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CASE 11
Pandora Internet Radio (2014): Just Press Play
I. CASE ABSTRACT
Pandora was built around the idea of providing listeners with only the
music that they love. To do so, Pandora fundamentally changed how people
listened to music by allowing station customization and the ability to listen
to music over the internet. As technology changed, Pandora evolved from a
website based radio provider and developed a mobile application where the
company could offer its services to customers whenever and wherever they
Pandora Internet Radio was founded in 2000 when founder Tim Westergren
developed an initiative called the Music Genome Project. This project, which
mirrored the major breakthroughs of the human genome project, sought to
analyze and categorize music based on 450 musical characteristics. As the
project grew, he realized that the extensive music database could be used to
effectively target, categorize, and recommend music to listeners. He
developed one of the smartest music recommendation programs available at the
Decision Date: 2014 FY Sales: $427 million
FY Net Loss: 38 million
II. CASE SUBJECTS AND ISSUES
Domestic versus International Law Mobile Computing
Strategy Formulation Competitive Advantage
III. STEPS COVERED IN STRATEGIC DECISION–MAKING PROCESS
CASE 11
Pandora Internet Radio (2014): Just Press Play
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IV. CASE OBJECTIVES
1. To discuss Pandora’s Intellectual Property issues.
2. To discuss Pandora’s competitive business level strategy.
V. SUGGESTED CLASSROOM APPROACHES TO THE CASE
1. This is an excellent case for instructor–led discussion.
VI. DISCUSSION QUESTIONS
1. How is an app development for mobile computing different than for
desktop computers?
2. Should Pandora Media be free (with ads) for everyone?
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Pandora Internet Radio (2014): Just Press Play
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6. Why can’t Pandora operate outside the USA?
VII. CASE AUTHOR’S TEACHING NOTE—Not Available
VIII. STUDENT STRATEGIC AUDIT
I. Current Situation
A. Performance
1. History
a) Tim Westergren founded the Music Genome Project which
turned into Pandora Internet Radio (2000).
2. Economic Performance
a) Fifty–four percent increase in total revenue from
2012 to 2013.
B. Strategic Posture
1. Mission
a) Our mission is to enrich people’s lives by enabling
them to enjoy music they know and discover music
they’ll love, anytime, anywhere. People connect with
2. Objectives
a) Increase the size of the Pandora music library.
b) Improve music recommendations to listeners.
CASE 11
Pandora Internet Radio (2014): Just Press Play
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i) Minimize acquisition costs
j) Retain current listeners and minimize attrition of
customers to competitors.
3. Strategies
a) To widen the availability of its service.
(1) Increase of usable platforms and devices
(1) Attract advertisers to Pandora’s
comprehensive suite of audio, display, and
(1) Increase the volume of listeners and
listener hours among all platforms.
d) Achieve financial stability.
(1) Negotiate lower content acquisition
costs.
e) To diversify revenue and operations.
f) By growing their user base internationally and
4. Policies
a) Focus on innovation and new technology.
b) An emphasis on an easy and convenient user
experience.
c) Simplicity of use and constant availability.
5. Pandora currently has limited international presence due to
II. Corporate Governance
A. Board of Directors
1. Eight board members, most of which are outsiders (six
outsiders, two insiders)
3. No experience from within the music industry (Fox
CEO
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Pandora Internet Radio (2014): Just Press Play
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b) Tim Westergren—Founder and still remains on board of
directors
c) Peter Cherrin—Since 2011
B. Top Management
1. Ten executives making up the top management positions.
a) Pasts involved in various roles within organizations
(1) Tim Westergren—Founder and CSO until
2014
(2) Brian McAndrew—CEO, President starting
in 2013
(3) Mike Herring—CFO starting 2013
III. External Environment (See Exhibit 1 for EFAS)
A. Societal Environment
1. Economy2
2. Technology
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Pandora Internet Radio (2014): Just Press Play
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a) Shift from computer to mobile computing (O/T).
(1) Technology changes impact revenue streams
(T).
b) Industry–related technology advancing at rapid pace
(O/T).
(1) Competitors have access to same and
compatible technology (T).
3. Political–Legal
a) Music is heavily licensed (T).
b) International copyright law is complex and
decentralized (T).
4. Sociocultural
a) Growing interest in mobile technology (O/T).
b) Americans spend a lot of time traveling in cars (O).
B. Task Environment
1. Threat of New Entrants: LOW
a) High capital costs to acquire content rights.
b) Low profitability
(1) International presence is cost
prohibitive.
(2) Consumers expect a low–cost model.
c) Profitability requires economies of scale.
(1) Ability to negotiate with music rights
owners.
d) Complex domestic legal landscape for music industry.
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Pandora Internet Radio (2014): Just Press Play
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(1) Apple and Spotify have worldwide
recognition
2. Bargaining Power of Buyers: HIGH
a) Substitute products are available.
(1) Market filled with comparable services at
3. Threat of Substitute Products: MODERATE
a) Satellite radio
(1) Largest base of radio consumers 25.8
million.
(2) Available on multiple devices.
(3) Differentiation of diversity of
channels.
b) Alternative internet radio options.
(1) Well established brands that continue to
grow.
(a) Differentiation in increased
customization of product for
4. Bargaining Power of Suppliers: HIGH
a) High costs to acquire content.
(1) Suppliers of music content stabilizing
their decreased profits by passing on
higher costs to their buyers.
b) Music rights owners have negotiating power because
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Pandora Internet Radio (2014): Just Press Play
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(1) Other competitors for advertising
dollars, such as social media sites,
5. Rivalry among competing firms MODERATE
a) Currently have 70 percent market share of internet
radio but large competing firms are gaining
penetration
(1) Spotify has a strong international
presence and differentiation in
customization attributes.
b) Industry growth is high
(1) With the increase of usable platforms and
new devices, new consumers will continue
to become available for competitors.
c) Competition for strategic partnerships
(1) Rival firms will compete to partner with
d) Competition over advertising dollars
(1) Suppliers of advertising outnumber
competing firms and therefore increases
competitiveness of firms.
f) Switching costs for consumers is low
6. Power of other Stakeholders: MODERATE
a) Government agencies protect users against privacy
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Pandora Internet Radio (2014): Just Press Play
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d) Governments that create copyright in foreign
countries.
7. Suppliers are the factor in the immediate environment that
are currently affecting Pandora.
a) Suppliers have the bargaining power with content
IV. Internal Environment
A. Corporate Structure
1. Centralized Management
a) Subsidiary in Australia
b) Functional structure (S/W)
(1) Geographical organization not applicable
B. Corporate Culture
1. Values (S):
a) Enriching users lives
2. Current issues (W):
a) Legal
b) Cost control
C. Corporate Resources
1. Marketing
a) Two products that are supported by the same platforms
CASE 11
Pandora Internet Radio (2014): Just Press Play
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(2) Subscription streaming service; no
advertisement interruptions—subscription
revenue base
(a) Subscriptions to ad–free Pandora
b) Main focus is on the US market
(1) Small presence in Australia, but
complexity of music licensing has
hindered international expansion.
c) Focus on low–cost promotions (S)
(1) Word–of–mouth marketing of the product by
users provided strong, early revenue, and
market share growth (S).
(2) Strategic partnerships to extend the
product’s user base and listener hours
(S).
(a) Integration with car manufacturers’
2. Finance
a) Have not made a profit since the IPO in 2011 (W)
(1) Operated at a loss of $27 million for
eleven months ended 12/31/13; worse than
the $24.5 million loss from the same time
period in 2012.
b) Need to curb content acquisition costs and marketing
expenses that threaten future profitability.
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Pandora Internet Radio (2014): Just Press Play
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(a) Advertising revenues up 43 percent
to $489.3 million
c) No long–term borrowing has been used for financing
since 2011 (S).
(1) Total Liabilities/Total Assets (Debt–to–
Assets) was only .2452 or 24.52% in
2013; leaving room for debt financing and
leverage in future growth opportunities.
Important Ratios
Liquidity Ratios
12/31/13
12/31/12
Current Ratio
3.325
2.258
Cash Ratio
1.575
0.622
Profitability
Ratios
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Pandora Internet Radio (2014): Just Press Play
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Gross Profit
Margin
40.57%
33.38%
Net Profit Margin
–4.50%
–6.28%
Leverage Ratios
Debt–to–Assets
(Total
Liabilities/Total
Assets)
24.52%
41.27%
D. R&D
1. Relying on R&D to deliver spark to profitability (S/W)
a) Service Compatibility (S)
(1) Internet/Connected devices
(2) Technology Partnerships
b) Music Genome Project improvements (S)
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Pandora Internet Radio (2014): Just Press Play
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2. R&D has been a massive strength for Pandora with the Music
Genome Project.
E. Operations
1. Mission and Objectives are consistent and properly aligned
through the service.
a) Desire to deliver music that the listeners love at
anytime, anywhere.
b) Second focus is to manage the advertising revenue
base.
(1) Matching potential advertisers with
appropriate target listeners; bringing
advertisements through video and audio
medium.
c) Development of the Music Genome Project, and
delivering what both the listeners and the
advertisers need—specific software development is not
mentioned in the case, but the functionality and
benefits are easily inferred (S).
(1) The Music Genome Project led by Pandora’s
founder—organizing music based on
specific characteristics (S).
(a) Developed software and processes
2. A few roadblocks face Pandora’s current operation.
a) Although the music recommendation software and
advertisement matching are unique strengths,
Pandora’s users are not capable of selecting a
specific song to stream that they may want to (W).