Pandora Music: Disruptive Innovation in the Digital Age

Introduction: Pandora and the New Music Landscape

Pandora Radio was launched in 2000 under the name Savage Beast Technologies. The idea was essentially the same as it has always been: to offer users a personalized listening experience with music that matched their tastes and preferences. After running into funding issues, the company re-launched in 2004 as an ad-based free streaming music radio site that still used the customized radio model to attract listeners. The idea resonated with listeners, and by 2011 the company went public on the New York Stock Exchange. By 2013, it had 200 million users, approximately 70 million of whom were active monthly listeners. Pandora attracted listeners via its free, ad-supported customized content but also gave listeners the option of paying a fee to listen without commercial interruptions. This paper discusses how Pandora used the Internet to become a disruptive innovator in the music industry by offering consumers their own tailor-made radio stations.

The Internet, Copyright, and the Collapse of the Old Music Loop

As Steve Jones notes, "whereas before the Internet, music was marketed and promoted to an audience in a closed loop primarily between record companies and radio stations, by the 2000s there was clearly no longer any such loop" (441). The breaking of this loop, made possible by the Internet, allowed Pandora to become a game changer in terms of how the music industry had to think about music and its utility in the Digital Era—the Information Age—the Age of Social Media. Digital content was streaming across the World Wide Web, digital files were being shared by music lovers on social media platforms, and Pandora had come along to revolutionize the concept of music distribution.

Pandora's disruptive innovation challenged the once "secure system for payments for performances" (Jones 441). That system had to be redesigned, with new deals negotiated to secure for artists the just rewards of their contributions. Performance rights organizations had overseen that aspect of the industry in the past—Broadcast Music, Inc. (BMI), the American Society of Composers, Authors and Publishers (ASCAP), and others—but when the Internet arrived and created a new venue for file sharing and streaming, none of these organizations had "a mechanism for tracking streaming music or other online performances and collecting royalties," and those offering music online were under no legal obligation to pay royalties to the artists (Jones 441). In the early days of the 1990s, the Internet was still a frontier: the problem of monetizing businesses and protecting intellectual property was something that urgently needed to be solved. The Digital Performance in Sound Recordings Act was passed in 1995, and the Digital Millennium Copyright Act was passed in 1998.

Consumer Empowerment and the Rise of Streaming

The power of the music industry shifted into the hands of the consumer. New media—the Internet—made the consumer the new arbiter of what would succeed and what would not. The consumer would get to pick and choose which new artists would rise and which would not. The consumer was at the controls, and social media was the method by which those controls would be exercised. Indie artists like Macklemore and Ryan Lewis catapulted to the top of the charts virtually outside the traditional industry system, thanks to the power of music streaming services.

Pandora changed the way people came to discover music. Instead of relying on the industry's radio systems to deliver content, users could customize their own accounts, set their preferences, enjoy new music in the genre of their choice, and discover artists they had never heard before. In this way, Pandora was a truly disruptive company. As Bhargava and Klat have pointed out, "the growth of digital content, and especially paid digital content, is driving the growth of the creative sectors" (8) all over the world.

Pandora as a Disruptive Innovator

Christensen, Raynor, and McDonald describe disruption as "a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses." What Pandora was able to achieve was made possible by the Internet and its democratizing qualities. However, the Internet was only part of the story. The other part was the revolutionary mobile technology that connected people to platforms like Pandora while on the go—the iPhone, Android devices, tablets, and iPads. The ability to access the World Wide Web from anywhere was the development that gave Pandora the power to truly disrupt the music industry and change the way people think about accessing music. Without smartphones in everyone's pocket, the Internet had limited utility, requiring users to be at a desktop computer. Apple changed all that by giving everyone a small, portable computer that doubled as a phone and camera—an all-purpose digital device. One could preserve memories by taking a photo, instantly uploading it to a social media platform, and linking a song to accompany it. One could create a digital diary of daily life and provide its own soundtrack, and Pandora was there to help make it possible.

As Chris Anderson notes, the first key to disruption is to "make everything available"—and that is exactly what Pandora did for music lovers. The second key is to give it away for free—and Pandora did that as well. Pandora provided free, unlimited music streaming to users, all tailored and customized to fit individual tastes. Pandora did not even require a conventional marketing strategy; word-of-mouth advertising effectively did the work for the platform. All Pandora had to do was convert its users' data into profiles it could use to attract advertisers and collect ad revenue. At the time of this writing, SiriusXM was reported to be considering acquiring Pandora for $3.5 billion (Borney). That figure speaks to the extent of Pandora's success in disrupting the music industry: "The deal comes as the radio industry grapples with digital competition in the form of streaming music apps and podcasts. SiriusXM and Pandora have competed for business" (Borney). Pandora's business model was never particularly robust—the challenge of generating consistent profits created ongoing difficulties—so the degree to which it can truly be called a disruptive force remains open to debate.

After all, Christensen et al. state that "disrupters tend to focus on getting the business model, rather than merely the product, just right. When they succeed, their movement from the fringe (the low end of the market or a new market) to the mainstream erodes first the incumbents' market share and then their profitability. This process can take time, and incumbents can get quite creative in the defense of their established franchises." Yet the company clearly did something right to attract a $3.5 billion offer from SiriusXM. As of early 2018, Pandora was still losing money every quarter, burning through nearly $50 million in operating costs (Kesarios). Nevertheless, it was able to challenge other industry players by drawing away market share. So even without turning a profit, Pandora was still gaining value and offering investors an exit through a potential buyout. That is what kept Pandora attractive to investors. Indeed, on the news of the buyout, Pandora's stock climbed nearly 10% in a single morning—a demonstration of the power of a disruptive service, even one that lacks a sufficient business model for profitability. Simply being a sustainable threat to the established music industry made it valuable enough for investors to hold.

Conclusion

The Internet helped change the way music was accessed by individuals in the Digital Age. Pandora, the free music streaming platform, capitalized on the new technology and used it to challenge the music industry's control over who heard what, when, and where. Pandora gave users something genuinely new—a radio station the listener could create. The listener would identify the types of music desired for the station and then sit back and let the music come. It was as simple as that. Pandora attracted 200 million users within a decade of its launch and ultimately drew a buyout offer of $3.5 billion. That, by any reasonable measure, sounds like the work of a disruptive innovator.

Works Cited

Anderson, Chris. The Long Tail. Change This.

Bhargava, Jayant and Alice Klat. Content Democratization: How the Internet Is Fueling the Growth of Creative Economies. PWC, 2017.

Borney, Nathan. "SiriusXM to Buy Pandora Streaming Radio Service for $3.5 Billion." USA Today, 2018.

Christensen, Clayton, Michael Raynor, and Rory McDonald. "What Is Disruptive Innovation?" Harvard Business Review, 2015. https://hbr.org/2015/12/what-is-disruptive-innovation

Jones, Steve. "Music and the Internet." The Handbook of Internet Studies, edited by Mia Consalvo and Charles Ess. Blackwell Publishing Ltd, 2011.

Kesarios, George. "Pandora's Profitability Problems Remain the Same." Seeking Alpha, 2018.