Pandora Is Auctioning Off Its In-App Banner Ads Programmatically

Ford Among First Brands to Test Company's Private Exchange

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An example of a display ad running in Pandora's mobile app.
An example of a display ad running in Pandora's mobile app.
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Advertisers can now buy banner ads to run in Pandora's mobile apps as easily as they can book a flight on Kayak.

The streaming radio service has built a private ad exchange to conduct live auctions in which advertisers can place bids for how much they'd be willing to pay for their ad to run in Pandora's apps. These auctions allow brands to pinpoint the types of listeners they want to see their ad based on who's listening to Pandora at a given moment, as opposed to advertising to a broader base of people over a longer period of time.

Pandora began operating such auctions last year for banner ads running on its website to fill some extra ad slots. But those advertisers were mainly using the auctions to advertise to people that had visited the advertisers' sites. Later in 2014 Pandora looked into letting advertisers target their ads based on the service's user data like age, gender and Zip code information that are provided when people sign up for Pandora. That would open up the auctions' value beyond retargeting people already interested in a brand to people who may have never heard of a brand but fit the profile of the brand's customer base.

In March of this year Pandora began a test to let some advertisers -- including Ford and digital agency Essence's clients -- use this first-party data to buy ads through a private exchange auctioning off its mobile in-app display ads. The company is now officially rolling out the system and will be briefing advertisers on during the Cannes Lions festival next week in France.

Pandora's VP-Product Jack Krawczyk likened the automation of the company's in-app display ad sales to a retailer accepting credit cards after previously only taking cash or check. It's just an easier way to buy what had already been for sale. It's Pandora's hope that reduced friction could mean more sales. "When businesses accept credit cards after accepting cash and check, you start to get a lot more transactions taking place in your system," he said.

Increased demand for its mobile display ads could help Pandora close the gap between its mobile and desktop businesses. While mobile accounted for 78% of Pandora's overall revenue in the first quarter of 2014, the company doesn't make nearly as much money from advertising when people listen to its service on their smartphones and tablets as they do on their laptops. In the first quarter, Pandora made $34.92 in ad revenue for every thousand listener hours on mobile, but $58.04 for those same hours when on desktop.

It's unclear the extent to which these automated mobile banner sales could help. Pandora doesn't break out what percentage of the ads it serves on mobile are display ads or audio ads, but it may swing toward the latter, especially depending on how many people listen to Pandora with their phone in their pocket or while perusing another app on their tablet. Pandora only serves display ads on mobile when it can see that Pandora is open and displayed on a device's screen, Mr. Krawczyk said. He added that Pandora can't yet sell audio ads through its exchange because the automated ad-buying tools that advertisers use aren't set up to buy audio ads, and advertisers aren't coaxing those tool providers into getting equipped for audio ads.

Pandora's private exchange isn't open to all advertisers, only the ones that have directly bought ads from Pandora's sales team. That stipulation should help to ensure the quality of the ads sold through Pandora's exchange. And to make sure there are no loopholes, Pandora is preventing any third-party automated ad-buying tool from exploiting one advertiser's access to Pandora's exchange by letting other clients piggyback on that access.

"In order to be able to transact with transparency as well as target with first-party data, you have to have a direct relationship with [Pandora] to buy into the marketplace," Mr. Krawczyk said.

In addition to Pandora's first-party user data, advertisers can target ads based on the 350 targeting segments the company has created by combining its own data with data from third-party data providers. They can also target ads using unique targeting segments that Pandora has created from its own data, such as their likely ethnicity and likely voting preferences. Or brands can bring in their own data, such as lists of mobile device IDs that apps are able to collect with users' permission.