Why Can't Pandora Score Mobile Ad Dollars?

In today's world of mobile advertising, being the most popular just doesn't cut it like it used to.

A Bloomberg report from yesterday is shedding some dim light on Pandora Media's (NYSE: P  ) advertising revenue prospects. It mentions that Pandora users are migrating en masse to mobile platforms like Apple's (Nasdaq: AAPL  ) iOS and Google's (Nasdaq: GOOG  ) Android. That bit shouldn't be news to anyone; the real shocker is that more than 70% of Pandora usage is delivered via smartphones and tablets, yet less than 1% of overall U.S. ad spending goes to mobile.

Competitors are storming the music streaming business. Rivals include Europe's Spotify, which made a big splash when it crossed the Atlantic, as well as music-based social networker Last.fm, which was bought by CBS (NYSE: CBS  ) in 2007 for $280 million. Clear Channel (OTC BB: CCMO.PK) also recently revamped its iHeartRadio mobile app.

Pandora and Spotify are both also trying to hitch a ride home with you. Pandora hooked up with Toyota (NYSE: TM  ) and Spotify is going steady with General Motors (NYSE: GM  ) . Think there's still room in the backseat for Sirius XM Radio (Nasdaq: SIRI  ) ?

Pandora's first earnings release as a public company mostly went well in terms of revenue growth, which jumped 117%. The problem I've always had is that content acquisition costs – the company's largest cost component -- continue to grow faster than revenue, rising 130% last quarter. Additionally, income from operations shrank by 42% despite the revenue gains.

The mobile market is evolving so quickly that it will take time to monetize the trend. According to research firm IDC, mobile ad spending is set to reach $10.5 billion in 2015, compared to overall ad sales of $328.6 billion. One reason that Pandora's ad growth has been sluggish is that the company has struggled to grow its sales force as quickly as its user growth.

As much as I love using the service, I hate the idea of investing in Pandora. I have no problem with companies being unprofitable in the early years, but there has to be hope that the company can overcome the money-losing hump eventually. In this Fool's opinion, even if Pandora does start putting up black ink, content acquisition costs will keep net margins razor-thin and the risks outweigh the potential rewards.

Add Pandora to your Watchlist to see if it ever becomes profitable.

Fool contributor Evan Niu owns shares of Apple, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Google and Apple. Motley Fool newsletter services have recommended buying shares of General Motors, Google, and Apple. Motley Fool newsletter services have also recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On October 13, 2011, at 11:53 AM, sirifire wrote:

    I am exactly of the same opinion. Companies like pandora, rapsody, spotify, slacker are 100% slaves to music royalties that keep mounting. Music is their only product. Pandora's bus model caves in under the weight of roaylty fees. Let us never confuse the service with the business. Pandora is an example of a vey poorly thought through business model with a relatively appealing idea. It is too early to claim that pandora will eventually go under but chances with the current business model are 50-50. The only real player in town that is steadily without hoopla mounting both sub base and revenue and in particular profit margins is Sirius XM. Once folks realize this within the next year or so its share price may be quite steep.

  • Report this Comment On October 13, 2011, at 1:06 PM, BullMarket75 wrote:

    Quote:

    "the real shocker is that more than 70% of Pandora usage is delivered via smartphones and tablets, yet less than 1% of overall U.S. ad spending goes to mobile."

    ------------------------

    How is it a 'Shocker' that only 1% of U.S ad spending goes to mobile"? Someone explain to me why a business savvy advertiser would choose to advertise on Pandora when 70% (and growing) are listening via a mobile device?

    --Pop-up ads? NO, b/c no-one is watching if listening on mobile device.

    --Commercials? NO, b/c that's terrestrial radio model that led you to Pandora in the first place

    I would love to hear the case from someone on why an advertiser would be smart to spend $$ advertising on Pandora.

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