Pandora, the popular online music streaming service, filed a 10-Q this morning describing in more detail how it's handling the massive influx of mobile advertising revenue it booked in Q2 2012.

The context here is that Pandora has still not figured out how to sell ads profitably, and the company has repeatedly posted net losses. Nonetheless, it is probably one of the five biggest mobile ad businesses in the U.S.

Pandora previously told investors that mobile ad revenue increased by 86% to $60 million in its fiscal Q2 2013. Total revenues were $101 million. Today, the company disclosed the downside of all that. Here's the summary:

  • A 112% increase in the number of ads delivered.
  • A decrease in the average price per ad of approximately 27%, due in part to the mobile ad mix.
  • An increase in Pandora's sales force by approximately 80% year-over-year

In other words, Pandora hired more salespeople, and sold more ads—but at a huge discount from the prior year. It's incurring greater costs to make lower dollar sales.



Click to enlarge Pandora's revenue's per listener hour.

All that explains what we told you on Aug. 30, which is that revenue per listener hour is in decline at Pandora. That's a crucial metric for the company, because every listener hour generates song royalty expenses that Pandora does not control.

As a result, Pandora has altered the language in the "Business Model" section of its 10-Q to warn that the ad revenues are not keeping up with the increased mobile listenership (see page 16):

 … our content acquisition costs increase with each additional listener hour, regardless of whether we are able to generate more revenue. As such, our ability to achieve and sustain profitability and operating leverage depends on our ability to increase our revenue per hour of streaming through increased advertising sales across all of our delivery platforms.  To date, we have not been able to generate additional revenue from our advertising products as rapidly as we have been able to grow our listener hours on mobile and other connected devices ...