State Bank of India

Pandora's One Stop Solution For Advertisers

It has taken quite a bit of time for the advertising world to realize the advantages Pandora (NYSE:P) can offer, but the word is getting out there and the response seems to be quite positive. Despite a challenging business model and competitive landscape, Pandora finds themselves in a niche that other services simply can not match. At least not yet.

Because Pandora is delivered to specific users the company actually knows who is listening, when they listen, and what they listen to. These are key elements that advertisers want to know and get a handle on as best they can. For decades advertisers had no "REAL" idea of the audience their ads were playing to. Don't get me wrong, it has not been a total shot in the dark, but the reality is that the whole advertising community relied on ratings books that essentially had everyone capable of breathing listening to one station or another 24 hours per day. Pandora can get very specific, and that has an appeal to the advertising world.

At this point Pandora is unique in the combination of the level of information they can provide and audience numbers that make advertising more useful. There will be a point in time when other companies like Slacker, iHeartRadio, and Sirius XM (SIRI) can catch up, but it is not now, and likely will take quite some time, In the meanwhile Pandora will continue to grow and make inroads.

What Pandora is going after now is local advertising. A recent article in the New York Times spells out what Pandora is trying to accomplish. They key here for investors is determining whether or not Pandora will succeed in this market. My thoughts are that Pandora has already put a dent in the market, and will continue to build momentum as the word spreads about what I term "specified advertising".

Specified advertising is when a client such as a car dealer wants to reach a specific demographic in their region. Pandora can not only tell that advertiser when people are listening, but how many, as well as what types of channels and streams that specified demographic is listening to. It is essentially a one stop shop. Think about it. That same car dealer working with terrestrial radio may have to cover five different stations and deal with five different sales forces in order to get advertising coverage. With Pandora it is one call and done.

The trick for Pandora in my view is to be very controlled in how they grow this segment of their business. If I was running the program I would concentrate on the top 10 markets, then expand to 15, and finally 20 and beyond. This is not an easy task. Terrestrial radio offers the ability to have popular DJ's read the spots, as well as the ability to work advertising into a radio promotion. Terrestrial radio can also offer a well controlled environment to record ad spots. Pandora, if they move to fast, will need to rely on third parties that may not represent the company the way a company person would. It is a tricky part of growing.

If Pandora plays their cards right they could begin adding some serious dollars to the bottom line as well as helping to rebuild what has been a leaner time in the advertising world.

The metric for investors to watch is the advertising and subscriber metrics. Pandora needs to increase revenues to get them more in line with what people want to see. With royalty expenses so high, investors need to be able to have confidence that COE Tim Westergen and his team can deliver on a scale that shows continued improvement. Pandora does not need instant profits to become a favorite of investors. They simply need to prove that they can weather the storm of growth.

Getting into local advertising makes perfect sense for Pandora.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.