Pandora 2012 Annual Report Download - page 25

Table of Contents
Our failure to convince advertisers of the benefits of our service in the future could harm our business.
For our fiscal year ended January 31, 2012 we derived 87% of our revenue from the sale of advertising and expect to continue to derive a substantial
majority of our revenue from the sale of advertising in the future. Our ability to attract and retain advertisers, and ultimately to generate advertising revenue,
depends on a number of factors, including:
• increasing the number of listener hours;
• keeping pace with changes in technology and our competitors;
• competing effectively for advertising dollars from other online marketing and media companies;
• penetrating the market for local radio advertising;
• continuing to develop and diversify our advertisement platform, which currently includes delivery of display, audio and video advertising
products through multiple delivery channels, including traditional computers, mobile and other connected devices, including automobiles; and
• coping with ad blocking technologies that have been developed and are likely to continue to be developed that can block the display of our ads.
Our agreements with advertisers are generally short term or may be terminated at any time by the advertiser. Advertisers that are spending only a small
amount of their overall advertising budget on our service may view advertising with us as experimental and unproven and may leave us for competing
alternatives at any time. We may never succeed in capturing a greater share of our advertisers' core advertising spending, particularly if we are unable to
achieve the scale and market penetration necessary to demonstrate the effectiveness of our advertising platforms, or if our advertising model proves
ineffective or not competitive when compared to alternatives. Failure to demonstrate the value of our service would result in reduced spending by, or loss of,
existing or potential future advertisers, which would materially harm our revenue and business.
Advertising on mobile devices, such as smartphones, is an emerging phenomenon, and if we are unable to increase revenue from our advertising
products delivered to mobile devices, our results of operations will be materially adversely affected.
Our number of listener hours on mobile devices has surpassed listener hours on traditional computers, and we expect that this trend will continue. Our
mobile listenership has experienced significant growth since we introduced the first mobile version of our service in May 2007. Listener hours on mobile
devices constituted approximately 5%, 24%, 51% and 65% of our total listener hours for fiscal years 2009, 2010, 2011 and 2012, respectively. We expect this
growth to continue, though at a less rapid pace. Advertising on mobile devices is an emerging phenomenon, and the percentage of advertising spending
allocated to advertising on mobile devices is lower than online advertising. According to IDC, the percentage of U.S. advertising spending allocated to
advertising on mobile devices was less than 1% in 2010, compared to 13% for all online advertising. Our cost of content acquisition or licensing fee is
currently calculated on the same basis whether a listening hour is consumed on a traditional computer or a mobile device. To date, we have not been able to
generate revenue from our advertising products delivered to mobile devices as effectively as we have for our advertising products served on traditional
computers. While a substantial amount of our revenue has been derived from display ads, some display ads may not be currently optimized for use on certain
mobile devices. For example, display ads are not well-suited for use on smartphones due to the size of the device screen and may not be appropriate for
automobiles due to safety considerations. Further, some display ads may not be optimized to take advantage of the multimedia capabilities of connected
devices. By contrast, audio ads are better-suited for delivery in automobiles and across mobile and connected device platforms and video ads can be optimized
for a variety of platforms.
Our audio and video advertising products are relatively new and have not been as widely accepted by advertisers as our traditional display ads. In
addition, the introduction of audio advertising places us in more direct competition with terrestrial radio, as many advertisers that purchase audio ads focus
their spending on terrestrial radio stations. Thus, one challenge we face in promoting audio ads is overcoming any reluctance of these advertisers to migrate
their advertising spend to online advertising. We have plans to increase our number of listener hours on mobile and other connected devices, including our
efforts to expand the reach of our service by making it available on an increasing number of such devices, such as smartphones and devices connected to or
installed in automobiles, and we cannot assure you that we will be able to effectively monetize inventory generated by listeners using mobile and connected
devices, or the time frame on which we may do so.
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