At the Frontier of Internet Connectivity: Joe Kennedy (HBS ’85) and Pandora Radio

Music lovers born prior to the advent of the mp3 will remember afternoons spent darting from aisle to aisle in a record store, tenaciously scouring the shelves for a newly released album. And if you know that Circuit City was an electronics retailer and not a municipality outside San Francisco, then you may recall using an in-store kiosk to search for artists based on your musical tastes. If you do, then you remember the origins of Pandora.

Founded in 1999 as Savage Beast Technologies, the internet radio giant began as the humble back-end software that powered the clunky metal stations of woebegone retailers like Barnes & Noble, Borders, and Tower Records. These companies licensed Savage Beast’s discovery engine, known as the Music Genome Project, which codified hundreds of attributes that made up a song’s “musical DNA.”

Joe Kennedy (HBS ’85) joined Pandora as CEO in 2004 at a momentous inflection point in the company’s history. Obituaries were being published for many of its key customers and the bricks-and-mortar industry was beginning to crumble. The company was managing to stay afloat with the help of an $8 million Series B round, but only after it dispersed back-pay to employees who had been working for free.

“We had a dozen credit cards and a pile of eviction notices from our landlord, but the heat worked in the summer and the air conditioning worked in the winter,” Kennedy joked.

Savage Beast founder Tim Westergren believed deeply in the underlying software and recognized that a business-to-business model was not the answer. To help the company move to a direct-to-consumer strategy, he tapped Kennedy, who had relevant experience as the former COO of E-Loan and VP of Sales at Saturn, to “repurpose the intellectual property of the business.” Kennedy recalled the transition:

“The IP was interesting, but the business application was totally wrong. The good news was that sales in stores that had the kiosk technology outperformed sales in stores that didn’t have the technology. But what that really meant was that sales in stores that had the technology declined more slowly. It doesn’t take a Harvard MBA to figure out that you’re not going to build a great business selling into a declining category.”

Since officially launching as “Pandora” in the fall of 2005, the company has become a trailblazer in the new era of digital music. Today, Pandora boasts $427 million in revenue (up from $19 million in 2009) and has more than 750 employees. Sales grew 56% in its latest fiscal year. In June 2011, the company raised roughly $250 million in an IPO, taking the coveted one-letter ticker “P” on the New York Stock Exchange.

Kennedy has been at the helm for the transformation. As a standout Electrical Engineering & Computer Science major at Princeton, he received a scholarship from General Motors that paid for his final two years in college and arranged for internships during those summers. After graduating, Kennedy entered the automaker’s rotational program, spending time both in division headquarters and on the factory floor.

As a byproduct of the rotational program, Kennedy came to realize the value of learning all the aspects of a business, an insight that propelled him to pursue business school.

“Diving deeply but narrowly wasn’t as interesting to me as really understanding all of the facets of a product or a business,” he recalled. “So that led me to think about business school as a way to set myself up for understanding and participating in how you take all of these different facets and make them work well together and achieve optimum results.”

After HBS, Kennedy joined Saturn (a GM subsidiary), where he rose to the top of the Sales & Marketing organization before being recruited away to be COO of San Francisco-based E-Loan. Yet he credits the underlying business education he received at HBS for much of his success at Pandora:

“If you spend years being functionally excellent at marketing, you can’t become a CEO and have all that experience in every other function—engineering, product development, finance, sales, HR. The CEO, the general manager, has to manage areas in which he or she has not spent many—or any—years growing up, and the background of the MBA program at HBS continues to give me that fundamental understanding of all the pieces of business and an awful lot is about how to do you put them together and optimize them.”

As a music lover who played the piano as a child and took a handful of music classes at Princeton alongside his engineering studies, Pandora was the perfect combination of Kennedy’s passions. As he recalled:

“The role at Pandora enabled me to combine a whole bunch of things that I love a great deal, including music and a deep love of computer science and algorithms. There’s a healthy amount of math in what we do. Clearly there is marketing and consumer psychology, and a business in its totality. And so if you circle back to why I went to business school – I liked big multi-faceted opportunities and how you take all the facts and put them all together. Savage Beast presented that opportunity and many of the facets were passions of mine, so it turned out to be a uniquely wonderful fit.”

Despite the company’s success, Pandora has only 8% share of all the radio listening in the United States. That leaves an enormous opportunity to, as Kennedy says, “connect billions of people around the world with the music they love.”

Still, the industry is crowded with competitors, from Apple to Spotify, who are chasing the same market. Despite the challengers, Kennedy remains optimistic about Pandora’s future because he believes the company is positioned at the forefront of internet connectivity:

“Pandora has been successful engaging consumers through devices that are not the desktop or laptop computer. However, I don’t like the term ‘mobile.’ There are two problems with that designation. First, people think about phones, but everything is being connected: your living room, your car, your refrigerator. Second, a lot of the frontier is not mobile. Your refrigerator doesn’t move, your smart television doesn’t move, so the crucial characteristic is not mobility so much as it is ‘everything is connected.’ And this is where we’re focused. The trend is particularly important in our business because the internet is just reaching all of those places where radio has traditionally been consumed.”

As he reflects on his career, Kennedy has the following advice for current MBAs interested in starting their own companies:

“There are many different paths to entrepreneurship. I think sometimes there is this belief that what I need to do is found a company the day I leave business school. But you might not be quite ready to do that, and my career path, while far from standard, illustrates that you can build to an entrepreneurial career and not start by founding a company as you graduate from HBS. There is no right answer. Going and working in a more established company gives you the opportunity to develop the skills and experiences that can be invaluable when you do ultimately found your company. Each individual needs to find and embrace the path that feels right to them.”