Value Line has initiated coverage of Pandora Media (P), an Internet music service that offers listeners personalized music streams. The company describes its service as a new form of radio in which the intrinsic qualities of music are used to create stations that are then adapted to playlists in real-time based on the individual feedback of each listener. Essentially, the company takes a listener’s preferences and streams music that a proprietary algorithm predicts that he or she will like. The Pandora service is primarily a free service, supported by advertising, though there are subscriptions available.

The company was incorporated in California in January 2000 as TheSavageBeast.com. In May of that year it changed its name to Savage Beast Technologies Incorporated. The Pandora Media name didn’t come into play until July 2005, when the company launched the Pandora service. In December 2010, the company became a Delaware corporation via a merger with a wholly owned Delaware subsidiary. The company’s initial public offering took place on June 15, 2011.

The Pandora service has over 90 million registered users who have created over 1.4 billion “stations”. The company claims to have a 50% share of all Internet radio listening time among the top 20 stations and networks in the United States. Although the exact details of the company’s market position is subject to debate, its prominence in the space is not—Pandora is one of the best recognized outlets for those seeking to listen to music over the Internet.

The Pandora service launched in 2005 and builds off of the Music Genome Project. The Music Genome Project is a music database built by a team of musicians and so-called “musicologists” containing an analysis for each song in the company’s database. The company’s song database contains over 800,000 songs from over 80,000 artists. Up to 450 attributes for every song in the company’s collection are used to capture the “fundamental musical properties” of each recording.

When a listener enters a single song, artist, composer or genre to start a “station,” a process the company calls seeding, its mathematical algorithms combine the “genes” (attributes) cataloged by the Music Genome Project with individual and collective feedback to suggest songs and build a personalized playlist. The end result is a personalized “radio station.”

The Pandora service is available through a variety of channels, including computers, smartphones, and consumer electronics made by companies such as Sony (SNE) and Panasonic (PC). The company also has relationships with automobile manufacturers and suppliers with the goal of offering the Pandora service to automobile buyers.

Although the company offers subscription services, it primarily derives its revenues from advertising. On this front, it offers advertisers three main tools: online display, rich media and video, and mobile and broadcast radio. One of the benefits of Pandora’s offerings is that it allows advertisers to interact with listeners in a way that simply isn’t possible through traditional radio media; for example, an advertiser can combine audio ads with rich display ads. Moreover, because the listeners are not anonymous, advertisers can reach individual listeners based on age, gender, zip code and music preferences. Further increasing the desirability of Pandora’s offerings to advertisers is that campaigns can be more closely monitored than with traditional radio, since there is often an immediate and trackable call to action.

Since the bulk of the company’s revenues comes from advertising, Pandora’s biggest asset is its subscriber base, which has grown primarily by word-of-mouth. This growth has been supported, we suspect, by the ability of users to customize their own music feeds and, perhaps more important, to provide feedback to help improve the service for themselves and others. This provides a sense of community and ownership. The organic nature of the company’s subscriber growth has allowed it to build its brand with minimal marketing expenditures. At some point, continued growth will likely require more outreach, which could be a burden on results.

Importantly, the company has been able to leverage its traditional computer-based service to build a large mobile audience. The company highlights that, in January 2011, Apple (AAPL) noted its Pandora app as the number two all-time downloaded free iPhone app and the number one all-time downloaded free iPad app. Mobile advertising has been touted as one of the most vital frontiers in the advertising space, which clearly makes Pandora’s subscriber base desirable to advertisers.

The company’s success hinges on its ability to increase its subscriber base and sell advertising space on its service. In order to increase subscribers, the company intends to continue expanding its song library and expand geographically. In addition, Pandora is looking to expand beyond music to such content as comedy, sports, talk, and news. In May 2011, for example, it began offering comedy stations that can be personalized to each listener's tastes.

Assuming that it is successful in increasing the size of its database, advertisers should find using its marketing tools appealing. Still, it must adapt with the advertising market, incorporating the currently favored models into its own offerings. Of course, Pandora must also continue to adapt with technology, offering its services on as many new and existing media devises as possible.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.