e.Digital Corporation (fka EDIG)

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Web Radio Pioneers Sing the Blues
http://www.businessweek.com/technology/content/jun2001/tc20010621_046.htm

Listeners love them, but advertisers ignore them. And the business' harsh economics has traditional radio companies circling like vultures

For music lovers, life doesn't get much better than NetRadio.com. Every month, 2 million to 3 million listeners tune into the online radio station's 100 genre-based channels, which range from heavy metal to jazz to classical music. In February, NetRadio topped the online charts, chalking up more than 3 million hours of streamed music, according to the most recent figures from radio ratings firm Arbitron. That's the seventh consecutive month NetRadio (NETRC ) has owned the No. 1 slot.

Sounds like a Web success story, right? Well, not exactly. In the quarter ended Mar. 31, NetRadio.com's revenues fell 64%, to $202,000. Its stock is trading at about $0.34, which resulted in the company being delisted from the Nasdaq in May.

That's about par for the course in the struggling online radio sector. While it has wowed listeners by offering more choice and innovative programming than traditional radio, online radio has failed to catch on financially. Although 75.5 million people tuned into online radio stations last year, and 106 million are expected to tune in by 2003, according to estimates from digital entertainment consultancy Webnoize, such numbers don't make up for the lack of a clear business model.

"IT'S A PROBLEM." Unlike traditional radio stations, which use a blanket signal to cover an area, online radio stations send an individual stream to each listener, raising costs per user. From a cost standpoint, the more customers they have, the worse off they are. Also, the big music labels don't want to grant Internet stations special licenses to make the Net stations more interactive for fear of cannibalizing CD sales and the big labels' own coming music-subscription services.

On the revenue side, technology for targeted Internet audio ads hasn't emerged quickly enough to have a big impact on the bottom line. Perhaps most alarming to the upstarts is that big radio conglomerates stand poised to move their content wholesale onto the Web to compete ferociously for ad dollars. "It's a problem for a lot of people to stay in the game," says NetRadio's CFO Mike Wise.

The upshot? At best, online-only stations are likely to end up as cheap eats for traditional radio companies, which already have relationships with hundreds of thousands of advertisers and can use them for their technology platforms, audiences, and brands. At worst, they'll become another relic of the Internet Age.

COSTLY FANS. Online radio is suffering partly because it has to shoulder unique burdens. Each listener requires an individual audio stream, which means bandwidth costs rise for the online broadcaster with each new fan. NetRadio's Wise estimates that the bandwidth necessary to stream online transmission costs $0.05 to $0.10 per hour per listener.

Unlike in other broadcast businesses, these per-listener costs remain constant. Over time, those bandwidth costs will drop and possibly be offset if advertisers can be persuaded to pay a premium for finely targeted spots. But that will benefit only large players with a strong balance sheet to give them staying power. Upstarts such as NetRadio don't fit that profile.

Licensing musical content has also turned into a headache for the online stations. Many of them let listeners personalize their music stream by giving high marks to songs they like and skipping songs they don't. That's too close to delivering music-on-demand, argues the Recording Industry Association of America, which filed suit against three prominent online radio stations and streaming sites in late May and early June.

The RIAA wants the stations to buy special interactive licenses from the labels. The stations counter that the innovations they're offering are legal. Still, the suit casts a pall over the stations' future prospects.

INSUFFICIENT TOOLS. So does the failure of advertisers to recognize online radio's potential. They remain leery of newfangled ad-streaming technology, which inserts targeted ads into online broadcasts. And the absence of standard ad-efficiency measurements leaves media buyers without the tools to justify online ad campaigns.

Most daunting is the fact that 75% to 80% of traditional radio's advertising revenues come from local businesses, which don't benefit from the scattershot exposure Internet broadcasting offers. "The bottom line is there's no easy way to tap into those mom-and-pop advertising dollars," says Dannielle Romano, a music analyst with Jupiter Media Metrix, which recently surveyed media buyers about the potential of online radio.

The emphasis on local ads will hurt the online-only stations more as the big companies figure out ways to pair targeted Internet ads with traditional radio ads, a capability the upstarts don't have because they lack strong relationships with advertisers in the first place. For example, the country's largest radio-station owner, Clear Channel, booked about $3.5 billion in ad revenues in 2000 and enjoys huge influence with media buyers. Jupiter Media Metrix predicts that by 2005, $1.4 billion of the $30 billion spent on radio advertising will go toward Internet radio spots. The big guys will take the lion's share.

"We already have almost 1,200 stations, each of which has relationships with advertisers and consumers," says Kevin Mayer, CEO of Clear Channel's Internet division. "We can leverage those relationships. It's much harder for a new Internet player to do that."

COMMERCIAL PROTESTS. And by simply simulcasting current programming over the Internet, traditional broadcasters should avoid the offensive that the record labels have mounted against the online-only stations aimed at restricting interactive functions such as customer playlists, pause buttons, and sampling.

Even so, traditional players haven't escaped all the battles. On Apr. 11, the American Federation of Television & Radio Artists filed with the U.S. Copyright Office to require stations to pay a higher talent fee if ads are played over the Internet. The AFTRA contract permits radio ads to be played only over the air. Rather than pay higher fees or create Internet-only ads, most radio stations -- including Clear Channel's -- responded by simply cutting off their simulcast Web streams in April.

It wasn't until June 18 that Clear Channel announced it would resume broadcasting some of its stations' content on the Internet by using ad-insertion technology from privately held company Hiwire. The National Association of Broadcasters is negotiating an agreement with AFTRA to get other stations back on the air.

NO POINT? Ultimately, the AFTRA dispute is just a bump in the road as the radio giants drive toward online dominance. And the beauty of the situation for them is all they have to do is sit back and wait. The rise of music-subscription services such as MusicNet and PressPlay, formerly called Duet, which are due out later this year, will undermine much of the value the Net radio stations offer.

"With a music subscription, users will be able to tailor music to their taste, so there won't be any point in trying to get some of what you want through a radio station," says Jupiter's Romano. In fact, analysts predict that as traditional players take control of Internet programming, it will become increasingly like what we hear anywhere on the FM dial during rush hour.

That would be the ultimate proof that, just like Napster and Salon, Net radio is a concept that remains exceedingly difficult for upstarts to make profitable.


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By Jane Black in New York
Edited by Alex Salkever