Pandora 2012 Annual Report Download - page 54

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Table of Contents
Given the royalty structures in effect with respect to content acquisition, our content acquisition costs increase with each additional listener hour,
regardless of whether we are able to generate more revenue. As such, our ability to achieve operating leverage depends on our ability to increase our revenue
per hour of streaming through increased advertising sales.
As our mobile listenership increases, we face new challenges in optimizing our advertising products for delivery on mobile and other connected device
platforms. The mobile advertising market is nascent and faces technical challenges due to fragmented platforms and lack of standard audience measurement
protocols.
In addition, we expect to increase the number of audio ad campaigns for both traditional computer-based and mobile platforms, placing us in more
direct competition with broadcast radio for advertiser spending, and these advertisers predominantly focus on local advertising. By contrast, display
advertisers have been predominantly national brands. To successfully sell audio ads, we may have to convince a substantial base of local advertisers of the
benefits of advertising on the Pandora service.
In fiscal 2011 and 2012, we substantially increased our expenditures for product development, marketing and sales and general and administrative
expenses to generate growth and provide support infrastructure for that anticipated growth. We expect that this increased level of operating expenses will
continue into the future.
Our total revenue has grown from $55.2 million in fiscal 2010 to $274.3 million in fiscal 2012. At the same time, our total cost and expenses have
grown from $70.6 million in fiscal 2010 to $285.3 million in fiscal 2012, principally as a result of the growth in content acquisition expenses. As the volume
of music we stream to listeners increases, our content acquisition expense will also increase, regardless of whether we are able to generate more revenue. In
addition, we expect to invest heavily in our operations to support anticipated future growth and public company reporting and compliance obligations. As a
result of these factors, we expect to continue to incur operating losses on an annual basis through at least the end of fiscal 2013.
Opportunities, Challenges and Risks
Advertising revenue constitutes the majority of our total revenue, representing 87% of total revenue in both fiscal 2011 and 2012. For fiscal 2012,
approximately 50% of our advertising revenue was derived from advertising delivered on mobile devices such as smartphones, tablets and other mobile
devices, nearly double the percentage derived from fiscal 2011, with the remainder of our revenue relating to web-based advertising on desktop and laptop
computers. In addition, listener hours on mobile devices constituted approximately 51% and 65% of our total listener hours for fiscal years 2011 and 2012,
respectively, with the remainder of listener hours delivered on desktop and laptop computers. Though the mobile advertising market is currently nascent, over
time we see no fundamental difference in the monetization potential between mobile devices and desktop and laptop computers.
Key Metrics:
We track listener hours because it is a key indicator of the growth of our business. We also track the number of active users as an additional indicator of
the breadth of audience we are reaching at a given time, which is particularly important to potential advertisers.
We calculate listener hours based on the total bytes served for each track that is requested and served from our servers, as measured by our internal
analytics systems, whether or not a listener listens to the entire track. We believe this server-based approach is the best methodology to forecast advertising
inventory given that advertisements are frequently served in between tracks and are often served upon triggers such as a listener clicking thumbs-down or
choosing to skip a track. To the extent that third-party measurements of listener hours are not calculated using a similar server-based approach, the third-party
measurements may differ from our measurements.
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