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Thursday, April 26, 2007

Terrestrial Radio:The Old Dog is Resilient

How is satellite radio doing? Judging by Bridge Ratings' just-released data covering the first four months of 2007 - not too well. And now XM has issued their first quarter report by announcing that though they had a losing quarter financially, subscriber growth surpassed the 8 million mark.

XM, which agreed to be bought by rival Sirius, reported a loss of $122.4 million, or 40 cents per share, narrower than $151.4 million, or 60 cents per share, in the year-ago period.

Revenue rose 27%, to $264.1 million, from $208 million last year. Makes it sound like XM's making progress.

The company ended the quarter with 7.9 million subscribers, up from 6.5 million a year ago. Last year, XM forecast that subscribers would exceed 8 million by the end of 2006, but scaled back that target significantly as retail sales of its radios waned. XM now expects to have 9 million to 9.2 million subscribers by the end of 2007, with subscription revenue for the year around $1 billion. Bridge Ratings estimates that subscriber number will be closer to 8.9 million - but, wait, we still have the summer months to get through.

Summer '06 was a comparative dead spot for consumer interest in satellite radio in general and that was before a merger of the two services was announced. Typically, merger news tends to send a 'caution' sign to consumers and it's either that or something is terribly wrong with the public's opinion of satellite radio that is causing a lull.

How can I say that when XM reports Q1 growth of several hundred thousand subscribers?

XM announced that they had passed 8 million subscribers adding 868,000 paying subscribers. But they lost 584,000 who did not renew their subscriptions! Is this a good sign? I think not. So, XM's net gain in Q1 2007 was 285,000 subscribers and that's why the true number of XM subscribers comes to around 7.9 million.

Based on past quarters when Sirius has grabbed a 60 share of subscriptions, it's possible that we'll see a net gain for Sirius in the 427,000 range for a total sector quarterly net gain of around 712,000 subscribers which is comparable to satellite radio's worst 2006 quarter (Q3).

What's interesting is that these companies continue to sign subscribers but it's getting much more difficult as time passes. 67% of XM's hard-earned first quarter subscriber gains were wiped out by consumers who did not find the value in retaining their subscriptions.

Actually, this is not all that far off from the typical performance for new companies with sharp growth curves like those that have existed in the satellite radio space for the last three years. And while there are those in that industry that underscore the fact that satellite radio growth is the fastest new media introduction ever, we are now seeing that its growth is also flattening faster than any previous new media play. Satellite radio as an industry is maturing faster than one would expect from such a new technology. This is what Bridge Ratings has been projecting for the last few years. And while 2006 was a turning point for the sector, 2007 will be a more difficult year for satellite radio.

Only HD radio can make satellite radio look good at this point. Our latest study indicates that just about every consumer whom we asked whether they were interested in purchasing an HD radio in the next six months said they weren't because they couldn't see the benefits of it.

HD radio is almost still-born and the radio industry continues to invest heavily. Good news this week was that Best Buy would stock HD radios in all of their nationwide stores. That's a positive step. Only one problem: no one cares.

So, we're experiencing the flattening of satellite radio which will continue to experience growth but at a much slower rate than previously expected and we're seeing almost non-growth for HD radio.

Terrestrial radio continues to be challenged for its time-spent-listening by other new media such as MP3 players, Internet radio and cell phones, but if trends hold, satellite radio will not be the grim reaper it was once thought it would be.

Terrestrial is far more resilient than many on Wall Street thought. It will still have its challenges but because of its purest benefits it will stick around for quite a while longer: It's free. It's easy to operate. Everyone has one. Everyone knows its benefits. And the public doesn't seem to mind paying for it with commercials.

To paraphrase Charles Dickens "these are the best of times - these are the worst of times" for media consumers, but at least there's plenty to choose from and most consumers are the real winners.

Tuesday, April 17, 2007

Copyright Royalty Board: Wiping out a Lifestyle

Perhaps it's something in the water, but terrestrial radio just can't seem to get a break. It seems as though the industry is getting pecked apart by nuisance-media and forces beyond its control. It's like that water torture where little drops of water wear down even the mightiest soldier driving them crazy with the tap-tap-tap of dripping water on the forehead.

First Napster, then the Internet boom, then the Internet bust which sent the industry in a tail-spin around 2000. However, that was no one's fault but radio's as they asked for, and got, exorbitant ad rates for any and all Internet start-ups willing to spend prime rate just to try to brand their new businesses. Radio was still cool then. Then the bottom fell out.

Then 9/11 derailed every one's business, then MP3 players - especially the iPod - started nicking away at radio's precious time-spent-listening - even in-car. Satellite radio has barely even scratched terrestrial's dominance, but it's there nonetheless and attempting to merge.

Bridge Ratings has been conducting research on the importance of Internet streaming to terrestrial radio and when promotion is done properly on terrestrial, on-line listening improves. In fact, our just released study shows that terrestrial simulcast listening is growing faster than any other Internet radio component. The industry has been encouraged by this growth and what it means for the future of an industry that was somewhat late to the streaming party.

Now, another bite - perhaps the biggest yet - is looming. The new Copyright Royalty Board rates. The decision this week not to readdress the industry's objections and to carry on with the increases which at the new 2007 levels will surely send most webcasters folding their tents, but by 2010 the rates get so onerous it's difficult to imagine even the big boys (AOL, Yahoo, Pandora) surviving.

If the rates go into affect (payments based on the new rates are due May 15, 2007) and Congress doesn't step in, traditional radio will be sent back 5 years and its advancement into the digital age will be still-born.

But, wait a minute! What am I thinking? Aren't I advocating for webcasters the same government intervention to prevent failure as Mel Karmazin and the satellite radio companies are seeking for their troubled companies? Sure, Mel says both companies can survive - even flourish - if the merger doesn't take place, but that just doesn't make sense. In fact, Bridge Ratings' March satellite radio consumer tracking shows subscription rates and consumer interest in satellite radio is at an all-time low.

In fact, that's not what I'm advocating. From what I've heard this week at the NAB, only a handful of webcasters are making any profit at all from their business models - only a handful! The thousands of others are either breaking even or losing money! The new royalty rates will wipe out an industry. Even those making a profit, aren't making much.

Satellite radio has 15 million listeners - Internet Radio has 72 million a month based on Bridge Ratings' most recent information. We're talking about an industry that will grow to 100 million listeners within two years and it's about to be extinguished. Congress wouldn't be saving an industry as much as they would be saving a lifestyle. Internet Radio has become a lifestyle and millions enjoy it every day.

The Internet radio industry needs a spokesperson - an agency with some lobbying clout to get out there NOW and disrupt this steamroller royalty rate before it snuffs out an industry and a lifestyle. Unfortunately, I don't see anyone stepping up to take on that role.

And unless someone does soon, those who enjoy Internet Radio will have whiplash and deep withdrawal when all those webcast links go dead.

So, why hasn't terrestrial radio sent in their best to clarify the point? That's really the question, isn't it?

Monday, April 9, 2007

The Light at the End of the Tunnel: In-car Internet

Imagine my joy/shock when I read this week that the Internet is coming to automobiles later this year. And when it arrives it will start to change how we interact with each other and the world around us. And, oh yeah, that includes listening to the radio.

In-car Internet has been a future possibility now for several years. Bridge Ratings began projecting in-car Internet radio listening estimates back in 2004 when its arrival was still unpredictable. However, 2007 will be the year cars and tech really mesh, thanks in part to Ford's Sync, a hands-free cell phone gizmo. It will also let you control your MP3 player using voice commands. Sync will be available on about a dozen 2007 car models in the fall and, yes, it works with those 100 million iPods out there.

But this is only the beginning. Future versions of Sync will incorporate Wi-Fi so you can download your email while driving through a Net cloud and then have the system read them to you.

And there's something called Autonet Mobile that wants to turn your car into a rolling hot spot. It will allow for high-speed Internet reception and seamless data streaming; that means you can listen to Internet radio, or browse the Internet, or pick up your email without signal drop-out. It also means everyone in the car could share one connection.

You may have once heard the joke that you shouldn't always look at the light at the end of the tunnel as a good sign; after all that light might be coming at you. Well, in-car Internet radio with thousands of streaming options as well as most of your favorite terrestrial radio programming is on its way and by 2008 traditional radio will have yet another competitor.

What's terrestrial radio to do? Well, it can't do too much about this one, folks, but what it can do is step up in this battle against increases in streaming royalty rates. Traditional radio's objection to the massive increases in streaming costs has been luke-warm and timid. In fact, the loudest, most thought-provoking objections have come from National Public Radio because they understand the impact of these large increases on their business.

Once again the National Association of Broadcasters and/or whatever other lobbying group radio can put together, is failing radio. When all but the streaming initiatives of the largest radio companies will survive the many-fold cost increases proposed by the Copyright Royalty Board, radio, as an industry, will be unable to effectively compete.

Internet radio industry spokesman Kurt Hanson who knows this stuff in his sleep was recently quoted as saying, "The implications of this (rate increase) are potentially fatal for Internet radio as an industry..."

So, yes, there is something radio can and should do as the light at the end of the tunnel draws closer: it can preserve its right to distribute its content over the Internet so that it will be there when its audience arrives.

This would seem to need to be pushed to the top of radio's priority list - but will it?

Wednesday, April 4, 2007

Radio Gets a Military Strategy Lesson

Did you see the news item this month from ZenithOptimedia that Internet advertising will surpass radio spending next year! Another example of the old man getting beat up by a youngun. But this shouldn't be a surprise. The radio industry has seen this coming for some time. You don't witness 35%+ Internet advertising growth rates without feeling them breathing down your neck.

But poor terrestrial radio has really been getting the short end of the stick these last few years.

First it was the dot-com bust, then the 9/11 advertising pull-back, then satellite radio's big PR push between 2002 and 2005, alongside Gen-Y turning off their FM radio's so fast you can hear the massive click in unison.

The Internet started out as a tough sell to ad agencies. In the late 90's, my LA station, KCBS-FM was among the first radio stations to build a working Internet business model for a new radio revenue stream. We had to be creative because advertising agencies in the late 90's by and large didn't see the benefit. They couldn't relate to the Internet. It only took Advertising agency media queens 5 years to figure out that audiences were splintering off traditional radio and that it was prudent to follow them.

Now radio is smaller part of a pool of ad dollars that is only slightly larger than it was in 2000 and that pool is being spread around to as many media targets as possible and still be effective. Radio used to be the targeting medium, then the Internet (thanks to Google) taught ad buyers how to pin-point buys and traditional radio became a reach medium officially. Unfortunately, in today's consumer market, reach and frequency isn't as effective as it used to be.

The Pincer Movement

This reminds me of a classic military strategy that has been used to some extent in nearly every war in history. It's called The Pincer Movement or Double Envelopment and it has been played upon traditional radio perfectly.

The maneuver is mostly self-explanatory; the flanks of the opponent (traditional radio) are attacked simultaneously in a pinching motion after the opponent has advanced towards the center of an army (Satellite Radio) which is responding by moving its outside forces to the enemy's flanks in order to surround it. At the same time, a second layer of pincer attacks (on-demand audio such as iPods and the Internet in this example), so as to prevent any attempts to reinforce the target unit.

And like most armies caught in this pincer movement, radio never knew what hit them. They became distracted by the foe in front of them (satellite radio) and didn't see the second layer in the rear-view mirror.

Such battles often end in surrender or destruction of the enemy force, although the encircled force (radio) can attempt a 'breakout'. A breakout is done with the encircled forces (radio) attacking a weak point in the encirclement, with allied forces attacking the same weak point, until there is a breakthrough and the encircled forces can move again. Hmmm...does radio have any allies that can assist in this battle?

Once the Radio industry recognizes that it is encircled, it should be asking, "What are the weak points in the encirclement?" and can radio use any of its "enemies" to attack these soft points?

I can think of several - in fact, Bridge Ratings has been publishing studies for the past two years uncovering this exact strategy. As an industry, however, radio has performed an uncoordinated attack and as any general will tell you, a confused and unorganized enemy is that much weaker.

Is the radio industry a weak opponent? If so, why?

Could it be that we have had years of poor leadership from our industry 'generals' who have been mis-leading (or poorly leading) our major forces (Clear Channel, CBS) without an apparent understanding of strategy or even the battlefield?

Or could it be that our strategist, the National Association of Broadcasting, has failed the industry by not leading the charge?

In any case, while ad spending on Internet radio still lags far behind terrestrial radio (but is advancing), the squeeze is on and total Internet spending will surpass the radio industry by the end of 2008 with about $20 billion that in all honesty is mostly new money. Radio can benefit from this windfall by not assuming that it has been left standing at the starting gate. It needs to continue its aggressive approach to capture what used to be called non-traditional advertising - new media advertising which is about to become 2008's version of traditional.

Think about it!