It only took three acts of Congress to save Pandora
The next time you’re feeling down about the prospects of your startup succeeding, remind yourself that it took three acts of Congress to save Pandora. CTO Tom Conrad told the audience at last night’s Las Vegas PandoMonthly fireside chat about the against-all-odds survival saga, calling the “royalty story” the lowest moment of his 10-year journey with the company.
For Pandora and other digital music companies, the royalty rates paid to music rights holders are the make or break factor in their business. Pay too much and the company will go bankrupt. Pay too little, and the music industry will revolt against you. Pandora has encountered both outcomes, at times simultaneously, despite the obvious contradiction.
At the time of Conrad’s story, Pandora had what’s called a compulsory music license agreement, which allowed the company to play non-on-demand music, much like a terrestrial radio station, for a fixed rate royalty. The compulsory license royalties were created by federal law, meaning that renegotiating these royalty agreements – something that all parties involved wanted desperately – required Congress to take up the cause.
“It was about creating a window wherein Pandora and other Internet radio services were even allowed to renegotiate a license after this [compulsory license] ruling,” Conrad says. “The way the law works, there was no system to allow for that.”
It quickly became evident to Pandora that it wouldn’t be able to negotiate with the the music industry independently. Instead, it needed to join forces with all of its direct competitors (other Internet radio services like Last.fm), as well as anyone in the digital music business who might one day wish to offer an Internet radio service, and attempt to work collectively to find a solution to this “shared” problem.
We didn’t have the same set of parameters that we were optimizing for on our side of the table. At the 11th hour, the deal fell apart, because of someone on our side of the table. I remember it being like 10:00 at night. We had two hours, and we thought if we could build a coalition of pure play Internet radio providers, then maybe we could negotiate a license.
I remember it like it was yesterday, the clock turning midnight and we hadn’t pulled that coalition together. It was gonna take another act of Congress, a third act of Congress to open up that negotiating window. I felt like we’d let down our team in Washington so badly that they would be disinclined to do so.
Pandora, of course eventually made out the other side of this regulatory and forced-cooperation gauntlet, and today is a $6.7 billion public company whose stock is up 200 percent over the last 12 months.
Co-founder and Chief Strategy Officer Tim Westergren told an equally mind-numbing story in which he and his co-founders had 11 maxed out credit cards, were $500,000 in personal debt, were on the verge of being evicted, and had not paid the company’s 50 employees in nearly two years before finally raising a Series B round of funding. Both accounts provide a dose of perspective for what it really takes to build an “overnight success.”
Elon Musk may have summed it up best when he said, “Being an entrepreneur is like eating glass and staring into the abyss of death.”