 songs it offers were played by listeners in June. “You guys love to ’thumb,'” he said, with 3 billion ratings so far on played songs, the vast majority thumbs-up.

The company intends to create a “musicians’ middle class” through coming features, giving artists more control over how fans interact with their music on Pandora, Westergren said. It just added a digital-upload feature for musicians selling on Amazon -- a relatively low hurdle -- to get their music in front of Pandora’s musicologists, who categorize 10,000 songs a month. Algorithm-based categorization, which would give Pandora a catalog several times its current size, can still only determine “pretty blunt characteristics” of songs, so Pandora’s “public works program” for the 40-plus musicologists it employs will continue, he said. The audience largely backed Westergren’s description of an opt-in mechanism to inform listeners of upcoming concerts they might like, based on their customized stations and ratings.

The in-stream audio ads recently added by Pandora -- a business decision Westergren said he hoped to avoid at his first Washington town hall (WID Nov 27/06 p4) -- drew no complaints from the crowd, except for a listener who complained some were noticeably louder than the music. “We were trying to fuck with you,” Westergren quipped. (Congress is considering a bill to regulate the volume of TV commercials as well.) Audio ads will remain a small but crucial “piece of the pie,” not taking over Pandora’s display ads, he said. Westergren encouraged listeners to shop for big-ticket items on Amazon after clicking to the e-commerce site from Pandora’s “purchase” menu for songs, as Pandora earns proportional commissions from every linked Amazon sale.

Thumbs Down to Direct Licensing, Acquisition

Asked about an unfriendly climate for venture capital, Westergren said “we don’t plan for exits,” a reference to acquisition. Pandora recently raised another $35 million following the new rates, and it’s expanding the business with an eye toward becoming a “public media company,” he said, without detailing when an initial public offering could happen. CEO Joe Kennedy later told us that Pandora has no firm schedule. “At some distant point in the future, [staying independent] would probably mean becoming a public company. But it is still way too early to even think about an IPO.” Competing services such as Last.fm, bought by CBS in 2007 for $280 million and directly licensed for on-demand streams, are a “moving target” for Pandora but it doesn’t see them as a competitive threat, Westergren told a questioner.

Taking on big terrestrial conglomerates is still Pandora’s aim, and “we'll take our lumps” in pressing Congress to make them pay performance royalties, Westergren told us later. The company has lobbied hard for “parity” in rate structures, but left the attacks on broadcasters to the musicFIRST Coalition, which includes the major-label and indie trade groups. After laboring for months to find an acceptable “number” with SoundExchange, Pandora is ready for better label relations as it expands artist-friendly features, he said. But the only way it’s likely to license directly is if Pandora adds on-demand streaming, Westergren said.

Many of fans’ requested features will eventually come down the pike, Westergren said, including stations programmed by outside DJs and news and talk programming: “We try not to feel like a computer, but we sort of do.” Pandora will integrate with a mobile music-identification application such as Shazam at some point, and an application for Android -- which Pandora has long called an unfriendly music platform -- is in the works, he said. GPS integration is a tall order because it requires user permission for every location query, and licensing hurdles make international expansion “tremendously frustrating.” - - Greg Piper