Pandora
is starting to see major success in December 2007. The users are growing to 8
million and online hours were growing at a staggering 50% year on year. Pandora
is projected to see a positive cash flow in 2 years. There is a potential
challenge that Pandora had to face with the Copyright Royalty Board in
Washington, DC. You are facing serious threats in licensing fees and
trying to find a balance of risk and reward. Tim Westergren, your chief
strategist and founder of Pandora has to make an important decision besides the
potential increasing licensing fees on what strategic path to choose: A conservative
path or an aggressive path. The conservative path would pull back on the growth
levels, reduce headcount and have minimal investment in the Pandora product.
The aggressive approach is a pedal to medal approach, which would add
headcount, significant investment and financing and take advantage of the first
mover advantage. The key problem is what strategic path will be the most
efficient for Pandora’s future growth.
There
are 4 major distribution channels: traditional radio, satellite radio, CDs and
digital music. Pandora will have a technological advantage over these alternatives.
Traditional
Radio
Traditional radio is a free music
broadcast for FM listeners. The radio stations earn advertising revenues based
off of advertisements. In recent years (2000-2005), traditional radio has been
on decline for several reasons: Listeners being annoyed with too many advertisement's
and with technology. Listeners found new ways to listen to music using portable
music devices like MP3 players.
Satellite
Radio
Satellite Radio is a subscription
based way to listen to commercial free music, sports and news. The subscription
is approximately $12.95 per month and is dominated by two companies XM and
Sirius. The two companies had a $6 billion accumulated losses by the early part
of 2007.
CDs
Compact Disc (CDs) consist of a
pre-recorded 10-14 songs or single songs CDs.
The CD comes with a CD booklet with pictures and song lyrics. CDs are
not free like traditional radio. In 2005, the average price of a CD was $14.92.
CDs like traditional radio are seeing a decline due to today’s technology.
Digital music is a new way of listening to music in a convenient and
user-friendly way.
Digital
Music
2005 is the year when the US digital
music sales doubled reaching over $770
million. Digital music growth is the reason the CD business declined. Digital
music is based on either a la carte single songs or monthly subscriptions.
iTunes has a la carte for $.99/song and Rhapsody $9.99/monthly subscription.
The digital music business is growing significantly however; Pandora has a
different philosophy. I am in favor of your free of charge philosophy of
listening to music and an optional monthly subscription.
Pandora
– Recommendation
The other four distribution channels
(radio, satellite radio, CDs, iTunes/Rhapsody) all have cons and they don’t
have the unique opportunities that Pandora offers. In exhibit 7, there were 4
attributes that Pandora was favorable (the colored circles). The pros
were: Variety, low price, ability to
find new songs and interruption-free listening. There was one major con (no
color in circle) that was to play specific songs on demand. In my opinion, I
wouldn’t change to a la carte for specific songs on demand for listeners. I
don’t think it hurts the value of the Pandora product as listeners like the convenience
of music listening. Pandora is the
preferred digital way to listen to music compared to the other distribution
channels. Pandora offers a free,
efficient and user-friendly way to listen to music on the Internet. Other
digital music services do offer similar ways to listen to music but to pay for
songs is not favorable and is a major difference (iTunes $.99/song and Rhapsody
$9.99/month).
I
wouldn’t change the marketing strategy as well as the word of mouth strategy
has been working well over the years. As it was mentioned to me, Pandora’s goal
is to create new ways for musicians and listeners to find each other. The
aggressive path is creating three new technological products that will
accomplish Pandora’s goal. I would recommend the following four bullets below
that will not only increase profits but make Pandora a household name.
- Continue to offer a free music service with an optional monthly subscription
- Continue to use the word of mouth marketing strategy (no significant marketing expenses)
- Continue to challenge the Copyright Royalty Board (Trying to Triple the licensing fees)
- Aggressive
Path (3 New Emerging Technology products)
Pandora’s
Emerging Technologies
I
would recommend three new products for new and existing customers that would significantly
impact today’s music word: a Pandora headset, a Pandora Watch and creating the
ability to watch music videos on Pandora. I see walkers and joggers struggling
with iNanos and their headphones. The iNanos are neat and can store up to 1,000
songs but the issue is iNanos are not convenient and causes technical issues. iNanos
are heavy and are a liability as they could break if you drop them. Also, customers need to buy additional
headphones since the iNanos headphones are not reliable and are a weakness in
their product. The Pandora headset would
be an exciting concept where users can listen to Pandora on a mobile wireless headset.
The Pandora headset requires no wires and essentially goes around your ears
similar to a wireless mobile phone headset. There are existing products that
have traditional radio headsets so the research and development wouldn’t
require an extensive amount of time. Pandora
wouldn’t require a significant amount of time for production as the main components
are already enabled with through computers, tablets and phones. You can charge $50
for a headset compared to the iNanos $60. You are reducing a price on the new technology
competing head to head with Apple. Overall, the Pandora wireless headset has an
advantage over Apple’s product: The Pandora’s headset is less expensive, comes
with no software, music downloading and doesn’t require purchasing additional
headphones.
First
Yearly Projections:
$50/Pandora
Headset * 1,000,000 new customers = $50 million (revenues)
$40/Headset
costs to make * 1,000,000 headsets =
$40 million (expenses)
Total: $10 million (profits)
The
Pandora watch is another excellent idea to add to Pandora’s new collection of IT
products. The Pandora watch is a unique, fun and exciting way to listen to
music. The Pandora watch is light, modern, hip and easy to listen to music in a
new efficient way. Pandora would partner up with an established watch company
such as Swatch. Throughout the years, Swatch has targeted a younger population similar
to Pandora. This would be a good fit for both companies to expand growth and
revenues. Swatch has the expertise with their watch functionality and Pandora adds
a new unique way to listen to music on a watch.
You would be able to even set the time to listen to your favorite
stations during a particular part of the day. For example, you can program the
Lionel Ritchie station in the morning and Best Hits in the afternoon. The
Swatch Pandora watch would sell for $60 for the watch, watch charger and music.
The watch would need a charger similar to mobile phones. We guesstimated a $30
million increase with the Pandora watch.
First
Yearly Projections:
$60/Pandora
Watch * 3,000,000 new customers = $180 million (revenues)
$30/Watch
costs to make * 3,000,000 new customers = $90
million (expenses)
$20/Swatch
royalties’ fees * 3,000,000 new
customers = $60 million (expenses)
Total: $30 million (profits)
Pandora’s
customers like the free convenience of listening to music but watching free
music videos is an even a better concept. It’s the same concept as
listening to music but you would be seeing the music videos for free. It would
have minimal commercials like the current process with listening to music. The
most profitable aspect of this alternative concept is earning the advertising
revenue in both segments of the business. Your company would earn both
advertising revenue in listening and watching music!
First
Yearly Projections:
$50,000/Commercial
* 9,125 Total (25 commercials/day *365 days) = $456 million (revenues)
$36/Yearly
Paying Subscriptions ($3/month)* 1,000,000 new customers = $36 million
(revenues)
$20,000/Licensing
Fee for Music Video * 10,000 Music Videos = $200
million (expenses)
Total: $292 million (profits)
Conclusion
A free product is unheard of in
today’s market. You have done an outstanding job with your Pandora product
revolutionizing the free music world while earning advertising revenues and subscriptions
fees. You have done an excellent job with the word of mouth marketing strategy and
I would continue to use the word of mouth as a free marketing strategy. There is a significant amount of technology
that I could add to your platform with three new ideas: a Pandora Headset, a Pandora
Watch, and watching free music videos on Pandora. I recommend all three new products
that would increase your revenues and the future is an aggressive path. In my
opinion, Pandora should use a pedal to the medal approach as this will generate
significant funds. You have the potential to make $332 million within the first year
projections ($10 million in the headset, $30 million in the watch and $292
million in watching music videos on Pandora)!
I am available to discuss these
great emerging technologies this week if you would like to discuss more in
detail.
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