Peter Kafka

Recent Posts by Peter Kafka

Pandora’s LivingSocial Problem (Which Could Be a Plus)

Pandora’s problem, in a nutshell: It’s a Web media company that never really gets to enjoy scale. The more users it gets, and the more use it gets, the more it has to spend on music costs.

So even though the Web radio service is in go-go growth mode, the only way it’s going to work is if its ad revenue grows even faster.

And if you want make the bear case against Pandora, which goes public tomorrow, it’s easy enough: Take a look at the clumsy ads it currently runs on its iPhone app.

BTIG’s Rich Greenfield does that in a 10-minute video, which I’ve embedded at the bottom of this post. But here’s the short version:

  • There are lots of ads, but most of them won’t be obvious to most users, because they’re visual, not audio, and you don’t spend much time looking at your Pandora app when it’s running.
  • There is a whole lot of advertising from LivingSocial, which gives the operation a late ’90s feel — as Danny Sullivan puts it, one “bubblicious” company advertising on another. And those LivingSocial ads are really, really persistent — if you close them out, they’ll pop back up. And even if you give in and sign up, as I’ve done, they won’t stop. Which is especially bothersome on Pandora, since the whole point of the service is that it’s supposed to learn what you like and give you more of it.
  • Conventional radio is a local business. But Pandora’s ads are predominantly national.
  • Did we mention all those LivingSocial ads? If you use Pandora a lot, it can seem like its primary purpose is to deliver new users to the daily deals service, and that music is a secondary benefit.

Then again, all of this is easy to flip around: Pandora’s ads are crude and clumsy because Pandora is just starting to become a Web media business — up until recently, it was a technology company that didn’t spend much time figuring out how to generate revenue.

Meanwhile revenue is growing very fast — up 131 percent in the last quarter. Think about what could happen when Pandora learns how to make its ads more sophisticated and targeted.

And along those lines, perhaps all those LivingSocial ads can end up working to Pandora’s advantage. Pandora tells investors that it’s going to spend money building out a local sales force, but perhaps there’s a way to piggy back on the huge sales force that LivingSocial (and/or Groupon) is buying.

Remember that the daily deals companies are at a pretty crude stage, too, which is why I keep getting spa ads I’m never ever going to click on. But local ads sold by LivingSocial, and personalized using Pandora’s algorithms? Pretty interesting.

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Just as the atom bomb was the weapon that was supposed to render war obsolete, the Internet seems like capitalism’s ultimate feat of self-destructive genius, an economic doomsday device rendering it impossible for anyone to ever make a profit off anything again. It’s especially hopeless for those whose work is easily digitized and accessed free of charge.

— Author Tim Kreider on not getting paid for one’s work