By Chris Castle

Some say we have vigorously attacked Pandora over the years, some would read those same critiques and say we were just being honest.  Maybe the cliched “brutally honest.”

Now it looks like we were not the only ones–in a very readable letter from Corvex Management’s managing partner to the board of directors, Corvex, as Pandora’s biggest stockholder, has gone on the record with a very well-reasoned critique of the company, its executive team and their business decisions.  Decisions, we can now determine, were largely made without input from the board and stockholders.

This is important to artists, songwriters, record companies, publishers and unions because Pandora is the largest user of the statutory license administered by SoundExchange.  The crappy rates delivered by the out-of-control Copyright Royalty Judges essentially creates a government mandated forced investment in Pandora’s future by the creative community.  An investment compelled by the government but without the rights of an investor.

If Pandora’s alleged management has lost the confidence of its largest stockholder, this bodes ill for the rest of us who are de facto investors in Pandora.  As usual with all tech companies, you have to ask yourself whether you would feel the same about a particular deal or result if Pandora were owned by Google, Apple or perhaps even Spotify.

Music Business Worldwide summarized the letter:

In a deeply unimpressed letter to Pandora CEO Tim Westergren (pictured) and his board of directors, Corvex Managing Partner Keith Meister lays out a number of issues about the streaming business’s direction, including:

A concern that Pandora is “pursuing a costly and uncertain business plan, without a thorough evaluation of all shareholder value-maximizing alternatives”;

“Questionable capital allocation decisions”. The $450m paid for Ticketfly last year comes particularly under fire, as does the timing of Pandora’s recent convertible debt issuance;

The fact that senior management only own small equity stakes. Even Tim Westergren, Pandora’s founder, only owns 1.8% of the business;

Talking of Westergren, Corvex is “surprised” that the exec was named CEO following the departure of Brian McAndrews in March. The firm says it was not consulted about the appointment of Westergren, and that his recent statements “suggest an unwillingness to consider a sale regardless of the price offered to shareholders or the cost and uncertainty inherent in a standalone business plan”;

Concern over Pandora’s recent spate of costly direct deals with rights-holders, the precursor to launching an on-demand Spotify-like service;

The company’s “poor absolute stock price performance, stock price underperformance relative to the market, and stock price underperformance relative to industry peers”;

The issue of small equity stakes held by senior management is of particular interest.  As he has often been criticized, Tim Westergren has been cashing out his Pandora shares at an average of $1,000,000 a month for years (which explains the 13 bathroom house).  I don’t begrudge anyone who has worked as hard as Tim to get a payday but–he is the one who wanted to be CEO.  When your stockholders have watched you get rich while your stock price drops like a hot rock, expect some criticism.

The Ticketfly deal was another brain-dead move reminiscent of the dot bomb era–it’s what people do who have a lot of money and don’t really understand the business they are in.

Most importantly, Bloomberg reports that “Pandora had hired Morgan Stanley to explore strategic options, according to people with knowledge of the matter. Westergren, however, has said the company is better off independent.”  I would take that to mean that Morgan Stanley is out.

Corvex was unimpressed:

We have become increasingly concerned that the company may be pursuing a costly and uncertain business plan, without a thorough evaluation of all shareholder value-maximizing alternatives.  For the reasons set forth below, we urge the company to immediately engage an independent investment bank with a fresh perspective and without any prior history of advising the company to advise on a value maximization process – including the execution of a sales process – and to evaluate the results against other options including the risk-adjusted value of continuing to operate on a standalone basis.

HINT: When your biggest stockholder sends you a letter and puts a paragraph in bold and underlined text, they want to get your attention.  This falls into the category of “remember when we take over the company and fire your asses, we asked you nicely first.”

Here’s another one:

Exacerbating the situation, Mr. Westergren’s public statements after his appointment as CEO appear to indicate a “business as usual” approach at best, while at worst they suggest an unwillingness to consider a sale regardless of the price offered to shareholders or the cost and uncertainty inherent in a standalone business plan….

“Being CEO is like managing my band. It’s got all the same things. The chances of success are almost zero. It’s a creative endeavor with lots of artistic differences. You’re poor as s***. You’ve got financial stress. It’s the same thing.”

“That’s the frame that we bring to this. This is something that your average musician can use. And if it’s not, then it’s a waste of f****** time. It’s another product built by some software engineer or a music fanatic who doesn’t know what it’s like to be an artist.”