A question for future Internet radio business models got a partial answer this week from the world’s biggest social network and second-biggest mobile advertiser.
Facebook turned doubters into believers when it released its second-quarter earnings on July 24. The company’s mobile advertising, a question mark since Facebook’s initial public offering, jumped 75% to $656 million from $375 million in the first quarter and almost nothing a year earlier. Investors showed their enthusiasm for Facebook’s mobile success by sending shares up nearly 30% to a 52-week high of $34.73.
Facebook’s mobile turnaround is good news for Pandora and other mobile-heavy digital music services. Facebook has different advertising products, but what’s important is the narrative, which goes like this: Users are shifting from desktop computers to mobile devices. This shift demands that Facebook create and sell mobile ad products to replace lost desktop revenue. Analysts and investors have seen the desktop-to-mobile shift as a major hurdle in Facebook’s business. Strong growth in mobile advertising would prove that Facebook and other companies could overcome the mobile ad challenge.
If Facebook can figure out mobile advertising, can other mobile-heavy companies do it too? Wall Street seems to think so. Pandora’s shares rose 5.9% the day after Facebook released its earnings. Pandora has faced similar doubts about its ability to effectively monetize its users’ transition to mobile devices. In the quarter ended Jan. 31, mobile listening represented 79% of Pandora’s total listening hours while mobile revenue was just 67% of total revenue.
But mobile advertising is following the same path as desktop advertising before it-it’s going up. Pandora’s mobile RPM, or revenue per thousand listener hours, rose to $26.15 last quarter from $19.16 a year earlier. Stifel Nicolaus analysts believe mobile RPM will increase to $29.75 in the current quarter. Four years ago, Pandora’s desktop RPM was less than $20. Desktop RPM was $48.33 last quarter and has exceeded $50 in many earlier quarters.
Mobile advertising success is vital to the future of Internet radio and the future royalties of artists and labels. ITunes Radio will be powered by Apple’s iAds mobile ad platform (and also generate revenue by converting listening activity into iTunes purchases). IHeartRadio, Slacker, Songza and other ad-supported Web radio services will benefit from a healthy mobile advertising business. Internet radio is inherently a mobile product. During the next decade, as listening behaviors in the automobile change, Web radio will become even more mobile.
Pandora is well-situated for the shift in automobile listening. The company’s audio advertising revenue will be comparable to its display ad revenue this fiscal year. Cowen & Co. analysts forecast Pandora’s audio ad revenue to grow by 44% each year from $298 million in 2013 to $1.8 billion in five years. High expectations, but Facebook has showed it’s possible.