My breakfast with Westergren: Pandora's founder talks about royalties, ads, brands, and bands

Pandora has been the best-known name in Internet radio since 2000, when founder Tim Westergren launched the Music Genome Project. But the (now public) company has recently struggled to sell enough ads to both offset music licensing costs and turn the kind of profits investors crave. However, the company’s foray into in-car listening, and enhanced efforts to win ad dollars that would normally be spent on terrestrial radio, might turn the tide in Pandora’s favor.

I wrote a note to Pandora founder Tim Westergren in August, asking if he had time to talk things over. He did. Over breakfast at Tim’s favorite spot — Sweet Maple in San Francisco’s Pacific Heights — we talked about a wide variety of topics, including the role of brands in music, fair compensation for musicians, Pandora in the car, millennials, and South by Southwest. 

Westergren had eggs. I had French toast. (It was good.)

VentureBeat: Do you see Pandora as mainly a subscription play or an advertising play?

Tim Westergren: We don’t think that radio is a paid proposition for the vast majority of people. So it’s more of an advertising model. The key metric for us is revenue per thousand hours, so that gives you a measurement of monetization efficiency. If you look at a how much revenue we’re driving, the revenue per thousand hours number is going up and up. 

Right now it costs us about 2.4 cents an hour per user to stream music. So it’s a relatively low overhead. But you want to take in more revenue than your content costs, and it’s a lot easier to do that when you’re really big. We see ourselves growing in that direction. 

VentureBeat: Will Pandora ever completely unseat terrestrial radio in the car? Will it ever offer a full slate of music, live and local news, weather, traffic, etc.?

Westergren: I think we’ll get there, but I don’t think we’re quite there yet. With consumers today the expectation that you have a lot more control. I think there will always be a place for terrestrial radio. But we think we can get a good share of the time people spend listening in the car. Half of all listening now takes place in the car.

It’s not that the technology is that complicated. It’s just a matter of finding good sources of content that are compatible with what we’re doing, and with licensing and ad rates that make sense. We have to have a way for the content to dovetail with [the] music experience. I would be really surprised if we didn’t have a substantial part of that in the next five years.

There are personalized podcasts. There’s definitely a potential to personalize it. But there are just some parts of it that lend themselves to broadcast. Some types of content don’t need that much personalization. Like in the Bay Area, for example, everyone can get pretty much the same weather.

VentureBeat: Do you see a lot of innovation to try to deliver different types of curated content to the car, beyond music.

Westergren: I think there’s a huge amount of effort there. That’s the intersection of two things: You have a lot of people trying to get [their product] in the car, and you have consumers’ expectation of interactivity and personalization. So you put those two things together, and you have a lot of new innovation happening.

Stitcher has been around for a long time now. They’re focused on getting non-music audio in the car. I think there are 30 or 40 companies working in this space. 

VentureBeat: When did you realize that the car was going to be an important space for Pandora?

Westergren: One of the moments when I got really excited was when I first used Pandora in the car. The app had been out on the phone for a while, and I had heard about people using it in the car, so I knew people were doing it but hadn’t had the experience myself. I had an iPhone and I put it between the seats and plugged it in with an AUX cable. Fifteen minutes later I had forgotten I was listening to Pandora, and I was thinking ‘this radio station is just nailing it; they’ve played like four songs in a row that I just love.” I forgot that I’d been listening to Pandora because I was so used to listening to traditional radio.

VentureBeat: Is Pandora really reaching millennials? Is there any secret to reaching this audience? Seems like advertisers are falling all over themselves trying to figure it out. 

Westergren: We don’t have a demographic focus. It’s not like we are “about youth” or “about baby boomers.” I mean, we are conscious of the demographics, but we don’t have any trouble reaching anybody. Music is universal. It reaches everybody. It’s also because of the interactivity and curation that we provide.

VB:Have you heard any great new bands lately? What’s your favorite debut record of the past year?

TW: Johnnyswim. They have this great white soul sound, really good.

VentureBeat: Is music as important to kids today as it was when we were kids? Is it more about games and YouTube videos now?

Westergren: I don’t think so. I don’t think it’s less important than it used to be. Music is still a source of cultural identity. Poeple who measure music against video or gaming are comparing apples and oranges. No, kids are not sitting in a living room listening to an entire record like we used to do. They are not out trying to discover the next big colossal band. Kids that I interact with are constantly consuming and sharing music but they’re doing it in a different way.

For one thing, everything goes through the phone now. We have a huge mobile audience on Pandora. 

VentureBeat: Is SXSW still relevant? Is it still a place to break cool new bands, or just a brand-fest?

Westergren: It seems to the be the traditional pattern that brands will follow festivals, and the reason is that the grassroots quality of these festivals is exactly what’s attractive to brands. Pandora is a brand, and that’s part of why we go to SXSW. That’s my perspective. I think brands are a really important part of the music ecosystem. Think of them as patrons of the arts. Last year we rented a beautiful house, and we had this beautiful stage, and we had four days of performances, and it was full of people. 

I was in a band; we really wanted to play at SXSW, we never did. But to be able to play on a big stage with a great sound system and lights and a big crowd is something I would have killed to do.

(Note: During the 1990s, Westergren played in a band called Yellowwood Junction after moving to San Francisco from Minneapolis. Yellowwood Junction was an acoustic folk outfit that played shows with bands like Leftover Salmon and The Mother Hips. Actually, Tim was trained as a jazz pianist and has played rock, blues, jazz and classical music. He received his B.A. from Stanford, where he studied computer acoustics and recording technology.)

VentureBeat: Is there a healthy role for brands in music?

Westergren: Brands can participate by providing a platform for artists, by providing a benefit for people. If you sponsor Beyonce’s tour, you’re getting in line to get behind this big celebrity …. So there are different forms of branding. There’s the kind where you’re just borrowing the celebrity of the artist. 

There are brands that are doing great indy showcases. There’s a difference between having the artist wear a brand T-shirt while playing and putting up this huge banner behind them. There are ways of doing it where the brand is viewed in a favorable way. 

And when you think about it, music has always been sponsored by brands. Radio is brand sponsored. But every brand does it differently, and you have to do it in ways where the brand is viewed favorably if you can.

VentureBeat:The last time I spoke to you was in 2008 about the royalties Internet radio has to pay the labels. Has the situation materially improved since then?

Westergren: It’s calmer now. It’s calmer. But there’s always a constituency that’s trying to create controversy and drive an agenda. It’s an industry that’s experienced a huge loss. So I can understand why emotions are running high.

VentureBeat: Is there a way to make sure independent artists get paid well for their music without further lining the pockets of record labels and publishing groups?

Westergren: Speaking from Pandora’s perspective, there are two ways we interact with artists on the compensation piece. We give 55 percent of our gross revenue to licensing. The majority of Sound Exchange (which collects licensing fees on behalf of artists) comes from Pandora. Publishing rights cost about 4 percent and performance rights is north of 50 percent.

So we pay a healthy chunk of our revenue to artists. We are doing everything to increase that as we are growing revenue and advertising. The real emotional statistic that keeps getting the soundbites and that gets musicians riled up is the per song royalty you pay, which is just a fraction of a penny. It’s easy to point to that, but it ignores the volume of plays that most artists get. It’s a misleading soundbite. 

Compare that to AM and FM radio, which don’t pay any performance [royalties]. So you have artists like Aretha Franklin who has never been paid royalties for all the radio play she has gotten, because she didn’t write the music and didn’t own publishing rights.

It’s just a classic chapter in the story of tech disruption where you have a lot of people throwing darts. But when they see there’s this whole other world on the other side, and people start to calm down.