Photo: B.I. / Matt Lynley
Pandora’s fiscal Q2 2013 earnings showed yet another quarter of robust revenue growth—and yet another loss on the bottom line. The market—buoyed by Pandora’s mobile revenue growth—boosted the stock on this news.We’ve made the case ad nauseam that Pandora’s business model is fundamentally flawed and can only be rescued if its lawyers and lobbyists can persuade the record labels to lower the royalties they demand to be paid on each song Pandora plays.
But in this most recent disclosure, a new problem has emerged for Pandora: It might be reaching a ceiling on its growth.
Here are some charts showing Pandora’s user growth and how much it gets in revenue. At first glance, Pandora’s user base appears to be growing:
But the number of total users has hit a plateau. It hit a plateau in the same period the year before, so we don’t yet know if the trend is still up or if there really are only 150 million people who want to listen to streaming radio.
More worrying is the situation around how much money Pandora makes from every user it has:
Pandora can’t seem to get through that $1.90 per user level of revenue. Still, Pandora’s revenues are obviously seasonal, so these lines could still be trending up.
But look at revenues per listener hour:
This is definitely trending down. It would seem that even though Pandora might be booking more total revenues for each listener, the average money it makes per hour from each listener is in decline.
Why? (We asked the company for comment but haven’t heard back yet.)
Here’s one theory: Pandora’s mobile ad business might actually be hurting it.
Mobile ad revenue, at $59 million in Q2, is now a majority of the company’s total revenues. Mobile ads are a lot cheaper, generally, than desktop ads because they’re smaller and fewer companies are set up to buy them. So there’s less overall demand.
Could it possibly be that because more people are accessing Pandora on their phones and tablets, and because Pandora has been so successful in attracting mobile ads, that the glut of lower-priced mobile inventory Pandora is serving to its user base is lowering the revenues it gets per hour of songs played?
If that’s the case, then the structural problem at Pandora could be about to get worse. It’s already bad because Pandora’s expenses are pegged directly to its revenues. Historically, Pandora has been unable to make $1 without spending $1.06 to get it. That trend continued in Q2:
Lower ad prices on mobile, coupled with a ceiling in users: That’s the worst-case scenario that is now Pandora’s No. 1 problem. It also makes the need for Pandora to launch its new Facebook-style ad exchange even more pressing.
- Pandora’s Mobile Ad Business Has Almost Doubled In Size
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