The “Business Model Later” Approach

I read a Peter Whoriskey Washington Post article on web radio provider Pandora this weekend that had me shaking my head. The company has over one million users and is one of the most popular iPhone applications, but it may have to cease operations:

http://www.washingtonpost.com/wp-dyn/content/article/2008/08/15/AR2008081503367.html

Pandora founder Tim Westergren admits the company isn’t making money, and is looking to Congress for help:

“We’re losing money as it is,” said Westergren, a former acoustic rocker. “The moment we think this problem in Washington is not going to get solved, we have to pull the plug because all we’re doing is wasting money.”

The article claims the problem is a change in royalty formulation, but I came away thinking the problem is deeper than that specific issue. It seems to me the company made some cool technology available online, without any clear idea of what the business model might be for the service they were introducing.

Pandora is far from alone in its predicament. Facebook has been the darling of business media since Microsoft’s investment last year gave them an estimated valuation of $15 billion. But last month CFO Sheryl Sandberg said growth comes first, and then they’ll worry about monetization, as reported by Stefanie Olsen of CNET:

Our focus is on growth–we believe this is the moment people are joining social networks,” Sandberg said here at the Fortune Brainstorm Tech conference, a three-day gathering on technology and media. “Then it’s monetization to support that growth.” http://news.cnet.com/8301-1023_3-9996796-93.html

I have seen this atmosphere before, up close and personal. Back in the early days of online advertising I was running communications at Advertising.com, now part of AOL/Time Warner. The mantra from the market was growth, not profitability. So we focused on getting big fast. But at least we had an established business model based on advertising — a proven one that translated well from the publishing world. So when the stock correction/crash of April 2000 hit, it was possible to trim our sails and focus on profitability.

After reading the Post piece, it seems like Pandora just didn’t think the economics piece through before launching. Wouldn’t you expect there to be legal issues since you’re making copyrighted material available? And wouldn’t you expect opposition from satellite and over the air radio — since when have entrenched business interests been easy to dislodge?

Compare Pandora’s approach to that of iTunes. Love or hate Steve Jobs, there’s no doubt Apple had a very clear idea of the business model before they launched iTunes. It has totally changed music consumption, restored the viability of the single and will eventually foster a conduit from performer straight to consumer. I found an excerpt from North Carolina State Professor Michael Rappa’s “Managing the Digital Enterprise” iTunes case study that states it very well:

Obviously there are many components. There’s the brilliant software and beautiful hardware, all tied up together with the content. But it was the business model which, I think, provides the glue that holds all this together, and makes it profitable for Apple to maintain sustainable business. So as we look deep into iTunes, one of the things that we see right away is just a kind of creative ferment, in terms of the ever expanding amount of content, not just along the trajectory of more and more songs. Yes that’s true. But through a kind of variety of other kinds of content, and through some of the kinds of tools that we’ve seen before, in terms of things that help customers both find what they’re looking for, find things they’re not looking for, and to kind of pull together a wider opportunity, in terms of helping the music consumer find and purchase music.

Another key element in this overall strategy was to strike an agreement with music distributors, the major music distributors, as well as hundreds of independent music publishers, to more or less tag song purchases to a kind of anchor 99¢ per download, getting it under that psychological $1.00 point that just, I think, is locked in people’s minds as a kind of fee anchor point, in terms of people’s spur decisions to purchase and enjoy music. It’s just really two facets: one, bringing it down to such a low price by being able to download individual songs, in a sense now unbundling the notion of an album or CD as an entire work that one would have to pay $12.00, or $14.00, or $15.00 or more, and two, having a motivation maybe to buy a single song, or one or two songs by an artist.

http://digitalenterprise.org/transcripts/itunes_tr.html

For the record, I enjoy using Pandora and totally understand the appeal of cool technology, distinct from any profit motive. Private firms are sometimes better able to invest in technology, since they are not subject to the quarter by quarter scrutiny of public companies. And if you have your own money, you can dabble all you want — see Google, and Paul Allen. But popularity isn’t automatically going to morph into profitability all by itself.

Westergren decided to take VC money, which means he had the responsibility to figure out how Pandora could become a sustainable business. Shame on them or shame on him, I don’t know. But now he seems to be throwing up his hands:

“We’re funded by venture capital,” he said. “They’re not going to chase a company whose business model has been broken. So if it doesn’t feel like its headed towards a solution, we’re done.”

The question is — was it broken, or not there to begin with?