Internet radio
service Pandora enjoyed a splashy IPO in June,
raising nearly $235 million selling shares at $16 apiece. Investors bet big on the digital music startup, despite its lack of profits. Since then, stock markets have gyrated wildly on fears of a
double-dip recession and Pandora rival Spotify has made its long-awaited entrance in the U.S. market.
Those factors have contributed to Pandora's stock price sliding back to $12 a share
lately, amid fresh concerns about its ad-supported business model as the company prepares to report its first quarterly earnings as a public company on Thursday. Since consumer usage of Pandora is
shifting increasingly to mobile, much of investor and analyst scrutiny is focused on how well it will be able to monetize that channel via advertising.
In a research report Wednesday, JP Morgan
analyst Doug Anmuth projects that mobile accounted for 66% of total listening hours on Pandora in the second quarter, up from 62% in the first quarter. While acknowledging increased worries about
Pandora making money in mobile, Anmuth says the environment has not changed over the last few months.
"It remains early in mobile advertising, and it should not come as a surprise that
inventory growth would outpace monetization," he wrote. "We continue to believe Pandora's low rates of premium sell-through, CPM and overall RPM in mobile represent strong growth opportunities over
the next several quarters."
A separate earnings preview by the site SeekingAlpha speculated that Pandora
could try to boost monetization through pricing changes or increases in the number of ads it runs. Beyond that, "it will be helpful to watch for any indications regarding its profitability, its
expectations concerning content acquisition costs and international expansion," it stated.
Another challenge highlighted in the JP Morgan report is fresh competition for Pandora with the July
14 launch of popular European music streaming service Spotify. Greeted with positive early buzz, Spotify had attracted an estimated 1.4 million users and 175,000 paying customers, according to an
AllThingsD article on August 8. (Worldwide it has more than 10 million users and 1 million paid customers.)
Still, Anmuth suggests that Spotify's focus on driving revenue via mobile
subscriptions will limit its appeal compared to Pandora's free offering. "We think Spotify will be a compelling product to some, but it costs $10/month to access the service over a mobile device, and
we continue to believe it's more competitive with iTunes than Pandora," he wrote.
Another issue for the company as it becomes primarily a mobile service is the industry trend toward capping
wireless broadband use. Sprint is the last of the four U.S. major wireless carriers, for instance, not to limit or throttle mobile data use with the recent rollout of tiered usage pricing by Verizon
Wireless.
Even so, Anmuth argues this should not affect music streaming by most Pandora users. "On Verizon, Pandora streams most mobile at a low bit rate of 32kbps, suggesting it would take an
extremely heavy 3G listening load to max out most data plans," he stated.
For perspective, 140 hours a month of listening -- or almost five hours a day -- would be equal to about 2 gigabytes of
data. Video, by contrast, tends to suck up much more bandwidth.
To help boost its ad efforts, Pandora earlier this month promoted Steven Kritzman as senior vice president of advertising,
reporting to Chief Revenue Officer John Trimble. In that role, the Clear Channel veteran will oversee U.S. sales strategy for Pandora's digital and network and spot radio businesses.
Given the
company's growing mobile presence, however, it would not be surprising to see Pandora bring on more staff with direct experience in mobile advertising.
One thing Pandora can't control is the
broader market, which is expected to remain volatile for the foreseeable future. That does not help untested, unprofitable Internet startups like Pandora, which Anmuth expects to post a narrow net
income loss of $200,000 on revenue of $60.7 million in the second quarter.