Tech

Pandora's strategy to fend off competition

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Pandora's co-founder has returned with an unlikely goal: to create a company that makes money for both musicians and Wall Street, he told CNBC's "Squawk Alley" on Thursday.

One of the first popular online music-streaming companies, Pandora has faced consuming pressure in the past decade as tech titans craft their own competing services.

Co-founder Tim Westergren believes that Pandora, unlike competitors, has a "magic" narrative that captures the sensibilities of both investors and musicians. And as an entrepreneur and former musician who is now the company's CEO, he said he's the one to tell it.

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"We are in a position to really align with the music industry, frankly," said Westergren.

Westergren said he plans to be "very externally engaged as the CEO," speaking frequently with the music industry, Wall Street and advertisers.

"I think we can build a business that's successful, that's actually also driving value for musicians," Westergren said.

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Westergren was summoned back to lead the company as share prices tumbled and profits dwindled. Shares of Pandora were down 41 percent year over year as of Westergren's March 28 return.

Since then the company has been on a path to expand its use case beyond radio to include tools like concert ticket purchases and customer interactions with musicians. Direct relationships with artists could be key going forward, said John Kellogg, assistant chair of music business management at Berklee College of Music, on CNBC's "Squawk Alley" Friday.

"Pandora has made, like, a complete 180 in terms of how they treat artists," Kellogg said. "They were trying to get out of paying higher royalties for a long time, over the past two or three years. So for them to enter into direct deals with publishers indicates that they are trying to smooth out their relationships with artists, because the artists are really going to be in control."

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Even for a company with 100 million users every three months (about 10 percent of all radio listening in the U.S., according to Westergren), Pandora's plan is not without its challenges. Shares of Pandora are still down more than 37 percent year over year.

Rival Spotify saw revenues gain 80 percent in 2015 but fail to turn a profit, Reuters reported, as musicians like Taylor Swift decried declining royalty rates. Kellogg points to Beyonce's video album as an example of the power artists will have in the future.

With everyone from Amazon to Apple now promoting music streaming services, activist investors at hedge fund Corvex have urged Pandora to consider selling the company rather than pursue what they told Reuters was a "costly and uncertain business plan." Subscriber bases simply haven't reached the proper scale, around 100 million paid subscribers, to expand profits past royalty rates, said Kellogg. Scale would let dominant players increase their monthly charges, Kellogg said.

"We made a decision to go more aggressive and expansive this year, but if we hadn't made that move, the core ad-supported radio product would have generated $60 million or so in profit," Westergren said. "That kind of sets us up really to participate in the market in a much more healthy way."