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Pandora Media, Inc. (NYSE:P)

Bank of America Merrill Lynch Global Technology Conference

June 3, 2014 11:30 ET

Executives

Mike Herring - CFO

Analysts

Nat Schindler - Bank of America Merrill Lynch

Nat Schindler - Bank of America Merrill Lynch

I'm Nat Schindler. I'm an Internet analyst here at BAML. I'm very happy to and to welcome Mike Herring, CFO of Pandora. Just – we are going to jump right in. The first question I want to ask you, we just watched an ad for Pandora that doesn't – that isn't on Pandora. You are actually doing marketing of Pandora now. How is that working and where is it playing?

Mike Herring

We are then doing – that doesn't play on television or anything. These are mostly in social media on Facebook in places where we are connecting with people who already have engaged with Pandora at some other point in their digital life. We can tell someone a Facebook user has also been a registered Pandora user whether it's through mobile or Web. And since one of the ways we are reaching out to maybe more occasional or casual listeners to drive more frequent use on the site.

Nat Schindler - Bank of America Merrill Lynch

And I know you are a real data driven company, you can come from the actual data driven provider – data provider from your Omniture days. So I could imagine you are not doing this with a lot of performance based testing, how well is it working?

Mike Herring

Of course, we do a lot of performance based testing. You got to remember Pandora has built on a massive data set. We are a data company that has a great streaming music product. It sits on top of it. And that data makes that product so good. And also what we are using to create a higher ROI advertising vehicle for our clients and is a tremendous asset that has a lot of potential in the future to do a lot of different things.

And we are using it in every aspect of our business and of course, we spend a lot of time looking at the effect of our social media programs, our advertising programs in driving usage over timing and driving users -- we may basically measure two different ways, how often users come back and return to using Pandora and then how long they listen when they are there.

And so it gets a lot more complicated after that but those are two highest level metrics and so engagement is really the critical piece of how we are building our business from a metric perspective. And so those kind of ads perform extremely well kind of reminds people not just that Pandora is there, but why they listen to it.

Nat Schindler - Bank of America Merrill Lynch

Okay. I think that there are three main areas that people think about when they about your company and investors talk about. So I think we should go over each of them. The first big one is usage and related to that competition. The second one is, contact costs, and the third one is monetization. And those have been the three main things that have been basically playing this company for – since you have come public and certainly in the last year.

Usage is I think the key long-term driver here. Can you talk to what drives usage more than anything else? What are the things that you pay attention to looking for a longer term usage of your product?

Mike Herring

Yes. It's funny. You mentioned those three categories. Those are our top three strategic priorities internally. Everything is bucketed under those three things. It's whether like managing a content cost and figuring how to leverage that most appropriately, monetization obviously key to that and then usage, user and hour growth over time. So those are the things we think about everyday, no matter where you are, which one of the 1200 employees you have at Pandora. At some point your objectives are oriented around those three things.

Usage has been a very interesting complicated one in the year-and-a-half that I have been in Pandora. When I arrived, there was growing sort of rampantly and good usage growth was actually a problem from a cost perspective and that leads to the second one because every hour, every song we stream we pay for is not a percent of revenue model or anything, it's actually on a cost per stream model. It's very expensive to just run it let – let music run unbridled. And we spend a lot of time in 2013 holding that back we had a – if you remember we had a listening limitation on free mobile listening 40 hours that we implemented really in April of last year. We rolled it out from March through the end of April that brought our hours down significantly in Q2 and Q3 as we sort of limited and put controls on how that usage was able to grow and sort of shape itself within our user base.

We learned a ton about our users in that timeframe and we have implemented a lot of other things around how people use our products just to make it more appropriate – more appropriate for the cost model, more appropriate from a monetization model. But also, just around what our service is really about. Net-net is that by August, September we released that listening limit keeping other controlled in place and we have allowed hours to grow since then and users to use as many hours as they are able to in a month without any sort of blunt controls or caps on what they are allowed to listen to.

As we look into this year, monetization and how well we are doing that is really what governs how we think about user growth and hour's growth. We need to be able to monetize at certain level for growth to make sense. We think over the next few years, our users will continue to growth. We think -- as the 230, 240 million people that listen to AM FM radio move to connected sources of music listening. Pandora stands that benefit disproportionately from that migration.

We have seen that over the years, whether its in last year or the last nine years, no matter what the competition is large, small, well-funded or a scrappy start up, Pandora continues to gain market share in that timeframe. Year-over-year despite the fact that Twitter and Google and Apple and Beats and Spotify all launched free sort of competing services our market share hasn't changed in online radio. That's I think a testament to the two things, one is we do something very unique compared to them. So we don't compete directly with them in the context of how we deliver our music experience.

And second, we just do it extremely well. And we have very loyal users because of that. So over the next few years we think we can take where we are now, 76 million users grow that to more than 100 million users in the United States, we think we have opportunities internationally over the next three, five years to really grow the business. And in the meantime it's about monetizing our existing business and growing hours. Hours means cost, but they also mean monetization opportunities. A year ago, it was all about those hours may cost and we are doing everything we could to control cost.

Today as we are monetizing, $40, $50, $60 per 1000 hours that costs stays flat at 22 so as that growth goes up, we are able to monetize that additional hour very effectively. That's the art in the model. We wouldn't want to go to increase 50% tomorrow that users in hours that we wouldn't be able to afford scale monetization staff enough to do that. It's about scaling monetization and growth together that's the art of the business. And as a team, I think we have done a really good job over the last 18 months. And we think that sort of program you will see over the next one to three years.

Nat Schindler - Bank of America Merrill Lynch

Couple of things in that I want to touch on. But it's interesting; you didn't have to deal with a roomful of guys like us. What you've just said, it doesn't matter, we will take that VC money, we will burn it and we will go for it and so many hours as we can get and just build enough usage and say monetization will come later.

Another way of saying this, are you being cautious because of the demands of kind of the public markets or just the appropriate way to move the business that you guys have – fully determined at this stage you should be kind of balancing?

Mike Herring

So it's a great question. The management at Pandora really specifically Brian and myself have grew in businesses that went through some pretty rough times and you know that. No matter how good things might feel now anything could happen tomorrow, Lehman Brothers can explode, whatever else might happen? And he was at aQuantive and I was at Ancestry in 2001, 2002, we saw our values drop precipitously. And both of us built businesses out of those ashes, not our business is ashes not the ashes of the industry and of the marketplace because something Brian likes to say profitability is strategic.

One of the great advantages Pandora has over any other competitors I mentioned other than maybe Apple and Google is that we have a model that works financially that has positive and growing gross profit margins and operating profit margins. And that matters. And so we are private, we might more aggressive slightly from a sales and marketing perspective. We know that it's important to show leverage in those areas. It's important to show growth in things like gross profit and such that its all about balancing how much you invest in new markets that takes them time to develop versus doubling down, tripling down I might consider are performing well and have higher RPMs and really blowing out that market, taking our market share, you balance those things in an artful way.

As a public company you just have more scrutiny, it doesn't mean as a private company that doesn't happen, you just have fewer investors rather than less concerned one. But, as a management team, our philosophy wouldn't be much different. It's important to have a solid financial model that you believe in. What that gives you is a foundation that allows you to experiment and go after aggressive big area ideas. Hiring Sara Clemens has a Chief Strategy Officer, couple of months ago was kind of maybe Brian's big change. People asking me like oh, Brian McAndrews as CEO, what's changed? The big change is that before he showed up we were all about the one to three year opportunity executing on the radio, advertising market, the local advertising market really blowing that piece out and taking our market share and we are doing that extremely well.

What Brian added to the mix was the perspective to stick your ahead up and look over the horizon and say where can we take this business over time. Let's think about international markets more deliberately. Let's talk about constant adjacencies, let's talk about ancillary businesses that can layer on that next $100 million, $200 million, $300 million revenue stream to build a really interesting big business over the long-term. And long-term meaning five, seven, ten years, 20 years rather than the one to three years that have sort of always been in Pandora sight.

Nat Schindler - Bank of America Merrill Lynch

All right. What's a -- delve a little bit more into that kind of the growth in usage?

Mike Herring

Sure.

Nat Schindler - Bank of America Merrill Lynch

One, your ad load is – you are hitting your max with some of your demographics, right? You sell them those max six ads per hour, 15 to 30 seconds spot that's still been your basic constant?

Mike Herring

It is our maximum ad load of success per hour.

Nat Schindler - Bank of America Merrill Lynch

Okay. I know there are some people out there doing the same, they are hearing more but they are –

Mike Herring

Well, you can skip or change stations do things what actually drive a higher number, but if you are just listening to music straight that's the max ads per hour.

Nat Schindler - Bank of America Merrill Lynch

Yes. That makes sense because actually to you hour is all the way through the list – the length of a song regardless of whether its plays. So a hour is different amounts of time for people. But going back to that six ads per hour that's fully loaded, you and I were in a demographic in a region where you are going to sell out. So and probably a lot of people in this room New York, San Francisco based people are going to see –

Mike Herring

Six ads regularly.

Nat Schindler - Bank of America Merrill Lynch

Have you seen – as you get up to – yet your average is still 2.5 or 2 point something. Have you seen a difference in behavior from those kind of demographics that are getting sold out at and versus people who are having a much lower ad load that guy in Barrow Alaska who is 90. I'm sure he is not gotten sold out yet.

Mike Herring

It is not materially six ads per hour is not – we haven't hit some sort of tipping point where that causes a 5% drop in return rate or 10% drop in hours within that unseen – unseeing that inflection point yet.

Nat Schindler - Bank of America Merrill Lynch

Because compared to your competition of traditional radio its still a fraction.

Mike Herring

Yes.

Nat Schindler - Bank of America Merrill Lynch

And but compared to your competition of iTunes radio, iHeartRadio other online systems, its probably a bit higher. I don't think any of them that have gotten up to that level yet.

Mike Herring

Well, it all depends. I mean if you look at iHeartRadio a lot of what they stream is, a lot more hours because they are streaming Z100 or something. It's all over the place. I think focusing on how those is important, it expresses the opportunity at some level because we could add compared to Sirius Radio which is the primary competitor at least from an advertising perspective the only ones we see in a company's competitive situation. They have a much higher ad load and theoretically that's we compete with primarily for user hours and listening. So we have a lot of room add ad load that would assume that's the way we drive monetization and it is. And no matter last year we increased ad load twice, but the key to monetizing it service like Pandora isn't about – can we add one more half ad an hour and add an hour here there. There are some of that in the sell through the rate side of things driving that sold ads per hour, two and a half, three, three and a half over time.

But on the sold out areas, it's about mix shift, it's about targeting and segmentation. We have been able to drive increased ECPMs over the last six quarters, quarter-by-quarter not because ECPM is about what we are actually selling that ad for. And we do that by investing aggressively in our local sales and shifting inventory from national accounts which even on the spot market we are paying $6 to $9 CPMs to local which start at 9 to 12 and can be as high as mid to high teens below 20, depending on how targeted they are, rolling out the segments that I'm sure you have seen but the first half a dozen have been around Hispanic and Spanish speaking in political affiliation and income levels. And we create these segments like that that we then can sell more directly to people trying to reach those specific targets. That helps you bring CPMs.

So managing yield out of that ad load is actually more of a priority toward to-date than it is figuring out how to sell that one more ad or increase that ad load another ad or two. If the latter was our goal, it would be a race to the pit the Sirius Radio is in right now. And that's not what we want. We want to be able to monetize very effectively and relatively very low ad loads so that the listening experience stays really at a high level.

Nat Schindler - Bank of America Merrill Lynch

So If I looked at your growth of monetization, which has been very impressive over the last year partially that is cut back in hour, so they are relate – not cut back an hour but hours growth. They are deepened variables obviously…

Mike Herring

True but like this year I expect, if you look at Q1, hours we are not significantly year-over-year, you are going to see that in Q2 and Q3 and you see RPMs also increase in the same timeframe.

Nat Schindler - Bank of America Merrill Lynch

Okay.

Mike Herring

Even though the denominator continues to grow – grow 30% plus or something this quarter, we will still see RPM increase here.

Nat Schindler - Bank of America Merrill Lynch

But they won't be the 50% that you saw in some quarters, why is it...

Mike Herring

That's because…

Nat Schindler - Bank of America Merrill Lynch

Yes, is it in our deepened variables, if I look at that number and that growth in that number, would you say most of that growth is coming from selling of higher prices for better targeting for kind of more of the sold out demographics or is it coming from getting ad sold to the guys that you weren't putting ads on before?

Mike Herring

So it's definitely both. Two years ago we were in 8 markets, today we are in 37. The eight markets we are in two years ago, it's about optimizing the mix – optimizing CPM based on targeting plus more sophisticated. And then in 29 markets that we have been in for 12 to 18 months not even 18 months, 12 to 15 months, it's about sell through rate, right? It's about sell through rate of local advertising at the higher CPM. That RPM equation, I use all the time, it doesn't matter what group that I'm speaking to within Pandora, holidays the sell through rate tons inventory, quantity tons price over hours. And everyone in our company can point to one part of that dynamic to that effect. And so sell through rate, when I'm speaking to my local sales team couple of weeks ago and our sales kick off and I'm talking like you guys need to drive this number. This number needs to go from 20% in your market, Mr. Kansas City local seller to 60%, 70%, I want local to be at that 2/3rds level that we see nationally as part of the budget in your market. That's there goal.

Whereas in Manhattan or San Francisco or LA, where we have been in one of those original eight markets, we are pushing that 60%, 70% local already and now it's about optimizing CPM against what the specific targets are from a demographic basis within that market. So it's a combination of both. And we are very fortunate to be able to do that in a mobile environment that's why we are third globally even though in a very hot mobile advertising market because we have this native advertising unit audio advertising that we can sell to a ready-made and hungry market – the radio advertising buyer that's dying for real targeting, real measurement of ROI, when they start to see that. It really opens up the account. And we have seen tremendous value being driven for advertiser and that's why that investment keeps coming that's why we went from 70 plus local people in market last year to 100 plus this year. It's about doubling down in markets where we see traction and opening up new ones.

Nat Schindler - Bank of America Merrill Lynch

Okay. I have got bunch of. I want to jump on, but I'm going to kind of steer it back into my format, so I'm going to go back to – you are 9% of radio listening hours.

Mike Herring

Yes.

Nat Schindler - Bank of America Merrill Lynch

You are roughly 30% of U.S. radio listeners and still growing? But, how do you close that gap, are there any structural things like close the gap and what are the main drivers, what are the changing factors I assume the smartphone and connectivity and the like but what drives that to close that gap?

Mike Herring

We are the biggest one probably is automobile listening. Automobile listening is 47% based on NPD data of all radio listening. And its sort of AM FM big lap toll, I mean its where -- and Sirius has a decent piece, I mean they are auto listening, all of those listening falls into that category. That's an area where Pandora as very low single digit penetration in that auto listening. So when you think about percentage of hours, we are really about personal listening that is in the car though we have made a lot of progress there. We are increasingly in automobiles that get sold. We've been in a third of all cars this year, 135 models, its something that we think it's one of those investments to drive ubiquity basically it allow you to use Pandora in whatever fashion you want to, wherever you are, however, whatever device you want to use, and auto is the big one. So that's a big part about driving the percentage of hours up over time.

And we averaged 22 hours per user per month. Overall radio listening is about 50, 55 60 hours per month of the average American. So it's a big opportunity and then we have a lot of opportunity close that. The other piece there is the talk piece, which is actually disproportionately larger in auto as well, new sports that sort of thing that we currently don't provide in any way other than comedy listening which isn't purely talk.

So there is – if we were going to really aggressively go after 100% of that listening high we would need to address that. And so far we haven't, its just not been core to – over time it hasn't become a platform that probably makes more sense especially as it become bigger in the car having inner specials of hop-in, news on the nines or traffic updates, whatever make sense. But what we are good at is really builds around playing the right music to each individual repeatedly song after song. And that's a harder thing to do, it's so topical and so topic is requires a certain context that it's harder to do in real-time.

Nat Schindler - Bank of America Merrill Lynch

What percentage of that 55 hours a month of radio listeners are listening to right now is talk or non-Pandora related – non-music format?

Mike Herring

A hotly debated topic. We think it's about 15% maybe 15% to 20%. I think Sirius is much higher than that, right? It's a very talk sports news oriented platform. But overall, I think its about 15% to 20% of radio listening.

Nat Schindler - Bank of America Merrill Lynch

And if you really think about if you look at all the hours that are listened to on the radio, your format has been smartphones from the get go. Smartphones are with people everywhere they go. I don't remember walkmans really stand-in there in between. So actually many people in the room actually don't even remember walkmans. But, if you – how much do you think your format actually just expands the market at time that people can be listening to music.

Mike Herring

Well, actually streaming music connected radio, we think is actually bringing music back to a large extent. It's allowing a lot more ease of use of music in a lot of different format in a much more pleasurable way – better way of bringing it, saying it. One of the thing Pandora does because it's a lean back service allows you just turn it on and just place the right thing. And that's 80% listening is this lean back mode, its in your car or it's at home or your – at your desk or walking down the street, play something if you want to listen to.

And then the alternate side, on demand side hasn't placed, some of them want to listen to a specific song, or you want to hear – put together a list or specific event and that has – that is hell a lot of easier now than its used to be. I mean I used to have a big record collection. And I would have a tape deck and I need to make mix tape that way. It was – it's a dedication and work. Today that is a ton easier, right, whether you are using iTunes or you are using subscription service. That ease of use, I think dramatically expands your real market. Bringing music back to people in a very aggressive way – in a low friction way. I mean reducing ad loads from 15 minutes to 2 or 3 minutes makes a huge difference in terms of how much you are enjoying that experience.

So – we think we are going to build that high over time that's the question. We see that experience definitely in our own users, start listening to certain amount and it grows their usage over time.

Let's look at our highest level, on a per user basis, we went from 17 hours a user last year to 22 hours user this year, part of that is providing other avenues whether in the car, et cetera listen to it. Others just building a love for music again and making it easy to listen.

Nat Schindler - Bank of America Merrill Lynch

If you ever feel guilty about taking away the 13-year-old right to passage of making a mixed tape for his girlfriend? I was shocked, I can't go through.

Mike Herring

Not exactly, no. Nobody does that any more.

Nat Schindler - Bank of America Merrill Lynch

I know exactly its gone. One thing you mentioned you brought up Kansas City that's an interesting one because connectivity I would imagine is a real big driver there. Did you see and what kind of impact did you see as Kansas City changed its broadband environment as Google fiber gets on?

Mike Herring

We are so big that it's hard to see any specific event usually moving the needle. And ironically Kansas City is sort of one of the exception because it was such contained environment that would win – connectivity just became easier across the board usage of Pandora goes up. And its part of our overall investment thesis is that the more places we are – the easier to use our product the more people will use it, more we can drive users, more we can drive hours per user. And have proven that I think in the kaleidoscope of effort. The Kansas City is a great example. By making it easier in the home, in the connected environment just to use – use services like Pandora, they switch over a lot faster. And we just saw – you can see it, if you look at it before and after a meaningful lift in listening hours per user in Kansas City.

I don't expect Google to change the world. I think they have different reasons why they are doing that. But, overall, when you think about broad net access in the United States, globally cell phone ubiquity, smartphone ubiquity all those things are about the same sort of evolution which is allowing connectivity to change the way we can consume music. And services like Pandora are waiting for them when they get there. And one of the reasons we grew so faster with mobile phones. We are a desktop business for a long time. iPhone launched in that – the catalogs for Pandora's growth just because when it became possible to do that within – our device like iPhone, Pandora was there waiting. We were like one of the few apps in 2007 that worked in that environment.

And because of that we grew very nicely and we went top 1, 2 in the iOS environment ever since. We think that is going to just repeat itself as devices whether TVs or set-top boxes or Sonos or Roku boxes or whatever. As this – it spread, all this connectivity spreads into every part of your life, you are going to change your whole consumption patterns around music, around any media generally and we want to be there waiting for consumers when they get there.

Nat Schindler - Bank of America Merrill Lynch

Well, that's a perfect segue into next question.

Mike Herring

Okay.

Nat Schindler - Bank of America Merrill Lynch

Google sitting there reportedly talking about blanketing the world with Internet connect –

Mike Herring

Satellite.

Nat Schindler - Bank of America Merrill Lynch

Satellites or low level satellites, is Pandora going to be waiting there and ready internationally?

Mike Herring

International stuff, I mean these sales, as long as we have the licensing in any of those regions of course, we will be there. The licensing piece, music is tough. It's a complex piece of our business model that means solving. I have always felt that the more complexity and difficulty in industry like this, the more value in niche over time. It's been something – I think we have seen repeatedly over the last 15, 20 years in the Internet world. And I think music is one of the last bashes, one of the last areas where that needs to be solved. So that value can be unleashed – it can be unleashed by the distributors like Pandora, it can be unleashed by the copywriter owners or the creators, the musicians that are out there.

I think everything being held back right now because of that and international is a great example of places where innovations not happening and music isn't being spread at least in the radio format yet because the licensing so ugly. I think we can solve that over time. And when – by the time they have launched a few hundred satellites maybe we will have that sign, we will see.

Nat Schindler - Bank of America Merrill Lynch

So there was a recent ruling out of Canada, I know your brothers out there have talked about Canada since the days of the IPO, and it's taken a while. But there was a reason, and is this going to – are you ready to walk in as soon as…

Mike Herring

So this speaks of the complexity. So that ruling is related to sound recordings, which is one part of the licensing. The other piece is the publishing side. So there is two pieces of licensing you need for every piece of music that you stream. And that its in sound recording part, Canada does things a little differently. United States, the CRB sets rates for the next five years, Canada waits. And then sets rates retroactively, which is why we weren't there because we didn't have any idea how much we would have to like pay retroactively above the street.

The good news is, what the rates they sent now, they are basically won't move half of much going forward even though it will still be a retroactive piece. So the sound recording licensing in Canada is definitely at a level that we think we can build the night business in Canada. We have to solve the publishing side now. But once, we are a big step closer to being in Canada.

Nat Schindler - Bank of America Merrill Lynch

What other countries are close in their royalty discussions?

Mike Herring

That is impossible in any accounts. I mean Canada came out – not out of the blue it's a process that we have been involved in for years trying to get it. But the ruling came out of the blue. And that's very typical of how these works literally something moves all of a sudden and we get a ruling from the government agency or a society and it moves us a step closer. So there is nothing that I can point to right now on that front. I would say that the other way to do it is direct licensing, obviously that's how Spotify et cetera iTunes have all operate internationally.

We have to see a direct licensing deal that we think is the right business model for Pandora. But, we are actively interested in talking to the content owners, copywriter owners and figuring out if there are ways to find a mutually agreeable licensing format that will allow us to expand internationally.

Nat Schindler - Bank of America Merrill Lynch

Is there why or direct licensing deals one of the reasons why you have amassed a pretty significant war chest of cash despite the fact that you are closing on cash flow – free flow cash – being positive free cash flow?

Mike Herring

It's one of the reasons. I mean you want to be able to enter these agreements from a position of strength. And if you can – a simple way of thing buy down rates at some level by prepaying that would be helpful historically these direct deals have been done with prepayments whether its by Spotify or Apple et cetera. The problem is that the big payments getting rates that make sense from my perspective – from Pandora perspective yet.

But those are also different models those are on-demand streaming models, subscription models, ways of thinking about distributing music that are different than what Pandora has done historically. So I would expect anything we would do internationally would be structured differently and prepayments certainly could be part of that. I mean that's one of the reasons why we put $400 million in the banks. We think – we are not – it's not for operating purposes. It's to have – to be capitalized the way certainly but also to have a position of strength as we look to do other things.

Nat Schindler - Bank of America Merrill Lynch

Make sense. I have a ton more questions. But, I would like to open it up to the room?

Question-and-Answer Session

Unidentified Analyst

(Question Inaudible) Can you talk a little bit about how you conducting play-offs that you guys amend maybe within that you can just remind us whether you sell programmatically today on the desktop and where those CPMs come out at versus your corporate digital desktop average?

Mike Herring

Right. So I will kind of start answering that backwards. Programmatic is really only available today in desktop display. And we have – we do a meaningful percentage not a majority of desktop display through programmatic channels and ad exchanges, private exchanges and such. And it's a good source of revenue, it's a great way to fill out, I mean your inventory especially in short timeframe.

In display because it's been controlled mostly by the advertiser side of the business, it has a depressing effect on CPM maybe that's the way of putting it. If you enough scale like Pandora and others like – you can counteract that pretty well especially if you have targeting capabilities. If you want a certain of audiences programmatic isn't necessarily going to solve that for you because that inventory is not going to be available in that environment.

What's different about mobile and programmatic by the way displays in the web side of things, it's really driven by the cookie world, right? Everyone in the stands with audience are based on cookies that's how you understand and build segments. And the mobile world it's down to cookies, so you immediately have a problem from an advertiser perspective. So the power shifted to the log-in publishers of the world and that's Facebook. That's Twitter. That's Pandora. We have logged in first party data at scale. And that's where the Facebook exchange is really interesting – interesting for Pandora. But interesting for anybody who is trying to reach an audience at scale in a targeted way in the mobile world, which is right now really hard to do outside of basically handful of publishers.

The difference is publishers control these markets, so the power – pricing power shifting from advertiser driven to publisher driven when you go from web to mobile that make sense. And that's why the exchange is so interesting is Facebook can control pricing much like Google control adware pricing over time, right? They brought that up as they increased segmentation, as they increased demand, as demand raised Google is able to allow that demand bring pricing up not depressive. And I think that's the dynamic Facebook looking for there. That's great for publishers like us if we participate in things like the mobile exchange or do around. Right, so that's a beauty of the mobile world at least the way we look at it from a logged in publishers perspective.

Nat Schindler - Bank of America Merrill Lynch

Any questions? If anyone else doesn't, I will follow-up? Right now last I heard you were running some 65% 70% of your desktop directly sold display inventory with the rest being filled in with that network and the like and programmatic.

Mike Herring

Yes.

Nat Schindler - Bank of America Merrill Lynch

And you were on the order of 15% of your mobile inventory sold directly and going off, I'll assume that's gone up since then is that changed dramatically in or the – has the CPM difference as you have gotten better with programmatic, closed, I mean that's it used on average order of 10x or direct?

Mike Herring

Here I will say close a little bit. I don't expect those CPM differences to close until we shift to a programmatic mobile model where a back majority of our inventory is and that's why that sell through rate in mobile so low and it's increased. But it's still a fraction of whether it's desktop, 80% of our inventory is in mobile. And the demand is nascent. They are still trying to figure that out. In the desktop world the buyers -- advertising buyers understand it super well. It's 15 years into it, 20 years into it, they have been buying advertising for a long time. They know how to target. They have all these cookies. They can bring segments to the table. There is third party aggregators of data that can help you segment.

All that stuff doesn't exist in mobile yet, right? That is really, really nascent. It's where the big opportunity is over the next one to three years probably. So in the meantime, we have to be careful about how we shift things in mobile. We have a lot of inventory; lot of it is caused action alongside our native audio ads that's a big use of mobile digital within Pandora. And we are increasingly selling more of it direct. But, we are not in a race to find a programmatic way of selling, we don't need to. So we are not going in that direction. It's one of the advantages of having such a big audio business.

Nat Schindler - Bank of America Merrill Lynch

Okay. Any other questions. We don't have much – we are out of time. But we will take one – anyone? Okay. Well, we are out of time.

Mike Herring

All right, then, thank you very much.

Nat Schindler - Bank of America Merrill Lynch

Mike, thank you very much.

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Source: Pandora Media's (P) Management at Bank of America Merrill Lynch Global Technology Conference (Transcript)
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