Peter Kafka

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Pandora Had a Good Wednesday, and a Terrible Thursday. What About the Next Couple Years?

On Tuesday afternoon, Pandora was worth $2.6 billion. At one point on Wednesday, after its shares started trading on the open market, the Web music company’s value had soared to $4 billion.

And by the end of Thursday, following a 24 percent stock drop, Pandora was worth $2.1 billion.

What happened?

Anyone who can tell you, with a straight face, why Pandora investors bid the stock up one day and crushed it the next is full of it.

But just to be clear: Other than showing up at the New York Stock Exchange to ring the bell and give some interviews, Pandora executives didn’t do a thing to make the company more or less valuable in the last two days. And nothing outside the company affected its intrinsic value, either.

So unless you’re day-trading, Pandora’s temporary gyrations shouldn’t be that interesting. More interesting: What do the company’s next couple years look like? And crucially, what happens in 2015, when the company’s music licenses get reset?

Here’s Pandora CEO Joe Kennedy’s take, via an edited Q&A I conducted with him in the IPO aftermath:

Peter Kafka: Pandora only offers Web radio, which has been great for you because it means you haven’t had to strike individual licensing deals with music labels. But it also limits the service you can offer. Do you think you’ll end up working with the music industry to expand your offerings?

Joe Kennedy: Our focus is on radio. The research indicates that 80 percent of the average American’s music consumption is in radio form. Only 20 percent is CDs, or iTunes, iPod or whatever. We’ve dedicated ourselves to that 80 percent of the market, radio-like listening, serendipitous listening. It leverages 11-plus years of intellectual property, and that really is our focus as a company.

We’re more than happy to leave the 20 percent to Sony Walkmen, iPods, iTunes, iCloud, Rhapsody, MOG, Spotify, you name it.

But a lot of people seem to think of you in the same category as all of those other services, anyway. Is that a good thing?

Consumers do this 80 percent/20 percent thing without thinking about it. I don’t think they’ve ever thought about it consciously.

As far as general commentary about digital music, I think there is a lack of discrimination: “Oh, it’s digital music. Oh, it’s streaming.” By implication, it all meets the same consumer need. I think that will go through increased refinement and precision over time.

But some services are going to end up mashing up different kinds of features, anyway. Google was reportedly trying to offer a cloud locker, and a store, and a Web radio service like yours. You sure you want to stay streaming radio only?

Yes. We’d rather be best in the world at one thing that’s a great big piece of the market than be less-than-best in the world at several things.

The licensing deal you have goes away in 2015, and lots of people think that when that happens, the music industry will insist on extracting every bit of revenue they can from you. You’ll be worth $3 billion and they’ll want to grab $2.9 billion of it for themselves. How do you plan for that?

We operate under Federal statutory licenses. The license mandates arbitration proceedings every five years, and it’s Federally administered. It’s not a negotiated process. We believe that that process will yield an economically reasonable outcome.

So let me translate: What you’re staying is that this isn’t like iTunes, or Spotify, where a label could say, “I don’t want to participate.”

It’s fundamentally different.

And you’re saying that at some point, you’ll have a deal, brokered by a neutral party, and that if it’s at least not fair, it will be equally disappointing for both sides. And that you guys can live with that.

The law proscribes that judges determine the rates at which a willing buyer and a willing seller would meet in a marketplace transaction. No party has the ability to say, “I’m not in.” It is an economic analysis.

You usage is up dramatically, driven in large part by mobile use via Android and the iPhone. But mobile revenue isn’t that big for you. How do you change that?

We generate considerable revenue from mobile. I believe we’re one of the biggest mobile advertising sites in the country. Today, mobile advertising is more nascent than desktop advertising, which took 10 to 15 years to develop, but mobile is growing far faster. Key pieces of the puzzle, like third-party measurement, are just coming in. We’ll benefit tremendously from that.

Radio advertising is local, and you guys are predominantly selling national spots. Are you going to have to ramp up to sell locally?

That’s part of the advertising opportunity. But the vast majority of the biggest national online brands spending money on the interactive market — the vast majority of them already spend money on Pandora. We have the opportunity to take that spending and expand it to mobile. So we don’t see our opportunity limited to one bucket or another. We’re fully legitimately an online player, fully legitimately a mobile player, and fully legitimately a radio player.

Cars are a big part of the bull story for you guys — that at some point you’re going to be competing directly with radio on most people’s dashboards. When does that become a big deal for you?

We’ve had announcements from six of the world’s major automakers — Ford, Toyota, GM, Mercedes, BMW and Hyundai — and they’ve all said “we’re going to integrate Pandora into our vehicles going forward.” Now, the nature of automotive is, it isn’t a flip-the-switch phenomena. It rolls out over several models, over time. And then you have a replacement cycle that’s about 7 years per car. So I think of automotive as a snowball, that starts out relatively small, but builds and builds and builds and builds. You get out to years five to ten, and it’s tremendously big.

So five to 10 years?

The way I’d phrase it is that it starts out relatively small, and snowballs.

And over the next five years, we have the explosion of smartphones. They’re selling at a 15 million per quarter pace in the U.S. alone, 15 million android and iPhones. A good year in the car business in 15 million.

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