The dotcom bubble grabbed headlines in the latter part of the 20th century. It became apparent to many people that not every start-up that bore the Silicon Valley label can be considered as a fail-proof business venture (Fox 39). But aside from the failed businesses associated with Internet start-ups, another major issue was the ability of the Internet to stream music for free.
In the past, this was not a problem because radio stations are entities that were heavily regulated to protect the interests of artists, composers and the studios that produced their albums. But in the digital age, it became easy to copy, transmit, stream and share music to those with an Internet connection. It is into this technological and economic backdrop that another Internet start-up called Pandora Radio struggled to establish a profitable position in the market.
The Genome Project
The ability to stream music from one computer to the next is already an ordinary occurrence in cyberspace. This type of activity is not the reason why Pandora Radio became an instant hit among music lovers in the United States. Also, Pandora Radio cannot be considered as an ordinary radio station. In a conventional radio station, there is a disc jockey or a person-in-charge who manipulated music records based on the program or as a result of a request from the audience. In most cases, radio stations follow a certain theme. There are radio stations that offer a certain type of music and this particular theme attracted a specific group of listeners.
In the case of Pandora Radio, no such scheme was used. In contrast, the founder of Pandora utilized a certain type of software-based on music theory. Thus, Westergren used his vast knowledge regarding the music business and music theory to develop software that breaks down the attributes of a particular song. It appears that a song has attributes similar to the DNA of an organic cell. Westergren said that this discovery led him to develop a system of codifying these attributes. In other words, digitized music was broken down into units and categories that the software can then use to develop a special library of similar types of songs.
Pandora Radio was a revolutionary concept if compared to conventional radio because all types of listeners can subscribe to listen because they do not need to fiddle with their radio to find out the station that they like. The potential customer simply enters a song that he or she likes and then the software is the one to search for songs that are of the same type. This design helps explain why Pandora Radio has millions of listeners. Other radio stations are limited by their format but not Pandora Radio.
Westergren should be elated by the fact that millions of listeners are tuned into Pandora Radio. But there is one major problem. According to the law, all radio stations are required to pay royalty fees to the owners of the song. Furthermore, Westergren had another problem. The law discriminates between conventional radio and Internet radio. Although Westergren and company were considered an agreement with SoundExchange this was a reprieve that will last only up to 2015.
The success of Pandora Radio can be considered bittersweet because millions of users forced them to pay a great amount of money in terms of royalty fees. It was time to persuade users to become customers. It was time to persuade users to pay for the services that they enjoy instead of relying on the free use of Pandora Radio. The dilemma was real to those who initiated Internet start-ups. The moment they charge money, there is a possibility that the millions of users will simply look for alternative Internet radio sites. But they had no choice because they have to make money or the company will be forced to file for bankruptcy.
The advice of Junior Partner
Westergren and Kennedy must heed the advice of the junior partner. Pandora Radio must be used with care. In other words, they cannot allow a user to abuse the free policy of the organization. The users must appreciate the fact that they can listen to great songs that appeal to them and enjoy these things free. It will not hurt if from time to time they issue reminders regarding the cost of the operation. Afterward, they can explain that only 40 hours of listening time can be considered as free. After listening for 40 hours the ability to continue enjoying the service can be had after paying 99 cents to purchase a song or to go through the subscription route. Thus, users are given the chance to subscribe to Pandora Radio for a fixed amount on a monthly or annual basis.
The founder must not be afraid to block the use of heavy users because they eat up a significant portion of the bandwidth. Also, these heavy users do not contribute to the success of the company. Thus, it must be pointed out that Pandora Radio only penalizes or restrict the use of certain individuals. Some heavy users also support Pandora Radio; these must be rewarded by the way they do business with Pandora Radio.
But they have to be clear about the development of their application. They have to continually refer to the 10 commandments of a successful “freemium” application. They have to focus on three major areas: 1) clearly define what is free and what is paid; 2) build subscription service into the application; and 3) ensure that the application works on all platforms (McCann 56). It is only through careful adherence to these principles that Pandora Radio can hope to attract subscribers.
Venture Capital Funding
Pandora Radio and its executives had reached a point wherein they need additional funding from venture capitalists. They needed money not only to keep the company afloat but also to add funds to improve their service. They boasted that they saved money because they did not use advertising. It was their users who utilized word-of-mouth advertising that created a huge following. However, if they want their users to pay through subscription then they need to enhance their customer service.
Customer relationship marketing costs money and the company can no longer afford to enhance its service without an infusion of funds from a venture capitalist. They hesitated to ask for money from venture capitalists because they know that there is a price to pay. They will probably lose a major control of the company if venture capitalists begin to exert their influence with regards to how the company should operate. However, they are left with no choice because they need money to operate and to upgrade their application.
Westergren and the company were forced into this position because they thought that the original business model of Pandora Radio was enough to generate revenue. It can be argued that the users did not understand the full extent of the Music Genome Project and therefore, they thought that Pandora Radio was similar to other radio internet sites available on the Web. It was time to upgrade their marketing strategies. Pandora Radio possesses cutting-edge technology but it seems that only a few people truly understood its significance.
Possible Options
The executives at Pandora Radio must vigorously argue their case with regards to the exorbitant fees charged by music companies. They must do research and cite studies made that can support their claim. For example, they can argue that music publishing generated $30 billion a year worldwide (Sobel & Weissman 25). By citing similar types of studies they can argue that the music industry is no longer threatened by the impact of Internet Radio. Piracy is another matter. But Internet Radio like the platform used by Pandora does not support and perpetuate piracy. Pandora Radio provides a mechanism for composers and musicians to be recognized even if they are not part of a well-established music studio. Thus, the company must lay the basis for its usefulness to the music industry.
Another major step that they should make is to increase the level of understanding with regards to their Music Genome Project. They have to let the listeners know and appreciate why they love listening to Pandora Radio. They have to understand the costs involved and how complicated the process used to codify songs into their library. Once word gets out regarding the special feature and capability of their software, then, it can generate more interest and word of mouth advertising regarding their service will surely increase.
Finally, Pandora Radio must revisit their subscription plans. If 40 hours of listening means that the first time users get to enjoy their service for one week, then, they can reconsider the number of hours that they allow for free. It can be argued that instead of 40 hours the company can lay down a rule that first-time users can only use the service for three days and after three days they have to decide to pay for the service or not. But before they lay down more stringent rules, the company must invest more in customer relationship marketing. They indeed saved millions of dollars because they did not advertise their service. However, if they want to seriously consider asking their users to pay for listening to an otherwise free site then they have to communicate to their target market and persuade them that they cannot get the same service from other radio stations or Internet radio sites.
Conclusion
Pandora Radio became acquainted with the harsh reality of Internet radio when the number of users breached the 1 million mark. It was supposed to be a time of celebration because only a few Internet sites can boast of 1 million users regularly. However, they are confronted with the fact that they have to pay royalty fees to the composer and music companies. As a result, they needed additional funding to keep the company afloat and use the money to improve their service. They need funding because, to maintain the existence of Pandora Radio, they need to persuade their users to subscribe and pay a particular amount to the company.
Works Cited
Fox, Scott. E-Riches 2.0: Next-Generation Marketing Strategies for Making Millions Online. New York: AMACOM, 2009. Print.
McCann, Tyson. The Art of the App Store. IN: John Wiley & Sons, Inc., 2012. Print.
Sobel, Ron, and Dick Weissman. Music Publishing: The Roadmap to Royalties. New York: Routledge, 2008. Print.