Pandora Names Ad Veteran McAndrews CEO as Apple Looms

Pandora Media Inc., the biggest online radio service, turned to digital-advertising veteran Brian McAndrews as its new chief executive officer in a push to boost revenue while fending off competition from Apple Inc.

The shares surged the most in six months. McAndrews was also named chairman and president, succeeding Joe Kennedy, according to a statement yesterday from Oakland, California-based Pandora. McAndrews led digital marketing firm AQuantive Inc., which was sold to Microsoft Corp. for about $6 billion.

With McAndrews, Pandora aims to bolster advertising, which accounted for 88 percent of its $427 million in revenue last fiscal year. While the company dominates Web radio, ad sales haven’t kept up with growth in listeners or royalty expenses, leading to losses totaling $50.9 million in the past three quarters. This month’s entry of ITunes Radio from Apple, already the largest online music seller, will add to the pressure on Pandora.

“That they are getting someone with an advertising background is very good,” Brian Nowak, an analyst at Susquehanna Financial Group, said in an interview.

Pandora advanced 12 percent to $23.97 at the close in New York, for the biggest jump since March 8. The shares have more than doubled this year.

McAndrews, 54, has experience in advertising, entertainment and in building a small company into something larger while taking on bigger competitors.

Entertainment, Advertising

He worked at General Mills Inc. and ABC before taking over Avenue A, a small digital ad agency in Seattle, in 1999. That company grew into AQuantive, one of the biggest online advertising networks matching marketers with websites, as Internet usage took hold in the U.S.

At Pandora, advertising is a big part of the opportunity, McAndrews said in a telephone interview yesterday. He said he expects to draw from his other attributes as well.

“I’d like to think I was also hired because I’m a proven leader and someone who understands how to scale companies,” McAndrews said. “My entertainment background doesn’t hurt either.”

Pandora’s 72.1 million users listened to 1.35 billion hours of programming in August, an increase of 16 percent from a year earlier, according to a Sept. 5 statement. The company’s share of total U.S. radio listening rose to 7.5 percent. Even so, its revenue amounts to a smaller fraction of the annual $15 billion local-radio advertising market.

“A big part of Pandora’s future will be its ability to disrupt traditional radio advertising and its ability to lure those ad dollars,” Nowak said.

Apple Challenge

It’s also got Apple to contend with. The company introduces iTunes Radio on Sept. 18, challenging Pandora’s dominance in Web radio, where rivals include Slacker Inc. and Clear Channel Communications Inc.’s iHeartRadio.

Ahead of Apple’s entry, Pandora removed a 40-hour monthly limit on free mobile listening. The company is also investing in new technologies, products and sales staff to drive continued growth.

The shares fell the most in more than eight months on Aug. 23 after the company forecast third-quarter profit that will miss analysts’ estimates because of the staffing costs.

Kennedy’s departure was announced on March 7. He made the decision after discussions with the board over the company’s future, according to a statement at the time.

Adding Listeners

Under Kennedy, Pandora rapidly increased listeners, eating into the local-radio market with online and mobile products. Second-quarter sales advanced 55 percent to $157.4 million, the company said on Aug. 22. Total expenses, including content acquisition, product development, marketing and overhead, increased by the same percentage to $165 million.

While McAndrews said he helped negotiate rights fees for sports at ABC, he hasn’t been involved in the arbitration proceedings and court battles that govern Pandora’s music royalties.

The company is currently in court as it seeks to limit fee increases. Music publishers EMI Music Publishing Ltd. and Sony/ATV Music Publishing LLC are trying to remove new-media rights from licenses with the American Society of Composers, Authors and Publishers that allow the music to be played.

Pandora filed a lawsuit in November asking a federal court to set “reasonable” fees with Ascap through 2015.

Microsoft bought aQuantive in 2007, trying to catch Google Inc. amid a boom in online advertising. The software maker, based in Redmond, Washington, later wrote down $6.2 billion of the value.

Since 2009, McAndrews has been an investing partner at Madrona Venture Group. His background in venture capital is a positive, said Nowak, the Susquehanna analyst, who recommends the stock.

“That gives him a lot of experience in identifying good businesses, knowing how to sustain and grow a business, and how to build competitive trenches,” Nowak said.

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