September 23, 2008
Lid May Be Closing on Pandora
By Janis Mara
OAKLAND -- Kristen Kuhns of Brentwood endures her hour-long commute by listening to country music from Pandora.com via her iPod and car radio. Maureen Nelson of Pleasant Hill screens out coworker chatter by plugging into classical music on Pandora. And Morgan Smith of San Francisco uses rock music from the online radio site to help him kick out projects on time.
All three may lose their beloved station, along with Pandora's 16 million other registered users, thanks to a decision by a government board obligating Oakland-based Pandora to pay royalties equal to 70 percent of its income, its founder says.
If the decision puts the lid on Pandora, it will end the saga of one of the country's most popular online music sites, known for its accuracy in finding music suggestions matched to its listeners' tastes. The $13 million company, founded in 2000 as Savage Beast Technologies, gets about 1 million visits a day and is one of the 10 most popular iPhone applications.
Paintings of musicians in vivid purples, reds and greens, CDs overflowing from white post office buckets, a massed arsenal of eight black computers for uploads (the Rippers) and an industrial- strength stage grace the company's downtown office.
But this doesn't mean that Pandora's 130 staffers are laid-back slackers rocking out to the approximately 13,000 songs that pour in every month. Years of deferred salaries and 14-hour days carried the firm through the 2001 dotcom bust to its current status as a $13 million company.
"Some of us went two and a half years without salary," said Tim Westergren, cofounder of Pandora. "We had this exciting time of unbounded optimism (the dotcom boom) and then we hit the wall."
Pandora (then Savage Beast Technologies) survived thanks to factors including a licensing deal with AOL and Best Buy that was enough to keep the lights on and pay partial salaries in 2002 and 2003.
At that point, Westergren's firm was a technology company hawking the system developed by the Music Genome Project, a database of analyzed songs that helps predict what songs listeners will like. Westergren, himself a musician, built the first version of the patented technology along with Nolan Gasser.
In 2004, after three months of grueling negotiations with venture capitalists, the company snagged $9 million in funding, a major coup and "a huge relief," the cofounder said. Within months, the company was reborn as an online radio station.
Pandora did a low-key soft launch in August 2005, with blogger Michael Arrington offering trial subscriptions on technology site TechCrunch. Thousands of readers wrote in until Arrington threw in the towel, posting, "I can't deal with the volume. You're on your own."
Basically, listeners tell Pandora what artists and songs they like and it creates a radio station for them, both with songs they know and new suggestions. Services like Rhapsody and Apple Genius offer recommendations, among other things, but don't create radio stations.
Pandora is holding its own against huge competitors, including Yahoo, AOL and Clear Channel. A recent deal with Apple almost doubled Pandora's growth rate, from 23,000 new listeners a day to 40,000, Westergren said. The Pandora application for the iPhone 3G allows people to listen to their favorite songs for free via the Internet even when they're on the go.
Despite this good news, recent developments could put a lid on Pandora's success.
"Pandora is in trouble. Frankly, all Internet radio stations are in trouble because of the rate hike imposed on them," said James McQuivey, an analyst with Forrester Research.
Internet radio companies must now pay record labels and artists double the former fees they paid to stream music online in the wake of a federal board's decision last year. Traditional radio companies, including satellite broadcasters, don't pay such high fees.
The issue is still being negotiated, but in the meantime, McQuivey said of Pandora, "Nobody does a better job of connecting you to good music you didn't know about than Pandora -- even the new Apple Genius auto playlist function pales by comparison.
"The music matches aren't as good as Pandora's and because you can't sample songs you don't own as part of the streaming experience, Genius ends up wearing a dunce cap when compared to Pandora," McQuivey said.
"At work, I type my case notes to classical music," said Maureen Nelson, an employment specialist with Goodwill who helps first-time drug offenders find work. "At home, I unwind to smooth jazz. On weekends, I actually carry my laptop with me to listen to rock music while I'm cleaning my apartment. I'm addicted to Pandora." Here's hoping Nelson doesn't have to go cold turkey.
Janis Mara can be reached at (925) 952-2671 or [email protected] Check out her Energy Blog at www.ibabuzz.com/energy.pandora.com-- Company: Internet radio station- - Founded: 2000, as Savage Beast Technology-- Founder: Tim Westergren-- Employees: 130-- 2007 revenues: $13 million-- Funding: Walden Venture Capital
King Street Capital-- Chief executive: Joe Kennedy-- Web site: www.pandora.com-- Address: 360 22nd Street, Suite 440, Oakland-- Telephone: 510-451-4100
Originally published by Janis Mara, Staff Writer.
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