Ernst and Young Case Competition

1. Purple & GOLD C O N S U L T I N G Cameron Chinn Venkat Rao Elaine Raymond Vance Roush

2. Objective Goal Position Pandora to create new revenue streams and refine existing ones, for long-term sustained growth NPV = $11,195,609 Purple &GOLD C O N S U L T I N G Situation Analysis Strategy Action

3. Introduction Situation Purple &GOLD C O N S U L T I N G

4. Problem Purple &GOLD C O N S U L T I N G Situation Analysis Action Strategy Conclusion Analysis

5. Industry Potential 300K Subscribers 48M Users Purple &GOLD C O N S U L T I N G Increasing Partners and Venues In 2008, Pandora built an iPhone app that let people stream music. Almost immediately, 35,000 new users a day joined Pandora from their cellphones, doubling the number of daily sign-ups At the end of 2009, Pandora reported its first profitable quarter and $50 million in annual revenue — mostly from ads and the rest from subscriptions and downloads. Revenue will probably be $100 million this year, said Ralph Schackart, a digital-media analyst at William Blair. Situation Analysis Action Strategy Conclusion Analysis

6. Broad Competitive Landscape Purple &GOLD C O N S U L T I N G Situation Analysis Action Strategy Conclusion Analysis

7. Competitive Options Purple &GOLD C O N S U L T I N G Proven that consumers prefer Music Genome Project (recommendations from music experts) over community generated recommendations Situation Analysis Action Strategy Conclusion Analysis

9. Home Entertainment-Cars Ad Partners Purple &GOLD C O N S U L T I N G New Revenue Stream New Revenue Stream Subscription Revenue Ad Revenue MAXIMIZE Situation Analysis Action Strategy Conclusion Analysis

10. Situation Analysis Purple &GOLD C O N S U L T I N G

11. Strategy Options Purple &GOLD C O N S U L T I N G Situation Analysis Action Strategy Conclusion Analysis

13. Revenue Generation

14. Increase in Brand Value

15. Legal Barriers

17. Pandora Video

18. Pandora International

19. Refine Current OfferingsC O N S U L T I N G Situation Analysis Action Strategy Conclusion Analysis

20. Framework Analysis Purple &GOLD C O N S U L T I N G Situation Analysis Action Strategy Conclusion Analysis

21. GE Analysis Open Mic Pandora Intl Pandora Video Refinement High Payoff Purple &GOLD C O N S U L T I N G Low High Low Feasibility Situation Analysis Action Strategy Conclusion Analysis

22. Analysis Strategy Purple &GOLD C O N S U L T I N G

23. Overall Strategy Pandora needs Long-Term Sustainable Growth Model  Ad revenue and hopeful subscriptions not enough Short-Term Strategy “Open Mic” Platform Long-Term Strategy Refinement is sustainable Record Label Product extension around valued artists Purple &GOLD C O N S U L T I N G Situation Analysis Action Strategy Conclusion Analysis

24. Refinement Lower Time Limit 20-40 hours a month 11.9% of users 21% of hours No direct revenue from users Annual Cost Savings = $586,000 First continuance payment at 20 hours Purple &GOLD C O N S U L T I N G Situation Analysis Action Strategy Conclusion Analysis

25. Refinement Watch Advertisement / Payment Continuance fees: Watch extended ad Pay continuance fee 20 hrs - watch 1-min commercial or pay $.25 40 hrs - watch 2 1-min commercial or pay $.99 Revenue from video advertisement is $90 per 1000 views Purple &GOLD C O N S U L T I N G Situation Analysis Action Strategy Conclusion Analysis

27. Subscriber to enter

28. 250,000 new subscriptions over 3 years = $9,000,000

29. Registered to vote

30. $10 per song

31. Projected participation:

32. Myspace music pages = 8 million

33. Year 1 = 200,000 songs submitted

34. Year 2 = 300,000 songs submitted

35. Year 3 = 500,000 songs submitted

36. Available for listening/voting for one weekPurple &GOLD C O N S U L T I N G Situation Analysis Action Strategy Conclusion Analysis

38. Potential heard by 50 million listeners (1/6 of the US population)

39. Your own channel

40. Weekly “Winner’s Spotlight”

41. Download the song

42. Become part of Pandora’s music library

43. Set-up

44. Top ten songs listed on home page

45. See all page

46. Searchable by genre, region, artist

47. Thumbs up, thumbs down

48. Fits with Music Genome Project (Core Competency)Purple &GOLD C O N S U L T I N G CROWD-SOURCING Situation Analysis Action Strategy Conclusion Analysis

49. Purple &GOLD C O N S U L T I N G Situation Analysis Action Strategy Conclusion Analysis

50. Joe Guitar18-34 aspiring musician 8M Myspace Music Artists Purple &GOLD C O N S U L T I N G Situation Analysis Action Strategy Conclusion Analysis

52. Ability to gauge where concerts would be on demand and what demographic to target

53. Data to track most popular music trends

54. Established Distribution Network

55. Market Potential: Indie Market

56. The global music market is approximately $40 to $48 billion

57. 30% of the global music market belongs to indie labels ($12 to $16 billion)

58. Internet sales in 2004 account for 6% of overall units soldPurple &GOLD C O N S U L T I N G Situation Analysis Action Strategy Conclusion Analysis

59. Competitor Reactions Open Mic There may be imitation, but Pandora will have the first mover advantage Indie Online Record Label  Competitors may start their own record label, but Pandora has a larger user base in the US, therefore more potential fans than the competition Purple &GOLD C O N S U L T I N G Situation Analysis Action Strategy Conclusion Analysis

60. Strategy Action Purple &GOLD C O N S U L T I N G

61. Financials Revenue Assumptions Purple &GOLD C O N S U L T I N G Situation Analysis Action Strategy Conclusion Analysis

62. Financials Cost Assumptions Purple &GOLD C O N S U L T I N G Situation Analysis Action Strategy Conclusion Analysis

63. Financials Purple &GOLD C O N S U L T I N G NPV = $11,195,609 Situation Analysis Action Strategy Conclusion Analysis

64. Timeline Launch ‘Open Mic’ Evaluate Feasability of Online Record Label Implement Video Ads Purchase TV ads on MTV Purple &GOLD 2011 2012 2013 C O N S U L T I N G Performance Analysis of Initiatives Web Still Ads on Facebook & MTV.com Purchase Web Video Ads on Hulu Purchase Ad Banners at Concert Venues Situation Analysis Action Strategy Conclusion Analysis

65. Action Conclusion Purple &GOLD C O N S U L T I N G

67. Free to use online

68. User friendly interface

69. Portable option

70. Complex user interface

72. Widespread use

74. Subscription fee

76. Portable

77. Cost per individual song

78. Many alternatives

80. Song search capabilityDigital Downloads

82. Increasing user referrals

83. Growing subscription rates Pandora begins to expend resources on advertising, resulting in: Revenue by Source 200720082009201020112012 200720082009201020112012 Advertisements Subscriptions 500% growth in user base over 5 years increases revenue over tenfold. Expected Financials Revenue and EBIT Background | Market | Competition | Business Model | Financials| Exit Strategy

84. Financial Calculations

86. CPM $10-50 based on type of advertising package

87. Users go on 2-3 times per week for 2-3 hoursIncrease in user acquisition rate based on continuation of viral growth and implementation of direct advertising and new products. Revenue sources divert from advertisements to subscriptions. While ad revenue continues to rise, its rate of growth decreases as number of users increases. Percent of Overall Revenue for Each Source in a Given Year

88. Market Trend Calculations (Cont.) 37.56% Increase of Broadband users increase per year 39% of Internet users use Streaming Audio x 37.56% Increase of Broadband users increase per year 14.5% of Internet users use Streaming Audio

89. All Competitors

91. http://www.fabchannel.com/

92. Online Concert Archive

93. Very Popular in Europe

94. BUT record labels hurting

95. Hesitant to make any deals with strictly web companies

96. Radio vs Online Radio Dichotomy

98. 20% are coming directly from Pandora’s iPhone app, which includes an easy link to open the iPhone’s iTunes app, and buy a track.

99. Another feature driving affiliate sales is the bulk music purchase option. This allows you to bookmark songs on Pandora, and with one click buy them all on either iTunes or Amazon.

102. Biggest boost – embedding Pandora in automobiles

103. Ford, Alpine and Pioneer are three companies that are going to be putting Pandora inside their cars and automobile music systems, respectively.

104. The service will piggy-back on 3G wireless connections on the latest generation of cell phones.

106. Fired Customers “Fired” Customers 35% choose not to watch commercial or pay >40 hr users are subscribers or pay So, 20-40 users are most unprofitable 35% of 20-40 hr users = 666,400 users Only 4% of total users, but save royalty costs

107. Risks Watch ad v. pay Users don’t pay or watch Deters users from site Open Mic Lack of participation in contest Lack of new users/subscribers Advertising costs exceed budget Lack of awareness Quality control