Summary:

Being the most popular is not a good enough business model, it seems, when it comes to music mobile apps. Pandora, the music-streaming app,…

Pandora icon

Being the most popular is not a good enough business model, it seems, when it comes to music mobile apps. Pandora, the music-streaming app, says it is the most-downloaded free music app in both the Apple (NSDQ: AAPL) App Store and Android Market in the U.S., but that volume has not translated into a gold-rush of mobile advertisers, its chief revenue source for the service. Although 70 percent of Pandora’s consumption happens on mobile devices, less than one percent of ad spend in the U.S. is aimed at mobile the platform. That’s potentially a big gulf, and leads one to wonder if we might see a pivot from Pandora (NYSE: P) on the horizon.

According to an article in Bloomberg, Pandora already attracts more listeners in big cities like New York and Los Angeles the cities’ biggest radio stations, but even so, analysts do not think that the service will be profitable until 2014.

Pandora today runs a streaming service that lets users listen to listener-generated radio stations, which it offers on a free, unlimited basis with ads running alongside the service. It competes most closely with the likes of Last.fm and is unlike services like Spotify, Rhapsody, Mog and Rdio, which offer users the ability to listen to specific music on-demand, and features subscription tiers starting at around $10/month that give users extra features, such as ad-free listening, mobile access and offline listening.

Although Pandora also works via PCs, the fact that it gets so much of its traffic from mobile platforms means that this is the area that the company will need to look at more closely if investors are not happy with those profitability prospects. And it seems as if they are not: increased competition from Spotify and the others, combined with the short-term profit issues, have shaved 16 percent off the company’s stock since it went public in June of this year.

Pandora hasn’t said it will pivot its service, but you do have to wonder if that could be on the cards. Mobile advertising, which looks like the most obvious revenue generator today, is definitely growing, but possibly not fast enough, and not in the formats that Pandora uses on its site, which range from display ads and video spots, to short audio clips, aimed at both local and national advertisers.

Mobile ads are forecast to generate revenues of $3.3 billion this year worldwide, according to Gartner. And depending on whether you trust Gartner or eMarketer’s figures more, the U.S. alone will bring in either $701.7 million or $1.23 billion. But with a large portions of that advertising coming in the form of search and maps revenues (great news for Google), as well as the old-fashioned format of messaging (that is, apps coming via SMS or picture messages) that doesn’t leave much to share among the many apps and mobile web sites looking for revenues from display and rich-media formats like video and audio clips.

According to Morgan Stanley, Pandora currently gets $20 in mobile advertising for each hour of music provided to listeners, and it will not offset music licensing fees with mobile advertising until 2016, when each hour of mobile music will generate $40, compared to the $23 in licensing fees it will get at that time, a rise of 35 percent on today’s rates. When the company filed its IPO it disclosed that half its revenues get eaten up by copyright royalties on music.

Pandora currently has 23 million active users and Morgan Stanley believes that this base could reach 159 million by 2021. If the company continues with its existing business model for the next decade, the analysts believe that Pandora will be listening to the service for an average of 18 hours per month by 2021, compared to 13 hours in 2010.

But even that raises another issue: whether Pandora can scale up its sales staff to meet that growth.

“It’s really tough to grow our sales organization 125 percent year-over-year,” noted CFO Steve Cakebread, speaking at an investor conference in September.

Although Pandora first debuted with an international service several years ago, it shuttered its international operation over music royalty issues and seems to have put those plans on ice for now.

“This is the most intractable problem of all,” Pandora’s CEO said in March. “It might be there’s simply no chasm bigger than the fundamentally global nature of the internet, and copyright which is still terribly parochial. We’ll be tripping over that, potentially not just for years to come but for decades to come. I wish I could say something more hopeful on that topic.”

You’re subscribed! If you like, you can update your settings

Comments have been disabled for this post