By Barbara Grady
People visit Oakland for lots of reasons, but did you know that technology and dot-com entrepreneurship are among the big draws this summer?
Some 42 college and graduate students from around the country have come to Oakland to be interns at Pandora Media, Inc., the Internet radio company that is the city’s largest — and arguably hottest — technology company.
They hail from schools known for engineering and science like U. C. Berkeley, Stanford, U. C. Davis and Cornell, but also from liberal arts schools like Wesleyan University, music schools like the Berklee School of Music, and business schools. This summer, they’re getting firsthand stories about the roller coaster ride of launching and sustaining a tech company, Silicon Valley style — right here in Oakland.
Tim Westergren, Pandora’s founder, spent some time one afternoon describing to the interns the company’s trajectory from an idea, to a struggling dot-com startup, to what is now a fast-growing, publicly held company that dishes out 1.25 billion hours of music a month to 200 million listeners. It is a quintessential Internet startup story.
“We’ve had many near-death experiences,” Westergren told the interns in a session one afternoon this summer. Those experiences included burning through cash to develop a product, but making no money, and struggling with how to turn technology into a product.
“We forged ahead,” he said. “We had this unique intellectual property” and eventually investors and consumers showed interest.
Pandora’s business is built around its Music Genome Project, a database and algorithm that analyzes songs for hundreds of characteristics and streams individualized playlists to listeners after decoding a listener’s taste from a song title or artist submitted. Westergren had developed the core technology with a small team more than a decade ago, and labored for years to turn it into a service.
But just as they decided to make a go of the Music Genome Project as a company, the dot-com economy collapsed, and investor and consumer interest dried up. They kept working anyway, piling up debt as they perfected their product.
“By the end of 2003 we had deferred something like close to $2 million in salary. I had 11 maxed-out credit cards and half a million in debt to people. It was a calamity,” Westergren said. ”And we really didn’t have a lot to show for it except this Music Genome Project: this big database that we kept building. It was a pretty cool product; you typed in a song and it spit out 10 songs that soudnded a lot like it. There was something about it that was very unique but we just hadn’t figured out how to make any money on it.”
Then the tides turned and both investors and consumers became interested. In 2004, consumers began adopting high-speed Internet and Pandora was ready with a product that was unlike anything else. High speed adoption made Internet radio viable, Westergren said. His company attracted a first round of venture capital financing that allowed it to rebuild its front end, develop a business model and acquire a name and URL. “A year and a half later, we launched Pandora in the fall of ’05. It just took off like a rocketship.”
“There was this huge appetite among consumers for a better radio experience,” he said. “Before we knew it we added 10,000 listeners a day and then 30,000.” Keeping up with that growth was frenetic. “It was like an emergency every day,” he said. To meet growing demand on its database, “we were FedEx-ing servers in. Every day we kept just barely ahead of the bandwidth demand.”
Then an even bigger turning point came in 2007, when Apple introduced the iPhone. Apple chose Pandora’s application as one of a handful of music apps to pre-load onto the iPhone at launch. The day the iPhone went on sale, “I think we added 35,000 listeners. We doubled our growth rate over night.”
From that point on, the story of Pandora has been one of fast growth in listeners and building a revenue model to capitalize on that growth. It now has about 200 million registered listeners, according to metrics listed in its financial statements, and 71 million active listeners a month. Its revenue of $427 million in fiscal year 2013 nearly doubled from the year before. But the company continues to make a net loss as it invests in the business. It lost $38 million last year.
Pandora went public in 2011 at an offering price of $16 a share. Its stock shot up initially then sagged before rising again this year. Monday it opened at $18.30 a share on the New York Stock Exchange under the symbol “P.”
The summer interns took in this story with close attention at their session with Westergren, but they had challenging questions too.
One intern asked how Pandora will fend off expected competition from Apple, which plans to launch an iTunes Internet radio service in the fall. Another asked if it isn’t time to tweak the algorithm.
“What has made Pandora successful to date, and will continue to,“ said Westergren, who is also chief strategy officer, “is we are the best at doing this — we do it much better than anyone else.” He said Pandora holds the largest radio market share in about 30 metropolitan areas. Overall, Pandora holds about 7 percent of the U.S. radio market, he said.
Asked what advice he’d give to them as students, Westergren said, “I think the thing I wish I had done earlier is to learn public speaking. And public speaking doesn’t mean standing in front of a crowd like this and talking, it means talking to someone, period, in a compelling, eloquent and powerful way.” He learned it by pitching the company to venture capitalists.
These days, he is also using it in Washington, D.C.
Westergren acknowledged that the biggest challenge for Pandora today is keeping up with royalty payments to musicians, by far its largest cost. According to its annual report, it spends over half its revenue on royalty payments, or about $260 million a year. Royalties are set by digital copyright statute, but broadcast radio is outside of that law. Westergren said he is trying to lobby for a more even playing field with AM and FM radio.
“The story of our business now is, can Pandora build a sales infrastructure and sales revenue fast enough to get ahead of that ever-growing royalty bill?” Westergren said.
Marta Riggins, Pandora’s Director of Recruiting, Brand and Events, said that this summer is the first time Pandora has had an internship program, and the idea is to help it recruit employees for sales and engineering positions.
“We themed it the Pandora Road Crew because we are a music company,” she said. “The road crew is the technical name for the people who support all sides of a band,” Riggins said. “The idea is they experience the entire culture that Pandora built,” from business to music to entrepreneurship. “They hear from key leaders and also experience white-board sessions with artists who come in.” Each intern is assigned a mentor, with whom they meet weekly.
“Some of the goal is for us to build relationships with undergrads and recent grads through career development, coaching, and of course, our speaker series,” said Anjuli Felix, the Pandora college recruiter who developed the internship program.
The summer interns also heard from Pandora’s chief technology officer, Tom Conrad, its chief counsel Delida Costin, some of its music analyst/engineering staff, and others. Later this summer they will hear from Chief Executive Officer Joe Kennedy.