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Why is Pandora not making more money in mobile?

Pandora revealed last week that its monetization via desktop is significantly higher than for mobile, pointing to the challenges that companies face because mobile advertising is not keeping pace with the quick growth in mobile usage. 

While Pandora?s mobile revenue reached over $100 million in fiscal 2012, up from $25 million in the previous year, the revenue generated per thousand mobile listener hours, or RPM, paled in comparison to the revenue from desktop. The financial markets did not respond well to the news, sending the value of its shares downward.

?In FY12, we quadrupled our mobile ad revenue to $100 million ? making us second to only Google in this fast expanding space,? said Deborah Roth, vice president of corporate communications at Pandora, Oakland, CA. 

?We believe that our strong position in mobile, as well as our growing leadership in radio, make us uniquely positioned to grow revenue in the mobile space, which is forecasted to grow from $1 billion to $13-20 billion over the next few years,? she said.

Mobile use grows
Pandora?s mobile RPM reached $20 in 2012, up from $13, while the RPM for desktop is significantly higher at $60-$70.

During a conference call with analysts to discuss the results, Pandora chairman and CEO Joe Kennedy said that it may difficult to continue to improve mobile RPM in the near term.

The reason that the RPM for mobile is so much lower than for desktop is that the mobile advertising market is still in the early stages while Pandora?s mobile use has grown very quickly.

One of the challenges that Pandora and others face in monetizing mobile is that smaller screens do not allow for large format, high-impact ad formats that it runs on desktop.

More interesting and effective ads units should start to become available as the mobile market matures, including more video ads. Today, most mobile advertising is still in the form of mobile banner ads.

?As advertisers start to experiment with new ad formats and technologies that are only available on handsets, we?re going to start to see new types of value creation for brands.,? said Dave Martin, senior vice president at agency Ignited, El Segundo, CA . ?That will lead to higher demand on mobile ad inventory and consequently better monetization for mobile services like Pandora.?

?This type of problem appears to be pretty common among online providers who are migrating their ad products to mobile,? he said.

Content costs rise
One of the key reasons why Pandora is not making more money from mobile is rising content costs coupled with the strong growth in usage hours driven by mobile.

?Content acquisition costs more than doubled from the year ago quarter to $48 million,? said Vik Kathuria, managing partner of digital investment group at Mediacom Interaction, New York. ?Strong mobile growth is directly linked to content acquisition costs rising proportionately, so in the short term profitability is affected but they are building market share and monetization will come down the road.?

Marketers also are not comfortable with the new ad formats that Pandora is creating.

?Pandora is creating new types of advertising, blending 15-second audio clips, display ads and video spots,? Mr. Kathuria said. ?Audio ads on the radio have traditionally been directed to local audiences, while display advertisers are more often national brands.

?Pandora?s service is multimedia and focused on national and local advertisers, an experiment that most companies are not used to,? he said.

One way Pandora could drive mobile revenue is to develop some key partnerships that would help it drive use even more.

?Ideally Pandora should partner with a large online destination site like Facebook, which announced a partnership with Spotify last month, this is a great way to gain distribution to hundreds of millions of users.? Mr. Kathuria said.

Personalized ads
In order to help drive up the RPM for mobile, Pandora will need to prove that mobile advertising has a different type of value than ads on the desktop.

For example, mobile ads can be more targeted and can be used to drive local experiences.

Currently, the ads on Pandora lack the same level of personalization that the music experience has.

?I don?t think the answer is delivering an ad every fifth song,? said Dan Israel, Atlanta-based strategy lead for mobile practice at SapientNitro. ?Pandora?s ad network does not feel that dissimilar from traditional radio.

?They need to make it more personalized and relevant,? he said. ?Pandora needs to leverage the music genome to provide more relevant content that would be useful information that users might pay more attention to.?

?If a user is listening to songs by Aerosmith and that the band is on tour, you could deliver an ad for tickets to a concert at a local venue. That is relevant and will get someone to pick up the phone.?

Final Take
Chantal Tode is associate editor on Mobile Marketer, New York