 If you're a fan of music and technology, you've probably used Pandora, maybe even today, maybe even right now. I hope not. Please be listening to the Future Music Summit. If that's the case, you'll probably want to hit pause, as I said, and tune into this conversation. With all the media focus on rate setting and the future of online radio, we thought this was absolutely the perfect moment to hear from Pandora founder and chief strategy officer Tim Westergren. He'll be joined by Chicago Tribunes Greg Hott, who we know can ask all kinds of questions. Musicians and indeed the musicians care about. We're thrilled to have both of them with us here at the Future of Music E-Summit. So please join me in welcoming Tim Westergren and Greg Hott. All right, good. Thanks for getting here early. I think it's a great forum. FMC is a great forum to have a hopefully rational discussion about something that stirred up a lot of emotion in the last few weeks, for sure. Tim, let's get a little context first. 2000, you co-started Pandora. And very much different landscape than a lot of promise, but a lot of doubt about whether this thing, this entity, would even make it. So congratulations for even getting your company here today, still alive. I can't imagine how many startups there were in 2000 that didn't make it. Tell us about the business model then and now. How has it changed? Well, it's pretty radically different. We didn't actually launch the business thinking we would become a radio product. We built what we thought would be a recommendation technology that we'd license out to other services that had their own consumers that needed navigation. And it took us about five years sort of wandering in the wilderness before we realized that the best use of our technology was in the world of personalized radio. That really came about partly through sort of thinking about our own product, but also looking at what was happening with infrastructure and consumers and broadband penetration and so on. So it took a while for the market, I think, to be ready for it. And it wasn't until 2005 that we kind of came to that decision in 2007 when we actually launched the service. So it's been a long, circuitous path, for sure. Now, we had a conversation in, it's been a decade-long process. I mean, there's no way to sugarcoat that. A lot of years of struggle, I would imagine. I talked to you in 2009, and even though Pandora at the time was obviously a growing business, you were saying at the time it was not a profitable one, you said you were losing money at that time. What's the reality now? We're kind of keeping our chin just about the waterline right now. Like when we last spoke in 09, it was on the heels of the first major decision to come out of that copyright royalty board for Web Radio. And the decision that came out then, which was ultimately reduced after a lengthy lobbying and renegotiation effort, that original decision would have put Pandora under. Without a doubt, it would have eaten up every all, if had that been in place and had we been operating under that ruling, we would virtually all of our revenue would be going to royalties right now. So it was a sobering experience to go through that. We got some relief through the subsequent negotiation. And what that left us with was a survivable rate, is how we would describe it. But the business now still really struggles to make ends meet. Now there were some numbers put out. You had your IPO, your initial public offering, last year. Some numbers associated with that. I've heard figures of the company being valued at $2.5 billion. And you can correct me on these users, tens of millions of users. I've heard figures 55 million, 80 million. People look at those numbers and say, man, this guy is kicking butt. He's got a seriously working company here that's making money. Most record companies today would kill to be valued at $2.5 billion. You might be able to put them all together. I'm not sure they'd be worth that right now. Irving Azoff, that genius of the 20th century record business, had some caddy remarks to make about that a few days ago. What's the reality of that? The perception versus your reality of where the company's at? Yeah, so it's kind of a Jekyll and Hyde business. I guess you could say that on the growth side, it's been a wonderful story. Our listenership just keeps exploding. And so does our revenue. I mean, Pandora has been doubling its revenue every year for some time. And that's been a really good story. Profitability is a completely different story for us. We're really struggling to make that happen. Although I think that for this topic of webcast rates, I think focusing just purely on Pandora's profitability misses, I think, a larger picture, which is Pandora is essentially all alone in internet radio right now. We have 75% market share of internet radio. And I think if you measure just music, it's probably higher than that. And I think any economist would tell you that's a sign that something is broken, that you have one company that has such a huge share. And it's because nobody wants any part of this business. Everybody gets to read our quarterly statements. And most businesses are reluctant to enter it. And not only have there been some large technology companies, Yahoo, MSN, AOL, who had large audiences and essentially walked away from the business, you've also got broadcast companies who are avoiding it. And to me, that's an enormous signal, because I think you could argue that radio is on this inevitable march to internet-connected delivery. And if you're a broadcast radio business, there's a huge strategic importance in participating in that and anticipating that. And in spite of that, they're sitting on the sidelines by and large. I mean, Clear Channel has made some efforts, but I think that the last seven years for us has been notable for the lack of competition. I think that should send off alarm bells. All right, so alarm bells, a lot of alarm bells went off a few weeks ago. In my gut, anytime the government gets involved in anything, I'm right away throwing up the red flag on what's going on here. Why? Internet Radio Fairness Act is now a bill before Congress. Whether you want it to be or not, you've become the public face of that bill in some ways. People have gone to you as a lightning rod for that bill. You're a supporter of this bill. Explain why, in your view, it's necessary for the government to get involved in this private sector issue. It's a great question. And I guess the weird focus is one of the critical ingredients to I think a healthy long-term music industry is a robust compulsory licensing system. So a methodology that businesses can take advantage of, a platform to get the rights to play music in one central way. So Pandora, for all intents and purposes, signs one piece of paper, the Digital Millennium Copyright Act and its associated webcast license that gives us the permission to play all the music that we play legally. It has a whole bunch of stipulations, but from a business standpoint, that's a fantastically efficient way to make rights available for businesses to build businesses offer products. That compulsory license comes from the government and it's a vital ingredient for our system. And one of the reasons is, in the case of Pandora, part of what I think has made the service appealing and has made it grow so fast is we play this enormous breadth of music. We have over 100,000 artists on Pandora. The majority of whom are actually independent, so not associated with a major label. An absent compulsory licensing system that allows us to get permission to play all that music, a lot of that stuff would just never get to participate because the economics of chasing down one independent label after another to get the rights to play their music just wouldn't add up. So I'd say sort of first and foremost, government involvement is absolutely essential for the health of, I think not just web streaming, but any other arena that could benefit from compulsory licenses. In terms of this act in particular, the focus of the Internet Radio Fairness Act, contrary to some of what's been written, it doesn't set rates. The act is intended to do one very specific thing, which is to extend to internet radio the same standard for setting rates called the 801B standard that's used by virtually every other sort of copyright arbitration process around us, including our competition, satellite radio, cable radio. The bill is really designed to create a level playing field in terms of the rate setting process. Doesn't necessarily mean we have the same outcome, but it's putting us on a par in terms of rate setting, which we see as a reasonable request. Mm-hmm. All right, so the idea being that satellite radio, cable radio has a better rate than you. And you're just saying let's equalize the playing field here, let's level it off. Obviously you would like your rates to go lower than they are. You feel your rate right now is unfair. That right? Yes, we do. And is it simply a case of it's unfair because everybody's paying a lot less? I think there's, that's a good question. That's for sure. I think that there's an inequity. It's hard to deny and literally we operate under two different standards. Ours is separate and unequal and worse. It's hard to look at them. It's impossible to look at those different rates and say that there's not discrimination against this one category. But I think that the net impact of this rate, while on the surface it leads to a higher per song fee, it leads to greater revenue per song, it's actually ultimately detrimental to the artist community because it suffocates an industry that could be doing so much more than it is. You're saying that basically right now the artist should look at it as this is a long-term kind of thing. Because if I'm an artist, I'm looking at this and I'm saying, wait a minute, you wanna cut my rates? I think I've seen figures, basically 80%, right? That would be kind of the hit that they would take. No, that's a huge misnomer. That's a very dangerous. Okay, let's clarify that. How much lower would the rate, in your ideal world, where would the rate be compared to where it is right now? How much of a hit? Yeah, so it's really important for artists especially to try and parse the rhetoric around this because that is not true. Again, what this legislation proposes to do is to provide us with the same rate setting standard so that when the Copyright Rulity Board judges consider our situation and they hear from everybody, they get to consider that evidence and information under the same sort of rubric as our other forms of radio. It doesn't set a rate. And we don't know what the outcome would be. It's been unpredictable in the past. I wouldn't want to even bet on what the outcome would be. So it's not setting a specific rate. It's just allowing us to operate on a more level playing field. But potentially the rate, you would like to see the rate lower. Yes, that's true, absolutely. And how low do you want to go? Again, this is probably not the place for me to sort of put forward what our number is, but the way I think about this is, so Pandora has maybe 30 to 40 engineers in that ballpark. Lots of companies operating in our space have hundreds if not thousands of engineers working on product. Internet radio as a category has been massively under invested in in many, many different dimensions. And that's because these economics prevented. Having a more reasonable economic structure would drive a lot more investment into this space. And frankly, I think in this day and age, in the music industry, when we see win-win opportunities, we all need to embrace them. And I think this is one of them. I think internet radio is an enormous bright spot in music. There is the opportunity here where there's an intersection of what consumers clearly want. I mean, without really a marketing budget, Pandora's audience has grown, as you mentioned, to tens of millions of listeners. An intersection of what consumers want. An intersection of what artists want. I'm not just talking about promotion, exposure, et cetera, but also revenue from performance and an intersection with business. It's an area in which you could build healthy, successful, and yes, public, well-capitalized companies. And the key to a healthy industry is recognizing that and embracing all that. Not saying, oh, I don't wanna do it because this company has gone public and has this market cap, or because consumers are getting money and music for less than it's worth. It's really saying, okay, there's a win-win-win to be had here. How do we all sort of ante up to make that happen? An artist is saying, when does that win-win take place? Because I understand right now, I'm gonna lose short-term. You're basically saying long-term we're all gonna win. Yeah, I mean, the sort of simple way to describe that is getting a smaller piece of a bigger pie. That if internet radio could operate under better economics, there would be more participants, it would grow faster, and it would easily swamp whatever sort of near-term change there was. And I think that's basic economics. I really think that would be, that's true. Now, it's taken 12 years for your industry. Just one, as you said, you're basically the dominant radio internet voice out there. It's been a 10, 12-year process for you to even get to this stage. And an artist is going away, I'm gonna have to wait 10 or 12 years to get my, because basically your industry is based on my work as an artist. And again, you were a musician. Maybe still in. Yeah, let me stop you there. I think I agree with that. The industry is based on their work and our work. That's part of what this conversation has to be about. Of course, these services would not exist with music. Some of my music's in Pandora. I'm part of that. But at the same time, a huge amount of effort has gone into building the services themselves. There's a, it's a partnership. And you have to view it that way. You have to see again a win-win. And I am an artist myself, and I'm no longer sort of performing artist, but I understand why it's awfully hard for an artist to hear anybody say anything about lowering anything ever right now. But again, focusing on the long term, I think if you can embrace that perspective, that a healthier business in the long run will grow faster, it leads to a very, I think obvious answer. And I think it's a much short time horizon than you talk about. Technology, I mean, internet radio's been around for let's call it 10 years about, I'd say. And still, 90% of radio listening is on broadcast radio. From the consumer's standpoint, that makes no sense. What consumers want is personalized listening. It's hit every other form of media. It's behind. And so consumers want it, and you've got this enormous technical infrastructure now, not just sort of the broadband infrastructure, but all these devices and car companies and everyone who is tooling up their systems to be able to deliver internet radio as easily and as ubiquitously as broadcast radio, it's ready to go. It just needs a little fuel. Artists have been hearing that argument for decades now. Help us form this business. Is it a new boss, old boss scenario here? Because there are a lot of businesses that have been built that way. And we still see a lot of starving artists, as it were. You do have some interest. You did post a blog the other day, which I thought was interesting, where you did talk about Pandora's payouts to artists. I guess technically to their service that pays them. 2000 artists making $10,000 a year from just royalties from Pandora, right? 800 at $50,000 a year. Now, these aren't extraordinary numbers, but there's an indication that streaming revenue can provide a certain amount of income over an annual basis. What is the possibility, you raise this possibility of creating an artist mill class. You're talking about these micro payments per stream. And obviously certain artists are doing it. You're asking us to say lower the rate, but we're gonna increase the number of plays, right? I mean, that's basically what's gonna happen. Is that basically the formula? I don't wanna sound like a broken record, but we're asking for a standard parody, which we think could lead to a lower rate, hopefully it will. But yes, fundamentally you're right, that we're saying that if you reduce this burden that internet radio as a category would grow a lot faster and would generate that kind of, a rising tide lifting all boats. Right. How realistic is that? I think there, I've seen some figures, 80 million songs somewhere in the, is that way overstated that are available in Pandora? No, a little over a million. A million, but how many artists are represented on Pandora? So it's over 100,000 artists, and I think this is interesting, over a million songs, over 95% of those songs play every month. So internet radio is, I say, arguably the first online music category to deliver on the long tail. When we talk about, for lack of a better word, the musician's middle class, it's not just lip service. I mean, we actually on Pandora are playing a huge breadth of music, and it's not just Pandora, there are tons of internet radio companies, there are hundreds of them, all of them kind of on shaky ground, but on internet radio you hear bluegrass in classic country and classical and bebop and standard jazz. I mean, it's klezmer music. All the stuff that doesn't get played on any other form of radio. So the opportunity here is for the whole, a huge gamut of artists that otherwise I don't think would have much in the way of public exposure. How is an artist supposed to view this in the context of a career, though, because what I'm hearing is the success rate under the old industry was about five percent. You know, you had about five percent halves, 95 percent who really weren't seeing anything from recorded music. Do you see a scenario where these numbers would actually increase to the point where you would see roughly 30, 40, 50 percent of the people on Pandora making, you know, a significant enough income to sort of live off that? I mean, is that what you're saying? That's our dream, absolutely. I mean, how big is that number? I think that's an interesting question. You know, how many artists have sort of a combination of the songs, the tenacity, the, you know, all the requisite skills. It's a hard career in lots of different dimensions that have all it takes to build that. But I think this platform has the potential to, you know, to unleash that. And granted, my experience is a little old now, but years ago when I was in bands touring, you know, I saw so many bands and I'd always think to myself, man, if only this audience that likes this kind of music could hear this band, you know, they wouldn't be playing to 12 people. They'd actually maybe be making a living at it. And so I sort of feel like I can scientifically say now, based on the seven years of experience since we launched our service, that there is an audience large enough with an appetite big enough and broad enough to support a lot more than the number of artists that are currently being supported. So you've got this successful, or it's starting to become successful business. You're the only player, or the main player in internet right now in terms of this kind of service. And the argument comes back at you, instead of lowering the rates or getting a more equitable rate, why not sell more advertising? Why not build your business, you know, through other ways, through other means? What do you say to that? Well, you can trust that we're doing absolutely everything we possibly can to build that as fast as we can. We have every incentive to do that. And I think that to focus on that misses a much more important question, which is how do we maximize this opportunity period? And I think the way you do that is a create incentives for a much broader base of businesses to go in and invest in it and market in it. That's how you turn this into a much bigger industry. So any business that goes in that has, that's an advertising supportive business that has these content costs is fundamentally motivated to do everything they can. You know, we have over 600 employees at Pandora, well over half of them are involved directly in advertising selling in some capacity. You know, you can be sure that any web radio company that's serious about this business, it does not need any extra incentive to build their revenues fast as they can. All right, we got, we're running out of time but I want to take some questions and the operative word is questions. Please no political statements right now. Those can happen afterward, but we've got a question over here. David Lowry, we've met before actually, Tim. I'm from the Tri-Cordist and also from the Bands Cracker and Camper Van Beethoven. When I read this bill, I'd say 90% of it actually isn't about rates. So I don't want to ask you about rates. I want to ask you about this one particular clause in the bill. Nothing in this paragraph shall be construed to permit any copyright owners of sound recordings acting jointly or any common agent or collective representing such copyright owners to take any action that would prohibit, interfere with or impede direct licensing by copyright owners of sound recordings in competition with licensing by any common agent or collective and any such action that affects interstate commerce shall be deemed a contract, a combination or conspiracy in restraint of trade in violation of section one of the Sherman Act. Okay, so basically what this says, says groups of copyright owners can't say anything about direct licensing deals going on or suggested. So what do you mean by any group of copyright owners? Is this a musical group? A pair of songwriters? An alliance between two indie labels? Artist unions? Also what is impede? I assume that it means the same thing that Sirius is suing the American Association of Independent Musicians for, which is simply for speaking out negatively about direct licensing deals. I see this as a terrible, perhaps unconstitutional infringement of an artist's right to speak out and I wonder how you feel about that. So I definitely don't wanna get into the legal and legislative language stuff. I'd be speaking out of turn if I did that. I think the sort of, the spirit of that section is really about, on the one hand, the collective licensing of music has these great benefits of centralizing how you get rights and how you administer them and you have bodies that are empowered to sort of offer up this huge bundle of content in one central place. In some ways copyright itself and the aggregation of copyrights around PROs like ASCAP, et cetera, have this huge benefit. The danger on the other side is it creates monopoly. In a music group, it could be anybody, any reader. It's as any copyright of any group of copyright owners. I mean, it could be two people, it could be my band. We would be under threat of prosecution under the Sherman Act. We would be restricted from saying, hey, you guys really shouldn't do that direct licensing deal. Or hey, we think that direct licensing deal is actually, you know, it's not beneficial for all artists. We would actually literally have our speech infringed. So you're, yeah, I would be out of turn trying to debate sort of the legal and legislative meaning of these words. I just can't answer that specific question. I can really just sort of answer this. The spirit of this is that you have to balance the centralization of rights with the centralization of rights with the potential for monopoly abuse of it. That's what it's there for. I would restrict them from saying that. Yeah, I think I've answered your question as best I could. Kurt Hansen, you might have some clarity. I thought, Tim, it was that if Sony and Universal NEMI conspired to stop direct licensing that that could be prosecuted and that a couple of musicians wouldn't be considered monopoly. Yeah, but would two musicians be, you know, would be monopolists? It's hard to imagine that they would qualify as monopolists. And there's also some future conversation about this at the next panel that Michael Brace has been at this afternoon. Sorry, we're gonna move on to Ann. Hi, you mentioned this. Oh, I'm Ann Chaitovitz. I now work at the Patent Trademark Office but I'm a longtime future of music coalition person. And so you mentioned that this should be win-win and that the services should be able to compete on a level playing field and artists should get more of a bigger pot. Do you think either of these are possible until broadcast radio pays because you're not on a level playing field and the pot is small and the international pots aren't available? Yeah, it's a great question. It's obviously a big longstanding issue that's been fought over as recently as just a couple of years ago. You know, my answer to that is I think it's becoming a less and less relevant question. I mean, I think that radio is moving in this direction and the right way to think about this is sure we can keep fighting and refighting the broadcast royalty issue as was done literally like in the last Congress. But I think the right way to sort of build this business is to say, look, internet radio is the future. Personalized radio is the future. Let's get that right. And let's accelerate that transition. Granted, massively self-serving to say that. But every hour that goes to internet radio is a net positive for artists and that's where we should focus. And that's our, we are an internet radio company. We're not a broadcast company. It's not sort of our fight to fight per se. Hi, my name's Tim Anderson. I'm from Old Dominion University. I had a question about ads. You mentioned that you're trying to build more ad revenue and I've read elsewhere that you've talked about extending to local markets. And I was actually kind of interested in how you built that local ad revenue infrastructure. Are you building sales teams or how are you going about this process given that you're going all over the US and it's so hard to do it on a local basis? Yeah, so I think one of the really exciting developments in internet radio is the fact that it's become large on a local scale which has introduced this whole new complexion to the business. Pandora now is the largest radio station in I think 20 of the 25 largest radio markets in the US. And that offers up the opportunity to become a local advertising seller. And we are hiring local ad sales people all over the country to sell to the local mattress store and the local grocery chain and the local car dealer. And it's tapping into this enormous advertising business that's been the sole domain of broadcast radio historically. And I think what is so significant about this for musicians is for the first time ever performers are getting to participate in the advertising revenue part of their business which by the way has been the largest since radio was invented a long time ago. So you're going to become stakeholders in the advertising, we, I'm a musician too, are going to be stakeholders in the advertising business including local advertising. And that's, I think the stakes for this are enormous. I think that radio holds within it one of the keys to a long-term health of this business because it is an enormous and healthy and growing area and radio still accounts for 80% of the hours people spend with music. So to get it right is key. Could you, to follow up on that, you also have this internet radio thing is obviously huge from a data standpoint too. You're able to sort of determine where audiences are for particular bands. And you've done some work in that area where you've enabled bands to sort of play concerts where they may not even be aware that there was an audience but through the fact that they had a high Pandora listenership. Can you speak on that just for a few minutes? I'm glad you, we haven't even touched on that. I mean, setting aside the financial side of things, one of the great distinguishing characteristics of internet radio listening is you're connected. So you can talk to individuals and you know who they are. I mean, speaking for ourselves, you know, on Pandora we have over 20 billion pieces of thumb feedback we've received from listeners. And we know their zip codes and we know their email addresses and we can talk to them. And we've begun to do things where we'll actually do a show where we'll find a band that's coming through a city and we'll email listeners on Pandora who have thumbed up their music that live within driving distance of a given club and invite them to a show. Not just who've thumbed up that band but who have thumbed up bands that sound like them. And we've successfully brought large crowds to bands, small bands, not bands with big marketing budgets that everybody knows about. And it doesn't take much to sort of extend that and say, you know, internet radio is about 10% of listening right now. What if it was 50 or 60 or 70 and you were taking all this capability to connect people and activate locally to bear on a phenomenon that large that gets back to that earlier question about the musician's middle class. Like that's where you really start to see things happen. So at a scale of 100 or 200 people at a show can make a difference for a band. I mean, when we were, when I was playing in a band, you know, the difference for us in making a living or not or surviving was, you know, a difference between 50 or 250 people at a show and that's within our reach. We got time for one question? Yeah, yeah. Okay. Oh, hi. My name is Bill Rosenblatt and from Copyright and Technology and for these purposes, I was an expert witness in the satellite radio CRB hearings and I'm a little mystified by your statement or your sort of assumption that royalty rates are scaring off competition from the internet radio space and, you know, that you don't have so much competition. The statistics that I've seen don't jive with that. Like for example, there's, I mean, you're the leaders and you have a lot of listeners but there's like maybe order of magnitude, half as many listeners that listen to simulcast internet radio that carries advertising that's covered under the same royalty rates and that runs pretty much on autopilot without 30 or 40 engineers. So, and therefore has a much lower cost base so how do you account for that? Well, our share of the market is growing and I don't think those of simulcast is a robust part of internet radio and I think you'd be hard pressed to talk to, executive of a major broadcaster who's enthusiastic about internet radio right now and again, the three largest players when we started AOL, Yahoo, MSN who had all built enormous online audiences, they left the business. I don't think, I mean, I'm not sure why our evidence is so different but I don't look at that market and say that people are coming into it. Okay, for example, well our experience and data says otherwise, so. All right, we have to run unfortunately but we appreciate the participation. Thank you, Tim. Yeah, thanks.