In order to battle rising music royalty costs,
) has decided to put a cap on free listening on mobile. Users will
now be able to listen up to 40 hours of free music every month and
will need to pay 99 cents to continue listening for the remainder
of the month. Pandora's growth has been stellar when it comes to
revenues and the number of subscribers. However, given that the
company has been growing much faster on its mobile platform where
currently monetization is low, it needs to address this issue.
Higher monetization is needed to offset rising costs. Let's take a
brief look at Pandora's monetization on mobile and desktop and how
the company intends to tackle this issue in the future (in addition
to the recently imposed 40-hour listening cap).
See our complete analysis for Pandora Media
Monetization - Pandora Desktop Vs. Pandora Mobile Vs.
Traditional broadcast radio monetization currently stands at
approximately $73 per 1,000 listener hours. In comparison,
Pandora's desktop monetization stood at $57 per 1,000 listener
hours in calendar year 2012. Pandora's monetization on its mobile
platform stood at around $22 per 1,000 listener hours for the same
Clearly there is a gap between current monetization levels for
mobile and desktop, and the mobile platform is far off from the
levels required to build a sustainable business and offset rising
content costs. However, the mobile platform continues to grow
rapidly. The mobile monetization rate increased by more than 50% in
calendar year 2011, followed by a small increase in 2012. Pandora
expects to increase its mobile monetization someday to levels
similar to what desktops have today.
Path To Higher Monetization
(1) Higher sell through of mobile inventory
Mobile listener hours have grown tremendously over the past few
years, leading to an increase in mobile inventory. Close to 75-80%
of the total listener hours now come from the mobile platform for
Pandora. However, the company currently does not have a large
enough sales force in many regional radio ad markets to sell
inventory and establishing this sales force will be key to higher
sell-through rates for its ad inventory. Over time, as the mobile
listener hours growth slows, Pandora should continue pushing sales
of its mobile ad inventory and eventually mobile monetization
levels should catch up with current desktop levels.
Radio ad buyers are for the most part indifferent between
placing their ads on the mobile or desktop platforms since
traditional radio has forever been a mobile platform. Therefore,
the company is confident about its ability to improve mobile
monetization to sustainable levels in the future.
(2) Long-term potential for increase in ad
Pandora serves about 8 to 12 ads per hour which can consist of 7
to 8 interaction-based display ads and 3 to 4 audio ads. In
comparison, traditional radio serves around 13 minutes of
advertising each hour or about 25 ad spots with each ~30 seconds in
duration. Given that Pandora is monetizing its 8-12 hourly ads on
the desktop at a rate of $57 per 1,000 listener hours, it implies
that Pandora is monetizing better than traditional radio on a per
What this also means is that Pandora has a significant
opportunity to increase its hourly ad frequency. We believe that
this has the most potential in in-vehicle platforms where users are
accustomed to higher ad frequency. The traditional radio market is
~$15+ billion. The in-vehicle market accounts for about 47% of the
traditional radio market and thus presents a big, untapped
opportunity for Pandora.
Our price estimate for Pandora can be significantly higher if
the monetization improvement strategies are successful. You can
gauge the impact by modifying the above forecast. We currently
forecast overall monetization for Pandora instead of separate
forecasts for mobile and desktop.
Our price estimate for Pandora stands at $9.75
, implying a discount of about 25% to the market price.
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