Pandora Media (NYSE:P) is the country's leading player in the booming streaming music market. There are 76.4 million active monthly users, and on any given day, roughly a third of those users are tuning in.
Pandora had plenty to say during this summer's conference call to discuss its second quarter. At a time when the tech giants are angling for some more skin in the streaming market, and the bar to clear in releasing an app remains low outside of lining up the required music licensing rights, Pandora needs to make sure it doesn't get distracted as it leads the pack.
Let's go over a few of the more interesting things Pandora pointed out in its call.
User growth is slowing, but engagement is improving
As of the end of June, a traditionally seasonal low point, active users increased 7.5% year over year from 71.1 million to 76.4 million. ... On an annual basis listening hours grew 29%, increasing from 3.91 billion in Q2, 2013 to 5.04 billion in Q2, 2014.
-- CEO Brian McAndrews
Set aside the seasonality excuse. That is something to consider when assessing Pandora's sequential performance as summer breaks create a lull, but Pandora's giving you year-over-year numbers, so it's all on an apples-to-apples basis. We're comparing this June to last year's June, and the grim truth is that Pandora's 7.5% gain is not keeping up with the overall growth of the smartphone market.
However, the second part of that quote paints a far more encouraging picture. Pandora served up 29% more content during the second quarter than it did a year earlier. In other words, the average active user is tuning in more often. The average listener tuned in for 21.1 hours of streaming content in June, 20% ahead of the prior year's consumption.
Mobile monetization is the key to success
Mobile advertising now accounts for 76% of total ad revenue, a record share. Continuing to close the gap with consumption, where 83% of total hours are consumed on those platforms.
Pandora originally launched as a desktop platform that would serve up musical playlists based on a listener's preferences, but that blew up when the smartphone and app stores took off. As Pandora points out, all but 17% of its usage these days is coming on smartphones and Web-tethered tablets.
Mobile monetization has been a challenge for dot-com giants. Advertisers don't like paying as much for a mobile user as they do for those surfing the Web on a PC. Investors see this in action when search giants post a spike in ads served but a drop in revenue per click. Pandora's in a better place since radio advertisers are used to reaching an audience on the move, and generating 76% of its ad revenue from 83% of its consumption isn't bad at all.
Higher premium rates haven't scared away premium listeners
... Pandora successfully implemented a price increase, in which the lowest cost, $36 annual plan was eliminated, and the $3.99 monthly plan was raised to $4.99 for all new subscribers.
Yes, Pandora did increase its rates during the quarter. The announcement came in March, giving new subscribers the chance to hop on at the $3.99 rate before the May increase. The allure of being grandfathered into the lower rate for existing Pandora One members should have also been a deterrent to cancellations.
Did it work? Well, Pandora closed out the period with 3.5 million premium members, up slightly from the 3.4 million it had at the end of March. That's not great. It once again reminds us that most of Pandora's users are freeloaders, putting up with ads instead of paying a couple of bucks for Pandora One. However, at least the number is moving higher.
Pandora wants the world, but it doesn't want it now
I think international is something that we do feel there will be opportunities in the medium to longer term.
Pandora entered Australia and New Zealand two years ago, but it's not in a hurry to expand beyond that. Unlike Spotify, which has grown its on-demand platform aggressively overseas, Pandora's concentrating on the stateside market before getting caught up in the sometimes thorny music licensing process in every international territory that it eventually wants to enter.
Pandora was asked twice about its international intentions, and both times it suggested that a new country or region isn't likely to be added anytime soon. It did mention that content cost rates in Canada appear to be attractive enough to make it an expansion market for Pandora, but for now, Pandora's keeping things largely close to home.
The connected car is moving, but it has yet to shift into high gear
We've seen some great growth in the auto business in terms of our native integrations. We now have 7 million unique users who've activated Pandora through their native automotive integrations and that's up from 2.5 million a year ago.
The connected car is going to be a big thing for the streaming music market, and Pandora has made sure it's leading the charge. It has deals for integration in 145 different car models, including the country's 10 best-selling vehicles.
The migration is still in its infancy. Pandora points out that the average in-car user listens to roughly six hours a month, far less than the overall average of more than 20 hours of a month. Then again, it's incremental growth at a time when smaller and hungrier alternatives are clamoring for ear time.
Growth may be slowing at Pandora, but it's also taking big steps forward in many other ways.