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What Can Pandora Learn From Facebook and Google?

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Pandora Media (NYSE: P  ) quietly increased the number of advertisements it runs from four ads to six ads in conjunction with the end of its 40-hour listening limit for non-subscribers. In this way, it increased its mobile ad revenue per thousand listener hours, or RPM, 6% over the previous quarter.

Now, Pandora's management doesn't expect that they'll need to increase its ad load in the short term because of the capacity that bump afforded the platform. Instead, management's focus is on increasing the value of their advertisements through targeting.

This is similar to the approach Facebook (NASDAQ: FB  ) has taken recently. Conversely, digital-ad giant Google (NASDAQ: GOOGL  ) , which arguably leads the industry in targeting abilities, has seen its ad prices drop and has worked to increase impressions. Both strategies work for each company, but is Pandora taking the wrong approach?

The Facebook approach
Last quarter, Facebook increased its average ad price 92% year-over-year. It's a good thing too, because ad impressions fell 8%. The ad increase came from a mix shift toward more effective newsfeed ads. As more users shift to mobile, just as Pandora is seeing, Facebook is one of the few companies increasing its ad prices.

Pandora saw a decline in its ad rates in 2012, but turned things around in 2013. The company continues to see its listener hours mix shift toward mobile devices, where ad rates are lower compared to desktop. Comparatively, Facebook saw mobile users outnumber its desktop users for the first time in 2013.

Thus far, Pandora has successfully navigated the shift increasing mobile ad RPM and closing the gap between desktop and mobile ad rates. In order to continue doing so it will need to improve its targeting. This is the same opportunity Facebook sees.

The problem is, Facebook has loads of data on its users: Pandora has, comparatively, very little. Perhaps it could better target fans of Cee Lo with T-Mobile's latest radio ad (a cover of "Forget You"), but for a company that already targets in "over 100 different ways," it's hard to see how much improvement it could make considering its user data is limited.

The Google approach
Google hasn't navigated the shift to mobile nearly as well as Facebook, or even Pandora for that matter. The company, which is largely responsible for the global proliferation of smartphones, is seeing a negative impact from lower ad prices on mobile.

In the fourth quarter, the company's average cost-per-click declined 11% year-over-year. Paid clicks increased, however, by 31% to grow total revenue for Google sites by 22% and Google network revenue 3%.

Google's presence in the mobile landscape may seems counterintuitive, as mobile devices naturally command lower ad prices than desktop. However, Google has successfully leveraged mobile devices to increase its ad impressions. The company continually expands its product portfolio to either gain valuable data for targeting or increase advertising opportunities. This is true for both mobile and desktop environments.

Pandora, however, has just one product -- Internet radio. It's successfully penetrating the in-car radio market, which is providing it with new listeners and more listener hours, but it's still seeing the growth in listener hours decelerate. In January, listener hours grew just 13% year-over-year, compared to growth of 42% in January 2013.

What can Pandora do?
Pandora's best approach might be a hybrid between increasing the value of its advertisements through targeting and increasing its ad load. It already plans to introduce advertising for its in-car service this year, and hopes that as more models roll out with Pandora built in its share of the in-car radio market will continue to increase. But competition is fierce in that area, and Google and Apple both have plans to get into in-car infotainment as well.

With mobile and in-car addressed, there's not much room for portfolio expansion of Pandora's Internet radio service. Perhaps the company can expand into other verticals such as on-demand streaming, a market currently dominated by Google's YouTube and, to a lesser degree, Spotify. This could add additional advertising opportunities without the need to grow its user base further.

Still, Pandora will have to work hard to extrapolate targeting data from geolocation data and listening habits. It's a much more difficult problem to solve than it is for Google and Facebook, where users all but tell the companies what they want to see ads for. Management, nonetheless, believes it's up for the challenge.

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Adam Levy

Adam has been writing for The Motley Fool since 2012 covering consumer goods and technology companies. He spends about as much time thinking about Facebook and Twitter's businesses as he does using their products. For some lighthearted stock commentary and occasional St. Louis Cardinal mania

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