Pandora radio runs counter to nearly every Internet trend. It eschews automation in favor of actual human musicians doing data entry. Unlike rival webcasters such as Last.fm, Mog, and Rhapsody, it ignores social networks and the wisdom of crowds in favor of expert selection. "It's profoundly unscalable. Our method is really absurd in that regard," Westergren says. "That was the VCs' biggest objection: How could you use this approach given how much music is out there? In the end, the only way to answer that question is to look at the experience itself and to ask, does this approach give you noticeably better results?" The site has a simple interface that asks users to enter a song or an artist they like. Pandora then streams a radio station that plays songs with a similar genome profile; you can give thumbs-up or thumbs-down votes to guide Pandora or add additional seeds. Say you're in the mood for a power ballad and enter Guns N' Roses' "Patience" as the seed song. Pandora will begin streaming similar songs that are slow, heavy on guitar, and cool sounding: "Distant Mornings" by Gustav and the Seasick Sailors, a Swedish rock band with slight folk influences, and "Hell Just Ain't the Same" by Theory of a Deadman, a Canadian band. It delivers surprises--you're tempted to dismiss Cat Stevens's "Hard Headed Woman" immediately, but then you find that it does sound kind of like "Patience." You also can direct Pandora. If, for instance, you want more power and less ballad, you can give Cat the thumbs-down or add another seed--say, Aerosmith's "What It Takes." Now the mix changes to Meat Loaf, U2, and, surprisingly, Guided By Voices and Dinosaur Jr., a pair of postpunk bands that fit in well.
The genome doesn't work perfectly, as Westergren admits. When you enter an eclectic artist like the Beatles as a seed, the system doesn't know which direction to take--do you want psychedelia like "Lucy in the Sky With Diamonds," British Invasion pop like "Love Me Do," or electric blues like "Yer Blues"? And for some reason it misfires altogether with Beck and Frank Zappa. Still, when you seed a station with a song, rather than an artist, and use the thumbs-up or thumbs-down ratings to guide the system, you end up with hours upon hours of very good radio.
Pandora launched in September 2005. After a quiet rollout to friends and family, the company had to double capacity three times in the first week. "Nobody--nobody--had dreamed it would be as popular as it was," says Lythcott-Haims. E-mails poured in, gushing about how cool it was.
Unfortunately, Westergren's latest business model turned out, again, to be not so cool. Pandora offered listeners 10 hours for free before requiring them to subscribe, but users easily could log in with different e-mail addresses and continue getting the free version. Fortunately, by now Westergren was a pro at, as he puts it, "jumping to another lily pad." Pandora scrapped the subscription model and decided to make money via advertisements on its site. Users interacted with the site a lot to rate songs or refine their stations, and every time they did so, Pandora could load a new ad. It could offer advertisers segmentation, so a Lexus ad would be shown on a jazz station, while a BET Awards ad would be shown on a rap station. Soon the company was doubling the number of listeners every month. Investors liked the new model and gave the company another $12 million. "That was the most enjoyable year of my adult life," Westergren says. Pandora was working at last. But just over a year later, it would be in crisis mode again.
Westergren was taking a bus to work on March 2 when his Treo buzzed with a news alert. He read it and called Joe Kennedy right away, frantic. The Copyright Royalty Board--an arm of the Library of Congress that oversees radio stations' royalty payments--had changed the amounts that Internet radio stations had to pay. Web radio stations are charged on a per listener, per hour basis. Starting next year they will be charged on a per listener, per song basis. Pandora's costs will almost triple, to about three cents an hour for each listener. The CRB also added a new charge of $500 a year per individual station--which in Pandora's case, with its millions of personalized channels, would be catastrophic. The new fees would triple Pandora's costs and Westergren and Kennedy debated shutting down immediately. At the new rates, says Kennedy, "the business model falls apart."
SoundExchange, the body that collects royalties for the recording industry, is lobbying for the increase, arguing that artists and songwriters need to be paid when their music airs. Online broadcasters agree that some payment is necessary, but argue that it should be at rates they can afford; they insist that they're helping market music that wouldn't otherwise be heard. Westergren, for his part, finds the rate change inherently unfair. AM/FM broadcasters pay royalties only to publishers and songwriters, not to artists or labels. Satellite radio stations pay a flat fee of less than 4 percent of revenue for royalties. But the new system charges Web broadcasters based on a range of factors, many of them on the esoteric side, such as whether use of the service serves to promote or substitute for record sales, and the fees tend to be higher. At an emergency meeting, some board members argued that the company should fight the rates; others suggested striking separate deals with the record labels themselves, which was deemed unrealistic. Pandora uses music from more than 6,000 different labels; it would be impossible to arrange agreements with all of them.
