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FILE -- Pandora Internet Radio CEO Joe Kennedy, left, and CSO and founder Tim Westergren pose for a photo in the headquarters in Oakland, Calif., on Thursday, Dec.16, 2010. (Ray Chavez/Staff)

OAKLAND -- Pandora's milestone announcement last week of a $100 million initial public stock offering wasn't always in the online music company's plans.

Just three years ago, the Oakland-based firm was in big trouble. Because of exorbitant royalty fees, Pandora was forced to pay -- and founder Tim Westergren was ready to empty the desk drawers and close shop.

"It was by far our largest costs, and drove the business to the point where we were literally having a meeting about (pulling) the plug because we had no way to get into the black," Westergren said in an interview in December.

Unlike conventional radio stations, Pandora was in a classification in which it had to pay several cents per hour, per listener.

"With the amount people listening, the amount was astronomical," said Joe Kennedy, Pandora's chief executive officer, in December.

In a last-ditch attempt, the company turned to its die-hard listeners and asked them to pressure Congress to step in and address the situation that threatened all online radio websites.

Because subscribers include ZIP codes when they register, Pandora was able to e-mail listeners with information on their congressional districts. The result was more than 1.7 million Pandora users reaching out to urge Congress to level the playing field with broadcast radio stations.

"It was "... a grass-roots opposition that we formed that made it possible to reach an agreement that reduced the royalty rate and made it possible for Pandora to stay in business," Kennedy said.


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Pandora now has 80 million registered users and has delivered 3.9 billion hours of music to listeners in its past fiscal year, according to the company, which is on track to post more than $100 million in annual revenue.

However, it has been a long journey. Pandora was founded in January 2000 by Westergren, who initially created the company as a recommendation tool. As a musician himself, he wanted to see if someone like him could be noticed in a "sea of invisible artists."

Using a system called the Music Genome Project, a formula was developed where hundreds of attributes in a song were analyzed and recommended to customers based on previous songs they liked or disliked.

"For musicians, we offered this incredible opportunity where an unknown artist from a small town had a chance to play right next to Bruce Springsteen in a play list," Westergren said.

In 2004, Pandora made a strategic revision and decided to go after a radio format where an intelligent play list was composed for subscribers and advertisements would be built in. The result attracted advertising revenue from companies such as Nike, Procter & Gamble, and Hewlett-Packard.

However, the tipping point for the company came in 2008, when smartphones such as iPhone became popular.

"On the day they launched, we almost got redefined over night," Westergren said. "With people able to hook their phones up to a car dashboard or to their stereo, we changed from not just being a radio on a computer but a radio."

Pandora also has partnerships with several automakers, including Ford, to provide its application integrated into the automotive music system.

In its IPO filing, the company reported $90 million in revenue for the three quarters that ended Oct. 31 and a loss to common stockholders of $7 million.

Rob Enderle, analyst with the Enderle Group, said that Pandora has a decent chance to succeed.

"Pandora has been popular for a long time, and they have a pretty decent audience," he said. "It's an established company. They are not a fly-by-night operation."

Bay Area News Group staff writers George Avalos, Brandon Bailey and Mike Swift contributed to this report.