Listening on mobile devices, such as smartphones, has grown from 4.6% in Pandora Media’s fiscal 2009 to 50.5% in fiscal 2011, which ended last January – and is no doubt even higher in the current fiscal year. But with well over half of its listening on mobile devices, Pandora admits that it is more difficult, at least to date, to monetize that listening through advertising sales.
Some detail about the mobile challenge appears in the company’s 10-Q for the past fiscal quarter just filed with the SEC.
“Advertising on mobile devices is an emerging phenomenon, and the percentage of advertising spending allocated to advertising on mobile devices is lower than online advertising. According to IDC, the percentage of US advertising spending allocated to advertising on mobile devices was less than 1% in 2010, compared to 13% for all online advertising. Our cost of content acquisition is currently calculated on the same basis whether a listening hour is consumed on a traditional computer or a mobile device. To date, we have not been able to generate revenue from our advertising products delivered to mobile devices as effectively as we have for our advertising products served on traditional computers. While a substantial amount of our revenue has been derived from display ads, some display ads may not be currently optimized for use on certain mobile devices. For example, display ads are not well-suited for use on smartphones due to the size of the device screen and may not be appropriate for automobiles due to safety considerations. Further, some display ads may not be optimized to take advantage of the multimedia capabilities of connected devices. By contrast, audio ads are better-suited for delivery in automobiles and across mobile and connected device platforms and video ads can be optimized for a variety of platforms,” Pandora said in its SEC filing.
“Our audio and video advertising products are relatively new and have not been as widely accepted by advertisers as our traditional display ads. In addition, the introduction of audio advertising places us in more direct competition with terrestrial radio, as many advertisers that purchase audio ads focus their spending on terrestrial radio stations. One challenge we face in promoting audio ads is thus overcoming any reluctance of these advertisers to migrate their advertising spend to online advertising. We have plans to increase our number of listener hours on mobile and other connected devices, including our efforts to expand the reach of our service by making it available on an increasing number of such devices, such as smartphones and devices connected to or installed in automobiles, and we cannot assure you that we will be able to effectively monetize inventory generated by listeners using mobile and connected devices, or the time frame on which we may do so,” the filing explained.
RBR-TVBR observation: It’s a “Catch 22” for Pandora. More and more of its audience is going mobile – and it has to pay SoundExchange the same rate for mobile listening as for listening via a computer with a larger screen. But as that audience moves it has to move its advertisers as well, away from display ads to more audio ads, which makes it more like the traditional radio industry which it claims to be “redefining.” Converting advertisers to audio isn’t happening fast enough for Pandora to keep up with the music royalties it has to pay for mobile listening, so the mobile growth is actually a financial negative in the short-run.