• by Mark Walsh  @markfwal, June 13, 2011

Pandora is poised to be the latest company swept up in the rejuvenated bull market for Internet IPOs. The Web-based radio service upped the price range of its stock offering to $10 to $12 from $7 to $9, and increased the total shares to be sold by a million, according to an amended securities filing on Friday.

Wall Street analysts and other observers, however, have been quick to note that Pandora's costs are rising fast along with its revenues and user base, as a result of paying licensing fees to the major record labels.

The more music streamed, the higher the expenses. GigaOM noted that in the first quarter of 2011, revenue jumped by more than 135% and the number of users, by 77%, but Pandora's losses also more than doubled compared to a year ago.

That raises questions about the company's underlying business model, which is chiefly ad-supported. In fiscal 2010, Pandora received 91% of its revenue from advertising and said in its IPO filing it expects advertising to make up a "substantial majority" of its revenue for the foreseeable future. But the company itself points to another potential problem on the revenue side, in the form of mobile advertising.

Mobile has become an increasingly important audience channel for Pandora. Listener hours on mobile devices accounted for 60% of total music listening on the service, up from just under 5% in 2009. Separate data released by comScore earlier this month indicated 42% of Pandora's total audience of 31.8 million across desktop PCs and devices in April was coming through mobile gadgets only.

The hurdle is monetizing that rapidly growing mobile audience. "To date, we have not been able to generate revenue from our advertising products delivered to mobile devices as effectively as we have for our advertising products served on traditional computers," the company stated in the Risk Factors section of its filing. "While a substantial amount of our revenue has been derived from display ads, some display ads may not be currently optimized for use on certain mobile devices."

The filing explains that some Web ads may not render well on smartphones because of the smaller form factor and may not take advantage of the "multimedia capabilities of connected devices." Think rich media ads on smartphones and tablets.

The crunch for Pandora is that its licensing costs are the same whether someone is streaming on a PC or a mobile device. So until it can monetize content in mobile as effectively as on the traditional Web, it stands to lose money on the same ad served to a mobile user as opposed to a desktop one. And Pandora concedes in the filing it doesn't know if it will ever to be able to monetize mobile inventory as well as that on the desktop Web.

One thing that could benefit Pandora is new measurement efforts like comScore's new "Total Universe" report that attempts to track a site's audience broadly across computers, phones, tablets and apps. Nielsen's nascent Online Campaign Ratings has similar ambitions. But until such cross-media tracking becomes the norm, the company will still have to rely on its internal research to help sell advertisers om its audience reach.

In effect, Pandora is caught between the more established world of Web advertising and the mobile ad frontier, where advertising hasn't caught up to usage. How well it manages that difficult transition will make the company a bellwether for the maturing of mobile advertising.