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Pandora’s Strategy To Limit Mobile Listeners Works Too Well

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September 03, 2013 – Comments (0) | RELATED TICKERS: P

Note:  Originally posted with additional tables here. Please let me know if financial tables can be formatted in a CAPS Blog.  Thanks.

Due to its cost structure, it costs Pandora money when listeners listen. However, Pandora will eliminate limits on mobile listeners as it begins to understand that it makes money when listeners listen, not when they stop.

Link:  Pandora’s most recent Form 10-Q

Pandora had previously limited the amount of time a user could listen to ad-supported Pandora on mobile devices.  Shockingly, growth in listener hours on mobile and other connected devices “was tempered.”  Beginning September 1, Pandora eliminated this limit.  Pandora claims that it was due to:

“our improved ability to monetize mobile listening hours. Although we are removing the broad 40 hour per month mobile listening limit, we have implemented other more precise measures that we believe will allow us to moderate the growth of mobile content acquisition costs while minimizing adverse effects on the listener experience. To the extent we take steps such as these to affect usage on a particular platform, trends in usage may be obscured or changed and comparisons across periods may not be meaningful.”

The first issue is a broader trend impacting every online provider.  As we have discussed in depth, the online experience is moving from desktop to mobile.  Pandora is not only not immune, but is directly and negatively impacted by, this change, and they know it.

“While historically our revenue growth was principally attributable to selling display advertising through our traditional computer-based platform, we now generate a majority of our revenue from mobile and other connected devices and our advertising includes a mix of audio, display and video.”

So how do you generate advertising from mobile listeners without driving them away?  Visual ads won’t work and, unlike visual ads, no one will listen to an ad playing over a song.  Pandora claims to have a way to “monetize” mobile, or at least minimize the damage.  This is particularly important as acquisition costs for mobile far exceed the costs for desktop as a percentage of revenue attributable to the platforms.

The other issue is specific to Pandora.  Its “content acquisition costs,” or royalty rates for songs, are high and going higher.  As listener hours grow, so do the royalty costs.  In addition, the rates themselves, already too high for this business, are threatening to increase as the collection agencies for the music industry are attempting to raise rates, including for some past periods.  Pandora is fighting and has made arrangements with terrestrial radio as an end-run around these other arrangements.  We’ll see if it works, but the fundamental problem of balancing income and costs remains.

For those with attention spans similar to ours, costs exceed revenues, resulting in losses.  This is especially problematic when the most expensive avenue for your product to reach your customers is also the fastest growing avenue.

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