In a recent interview with the Washington Post (“When we were small: Pandora“), Pandora’s founder Tim Westergren talks about how they shifted their view on their IP assets and made the company a run-away success:
[Washington Post reporter J.D.] Harrison : During those first few years, what was your revenue model?
Westergren: Our original idea was that we were going to build a technology that we would license out to other companies. So if you were a portal or a music retailer, you could take what we called the Music Genome Project and embed it in your Web site, and that would allow you to help your own consumers navigate catalogues. So we thought of ourselves as a B2B license technology. We chased after that business plan for years, really.
Really, what we were doing was looking for lily pads — someplace to keep us going, some partnership, some sign of progress that would help us raise our next round of financing. So we improvised all sorts of things.
Harrison: When did you pivot to the personalized music streaming service?
Westergren: In 2004, we raised our second financing round, and when we did that, we basically had the time to hit the pause button and say, “Okay, we have this Music Genome Project, this really big piece of intellectual property, but we haven’t figured out the business model yet. Let’s sit down and figure out what we want to do with this thing.” What we realized was that radio was a healthy part of the music industry, and lo and behold, this thing we had been building was perfectly suited to personalized playlists. So we peeled off a team of engineers and built what we called One Click Custom Radio.
In other words, Pandora went for an external monetization model (i.e. developing IP for others to use) to an internal monetization model (i.e. operating using its own IP).
The lesson I take away from this: your IP is only as good as there is someone willing to use it.