While it is clear from Pandora Media’s (NYSE:P) recent earnings that the costs for the Internet radio giant will remain a concern at least for a while, there are also plans around how to continue the growth and enhance monetization in the future to mitigate these costs. These include enhanced targeting of ads with the shift of advertisements to mobile and integrating with other systems that radio listeners use.
Furthermore, a big chunk of growth will come from the automobile segment which accounts for almost half of radio listening. Pandora has already made some strides in this direction, but it will face competition from Sirius XM (NASDAQ:SIRI) which has been very successful in tapping into this segment.
From PCs To Mobile
Pandora started out as an online radio service primarily for PCs. However, given the recent surge in smartphones and tablets as well as the success of Pandora’s app, the majority of the growth in listener hours is coming from mobile devices.
However, the bad news is that the advertising spend is still that focused on the mobile platform. This is the reason why Pandora’s monetization levels on its mobile apps are lower than those on PCs.  Nonetheless, this is changing and mobile ad spending in the U.S. is expected to grow from $1.45 billion in 2011 to close $10.8 billion by 2016. Pandora will leverage this growth to increase its ad pricing to combat soaring costs.
Pandora’s unique selling point to advertisers is hinged on two factors:
- Its broad reach with over 150 million registered users and over 50 million active users, as well as a large amount customer data that will help advertisers in better targeting customers.
- Since users interact with Pandora’s user interface often, the radio service can serve both audio and visual ads.
In addition to the above, the company has also hinted at a plan of integrating into systems that its listeners use on a frequent basis to improve monetization. Ultimately, Pandora aims to improve the ad revenue earned per listener hour, which will directly impact the profits and help it mitigate rising content and marketing costs.
Our price estimate for Pandora Media stands at $7.90, implying a discount of about 25% to the current market price.Notes:
- Pandora Media’s Q1 fiscal 2013 earnings transcript [↩]