Pandora Media Files IPO to Raise $100 Million for Web-Based Music Service

Pandora Media Inc., the biggest Internet-radio company, plans to raise as much as $100 million in an initial public offering, aiming to capitalize on its growing audience and renewed demand for dot-com investments.

Morgan Stanley, JPMorgan Chase & Co., William Blair & Co. and Stifel Nicolaus Weisel will handle the IPO, Pandora said yesterday in a filing with the U.S. Securities and Exchange Commission. The Oakland, California-based company didn’t say how many shares it would offer or at what price.

Founded in 2000 by Tim Westergren under the name Savage Beast, Pandora’s ad revenue surged over the past two years as its music application became one of the most popular on Apple Inc.’s iPhone and Google Inc.’s Android devices. Sales more than doubled to $55.2 million in the year ended January 2010 and then jumped to $90.1 million in the first three quarters of the following year. The service has more than 80 million users.

“They are almost a household name at this point,” said Brian Zisk, co-founder of the Future of Music Coalition, a Washington-based nonprofit that advocates for artists. “The whole concept that you can go out and have an IPO as an Internet music company is a great thing.”

Pandora followed Freescale Semiconductor Inc. in filing for an IPO yesterday. Freescale, a maker of chips for cars, phone networks and consumer devices, plans to raise $1.15 billion --an amount that would make it the biggest U.S. technology IPO since Google in 2004.

‘Clearly Optimistic’

More Internet companies also are moving toward IPOs. LinkedIn Corp. announced plans last month to raise $175 million in an offering. HomeAway.com Inc., the vacation-rental website, is choosing bankers for an IPO, people with knowledge of the plans said this week. And the daily-deal site Groupon Inc. is in talks with banks about going public, people familiar with the matter said last month.

“Management and their investors are clearly optimistic about IPO prospects this year,” said Lise Buyer, principal of the IPO advisory firm Class V Group. Pandora is “a highly regarded consumer brand, which certainly could help with the deal marketing.”

The company’s growth has helped bring it closer to profitability. Its net loss for the nine-month period ended in October was $328,000, compared with $18.6 million in the year- earlier period.

Ad-Supported

Pandora offers its service for free and makes most of its money by selling advertisements to marketers such as Hallmark Cards Inc. and MillerCoors LLC, which target users based on age, gender, home ZIP code and musical taste. The company generates more than 86 percent of its revenue from ads, though it also has a subscription for users who prefer to pay for an ad-free service.

As more music goes online, Pandora faces increased competition from companies such as CBS Corp.’s Last.fm, as well as startups like Slacker Inc., Spotify Ltd. and Rdio Inc. Apple, Facebook Inc. and Google could offer competing services in the future, Pandora said.

The company also said in the filing that its auditor has identified “material weakness” in the way it handles financial reporting. The company said it’s working to remedy the concerns.

Top Investors

Pandora’s biggest shareholder is venture firm Crosslink Capital in San Francisco, which owns 23 percent of the company. Walden Venture Capital, also in San Francisco, owns 19 percent, and Menlo Park, California-based Greylock Partners controls 14 percent. Westergren owns 2.4 percent, and Chief Executive Officer Joseph Kennedy has 2.7 percent.

Earlier this month, the company added former News Corp. President Peter Chernin and former Netflix Inc. Chief Financial Officer Barry McCarthy to its board.

Pandora’s IPO marks a recovery from the brink of bankruptcy. In 2007, a ruling by the U.S. Copyright Royalty Board increased song royalty rates -- a cost the company struggled to absorb. Westergren lobbied the government to allow the rates to be renegotiated, saying Pandora would go out of business without the change.

New terms were reached in July 2009, when online-radio companies agreed to pay a per-song royalty or 25 percent of revenue, whichever is greater, for music they stream. The money is paid to SoundExchange, a nonprofit group for music labels.

From its early days as a song-recommendation site, Pandora has remade itself as a top Internet service, said David Pakman, a New York-based partner at venture capital firm Venrock Associates and the former CEO of digital-music company EMusic.com.

“It’s a great service, an important Internet brand, and a company that has made a great transformation over 10 years,” Pakman said in an e-mail.

To contact the reporters on this story: Ari Levy in San Francisco at alevy5@bloomberg.net; Adam Satariano in San Francisco at asatariano1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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