Pandora’s mobile-advertising market bane

SAN FRANCISCO (MarketWatch) � In this year of ongoing presidential politicking that will culminate in the election on Nov. 6, it probably helps to remember the phrase made famous by the late House Speaker Tip O�Neill: �All politics is local.�

O�Neill�s words could be modified to read �All mobile advertising is local,� following what Internet-based radio company Pandora Media Inc. P �recently had to say about its business outlook. The forecast and reaction speak not only to where Pandora�s future lies, but also to some of the realities facing businesses as consumers increasingly rely on smartphones and tablets for their favorite music, videos and other media and information.

/quotes/zigman/5419837/quotes/nls/p P 9.97, +0.12, +1.22%

�Nobody seems to get that radio advertising is a local market,� said Wedbush Securities analyst Michael Pachter. �[Pandora] is doing a poor job of selling local ads.�

When the average person turns on the radio in the car, Pachter added as an example, he or she is most likely to be interested in services by local businesses that can be reached relatively close to home.

�The trick with mobile advertising is that nobody really believes people view or click through the ads,� the analyst commented. �There�s no question Pandora will monetize this market, but the question is when.�

Investors have shown their displease and concerns with Pandora almost since the minute the company went public on June 15, 2011 at $20 a share. Since then, Pandora�s stock price has been trimmed by 44% at $11.23 on Friday, and that includes a one-day drop of 24% in the wake of its disappointing report and outlook on March 6. Read more about Pandora's most-recent earnings report.

Now, on the surface, Pandora�s ad sales appear to be pretty good. When the company delivered its 2012 fiscal fourth-quarter results last week, it reported advertising revenue of $72.1 million out of total sales of $81.3 million. Those ad sales were up by 74% from the year-ago period.

But for an outfit such as Pandora, content is everything, and it certainly doesn�t come free. The company even said as much as its content-acquisition costs more than doubled, to $48.2 million from $23.9 million in 2011�s fiscal fourth quarter.

Yet zero is the price most Pandora listeners pay to hear music. Yes, Pandora does offer a paid option for $36 a year, which removes all advertising from the listening experience, but most of its 47 million registered users paid nothing for the 2.7 billion hours of listening that took place during the company�s 2012 fiscal fourth quarter, which ended in January.

Hence, there�s a need for advertising to acquire new content so that when you listen to, say, your customized Smithereens channel, Pandora can provide you with more variety and not the same three Lemonheads songs every hour you log on, most likely through the Pandora app on your iPhone. (Yes, I am making a point here about the same three Lemonheads songs coming up over and over again.)

�Pandora always carried very little margin for error, and now there�s error,� said Mark Mahaney, who covers Pandora for Citigroup. The analyst cut his rating on Pandora�s stock to neutral from buy, and also took down his price target on the shares to $17 from $25. The �error� Mahaney spoke of is �that with content costs constantly rising, monetization of mobile usage has to keep rising.�

Click to Play SXSW tries out new democracy

At the annual tech and entertainment festival in Austin, Texas, much of the agenda is dedicated to new forms of political campaigning, (Photo: AP)

Pandora Chief Executive Joe Kennedy, for his part, said mobile revenue was more than $100 million in the company�s 2012 fiscal year, up from about $25 million in 2011, and its key measure of revenue per thousand-listener hours, or RPM, rose to $20 from $13 a year ago.

�We believe Pandora achieved more mobile-ad revenue last year than any entity other than Google GOOG ,� Kennedy said on a conference call discussing earnings results.

Big shoulders to stand on, for sure. Which might also explain why Kennedy then couched his comments by saying: �Our current growth rate in mobile-listener hours may make it difficult to continue to improve mobile RPM in the near term, [but] over the long term, we are well positioned to take a significant share of this market.�

Adding more local sales staff is seen as a step in the right direction, and the company said it has finished up the initial staffing of local radio-ad sales teams in �most of the top 10 U.S.markets.�

But as Pandora realizes that all radio advertising is effectively local, there�s a sense that patience will be required for anyone betting on Pandora as an investment to hold onto down the road.