Why Mobile Is Crucial For Pandora’s Top Line Growth And Bottom Line Sustenance

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The key to Pandora Media‘s (NYSE:P) long-term survival is mobile monetization, and investors know it. The company’s stock has been up more than 30% since it released its Q2 earnings, which — driven by a significant rise in mobile advertising revenues — comprehensively beat analysts’ expectations. The mobile ad business accounts for about 65% of Pandora’s value, in our estimation, and it has been performing well for a while now. The Internet radio company’s mobile ad revenue per 100 listener hours increased from $2.19 in 2011 to $3.78 in 2014, Moreover, this uptrend is likely to continue, going forward. Users’ listening preferences are continually shifting to the mobile platform and that is where advertisers are putting their money. In fact, the mobile ad industry has been growing at a significantly faster pace than the desktop ad industry.

While Pandora has been doing very well on the top line front, its bottom line remains a concern, which has made investors a little skeptical about the company. It is still unprofitable due to the high content acquisition costs, which are likely to increase further from 2016 onward, thanks to the proposed increases in royalty rates. Since Pandora will not have much control over the rise in its content related expenses, it will need to gain substantial operating leverage to suppress the impact of the royalty rates increase. That is why increasing mobile monetization is absolutely vital for Pandora.  Fortunately, it appears to be taking steps in the right direction.

Our price estimate for Pandora is at $21, implying a premium of about 15% to the current market price.

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Mobile Shift Attracting Advertisers

With the proliferation of smartphones and the third generation mobile networks, U.S. consumers have been spending more time on their mobile devices as compared to desktops. According to eMarketer, average time spent on digital media per day between 2011 and 2015 increased at a CAGR of 11%. Interestingly, time spent on desktops and laptops has fallen at a CAGR of 2%, while time spent on mobile (non-voice) has increased at an impressive 37% every year. [1] At present, U.S. adults spend more time on mobile every day (2 hrs 51 minutes) than they spend on desktops (2 hrs 22 minutes). A recent “State of the Internet” report by Kleiner Perkins Caufield & Byers pointed out that Internet usage through mobile devices is growing much faster (23%) than the rise in overall usage (8%). [2]

average daily

This indicates a clear shift in the use of digital channels and, more than anything, it has encouraged brands to either increase their advertising budget or shift from desktop and other platforms. From 2009 to 2014, the global mobile ad industry grew about 34% every year, while the figure for the desktop ad industry is 11%. [2]

For Pandora, close to 80% of its listening happens on mobile devices, which clearly implies that it is at the right place at the right time. Mobile ads aren’t too expensive as yet and several local and national brands are looking to make the most of the opportunity. Click-through rates are high and there is enough data available to map usage trends that can help brands in better ad targeting. A recent Business Insider Study has shown that industry-wide mobile video ad revenues are expected to grow thrice as fast as desktop ad revenues over the next six years. [3] This trend can be taken as a proxy for non-video ads as well. Hence, it makes ample sense for Pandora to bolster its mobile platform since it already has a user base big enough to attract advertisers.

digital

*source:Business Insider

Pandora Is Improving Mobile Ad Inventory And Targetting Local Advertisers

In line with what advertisers are seeking, Pandora has made display ad inventory available for programmatic buying across mobile devices. The move is aimed at making mobile ads more engaging and, subsequently, getting a higher amount from advertisers. In fact, with access to Pandora’s registration data, advertising IDs and proprietary targeting segments, advertisers will be able to reach the most relevant audience. The company released the beta phase of its mobile programmatic solutions in March. It immediately attracted Ford and Essence to the platform and launched the offering mid-June, ahead of schedule. [4] [5]

Moreover, Pandora has been aggressively targeting the local ad industry with its reinforced sales force, which has played a pivotal role in its mobile ad revenue growth. Pandora has a sales team in over 40 local markets across the U.S., where it has seen advertising revenues rise significantly. Though the company does not provide details around what portion of its advertising revenues comes from local markets, it surely has a lot to explore in this space. Terrestrial radio services currently dominate the local ad industry, earning close to $14 billion in revenues from local ads, which is over 80% of their overall ad revenues. [6] In the last quarter, Pandora reported a staggering 67% increase in its local ad revenues.

It is evident that the mobile platform is where the growth is. Pandora has been doing very well on this front and it can sustain this momentum going forward, thanks to the aforementioned reasons. This will not only help the company bolster its top line, but will also enable it to counter the increase in its content and sales & marketing related expenses. Pandora’s business model does not allow it much control over the expenses,  Hence, significant top line growth becomes imperative for for sustaining its business.

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Notes:
  1. US Adults Spend 5.5 Hours with Video Content Each Day, eMarketer, Apr 16 2015 []
  2. Internet Trends, KPCB [] []
  3. Mobile video advertising is growing three times as fast as spending on desktop video, Business Insider, May 28 2015 []
  4. Pandora Delivers Mobile Programmatic Solutions to Advertisers, Pandora, Jun 16 2015 []
  5. Pandora’s Q2 2015 earnings transcript, Jul 23 2015 []
  6. Pandora unleashes sales force on local markets, Crain’s New York, Apr 21 2014 []