Facebook received heaps of praise last month when it reported that mobile now accounts for 41% of the company's advertising revenue. On Thursday Pandora outdid the social network when the Internet radio company that mobile made up 70% of the company's $128.5 million in second-quarter advertising revenue.
Pandora's mobile advertising revenue has grown to the point that the company will be eliminating a recent move to convert some power mobile users into subscribers of its ad-free service. The company, which has been hampered by ballooning costs for acquiring the songs it streams and seen its stock hurt as a result, has also begun experimenting with increasing the amount of ads it airs, further underscoring advertising's importance to its bottom line.
Advertising Age discussed Pandora's advertising business in an interview with the company's chief revenue officer John Trimble following Thursday's earnings call.
Advertising Age: Mobile advertising now accounts for 70% of Pandora's total ad revenue. What do you attribute that to?
John Trimble: We saw the move from desktop to devices early, especially within our app environment. We accelerated our strategic moves, and I break it out into a small handful. The first is we really pushed on the product innovation to take advantage of audio, as it is really the killer native app within the mobility and music space. Next we really started to scale our sales force. We've grown the sales force by 73% year-over-year, and a lot of that is to compete directly for that $15 billion of broadcast radio advertising. More specifically, while we did it on a national level, we pushed extremely hard into the local markets. Last year at this time we were in approximately 8 to 10 markets; we're now in the top 28 radio markets.
Ad Age: Audio ads accounted for more than 60% of total ad revenue this quarter, making it Pandora's dominant ad format. Now you are looking to gradually increase the amount of audio ads run on the service, starting with last week's test to air back-to-back audio ads. What's the motivation behind that?
Mr. Trimble: A couple things. One, in the mobile device world the native application of an audio ad is extremely effective. You can create calls to action. It's very intuitive when you're listening to music. And then based on the success of our ability to monetize at the more recent capacity, we now have the ability to move that capacity up to be able to take the markets and deliver more inventory for advertisers.
Ad Age: To what extent are you looking to increase ad loads or minutes of ads per hour?
Mr. Trimble: I think we look at it in combination of [the two]. How do you think about the user experience while continuing to deliver the type of inventory to meet marketplace demand? And I think right now three minutes an hour continues to be a great user experience and allows us to be able to deliver against advertisers' needs.
Ad Age: Pandora chief financial officer Mike Herring pegged five ads, or two-and-a-half to three minutes of ads, an hour as the max. Is that the ceiling under consideration?
Mr. Trimble: Again we've been really conscious of moving ad loads up in a very user-friendly way. Everything we're doing is testing. We're moving slowly in how we move it up, in how we serve the ads. And again we want to be responsive of both the user experience and how we keep the value exchange strong with the brands. So I think what we'll do is begin to test these double spots. We'll see how it moves from the user experience.
Ad Age: Pandora announced today that it will eliminate the 40-hour monthly listening cap on the mobile ad-supported service that was instituted in March to counter the increased royalty costs from those longer listens. What does that signal about the mobile advertising business?
Mr. Trimble: I think it reinforces the success we are having with monetizing and selling ads on mobile platforms. We used the cap as a lever to control some of the costs, but we've always looked at the business as 80% ad-supported and 20% subscription-based [Advertising accounted for 82% of Pandora's second-quarter revenue].
Ad Age: Content is a big cost, increasing 35% year-over-year to $81.9 million in the second quarter. But sales and marketing expenses have had a steeper climb, up 95% to $45.8 million. Why?
Mr. Trimble: I'd say we have been extremely active in bringing on new sales people over the last 18 months. It certainly adds to your short-term cost of sales. What we've been really clear about is we continue to want to invest in the growth and push of our local business.
Ad Age: How are you going about managing the growth of the local business without impeding your national advertising business?
Mr. Trimble: We've been really effective in creating a very good delineation of sales channels within our organization. We're not doing anything that hasn't been done very effectively across many advertising mediums, from television to broadcast radio to Google. If you do it properly and have a sophisticated approach to the market, there are ways to tap into the multiple revenue and market opportunities.
Ad Age: Mr. Herring said local is the fastest growing segment of Pandora's advertising revenue. What is the split between local ad revenue and national ad revenue? And is there an ideal ratio you're aiming for?
Mr. Trimble: At this point we really don't publicly break it out for competitive reasons.