Among the most difficult of all business problems is the emergence of a new competitor with deep pockets, high brand awareness, extensive retail distribution assets, domain competency, and a huge installed base of existing customers. And that’s precisely what Pandora, the music streaming service, now faces as Apple plans its own streaming music service.
Particularly troubling for Pandora, which is among the biggest recipients of mobile advertising revenue, is that Apple is likely to offer its own music streaming as a loss leader. In other words, Apple will merchandise music streaming to sell more content and devices, forgoing the key revenue stream that Pandora relies upon.
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And Pandora has been struggling to maintain profits, even as it already has established itself as a big and growing venue for mobile advertising. Pandora mobile ad revenue increased by 86 percent in its second quarter.
Total revenue was $101.3 million, a 51 percent year-over-year increase. Advertising revenue was $89.4 million, a 53 percent year-over-year increase.
Subscription and other revenue was $11.9 million, a 36 percent year-over-year increase. Pandora also saw a 112 percent increase in the number of ads delivered.
But the problem is that listeners, and listener hours, are growing faster than revenue is growing. Pandora also says it experienced a decrease in the average price per ad of approximately 27 percent.
Pandora also has invested in its sales force, growing operating expense in that area approximately 80 percent year-over-year.
So Apple poses a huge threat.
Pandora has still not figured out how to sell ads profitably, and the company has repeatedly posted net losses, despite being one of the five biggest mobile ad businesses mobile ad businesses in the United States.
So Pandora is selling more ads, but facing pricing pressures, investing in higher sales capability, at a time when user growth is outstripping the pace of ad sales.
Now, Pandora also will face competition from Apple, under circumstances where Apple can afford to merchandise its service. It’s always difficult to compete in your core business with well-heeled new entrants who can afford to give away what you sell.
Edited by Brooke Neuman