In the recent Consumer Electronics Show (CES) in the U.S., Pandora Media ( P ) unveiled its monetization strategy for in-car systems. The company plans to introduce 15-second and 30-second audio advertisements while reducing ad frequency as compared to its other platforms such as desktop, smartphone and tablet. It expects that advertisers can run more car-specific campaigns and take advantage of Pandora's targeting ability to generate an attractive return on investment. However, it remains to be seen whether the ad revenue generated per 1,000 listener hours matches what Pandora recently achieved on its mobile platform. It is absolutely critical that the company is able to maintain at least those levels to become profitable as it makes further inroads in the car radio market.
Our price estimate for Pandora stands at $24 , implying a discount of about 25% to the market price.
There Is Actually An Opportunity To Increase Ad Frequency
Until last year Pandora served about 8 to 12 ads per hour consisting 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 around $55 per 1,000 listener hours, it is monetizing better than traditional radio on a per ad basis.
What this means is that the company 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 frequencies. 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.
But The Current Strategy Is Totally Opposite
However, Pandora can potentially charge higher rates for its targeting ability that enables advertisers to reach the right audience. The company expects that this will offset the potential loss of revenue due to lower ad frequency, although car owners are accustomed to higher number of ads while listening to radio. Besides, this might even be necessary to compete with other radio services focused on in-car systems including Sirius XM ( SIRI ) and terrestrial radio. Sirius XM offers ad-free subscription based radio services and is becoming increasingly popular in the U.S.
That said, Pandora has to balance its competitiveness against the ability to generate profits. In that regard, the company seems to be on the right track, as is evident from the recent jump in its mobile monetization. Mobile ad revenues stood at $104.9 million in Q3 2013, growing 58% over the same period last year and accounting for more than 70% of overall advertising revenues. The mobile ad RPM for the quarter stood at $36, up from $33.90 in Q2 2013 and $25.59 in Q3 2012. Pandora needs to ensure that its efforts to tap the in-vehicle market don't come at the expense of profits.
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