Digital radio continues to attract listeners and revenue. But industry watchers worry that profitabilityradiorightsize problems and scale pose long-term challenges. The experiences of Pandora, a large industry operator, illustrate where the digital radio market is headed this year.

Digital radio will reach 159.8 million listeners in 2014. eMarketer analysts say that number amounts to 63.5% of Internet users and 50.1% of the U.S. population. Analysts expect about 183.4 million U.S. consumers to tune into digital radio by 2018. The growth rate between now and then is significantly lower than it has been in the recent past. However, digital radio has reach enough critical mass to attract the attention of advertisers. On average, digital music listening hours stand at about 4.22 billion hours monthly or about 26 hours per user – just under an hour a day.

One of the most popular services, Pandora, claims to own 8% of total U.S. radio listening. While a small amount of the firm’s revenue, 20%, is derived by selling subscriptions to consumers who want an ad-free curated experience, the company is going after the local advertising market in a big way. The company is using local sales reps in up to 40 markets to sell its space. In an interview with NetNewsCheck, the firm’s CRO John Trimble acknowledges that big categories for Pandora include automotive and quick serve restaurants. Pandora appears to be going after automotive in a big way. The company is targeting the auto ad market at all three tiers. One analyst believes “car-native” audio ads are 60% of Pandora’s ad revenue.” In addition, the company has seized on the opportunity that in-car listening brings and its service is now part of the dash in many new cars.

SMBs will be a focus for Pandora this year but the firm is also working with major brands to roll out messages. The optimal spots for the format, at least for now, appear to be 15 or 30 seconds.

The company had a loss on its $647 million revenue in 2013. That’s not an unusual situation in a high-growth tech-related business which is investing for the future but stockholders and analysts are concerned about rising costs, especially those related to music royalty payments.

While the digital audio market struggles with profitability issues, more consumers appear to be comfortable with this listening experience. Have you purchased digital audio ads? Did the investment return a solid ROI?