Pandora Media Inc. (P)’s online music service is so popular among smartphone users that it’s the most-downloaded free music program on Apple Inc.’s and Google Inc.’s app stores. So far that hasn’t won over mobile advertisers.
Pandora users are listening to more music on Apple’s iPhones and iPads and the devices that run Google’s Android operating system. While more than 70 percent of the service’s usage happens on smartphones and tablets, less than 1 percent of overall U.S. advertising spending is devoted to mobile devices.
Though the company draws larger audiences in New York and Los Angeles than those cities’ biggest radio stations, analysts don’t expect listener growth to translate into annual profit until fiscal 2014. With competition accelerating from music-streaming services Rdio Inc., CBS Corp.’s Last.fm and U.K.-based Spotify Ltd., signs that advertisers aren’t spending much to reach mobile audiences have wiped 11 percent from Pandora’s stock since its June initial public offering.
“They just can’t sell advertising that fast,” said Mark Mahaney, an analyst at Citigroup Inc. (C) in San Francisco, who recommends buying the shares. Users are “shifting so rapidly towards mobile devices, and it’s going to take longer for the monetization to pick up.”
Pandora shares gained 6.3 percent to $14.28 today. Deborah Roth, a spokeswoman for Pandora, declined to comment on the company’s mobile advertising trends.
The Oakland, California-based company is forecast to continue its rapid expansion. The service, which had 23 million active users in fiscal 2011, is projected to grow 21 percent annually and reach 159 million active listeners worldwide by fiscal 2021, Scott Devitt, an analyst at Morgan Stanley in New York, said in an interview. By 2021, users of the service will stream an average 18 hours of ad-supported music each month, up from 13 hours last year, he estimates.
The mobile service has struggled to attract marketers in part because Pandora is creating new types of advertising, blending 15-second audio clips, display ads and video spots. Audio ads on the radio have traditionally been directed to local audiences, while display advertisers are more often national brands. Pandora’s service is multimedia and focused on national and local advertisers, an experiment that most companies aren’t used to.
Short on Salespeople
The company also doesn’t have enough sales representatives to keep up with user growth, and in cities like Miami and Atlanta, it has no salespeople, said Chief Financial Officer Steve Cakebread.
“It’s really tough to grow our sales organization 125 percent year-over-year,” Cakebread said at a Goldman Sachs Group Inc. conference on Sept. 22.
In cities where Pandora has sales offices, including New York, Los Angeles and San Francisco, the company already averages more time with listeners than the biggest local radio stations, Devitt said, citing Pandora-supplied estimates and data from Arbitron Inc., a radio researcher.
Meanwhile, Pandora is subsidizing its mobile business by bolstering advertising on its website. Last month, it added new features including video commercials that command higher rates from advertisers compared with audio spots, Cakebread said. After subtracting licensing costs, revenue from Pandora listeners using computers is nine times higher per hour than from those on mobile devices, Devitt estimates.
Along with the site redesign, the company lifted a 40-hour monthly cap on computer listening, which had required users to pay for a premium service if they wanted more hours. Previously, when the cap was reached, users would switch to listening on mobile devices. Any amount of listening is now free and ad-supported, a change that may add $53 million in revenue in the next four years, Devitt said in a Sept. 23 report. Removing the cap will also result in $11 million less in subscription fees, Devitt wrote.
The company needs that extra cash to deal with another challenge -- a growing field of rivals. CC Media Holdings Inc. (CCMO), the largest owner of U.S. radio stations, last month jump-started its iHeartRadio Internet offering with a series of concerts in Las Vegas. The service, available online and through applications on mobile devices, lets listeners create personalized playlists and listen to its broadcast outlets.
Pandora also faces new competition for listeners’ time from Spotify, operator of Europe’s biggest online music service, which in July began signing up U.S. customers for its ad-supported and subscription plans, and from Rdio, started by a co-founder of Skype Technologies SA, which on Oct. 6 began offering free music without advertising.
The competition has unnecessarily dragged down Pandora’s stock price in recent months, because the service is free, and it has a vast music portfolio and a loyal audience, Mahaney said.
“You’d have to have a dramatically better mousetrap for somebody to switch away from a free service to a $10-a-month service,” Mahaney said in an interview. “The end market is a lot bigger for an advertising-supported model than for a subscription-supported model.”
Morgan Stanley (MS)’s Devitt agrees that it’s just a matter of time before ad dollars follow the users. Mobile revenue for each hour of music provided to listeners will almost double to $40 in 2016, topping the rising costs Pandora pays the record labels to license music, Devitt estimates. He says licensing fees will climb 35 percent to $23 an hour.
Advertising on mobile devices is expected to jump almost 12-fold from last year to $10.5 billion in 2015, compared with a 32 percent rise in overall U.S. ad sales to $328.6 billion, according to IDC data. Pandora is preparing for that surge by putting its service in front of as many music lovers as possible, even if it’s a currently a money-losing endeavor.
Pandora in Cars
Pandora’s lead over traditional radio will accelerate as its service becomes more widely available in automobiles starting with 2012 models, Devitt said. The company has deals with Ford Motor Co. (F), General Motors Co. (GM)’s Chevrolet, Daimler AG (DAI)’s Mercedes-Benz and Bayerische Motoren Werke AG (BMW)’s BMW. Toyota Motor Corp. (7203) said Oct. 6 Pandora will be offered in its newest Camry and Tacoma vehicles. That presents an opportunity for mobile ad growth for Pandora even beyond smartphones.
“Pandora in every car is pretty powerful,” said Josh Felser, co-founder of venture firm Freestyle Capital in San Francisco, who previously sold music startup Spinner.com to AOL Inc. (AOL) “People are still in their cars multiple hours a day and radio is the dominant way they listen to music. Pandora is going to dominate that market.”
Still, to satisfy investors, Pandora will have to make sure that its mobile advertising begins to catch up as smartphone and tablet listening grows and rivals push ahead.
“It’s a challenge for any company blazing a trail in a consumer space,” said Myk Willis, chief executive officer of Deerfield Beach, Florida-based Myxer, a mobile-entertainment company that will offer an Internet radio service this year. “When you’re driving consumer growth in a category that is relatively new, ad dollars always flow slowly into that space.”