July 22, 2011
Pandora Media Inc. Chief Executive Officer Joe Kennedy said the streaming-radio service isn't finding enough advertisers to buy all the space created by mobile-phone users, underscoring concerns about its ability to convert popularity into revenue.
"The sheer level of aggregate advertiser demand for mobile is limited," said Kennedy, 51. "Pandora is one of the top five players in mobile, so we generate a lot of inventory and are ahead on where aggregate demand is for mobile advertising."
The online-radio company, which held its initial public offering last month, is getting most of its growth from users of mobile devices, such as smartphones and tablet computers. Sixty percent of Pandora listening comes from the mobile market, up from just 12 percent two years ago, according to the company.
Pandora isn't profitable, with losses of $92 million since 2000, the Oakland, California-based company said earlier this year. Pandora's costs continue to grow because of higher licensing fees for the rights to music. Increasing mobile ad sales will be needed to help offset those expenses, said Rich Tullo, an analyst at Albert Fried & Co. in New York.
"They're in a tight spot right now," said Tullo, who recommends selling Pandora shares. "If your content costs are going to accelerate, then the management and monetization of your ad inventory is mission-critical in becoming a profitable company."
When Pandora's stock made its June 15 debut on the New York Stock Exchange, it joined a wave of Internet businesses going public this year. Pandora's shares fell 55 cents, or 2.9 percent, to $18.21 at 10 a.m. on the New York Stock Exchange, and earlier dropped as much as 4.9 percent to $17.85. Before today, the stock had climbed 17 percent since the IPO.
Pandora generated $119.3 million last year from advertising, or 87 percent of its sales, and another $18.4 million from subscriptions to an ad-free version of the service and other revenue sources.
Brands such as Anheuser-Busch InBev NV's Budweiser, Yum Brands Inc.'s Taco Bell and A&E Television Networks LLC's History Channel have run ads targeting Pandora's mobile users. In all, marketers will spend $2.55 billion on mobile ads in 2014, according to New York-based research firm EMarketer Inc. That's more than double the $1.1 billion in spending this year.
In the long run, Pandora stands to gain from advertiser interest in mobile, said James Boyle, an analyst at Gilford Securities Inc. in New York.
"As advertising demand on the Internet keeps surging and the logical ad demand for the explosive mobile-device universe also dramatically increases, the supply-demand equation should consequently shift, long term in Pandora's favor," Boyle said in an e-mail. He has a "hold" rating on shares of Pandora.
While Pandora already competes with Sirius XM Radio Inc., a subscription-based satellite-radio service, it may face a bigger challenge from Apple Inc. and other established technology companies, which are investing in their own online-music offerings.
Startups such as San Diego-based Slacker Inc. and San Francisco-based Rdio Inc. also offer music through the Internet. CBS Corp.'s Last.fm competes in the market as well.
Much of the growth from mobile advertising will come from small businesses looking to reach prospective customers when they're nearby, said Rich Greenfield, an analyst at BTIG LLC in New York. Pandora has more experience selling ads to bigger brands and may not be equipped to reach those smaller, local businesses, he said.
"They don't have a sales force to sell local ads the way your local radio station does," said Greenfield, who recommends selling the stock. "We think it's one of the biggest problems of the story."
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