Case analysis - Justification

1. History

a) Tim Westergren founded the Music Genome Project which turned into Pandora Internet Radio (2000).

b) Joe Kennedy joined Pandora as CEO (2004)

c) Pandora filed for an IPO (2011)

d) Brian McAndrews replaced Joe Kennedy as CEO (2013)

e) Tim Westergren resigned from post as Chief Strategy Officer (2014).

2. Economic Performance

a) Fifty-four percent increase in total revenue from 2012 to 2013.

b) Content acquisition costs and sales and marketing expenses combined accounted for 81 percent of Pandora’s total revenue in 2013.

c) Net loss of $27.017 million attributable to common stockholders in 2013.

d) No profitability since IPO in 2011.

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 music on a fundamentally personal and deeply emotional level. Whether it’s a song someone first heard ten years ago or one they’ve just discovered, if they connect with that music on our service, a strong bond is forged at that moment with Pandora. Just as we value music, we also hold a deep respect for those who create it. We celebrate and hold dear the individuals who have chosen to make music, from megastars to talented new and emerging artists.

2. Objectives

a) Increase the size of the Pandora music library.

b) Improve music recommendations to listeners.

c) Widen the availability of Pandora services.

d) Make the Pandora service an experience that is seamless and easy to use for its customers.

e) Increase its user base.

f) Increase revenue

g) To be a profitable company.

h) Gain market share in the music streaming industry.

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 to make Pandora available everywhere there is internet connectivity.

b) To transform listener hours into revenue.

(1) Attract advertisers to Pandora’s comprehensive suite of audio, display, and video advertising products at a competitive rate.

c) To grow market share.

(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 expanding into new markets.

g) To increase advertising revenue by offering a better value proposition to advertisers than traditional radio and other streaming rivals.

h) Improve music recommendation.

(1) Continue to develop recommendation software and algorithms that selects accurate music for listeners.

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 cost restraints, however, their mission, objectives, strategies, and policies reflect a growing interest and vision to find a viable way to expand internationally and enter new foreign markets.

1. Eight board members, most of which are outsiders (six outsiders, two insiders)

2. Experience spans the realms of internet, digital/sound, telecommunications, media, and venture capital.

3. No experience from within the music industry (Fox Interactive Media).

a) Brian McAndrew—Chairman of the Board starting 2014, CEO

b) Tim Westergren—Founder and still remains on board of directors

c) Peter Cherrin—Since 2011

d) Peter Gotcher—Joined 2005

(1) Investor with Redpoint Ventures

e) Robert Kavner—Joined 2003

(1) Technology management background

f) Elizabeth Nelson—Joined 2013

(1) Finance background

g) David Sze—Joined 2009

(1) Senior partner at Greylock partners

h) James Feuille—Joined 2005

(1) Tech background

1. Ten executives making up the top management positions.

a) Pasts involved in various roles within organizations in media, IT systems, corporate web services—expertise in strategy, product management, IT structure, technology engineering, and other fields.

b) Combine with board of directors to constitute 4% inside ownership of the company’s stock[footnoteRef:1]. [1: Pandora Media Inc., Major Holders. Yahoo Finance. ““http://finance.yahoo.com/q/mh?s=P+Major+Holders““ Web. 05 October 2014.]

(1) Tim Westergren—Founder and CSO until 2014

(2) Brian McAndrew—CEO, President starting in 2013

(3) Mike Herring—CFO starting 2013

(4) Delida Costin—General Council

(5) Simon Fleming-Wood—CMO starting in 2011

(6) Tom Conrad—Interim Head of Product, CTO 2004-2014

(7) John Trimple—Chief Revenue Officer starting 2009

(8) Sara Clemens—Chief Strategy Officer

(9) Chris Martin—CTO starting in 2014

(10) Kristen Robinson—CHRO starting in 2014

1. Economy[footnoteRef:2] Disposable income grew at a 4 percent annualized rate from 2013 to 2014 (O). Automobile sales plateau in 2014 (T). Increasingly global marketplace (T). [2: ““Economic Outlook, Indicators, Forecasts - Your Business-Kiplinger.”“www.kiplinger.com. N.p., n.d. Web. 03 Oct. 2014.]

2. Technology

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 advanced technologies (T).

(2) Investments in technology R&D allow for technological advances (O).

c) Compatibility with listening devices (O/T).

(1) Potential to outperform competitors through technology compatibility (O).

(2) Competitors have ability to create compatible technology (T).

3. Political–Legal

a) Music is heavily licensed (T).

b) International copyright law is complex and decentralized (T).

c) Domestic privacy and patent infringement laws are constantly changing (T).

d) International Property Rights protect a company’s intellectual property (O).

4. Sociocultural

a) Growing interest in mobile technology (O/T).

b) Americans spend a lot of time traveling in cars (O).

c) Trend towards wanting access to music/information everywhere and at any time (O).

d) Increased interest in international travel/globalization (T).

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.

(a) Complex and undeveloped international copyright laws.

(b) More difficult to protect trademarks and patents internationally.

c) Profitability requires economies of scale.

(1) Ability to negotiate with music rights owners.

d) Complex domestic legal landscape for music industry.

(1) Patent disputes and protection of intellectual property.

(2) Strict compliance with privacy laws and protection of user information.

(3) Comply with strict domestic copyright laws.

e) Strong brand names currently in the industry.

(1) Apple and Spotify have worldwide recognition

f) Expanding scope into new platforms beyond the internet is difficult.

g) Market is already saturated with competitors.

h) High Costs associated with attracting advertisers.

2. Bargaining Power of Buyers: HIGH

a) Substitute products are available.

(1) Market filled with comparable services at similar price.

b) Low switching costs.

(1) Consumers are not locked into contracts

c) Buyers are price sensitive and would switch if the service price increased.

d) Low product differentiation between brands.

(1) All music streaming services offer similar attributes.

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 consumers.

(b) Already established in international markets.

(2) Traditional radio

(a) Decreasing market share but still a prevalent option for music listening.

(3) Pandora currently has 70 percent market share of internet radio.

(a) Built a base of loyal consumers

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 music streaming companies are dependent on gaining rights to their product.

(1) Disproportionate bargaining power and cost increases (12 percent in 2013) limit profitability.

c) Suppliers of advertising have increasing options to invest marketing dollars.

(1) Other competitors for advertising dollars, such as social media sites, online news, and traditional radio, increase the power of suppliers for distribution paid advertisements.

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.

(2) Spotify has a strong international presence and differentiation in customization attributes.

(3) Satellite radio with 25.8 million subscribers offers more diversity of channels.

(4) Traditional radio not a major threat to Pandora.

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 companies that allow them to integrate into new platforms and gain access to new users.

(a) Automobile integration and partnerships with car companies.

(b) Household electronic device companies.

d) Competition over advertising dollars

(1) Suppliers of advertising outnumber competing firms and therefore increases competitiveness of firms.

e) Competitors offer similar music products

(1) Puts pressure on companies to deliver either low cost or differentiation model.

(2) Pressure to invest in R&D and create new music recommendation software.

f) Switching costs for consumers is low

6. Power of other Stakeholders: MODERATE

a) Government agencies protect users against privacy issues.

(1) Class action lawsuits for negligent protection of user information.

b) FCC

(1) Regulates communication by radio.

c) IRFA (Internet Radio Fairness Act).

(1) Brings fairness to the music royalty process for internet radio.

d) Governments that create copyright in foreign countries.

(1) Music streaming companies looking to expand abroad are dependent on governments creating regulated copyright laws and patent protection.

7. Suppliers are the factor in the immediate environment that are currently affecting Pandora.

a) Suppliers have the bargaining power with content costs that are currently hindering Pandora’s profits.

b) International governments in the future could become a factor in the environment if Pandora chooses to expand abroad because they will be faced with new regulation and copyright laws.

1. Centralized Management

a) Subsidiary in Australia

b) Functional structure (S/W)

(1) Geographical organization not applicable with focus on domestic market.

2. Structure understood mainly due to small size and lack of international expansion. (implied by case) (S/W)

3. Structure allows for innovation and market leadership. (S)

4. Similar corporations have successfully implemented geographic management structures (W)

1. Values (S):

a) Enriching users lives

b) Connect with users on personal and emotional levels.

c) Technology Innovation

(1) SaaS/Big Data Analytics

d) Growth over profitability

2. Current issues (W):

a) Legal

b) Cost control

c) Adapting to competition

d) Lack of internationalization

3. Avoidance of international markets (S/W)

a) Does not have to take into account national differences.

1. Marketing

a) Two products that are supported by the same platforms (computer and mobile) and marketing approaches but drive two different revenue sources.

(1) Free music streaming service; using advertisements to drive revenue

(2) Subscription streaming service; no advertisement interruptions—subscription revenue base

(a) Subscriptions to ad-free Pandora One streaming service for $4/month or $36/year

(i) In line with competitors; much cheaper than other options

(3) Both are streaming products; lack the ability to select single, specific songs to play—competitor, Spotify, provides this capability, and Pandora product change may be needed

(4) Free and subscription streaming services are available

b) Main focus is on the US market

(1) Small presence in Australia, but complexity of music licensing has hindered international expansion.

(2) Quickly took hold of the US market; reached 70 percent market for internet radio market (S).

(3) Establish 8.6 percent market share for the entire radio marketer.

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’ production and after-market stereo deck products.

(i) Extension of mobile user listener hours and user base for new car purchasers.

(b) Integration with home entertainment systems.

(i) Increasing listener hours for the computer and mobile platforms and user base for home entertainment system purchasers.

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.

(1) Total revenues increased 54 percent from 2012 to 2013 (S)

(a) Advertising revenues up 43 percent to $489.3 million

(b) Subscription revenues up 140 percent to $110.9 million

(2) Expenses have also been on the rise; erasing margins (W)

(a) Content acquisition costs up 36% to $314.9 million

(b) Marketing and sales cost up 80% to $169.8 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.

d) Proper metrics in place to monitor the profitability of services, influencing pricing, and distribution of advertising.

(1) Revenue and costs relative to listener hours.

Important Ratios

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)

c) No individual song search or play feature

(1) Currently, weakness could be huge strength if developed.

d) Innovative custom-tailored marketing (S)

e) $29.986 million invested in R&D for year-end Dec. 31, 2013

2. R&D has been a massive strength for Pandora with the Music Genome Project.

a) Competitors/substitutes developing more advanced features, and Pandora is at risk of losing its market-leading technology status.

1. Mission and Objectives are consistent and properly aligned through the service.

a) Desire to deliver music that the listeners love at anytime, anywhere.

(1) Most of the operations located in the United States; with a small presence in Australia.

(2) Providing internet-based music streaming on computer-based and mobile platforms

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 for gathering user data.

(b) Created a unique approach to recommendation of songs based on the listener data, gathered through the online streaming platform.

(c) Used the data to additionally assist advertisers on the listening platforms to target users with interests in their style of products based on data gathered and analyzed by the musical analysts on staff.

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).

b) Pandora is struggling to relieve pressure from increasing costs across the organization (W).

(1) Content acquisition is becoming more and more expensive as the music industry seeks to regain profits.

(2) Pandora’s sales force for developing relationships with advertisers grew 80 percent in 2013.

(a) Sales forces are located in various areas of the country

(i) California

(ii) Illinois

(iii) New York

1. Main HR objective is to increase revenue through expanding sales force.

a) Implied from performance/budgets

b) Currently, employee expenses are rising far faster than revenue (W).

c) Increased experience will likely lead to increased sales force productivity down the road.

(1) Implied from the case.

2. Deal with significant management changes

a) Major change in leadership.

(1) Loss of Westergren (Founder CSO)

(2) Addition of McAndrews (CEO)

3. Initiatives have demonstrated mixed success.

a) Key metrics, like advertising revenue per listener are improving (S).

b) Difficulty controlling rising costs (W).

1. Long-term competitive advantage through technology innovation.

a) Leveraging SaaS/Big Data Analytics to deliver a differentiated service (S).

(1) Two main trends in the technology industry.

b) Ease of use/ease of access (S)

(1) Internet

(2) Mobile

(3) Connected Devices

(4) Technology Partnerships

c) Music Genome Project (S)

(1) Long time differentiator

(2) Competitors are catching up

d) Numerous patents (S)

e) Innovative customer-specific advertising (S)

(1) Need to improve value of mobile advertising. (W).

(a) Two-point-five times less valuable than the Internet.

f) $29.986 million invested in product/technology development for year-end Dec. 31, 2013 (S).

(1) Pandora would like to see more value from this (W).

2. Competitors have differentiated IS features.

a) No individual song search function (W)

b) No playlist function (W)

3. Technology related lawsuits (W)

a. Current objectives can work with fine tuning.

i. Negotiate lower acquisition costs to increase profits.

ii. Increase platforms that can run Pandora radio.

b. Alternative strategies

i. Develop a cost-effective strategy for growing internationally.

1. Acquire international companies that already successfully operate within international copyright law.

2. Alter business model to grow launch service.

ii. Pros

1. Increased user base

2. Increased advertising revenue

3. Find new and potentially more profitable customers.

4. Increase economies of scale for negotiating acquisition costs.

iii. Cons

1. Initial startup costs internationally could hinder short-term profits.

2. New users are less profitable and require new product and service offerings.

3. Current business model unable to coexist with international regulations.

4. Costs could increase.

c. Differentiation

i. Pros

1. Have bargaining power to charge a premium price for product.

2. Creates consumer/buyer loyalty.

3. Increased returns.

4. Attract users from other services.

5. Can charge more for advertising time slots because demand for their music better aligns advertisers with target markets.

ii. Cons

1. Costs for development

2. Only successful if they can outperform their competitors in this strategy.

d. Cost leadership

i. Pros

1. Increased market share in the music streaming industry.

2. Increased market share would give Pandora the bargaining power to negotiate lower content acquisition prices.

3. A good defensive strategy in a market with a lot of competitors and possible new entrants.

ii. Cons

1. Lowers profits to beat competitors in price.

2. Devalues the brand and premium image.

e. Stability

i. Pros

1. More predictable cash flow and maintaining margins.

2. Stay with core competencies.

ii. Cons

1. Difficult to maintain long-term viability without growth.

a. Possible loss of market share.

f. Retrenchment

i. Pros

1. Increased financial viability.

2. Decrease in the diversity of products or services.

ii. Cons

1. Could lose market share.

2. Quality of service could suffer.

2. Recommendation Strategy

a. Business Level

i. Growth strategy

1. Need to evaluate and identify international markets to protect long-term opportunities.

2. US market at risk of becoming saturated.

3. Economies of scale from larger size will allow Pandora to raise advertising prices and negotiate lower costs.

b. Functional Level

i. Differentiation

1. Create a long-term competitive advantage through a superior service.

2. Competitors are increasingly advanced, Pandora needs to create a differentiated service to protect long-term growth.

ii. How resolves short-term problems

1. Helps decrease the bargaining power of suppliers.

iii. How resolves long-term problems

1. May initially increase costs but long-term will positively affect profit margin.

a. Upfront costs of expanding internationally in growth strategy.

b. Heavy investments in R&D for differentiation strategy.

2. If differentiation is successful in creating long-term advantage they will be protected from new entrants.

a. Effectively retains loyal customers

3. Need to establish policies to effectively grow in new markets.

a. Issue policies into expanding into international markets.

b. Evaluating the best growth opportunities.

4. New policies for differentiation

a. Continue to focus on innovation.

b. Focus on user customization features.

5. Differentiation will keep delivering on the mission of giving consumers the music they love.

a. Help increase advertising revenue.

b. Increased customer retention

3. Implementation

a. Organizational structure:

i. The CEO as a leader should take charge in leading the growth and differentiation strategies.

ii. CEO, General Counsel, and CSO should work together to create a framework for expanding internationally.

1. General Counsel needs to research international laws and develop a legal plan to expand into new markets

b. Programs:

i. R&D: Create feature set that will create sustainable competitive advantages.

1. Align the benefits of the Music Genome Project to enhanced product capabilities (e.g. listener playlist creation, suggested playlist generator).

2. Better alignment with consumer analytics provides better value propositions for advertisers.

ii. Growth: international markets must be targeted in order to protect company prospects as the US market becomes saturated.

iii. Marketing: international marketing strategy must be implemented in order to increase consumer awareness of Pandora in new markets.

1. Salesforce dedicated to advertising revenue must be structured to have some international orientation

2. Dependence on word-of-mouth and partnership marketing in the US requires spending on marketing the Pandora and Pandora One products.

c. Feasibility and Time Tables

i. Financial Feasibility

1. As profitability is already an issue, new strategy will be difficult to execute

a. Still necessary as competitors are increasingly prevalent

2. Pro-forma Budgets

a. Assessment not possible based on the data proved in the case.

3. Priorities and Timetables

a. Currently ignoring international market.

b. Future strategy should include creating a feature set that is competitive and differentiated from competitors.

c. May require continued lack of profitability.

i. Still possible due to liquidity position.

d. Necessary Standard Operating Procedures

i. Need improvements in the effectiveness of new sales force.

1. Costs are increasing faster than revenues.

2. Should potentially consider decreasing size of sales force.

ii. Need to create formalized process for evaluating international expansion.

iii. Need to get more value from R&D investments.

a. Current information systems are capable of supporting company’s activities.

i. Pandora’s information systems provide sufficient feedback on implementation activities and performance. Pandora is very aware of which initiatives are profitable, and by how much, and which initiatives have significant costs to the business. Since growing the business and reducing specific costs are some of Pandora’s key strategies, the information systems provide adequate support for the company’s activities.

ii. Information is not provided on the timeliness of the information provided by information systems.

b. Control measures in place to enforce conformance with strategic plan.

c. Discussion of control measures not discussed in the case.

d. Suggested additional controls:

i. Proactive monitoring of legal rulings in the US market.

ii. Develop quantitative metrics to analyze impact of new technology offerings.

e. Reward systems not discussed in the case.

f. Corrective action not discussed in the case.

Exhibit 1—External Factor Analysis Summary Table

Exhibit 2—Common Size Income Statement

Exhibit 3—Financial Ratios

Exhibit 4—Internal Factor Analysis Summary Table

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