Pandora: Had for a song

Pandora, the music streaming company, says its mission is to "unleash the infinite power of music" (oh, that). But the money (not infinite as of yet) comes mostly from advertising, which contributes 80 per cent of revenues. It is among the largest mobile ad groups in the US, with half a billion dollars in mobile ad revenue last year.

Pandora has the advantage of its 82m users' attention. It boasts the most minutes spent per user of any smartphone app in the US - slightly higher than Facebook - according to January data from ComScore. The average visitor spends 20 hours a month using Pandora's app.

But Pandora's ad sales are less impressive than its rivals', largely because its ad technology has lagged behind. Pandora sells $9 of ads per active user, whereas Facebook sells $25 per US user per year. Part of the reason is format: Pandora's users mostly listen, rather than stare at their screen. But technology plays a big part. Pandora does not yet have fully automated ("programmatic," in the jargon) ad systems, in which a computer selects when, where and at what price ads are run. It has been testing some programmatic ads that may be rolled out later this year, but many Pandora ad sales are still done the old fashioned way, with individual sales reps who call up local businesses.

Improving ad sales is crucial for Pandora because growth in users and listener hours are slowing. Last year, Pandora increased revenue by 40 per cent even though listener hours grew by 15 per cent. It will need to repeat the trick this year. Moreover, a ruling by the Copyright Royalty Board this year will set the prices that Pandora must pay for its songs from 2016. The company currently spends 48c of every $1 it earns on royalties.

Perhaps the best thing that can be said for Pandora is that its stock is cheap. The share price has halved over the past year, partly due to uncertainty over the CRB ruling. Pandora trades at two times forward revenue, compared to 10 times for Facebook and 8 times for Twitter. For those who believe the company can improve its ad model, the stock can be had for a song.

Email the Lex team at [email protected]

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation