In 2000, Tim Westergren started Pandora, a pioneering Internet radio company that now has 22 million intensely loyal users. The site recommends songs to people based on their favorite artists, tracks, and albums. Along the way, the Oakland, California entrepreneur has reinvented his business model again and again. He has also clashed with the recording industry and was nearly forced to close his doors several times last year. "I've never, ever given up, even when we were in the most depressive bleak times," Westergren told Inc. in 2007. "I always thought Pandora was a good idea and would have a day." Here's how he built a web behemoth.
In a world of impersonal web services, Pandora prides itself on its human ingenuity. From the very beginning, Westergren insisted on having real live human beings inform each recommendation the site makes. Analysts rate a user's likelihood of enjoying a song based on a 10-point scale that takes into account as many as 400 attributes such as lyrical content, harmony, and rhythm. "It's profoundly unscalable," Westergren told Inc. in 2007. "Our method is really absurd in that regard."
It's not as easy as it sounds. Since launching Pandora in 2005, Westergen has revised his business plan several times. He has variously toyed with the idea of charging listeners a subscription fee, with making money through licensing arrangements, and with the idea of placing Pandora's technology in store kiosks. Along the way, Westergren was rejected by venture capitalists no less than 350 times. Still, the entrepreneur kept at it until he found a business model that worked. Westergren eventually settled on a strategy that relies on a hybrid of ad revenue, subscriptions, and revenue sharing deals with web giants like iTunes and Amazon. Today, the Pandora does about $25 million in revenue annually.
Westergren routinely seeks input from his users. On a typical day, he has a backlog of about 1,200 emails from customers that he or his staff will answer personally within a week. And 15 times a year, the CEO organizes Town Hall meetings with Pandora users across the country. At these events, which draw up to 300 attendees, Westergren speaks freely about everything from his company's finances to the legal minutiae of Internet copyright law. Think of it as a customer pep rally.
In 2007, a government ruling more than doubled royalty payments for Web radio stations, placing Pandora's ongoing viability in jeopardy. "Our investors wanted to shut us down," Westergren told Inc. in late 2008. "We were just hemorrhaging money." So Westergren e-mailed each of his customers asking them to contact their Congressional representatives to demand that the ruling be reviewed. He also pleaded for help on Pandora's blog. Over the next year and a half, no fewer than 1.7 million Pandora fanatics called, faxed, or wrote to Congress to plead Westergren's case. As a result, Pandora is now wrapping up negotiations that are expected resolve the royalty issue. "It was an absolute Hail Mary," Westergren said. "If that didn't work, we were finished."