Pandora Media (NYSE:P) has stepped up its sales efforts in the last year. No doubt pressured by big-name competition like Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOGL) (NASDAQ:GOOG), Pandora is spending heavily on selling ad space and improving its ad pricing.

Efforts have paid off to some degree, as evidenced by an increase in revenue per thousand listener hours, or RPM, and gross margin. But, looking more closely at Pandora's recently released earnings report, there is an increase in sales and marketing expenses as a percentage of revenue. This may be cause for concern with Pandora and indicative that the competition is leaving bruises on the business.

The cost of sales (people)
The goal of Pandora's sales team is to attract businesses to its platform and increase the average ad price. To that end, Pandora's advertising RPM increased 34% year-over-year, from $24.85 last year to $33.40 this year. Total ad revenue climbed 45%, further driven by the 12% increase in listener hours.

Here's the problem, though. Sales and marketing expenses grew 62.6% year-over-year.

Even total revenue, which includes subscriptions, couldn't outpace the increased sales and marketing spend. Total revenue grew 53.9% on a non-GAAP basis, which discounts the one-time addition of the subscription return reserve, totalling $14.2 million.

So, what's going on here? Why isn't Pandora exhibiting operating leverage with such strong sales growth?

Pandora's Marvin Gaye station -- What's Going On?
Looking back at the past two years, this isn't a problem unique to this quarter. Pandora has increased the percentage of revenue dedicated to sales and marketing every quarter for the past five quarters.

Source: Pandora

The addition of Apple as a competitor is clearly not the catalyst for this trend, as the iTunes Radio service only started streaming music last September. Google's presence in the market through YouTube has been a constant pressure on Pandora almost since its inception, so that wouldn't explain this trend either.

It's not the higher costs associated with allowing subscribers to transact through in-app purchases, either. The company saw significant growth in transaction costs, but the primary drivers are associated with increasing headcount for its sales team.

It's hard to believe that the company is already tapped out on all the low hanging fruit; it only generated $140.6 million in ad revenue last quarter. The digital advertising market is about 250 times larger, and it's expected to grow nearly 15% this year, so there's plenty of opportunity.

Growing competition
The problem doesn't seem to be any one competitor, instead it's the multitude of competitors capitalizing on Pandora's easy-to-copy business model. That's not to say Pandora isn't the best at what it does. A quick look at its market share numbers will confirm that it's the top choice for most people.

Dozens of competitors, however, have popped up on the Internet since Pandora first launched in 2000. The competition has recently picked up steam as Internet connections get faster and streaming gains momentum. Bigger names are getting in on the action, and start-ups like Spotify and Rdio are innovating the space. In all likelihood, the competition is only going to get stronger.

Google just launched its YouTube Mix service for Android, which automatically generates video playlists for users and represents a threat to Pandora as a potential Internet radio service. Other big-name tech companies are rumored to have plans for launching some sort of music streaming service as well.

These companies are able to scale quickly thanks to their primary sources of revenue, which means their sales teams can be just as strong as Pandora's. With so many options for businesses to choose from, Pandora faces pricing pressure as audio ad inventory increases.

In other words, Pandora's RPM isn't increasing as fast as it would without these big names competing, so the company has to spend more for every dollar it makes.

The bottom line
Although its sales team has successfully grown gross margin in the face of rising content costs, operating expenses continue to weigh on Pandora. The company is spending heavily to attract new businesses, but is doing so less effectively every year. This is reflected in the company's bottom line.

The company's net loss shrunk by about $10 million in the first quarter. Factoring in the net difference in the subscription revenue reserve, however, the net loss grew. That's been a pattern at the company over the last two years, as growth in operating expenses outpace sales growth. This will be a metric for investors to keep their eye on going forward as the big-name competition persists.

Adam Levy owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), and Pandora Media. The Motley Fool owns shares of Apple, Google (A shares), and Pandora Media. 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.