Larry Guzman, Vidal Harris, Jesse Jernigan, Hannah Reams, Kelsey Smith
MGMT 4842
April 22, 2015
I. Pandora Media, Inc.
A. SIC codes
Pandora Radio is the leader of all Internet radio companies in the United States. The primary SIC
code for this company is 4832 - Radio broadcasting stations. This industry consists of
establishments engaged in broadcasting radio programs to the public, including commercial,
religious, and educational stations and establishments primarily engaged in broadcasting.
Another SIC code that Pandora falls in is 4811 - Radio Broadcasting Industry (Reference for
Business). Also, the primary NAICS code for this company is 515112 - Radio Stations.
B. Vision/Mission Statement
Pandora’s vision is stated in its 10-k report as “to make the future of radio highly personalized to
each listener’s tastes, provide exposure to the broadest possible number of artists and genres, and
offer a targeted and efficient platform for advertisers. We are working quickly to create this
future, and doing so in ways that terrestrial radio simply can’t match” (2014 Annual Report). The
mission is listed on the website and says: “Our mission is to help you connect with the music
YOU love.” (About Pandora Media). It is further expanded in the 2012 annual report and says:
“To enrich people’s lives by enabling them to enjoy music they know and discover new music
that they’ll love.” Pandora then states that their focus on this simple mission has enabled them to
continually increase consumer demand for Pandora, resulting in enormous scale and listener
engagement. Few companies engage with users at the scale that Pandora does and few
companies operate and manage the amount of data and feedback that result from this engagement
(2012 Annual Report). Pandora’s mission statement includes the product or service and the
customers. It does not go into detail about the target market, employees, and stakeholders of the
corporation. Pandora’s largest age demographic of listeners are adults from the age of 18-49. In
2012, Pandora was ranked as the largest adult radio network in the U.S. for this range
(PRNewsire). Pandora also states on its website that the employees are a collection of engineers,
musicians, designers, marketers, and world-class sellers with a common goal to enrich lives by
delivering music enjoyment. Pandora states that people – listeners, artists, and employees – are at
the center of their mission and everything that they do, and this also applies to stakeholders
(Pandora Jobs).
C. Enterprise Strategies
Pandora experienced attacks against its business model by the music industry when CFO Mike
Herring joined the company in 2013. Internet radio critics accused Pandora of short-changing
artists and their labels. The CFO approached the matter by explaining that paying money in
royalties does not make them partners with record labels. The steps taken to remedy the
relationships with record labels and artists were that discussion about licensing was removed
from Pandora’s legal department to the CFO’s department, helping music copyright holders feel
compensated over time. Then, the company talked with artists about Pandora and what they can
do, hoping to develop trust that would continue to grow. In trying to fix the damage, working
with the artists was the hardest because the artists do not really know where money goes. They
only get a check every quarter and do not know where the money comes from. After talking to
them, Pandora hoped they would better understand the dynamic and change their attitudes.
Pandora also gives data to them about how many times their songs get played, what
demographics, and what regions of the country are listening to it. Pandora is still trying to find
the right balance for fair compensation between copy right holders and right economics for
distributors (Pandora CFO).
Corporate level strategy
1. Pandora is currently competing in a very saturated market. Consequently,
Pandora competitors include Apple, Spotify, Clear Channel, Slacker, Sirius XM, RDIO,
Microsoft, Rhapsody, Google, Amazon, YouTube, Hulu and VEVO. However, Pandora is
currently competing head to head with Sirious XM in the automobile segment of the industry as
it grows.
Pandora competes on niche market with Sirius XM when it comes to implementing Satellite
radio in automobiles. Pandora has recently launched a partnership with Pioneer sounds to
incorporate Pandora radio in the automobiles. It competes on a niche market with Sirius XM
because as a right now these two companies are the only providers of satellite radio within the
automobile industry.
Also, Pandora not only competes in the broadcast radio industry, but in the advertisement
industry. In such industry Pandora competitors include Facebook, sGoogle, MSN, Yahoo!, ABC,
CBS, FOX, NBC, The New York Times and the Wall Street Journal.
2. Pandora has an innate strategic advantage as shown in their annual report: “Terrestrial broadcast
and to a lesser extent satellite radio are significant sources of competition for advertising dollars.
These radio providers deliver ads across platforms that are more familiar to traditional
advertisers than the internet might be. Advertisers may be reluctant to migrate advertising dollars
to our internet-based platform. (2014 Annual report)
Also, Pandora was the first online platform of it’s kind with the integration of the Music
Genome Project. Pandora has the most users, the largest market share, and highest loyalty rates
among consumers. The corporation has developed a mobile application to enable consumers to
use the service across a variety of platforms. The technological advantages of Pandora paired
with the marketing access to advertising streams makes this corporation the leading brand of its
kind.
3. Pandora current attitude towards growth is to get bigger. Pandora is currently working in
expanding their costumer base in order to achieve their financial capacity.
Pandora held 73.6 percent of the market as of 2012. Currently in the ‘growth’ stage, this industry
is on the rise, meaning more competitors will come to existence within the next few years and
the late majority to the population will begin to use the technology soon. Studies completed by
Arbitron show that consumer use of Internet radio has almost doubled from 2008 to 2013.
IBISworld predicts that the industry will grow almost 15 percent in the next five years. (Pandora
Business plan 17)
a. Pandora is using concentration and product development in their intent to grow. Pandora is
currently introducing two new radio channels such as news and sports in addition to great
range of stations already offered. In other words, Pandora is offering new type of product in
already existing market.
b.
Over the past couple years, Pandora has participated in a number of partnerships and
alliances, bringing its total current up to over 1,000 partnerships. Pandora partners with a
variety of companies, ranging from automotive companies to independent retailers. The main
purposes of partnerships for Pandora are to expand its customer reach as well as increase
versatility of and access to its service. (Pandora Business Plan 22)
Another strategy Pandora is currently using in order to expand their listener base is viral
marketing strategy to also expand consumer awareness for their service.
c.
Pandora utilizes a functional level structure where the decision-making is very centralized.
Based on recorded statements Pandora Media Inc is currently employing 1,410 people. This
is 93.97% lower than that of the Services sector, and 60.69 percent higher than that of
Broadcasting - Radio industry, The Number of Employees for all stocks is 84.8 percent
higher than the company. (Pandora number of employees) The hierarchy at Pandora is as it
follow:
Callum, Danny. Pandora Business Plan. Publication. Worldpress, Apr. 2014. Web. Apr. 2015.
<https://rachelchesno.files.wordpress.com/.../businessplanpandora-final.docx>.
"Pandora Number of Employees P NYSE." Macroaxis. Web. 19 Apr. 2015.
<http://www.macroaxis.com/invest/ratio/P--Number-of-Employees>.
E. Business Level Strategies
Pandora is a consumer-oriented music discovery service, more specifically a non-interactive
radio station. The primary line of Pandora Radio is the Internet streaming of entertainment by
way of music, i.e. Internet radio service. Pandora competes in this market by offering free
Internet radio, which includes commercials, and also a non-commercial service called Pandora
One, which requires small fee (Pandora).
Pandora competes in this market by using a growth strategy. They have 75% of the market share
for the top 20 online radio stations. They also use a growth strategy because they have partnered
with 20 different auto manufactures and 650 electronics devices. Pursuing all of these new
relationships has helped them to gain market share, which they hope will help to increase their
revenues.
The product of Pandora is Internet radio. If you don’t mind listening to commercials the radio is
free, but if you do not want commercials, then the fee is $4.99 a month. Pandora offers its
services through mobile devices that connect with the Internet such as laptops, tablets, and cell
phones. One can also access Pandora through automobiles if the individual has a car stereo or
navigation unit that supports Pandora. These systems still require a smartphone to handle the
actual music streaming, even though the user will not have to touch the smartphone to control the
music (How to Listen to Pandora in the Car). Promotions used by Pandora radio are gift cards
with $5 more on card than purchase price. They also send advertisements to your devices asking
you to sign up for free Internet radio. With the purchase of certain automobiles, a free year or 6
months of Pandora are now offered. This is done in hopes that one will purchase a subscription
to Pandora one once the free trial has expired. Place is on any mobile device and currently in 20
different vehicles and anything with the internet. It is a global market.
Pandora wants to appeal to all age groups but their target market appears to be the age of 18-34.
Twenty-two percent of users are under the age of 18, 16% are from ages 18-24, and another 16%
of users are ages 25-34. Targeting the younger generation is easy because they have grown up
with the Internet and always having mobile devices on them, and they like the ease of having
music at their fingertips (Bing).
F. Functional Level Strategies
Pandora radio’s annual income was $412.8 million, which primarily came from advertising and
premium subscriptions. They spent $53 million on marketing, which is roughly about 13 to 14%
of the total gross revenue.
Pandora radio’s research and development strategy is to seek out as many outlets to offer
Pandora, including an alliance with the automobile industry as well as other electronics that have
Internet capabilities. Another part of their research and development is to figure out how to keep
royalties from going through the roof or finding ways to offset or get other companies to share in
the paying of royalties.
The financial strategy that Pandora uses is to offer an Internet radio service for free, or if you do
not want commercials while listening to music, then the subscription price is still lower than their
competitors.
F. Industry Analysis
There are currently over 4 million Americans that are actively using online internet radio
services to listen to their favorite tracks, artists, and albums. That number has risen from 3
million to over 4 million in less than one year according to research conducted by Triton Digital,
a company that operates a digital audio exchange for advertisers. John Rosso, president of
market development at Triton Digital, said that the rapid growth is a testament to just how
powerful the music streaming industry is becoming. Another interesting bit of information
uncovered in Triton’s research is that it is the younger generation that is pushing the growth of
the industry. The top two performers in the industry are Spotify and Pandora. Of people aged
12-24, 69% of them are listening to some form of online radio on a weekly basis according to the
Infinite Dial 2015 study conducted by Edison Research and Triton Digital (Resnikoff, 2014).
As of 2014, Pandora led the way with market share by owning 31% of the market. The next
closest internet radio broadcasting service was iHeart Radio with a mere 9% of the market. After
iHeart Radio, it is quite a competitive jumbled field of other companies vying for a larger piece
of the pie. There are only about ten music streaming service companies with a solid percentage
of market share, and these have aligned themselves as the major competitors in the industry.
iTunes radio has recently leaped over Spotify for the third highest market share in the industry at
8% (Elmer-DeWitt).
Music streaming revenues for
companies such as Spotify,
Pandora, YouTube, and Sirius
XM have boomed in the past
several years. In 2014, music
streaming revenues surpassed
CD sales for the first time ever in
the United States. That fact is
astonishing considering how long
ago CDs began their decline. The
Recording Industry Association
of America (RIAA) also pointed
out that the industry still has a lot of untapped growth. The number of Americans subscribed to
online streaming services is much smaller than you might think. According to the RIAA, Spotify,
which is one of the largest in the industry, only has 7.8 million paying subscribers in the United
States. That’s just a little over the entire population of New York City, NY. This is a prime
example of just how much opportunity is out there for these music streaming companies to take
advantage of. The 7.8 million paying users of Spotify is nearly a 45% jump from the previous
years so that is a sign of growth. But, to put this into perspective, there are 35 million paying
Netflix customers in the United States (Blattberg).
On a more global scale, subscription service
revenues increased by 31% in 2013. According
to industry expert, Tom Silverman, he expects
the overall music industry to grow $4.6 billion
this year to $5.53 billion in 2019 which
represents a 4.7 percent compound annual
growth rate. Silverman also expects subscription
revenue to continue its rapid growth. He predicts it to grow from $668.5 million this year to
$1.56 billion in 2019. That is almost a total percentage increase of 15% in 5 years. While it’s
slow growth for the music industry as a whole, it represents the dominating nature of what
streaming music is expected to be. Other revenues across the board in the music industry are
expected to remain stable, but music streaming revenues are going to continue to grow at a
steady pace (Peoples).
Key Success Factors
A key success factor the music streaming industry is whether or not they can increase the number
of paid subscribers. It is projected that Pandora will not be able to offset its ad sales and royalty
payouts by 2016. This means they will have to increase revenue somewhere in one of their
channels. If the industry can figure out a way to persuade online listeners to sign up for their paid
services they will offset the costs of royalty fees. Whether or not they have been successful in
doing so is a question that remains to be answered. Another hope for a company like Pandora is
that advertising rates grow in the next few years. This will help them stay afloat for several more
years, but if they want to consistently maintain their profits and continue to grow, they must
increase their amount of paid subscribers.
While many analysts and experts in the field agree that there is plenty of room for growth in the
music streaming industry, there are some unknowns that could alter the industry’s path to
dominance. Many artists and record label companies believe that they are being paid far less in
royalties than what they deserve. This could be termed as another key success factor to the
industry. Whether or not they can retain the current artists on their playlists. High profile artists,
such as Taylor Swift, have pulled their music from several streaming services because they are
firm in their belief that they are not properly compensated for their work. According to Louis
Bedigian, Pandora pays up to $.00137 for each song played, Spotify pays up to $.0084 per play,
and iTunes pays up to $.0033 per play. For each song they play, these servicing companies must
pay royalties to the artist and the record company. If the artist sings and writes their own music,
they receive both royalties. Currently, Pandora pays out about 50% of their revenues in royalties
and Spotify pays out 70%. Whether more and more artists jump ship from these streaming
companies is a big question for the industry. But, with revenues expected to increase within the
industry in the next several years, it seems that revenues will far outweigh royalties (Bedigian).
Attractive Industry?
Overall, the music streaming is very much so an attractive industry. With many economists and
music industry experts pointing to streaming as the next biggest source of revenue for music, it is
hard not to like its odds at future success. Revenues are expected to climb across, but the
question is who will come out on top? Spotify seems to be the front runner with many of their
projections showing them to be the class of the pack. The global value of the music industry is
expected to double in the next five years because of the streaming boom. Paid subscriber
numbers are expected to increase, advertising rates will most likely increase, and the popularity
of these brands are on the rise. It seems like the perfect recipe for an arms race in the music
streaming industry which will continue to drive revenue and profits. With other forms of sales in
the music industry declining, streaming is expected to carry the torch for the industry as whole.
As mentioned before, Tom Silverman stated that he believed the music industry could be worth
well over $100 billion thanks to streaming services. While his prediction may seem far-fetched,
the music streaming industry will most likely make up most of that figure at some point
(McCarthy).
Porter’s 5 Forces are threat of new entrants, competition in the industry, power of suppliers,
power of customers, and threat of substitute products (Investopedia). Music streaming is mainly
dominated by those at the top. Pandora, Spotify, and iTunes are in a class of their own. It would
be difficult for new entrants to gain footing in the industry. Over time, it could be done, but it is a
very difficult industry to enter. Competition is fierce amongst those in the music streaming
industry. Each brand is constantly looking for ways to improve their product or service. They are
focused on understanding their listener’s needs and developing a product that fits their needs.
Both suppliers and customers have a huge impact on the industry. The suppliers are essentially
the artists and the record labels. They are in control of who uses their music with consent. Music
streaming companies pay royalties and fees to be able to play their music, but just as in the case
with Taylor Swift, they have the power to pull their music whenever they please. Most of these
streaming services are free unless you sign up for premium versions. The customers control the
buying power. Would they rather listen for free with limited features, or would they be willing to
pay a monthly fee for unlimited features? The industry is somewhat struggling with figuring out
a way to increase the number of their subscribers. Substitutes are available throughout the
industry. You could use an iPod and buy your songs so you can officially own them, you could
just listen to basic radio, or you pay monthly for satellite radio. The decision on how consumers
want to listen to their music is up to them. Some options come with a cost, and some are
absolutely free. It is the music streaming industry’s job to persuade consumers that their
subscriptions are worth the price.
G. SWOT Analysis
Strengths:

Users can try for free

User personalization

Mobile Applications

Social network connections (Facebook)

Millions of tracks available to users

Industry is expected to grow
Weaknesses:

Lack of paid subscribers = lower revenue

International restrictions

Advertisements sales are declining

Royalties to artists and record labels

Requires good satellite signal from mobile applications
Opportunities:

Royalty rates may drop in the coming years

Room for growth across the industry is there

Technology advancements

Celebrity endorsements

Automotive industry (Pandora)

Improving economy (more money for users to buy premium versions)
Threats:

Artists pulling their music because of royalty issues

Poor economy

New entrants

Hackers disrupting subscriber’s accounts

Royalty costs and legal issues
II. Central Problem
A. The central problem is expanding into non-music content to increase competition.
B. Pandora has started an expansion of their operations into delivery of non-music content stations.
This has increased capital requirements and put us into competition with different companies.
Pandora has an established reputation as an online music provider so they are taking a risk
entering into this expansion. The ability to attract advertisers to these new stations is not certain
but it is a risk worth taking. Pandora will also have to obtain and retain rights to non-music
content on acceptable terms to successfully earn revenues from the content. Pandora will also
have to effectively manage the risks and challenges associated with these expansions which
could affect revenues and profitability. Pandora has to weigh the options as to what other nonmusic stations they want to pursue. Our group has decided that Pandora should take the risk and
pursue offering news and sports stations. Spotify, which is one of Pandora’s main competitors,
does not offer these types of stations. By expanding into more non-music content, we are
beginning to enter into a different type of competition. We will be increasing our competition
with Sirius XM Satellite Radio. Sirius XM currently offers a wide array of music, news, and
sports stations. Pandora and Sirius XM are currently competing in the automotive industry.
Pandora recently partnered with Pioneer in 2010 to increase its brand presence in the market.
Pioneer has wide range of products that work with the free Pandora iPhone app to provide direct
control of Pandora from your in-dash navigation unit. By incorporating Pandora into the Pioneer
sound systems, the internet radio provider will take your music experience to another level. By
adding news and sports, it allows users to expand their listening options beyond music content.
III. Solution
A. Rejected Solution
A solution that we have decided to reject was the idea of joining the headphone’s market. By
partnering with Sony, we could incorporate Pandora into Bluetooth wireless headphones, users
would be able to stream music directly from their headphones. The problem that we encountered
with this idea was that the market we would be competing in was already saturated. Companies
like Beats by Dr. Dre, Samsung, Sony, and Jam already offer similar services/products and
would make it nearly impossible for Pandora to gain market share.
Since manufacturing costs are a big part of developing this new form of technology, it would be
a high risk venture with a high possibility of failure. Even though Sony would help Pandora
increase their customer base, Sony would request a fee for incorporating Pandora into their
product.
B. Recommended Solution
The first step to our proposed solution would be putting the word out that we are trying to
develop news and sports stations. We decided this would be the best first step and let interested
parties contact us rather than us pursuing them. After contacts are made with those that are
interested, we would contact other parties and tell them about our idea to see if they would like
to work with us and offer content on the new stations. Pandora would be able to recognize your
current location and offer local sports and news accordingly, while still offering various existing
channels. The local stations would have to be willing to partner with Pandora. Pandora would
pay royalties but this would be offset by having more advertising revenue coming in. The
advertising revenue would increase because, for example, if CNN decided it wanted to have a
station, companies that already advertised with CNN may want to also advertise through
Pandora, boosting revenues. So by offering news and sports, as well as music, Pandora will be
using product development to increase market share and utilizing alliances to limit our
competitor’s options for advancement. These new stations will be options that were not
previously available to Pandora users. The way the Pioneer system works is that by pushing a
button, Pandora radio is activated. After it is activated, the user is able to choose from the various
channels that Pandora offers. Pandora is connected to the Pioneer system via Bluetooth from the
user’s mobile device. So the user still has all of the features that are offered in the mobile app but
they can control the music by the in-dash unit. By offering the additional stations, there is more
available content for the user to choose from. Since Pandora has already formed the alliance with
Pioneer, there is growing recognition of the Pandora name. By offering the new additional
stations as well, users may be more willing to pay for a subscription so they do not have to listen
to advertisements. Even if subscriptions do not increase drastically, Pandora will still benefit by
this alliance and new channel offerings because more companies will want to advertise through
them to get their name out. The organizational structure of the company is not affected by
incorporating the new channels into what Pandora currently offers. The reason is because we are
not merging or acquiring a new company by doing this, just expanding what we are currently
doing.
Our group believes that this solution will solve the problem of lack of competition with satellite
radio providers. By adding the new stations while also working with Pioneer, we will be able to
reach a broader consumer base. This will increase awareness of what Pandora offers and by
doing this, increase revenues and listeners. By offering the sports and news channels, Pandora’s
advertising market will also expand, giving them a competitive edge that they previously did not
have. We predict that the sports channel will bring in more advertising revenue than any other
channels that they currently offer. When sports are shown on TV, there is an abundance of
advertisements shown. By offering sports stations on Pandora, Pandora will be able to benefit by
appealing to companies that normally only advertise when sports are on. This could be small or
large businesses that are affiliated with sports that want their brand name to be recognized, but
usually decide to do so only when the sport they are associated with is played.
*Proforma’s attached separately
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