Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Pandora Can Predict Who You'll Vote For This November

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Pandora (NYSE: P  ) will roll out a new advertising service next week that will allow political organizations to better target its listeners this fall. The targeting relies on location and listening data to predict political affiliation, and is part of Pandora's latest efforts to improve ad targeting, thus increasing the value of its advertisements.

Pandora increased its ad load last fall from four ads per hour to six ads per hour, and doesn't plan on increasing the load again in the near term. Instead, management plans on increasing ad prices through targeting. But targeting advertisements is much harder for Pandora than it is for a company like Facebook (NASDAQ: FB  ) or Google (NASDAQ: GOOGL  ) , whose users volunteer much more data.

Learning about its listeners
Pandora's engineers are mighty clever. Even though Pandora listeners don't volunteer much more than their gender and zip code, the company is able to deduce a lot of information from its users listening habits. For example, a listener in her late 20s or 30s with a children's music playlist is probably a parent.

With political targeting, Pandora has taken it a bit further. By gathering voting data from each county and correlating it with the music that's popular in each county, Pandora can find Republicans and Democrats no matter where they're located.

Using independent data points requires a lot of guesswork, especially when there's not an exact connection between them. Therefore, the accuracy of the ads is not ideal, but Pandora's management believes its targeting system is 75% to 80% accurate. Comparatively, it's a safe assumption that about 100% of people that are members of the group "Young Democrats" on Facebook are indeed Democrats.

That's not to say Pandora's targeting is worthless. Indeed, there are numerous opportunities for the company to improve its targeting by using data from listening habits to infer interests. The problem is no matter what Pandora does, it will require a significant amount of guesswork. Maybe that hypothetical listener mentioned earlier is a preschool teacher and isn't interested in buying diapers.

As a result, advertisers aren't going to pay as much for Pandora's best guess compared to Facebook's no-brainer because the return on investment needs to match the market. If 20% to 25% of political ads miss their targets, they're practically useless to Pandora's advertising partner.

Do people pay attention to ads?
Every 20 minutes or so, a listener must sit through ads and listen to them. Pandora has implemented several methods in the last year to ensure that listeners are actually engaged with the music it's paying for. On the flip side, this offers some assurance to its advertisers that their ads are being listened to, but it's not a 100% guarantee. On a platform like Facebook or Google, advertisers only pay when a user engages with the ad.

Unlike with online video on YouTube, where it's almost a sure bet a user is sitting in front of her computer, music listeners are often multi-tasking. That's why YouTube and other online video companies are able to charge such a premium for their advertisements. Pandora, again carries a certain amount of risk that a user will not be paying much attention.

Pandora will begin rolling out ads in cars this year, however, which may garner a premium over its typical ads precisely because advertisers know that listeners will pay more attention. Pandora has more than 4 million in-car listeners, and it's firmly establishing its presence in many of the best-selling cars. The downside is that listeners are unable to take immediate action on advertisements like they are on desktop or mobile devices.

Increase ad rates faster than royalties
Pandora's royalty rate is set to climb 8% in 2014, and another 8% in 2015 before its agreement expires. The company is currently locked in a court battle that could determine the future of its royalty rates, but the increasing number of music-streaming services could potentially cause the rights to music to increase. In the near term, Pandora should have no problem growing ad revenue and improving its targeting. But there's certainly a limit to its targeting data, which means its ads will always demand less of a premium than more data-driven platforms.

The next big trend in tech is here, and you can profit
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2842767, ~/Articles/ArticleHandler.aspx, 9/3/2015 7:29:01 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

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

Today's Market

updated Moments ago Sponsored by:
DOW 16,374.76 23.38 0.14%
S&P 500 1,951.13 2.27 0.12%
NASD 4,733.50 -16.48 -0.35%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/3/2015 3:59 PM
FB $88.15 Down -1.74 -1.94%
Facebook CAPS Rating: ***
GOOGL $637.05 Down -7.86 -1.22%
Google (A shares) CAPS Rating: ****
P $18.13 Up +0.83 +4.80%
Pandora Media CAPS Rating: *