MARCH 3, 2005
NEWS ANALYSIS :TECH
By Heather Green, Tom Lowry, and Catherine Yang
How fast is technology turning
radio upside down? Ask Brian Ibbott. Last September, when the wannabe
Denver deejay started playing music on the Internet, the term for what he
was doing -- podcasting -- had been around for two weeks. These days the
35-year-old produces a half-hour show of popular songs called Coverville.
Some 9,000 devotees download it three times a week to play on -- what
else? -- their iPods. And if they tire of Coverville, they now have 3,500
other podcasts -- and counting -- to choose from.
For all the
hullabaloo it's generating, podcasting is not even close to being a
business yet. While startups such as Odeo and The Podcast Network are
providing technological support and creating a podcasting network, right
now Ibbott has barely enough ads to cover expenses, and most podcasters
work for free.
EASIER ENTRY. Maybe
a few will come up with a way to make a living doing it. Maybe not.
Regardless, a trend is afoot that could transform the $21 billion radio
industry. Consider the basics: With no licenses, no frequencies, and no
towers, ordinary people are busy creating audio programming for thousands
of others. They're bypassing an entire industry.
The digital
revolution took its time getting to radio. Now it's exploding -- and the
big bang goes far beyond podcasting. As radio shows are turned into
digital bits, they're being delivered many different ways, from Web to
satellite to cell phones. Listeners no longer have to tune in at a certain
time, and within range of a signal, to catch a show or a game. As the
business goes digital, the barriers to entry -- including precious
airwaves -- count for less and less.
A host of new players is
piling in. They include satellite-radio upstarts XM (XMSR ) and Sirius (SIRI ), new-media
giants such as Yahoo! (YHOO ) and MSN, and
regular folks like Ibbott.
ADS AND
MINUSES. Traditional radio powers are already feeling the
pain. On Feb. 25, Viacom (VIA ) announced a $10.9
billion write-down in assets at its Infinity Broadcasting division, a
clear signal that earnings prospects were dimming. A day later, Clear
Channel Communications (CCU ), the nation's
largest radio chain, took a $4.9 billion writedown on its radio licenses,
although the company says it did so to comply with a new Securities &
Exchange Commission requirement to value its businesses.
Whatever
the reason, there's no denying a stark reality: Listeners, increasingly
bored by the homogeneous programming and ever-more-intrusive advertising
on commercial airwaves, are simply tuning out and finding alternatives.
Says Rishad Tobaccowala, chief innovation officer at Publicis Groupe
Media: "Radio pissed on their own product and then cluttered it up."
The industry tumult comes down to a simple phenomenon. As digital
forms of radio proliferate, listeners will enjoy an abundance of new
programming -- but much of it still lacks a proven business model. What's
more, even tested radio businesses could see ad revenues wither as new
rivals snatch away listeners. No one is saying commercial radio is going
away: It still draws more than 200 million listeners a week. The industry
"is challenged, but not dead," says Laraine Mancini, an analyst at Merrill
Lynch & Co. Still, the biggest fear, for old-timers and newcomers
alike, is that even as audio programming grows by leaps and bounds, ad
dollars will shrink.
BUYING A
SONG. For radio to make money, execs must be as innovative
with the business model as they are with technology. Satellite is losing
money, but its subscription approach is expected to pay off in a couple of
years. Now, Net radio players and cellular services are experimenting with
subscriptions, too.
|
"This is the tyranny of choice," says Fred Jacobs, founder of radio industry consultant Jacobs Media. "Companies need to rethink the competitive scenarios and take risks." |
It's possible to imagine people paying monthly
fees to hear programming-on-demand on the phone, PC, or in the car.
Listeners could buy a song they hear on the radio with the click of a
button. Companies could sell subscriptions and place ads inside customized
traffic information, weather reports, or sports tickers. "This is the
tyranny of choice," says Fred Jacobs, founder of radio industry consultant
Jacobs Media. "Companies need to rethink the competitive scenarios and
take risks."
As old-fashioned radio struggles, listeners are
creating the future. In just seven months, podcasts have appeared,
covering subjects from Delta blues to vegetarian cooking to consumer
gadgets. Podcasting is growing on the backs of two trends in the tech
world: the proliferation of blogs -- scores of which are becoming informal
radio stations -- and the growing popularity of mp3 players, including, of
course, Apple's iPod. Much like television's TiVo (TIVO ), podcasting
gives users the chance to listen to their programming whenever and
wherever they want it.
SKY-HIGH
AMBITIONS. Already the forces of commercialization are
circling. Entrepreneurs are offering software and services to help
podcasters turn out more polished shows. Advertisers such as Volvo (F ) are sponsoring
podcasts. And traditional radio stations, such as the British Broadcasting
Co. (BBC) and National Public Radio (NPR) station WGBH in Boston, are
launching podcasts.
"One of the reasons to do this is because we
don't know what it will add up to," says Ruth Seymour, station manager at
NPR station KCRW in Santa Monica, which on Mar. 1 began podcasting 22
shows. For now radio stations aren't charging for podcasts, hoping instead
to lure more listeners nationally.
If podcasting is for now more
of a potential threat to traditional radio, satellite is already drawing
blood. While the two players, Sirius and XM, aren't expected to turn a
profit until at least 2008, they have lined up high-priced programming
talent and are making an aggressive play for the classic car-radio market.
But drive-time radio isn't their only goal: They're stepping up marketing
of handheld receivers that allow people to record shows and are placing
programs on desktop programs such as Microsoft's (MSFT ) Media Player.
"Satellite-radio companies are at the beginning of their growth curve,"
says XM CEO Hugh Panero.
FEWER
EARS. Having raised comfortable piles of cash, both XM and
Sirius are investing to lure subscribers. Sirius is prepared to pay Howard
Stern up to $500 million over the next five years after luring the shock
jock from terrestrial radio, hoping he'll bring loyal fans with him.
Despite a rocky start, Lehman Brothers expects nearly 35 million people to
tune in to satellite radio by 2010, up from roughly 4 million now.
While only a fraction of the traditional radio audience, these
defections could have a huge impact. Lehman Brothers analyst William
Meyers estimates that since many satellite listeners listen during the
daily commute, the most lucrative hours, satellite alone will cut
traditional radio revenue growth after 2006 to 2.5% from 4%.
How
is old-time radio responding to this assault? For starters, it's looking
for ways to bring back listeners. With ads clogging airwaves, the average
listening time per person has dropped by more than three hours, to just
under 20 hours a week since 1993, according to industry monitor Arbitron
(ARB ). Clear Channel
and Entercom Communications (ETM ). are reducing the
frequency of commercials and cutting them from 60 seconds to 30.
ON-DEMAND CONTENT. More profound
changes lie ahead as the radio majors join the digital fray. Their biggest
hope is high-definition, or HD, radio, which provides CD-quality sound. By
the end of the decade at least 2,500 stations are expected to have it.
Radio execs are betting that HD will allow them to offer the kind of niche
programming already available on satellite radio and on the Web. And in
the next few years, HD will feature TiVo-like functions, enabling
listeners to store music and news and get on-demand content such as
traffic information, weather, and sports scores.
HD radio will
keep traditional players in the fight. But getting traction will mean
convincing carmakers to install the radios -- and satellite has a head
start in colonizing the dashboard. Cutting the price of HD receivers --
now $500 to $1,000 -- will be crucial to attracting auto makers.
Even as they gear up for HD, the likes of Clear Channel and
Infinity have discovered the Net. By this summer nearly 250 Clear Channel
stations in the top 25 markets will introduce ad-supported sites offering
radio feeds and studio performances from artists. Yahoo, MSN, and America
Online (TWX ) have
staked out an early lead by providing subscriptions and free services that
allow people to customize music channels, skip through songs, and buy a
tune as they hear it. "If we don't do these things online, people will go
somewhere else to get it," says Evan Harrison, hired from AOL Music to
develop Clear Channel's Web strategy.
NEW AND
IMPROVED? Not everything is easy for those taking the digital
road. While audiences at the biggest Net radio players, including Yahoo
and MSN, continued to increase last year, the total weekly online-radio
audience was unchanged during the past six months, at around 19 million,
according to a recent Arbitron survey. Why the plateau? Some companies
limited the music people could hear online to avoid paying heavy
royalties. To help foot the bill for those fees and boost the nascent
industry, AOL, Yahoo, and MSN agreed last year to jointly seek advertisers
for their online radio stations.
Radio execs argue that their
innovations and adjustments in programming will put their business back on
a sound footing. "We've gone through a lot of events in our history that
were…all said to spell the demise of radio," says Jeffrey H. Smulyan, CEO
of Emmis Communications, a leading owner of radio stations. "I feel good
about the radio business."
On one point, he's right to be
optimistic. Thanks to the new technology, more people than ever will be
creating and listening to audio programming in coming years. But the radio
industry, a members-only club for the best part of a century, is turning
into a free-for-all.
Green is Internet editor
for BusinessWeek, Lowry is media editor, and Yang is a reporter in
the Washington bureau
with David Kiley in New York
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