Founder Tim Westergren on the future of Pandora

Pandora is the brilliant brainchild of Tim Westergren, who founded it to satisfy the need for Internet radio through the highly scientific music genome project. And up until recently it was free. Many fans were upset that the site is now charging its users. But Westergren maintains that they created a model that works for everyone.

For the user who doesn't want to pay anything, they're allowed 40 free hours a month. For the user who might listen more than this, but doesn't want to sign up for anything long term, they can pay 99 cents month-to-month, for unlimited listening with advertising.

And the third option, is Pandora One, a $36 per year subscription program for people who want to either support Pandora, or want to pay for a higher quality experience with added features and no advertising.

Today Pandora is doubling in size annually, and also doubling in revenue annually. They have built a team of 50 in advertising sales, and are really banking on their existing models, as well as serving as innovators in online advertising such as audio advertising.After settling a long disputed battle over royalties, they're working toward giving more power to musicians, through launching Pandora for Artists, which will allow individual artists to connect directly with fans.

Pandora is proving to be very profitable in revenue and exposure to both the record industry and individual artists. This year alone, they'll be paying more than $20 million in performance fees. Each month they sell over 1 million songs through iTunes.

We spoke with founder and now chief strategy officer Tim Westergren at the New Music Seminar about Pandora continues to revolutionize the music industry online and beyond.

Q: When you created Pandora, had you always planned on it being a free site?

A: Quite to the contrary. When we originally launched, it was subscription only. So you could get 10 hours for free, and then you had to subscribe for a year for $36. And nobody signed up. The reason we did that was our belief at the time was people would be using Pandora, but they wouldn't be looking at it. They'd launch it, minimize it, so the only way for us to really make it work would be through subscription. But nobody subscribed, so after three weeks we launched a free service.

Q: Were the royalties an issue when you first started?

A: Yeah, they've always been. Since we've launched actually, we didn't know what our royalties would be. They were still being disputed. In July '07, the royalty ruling came out, and it was retroactive. So we'd all been waiting for a long time to see what we were going to have to pay going forward and in arrear. But then they came out with this crazy number, and we went to this big negotiation, and then we went through two more years of uncertainty. So the single biggest item in our business model has been TBD since we launched. It's not a typical approach to business.

Q: What issues forced you to monetize?

A: There's a per-song charge which means the more you listen, the more you cost. There's no scale benefit. If someone listens 40 hours it costs x, listens 80 hours, costs 2x.

And then over the last year we've watched the listening patterns of Pandora listeners. And there's a certain group that listens a lot more than others, about 10% of the listeners. And they listen a lot, so they're actually a pretty substantial cost for Pandora. So we had to figure out a solution to this.

What a crazy model that traffic is actually costing you.

I know. Usually it's the opposite. We love heavy listeners, and that's the hardest part about this. It's completely contrary to everything in our DNA to ask somebody who listens a lot to stop listening, or stop listening or pay, but we have an unavoidable economic reality. It's harder to deliver advertising subsidies as you listen more and more, because they already know you. Advertisers have already spoken to you once. So what we decided was to figure out an offering that will work for every user.

Q: If you're a young musician, how can you use Pandora to promote your music?

A: Well, right now the main thing is just to be on Pandora, so submit your music. Not everything that we receive goes in. We have a curatorial process. About 30% of the music that we receive winds up in the collection. So we're trying to find the best stuff we can find, and prioritize. We get 10,000 new songs a month.

But beyond that there's not a lot more you can do, but that's going to change. So what we're really starting to work on is a system on Pandora that will enable a musician to essentially login and go to work. Look at what's happening to their music, who likes it, where they are, connect with fans.

You've got 30 million people here. You've got you know, 100,000 artists here, and Pandora is talking to both of them. So we just want to slide out of the way and let those two connect.

What new technology can we expect to see from Pandora down the road?

A: We're putting a lot of effort into the mobile space. So we're on the iPhone, the Blackberry, the Palm. We're working on the Android. We're working on getting into automobiles.

We're working with tons of CE companies to get Pandora into connected home electronics. So not long ago we launched on the Samsung BluRay DVD player. Everything in the house is going to have WiFi essentially, alarm clocks and refrigerators and picture frames. And those are all conduits for Pandora. So we're just trying to spread it out everywhere.

Flatscreen TVs are going to come with Internet connections. And you just put the TV up and it'll be all self-contained. We'll have everything up including web and audio of course. You'll be able to get Pandora on it, control it with your remote, with a big user-interface on the screen. So that same thing will be done on ultimately hundreds of devices.

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