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Radio’s Sustainability Sweepstakes

Our anonymous colleague Guy Wire raised some eyebrows recently when he suggested that terrestrial radio might buy up satellite radio interests.

Our anonymous colleague Guy Wire raised some eyebrows recently when he suggested that terrestrial radio might buy up satellite radio interests. Without diving into analysis of this idea, one basic point Guy made in the process is worth repeating: Risk is always mitigated by spreading it out across multiple stakeholders.

This could be critical to the sustainability of any next-gen radio ventures, and it is a key differentiator between satellite and terrestrial radio’s prospects. Of course, satellite radio is backed by a lot of individual investors and shareholders, but as far as those folks (and Wall Street in general) are concerned, there are just two metrics that sum up the health of an entire industry: XMSR and SIRI. Terrestrial radio is far more diversified, in both real and market-cap terms, and the companies that represent its overall condition are currently much more sound and stable than either of the satellite radio operators today.

Granted, it’s been tough going lately for satellite radio, particularly for XM, given lawsuits filed against it by its own shareholders and by the RIAA, investigations by the FTC and the SEC, and a very public board-member resignation. These are all piled atop issues affecting both services, like pending legislation that would “clarify” sat-radio’s music licensing terms (and perhaps result in higher royalty fees), alleged FCC Part 15 violations in receivers, slowing subscriber growth rates and the aforementioned stocks’ recent performance.

Another relevant detail is worth recollection, from an earlier satellite-based market failure: the Iridium LEOsat system. What saved its parent Motorola from going down with the spaceships was the forced diversification of Iridium holdings among many other telcos and national post/telecom operators, with whom Motorola had to cut deals before they would allow Iridium to offer service in their territories. Motorola probably wasn’t happy about having to slice the pie so many ways when they signed the deals, but they were certainly relieved at the end of the day when that same pie allowed the company to only bear a fraction of the losses. No such luck for satellite radio, should it come to a similar fate.

Of course, it also helped that Motorola had plenty of other revenue-producing business to help it weather the failure – another big difference between it and the satellite radio companies.

Share the wealth (or pain)

Now consider the very different context in which IBOC is being deployed. The technology’s highly distributed debt load and scalable/staged implementation among hundreds of separate radio operations puts no operation at risk. And, should the system fail to reach critical mass, its owners still have a viable ongoing business.

IBOC also gives terrestrial broadcasters the choice of whether to opt for a qualitative or a quantitative improvement over legacy service. The downside is that either will only be realized with the purchase of a new receiver. This is where the generally adequate quality of FM works against IBOC, but where multicasting can help. Either way, however, the ROI on IBOC conversion will be long in coming.

Satellite radio also requires a new hardware purchase, but at least the value proposition is fairly clear. A hundred new channels available everywhere is likely to get your attention. The equivalent value proposition on buying a new IBOC receiver is largely dependent on how much the listener likes the stations already available in the market. On the other hand, there’s no churn with IBOC, while there can be a significant amount with satellite radio. It’s one thing to think you’re getting 100 stations for $12.95 a month, but after using it for a while and finding you’re only listening to three or four stations, you might just redo the math and let that subscription expire – especially if it was a promotional free-trial period.

The third option

Often the discussion ends there; but let’s extend it to consider Internet radio in the same analysis.

Yes, Internet radio also requires a subscription to broadband Internet service, but this generally flat rate fee is also spread across many other uses. In fact, the use of broadband for streaming media generally is viewed as a bonus feature, since most users are getting the service primarily for other uses. Combine this with the fact that most Internet radio services are free and you have an option that is relatively close to terrestrial radio in terms of cost/benefit to the listener.

Broadband Internet and its terminal equipment are already widely deployed and growing fast, so the ROI to any service provider is not something you have to wait years to see (if ever). Results are quickly apparent and a continuing upward trend is almost guaranteed. In this respect, Internet radio exceeds the value of either satellite radio or IBOC to its investors.

The cost burdens and risks are even more scalable and well distributed with Internet radio, since broadcasters generally don’t own the delivery infrastructure – they just rent it from third parties. Of course the paradigm of paying per listener is a foreign experience for broadcasters, but it works both ways: If you don’t have a lot of listeners online, you pay less. Compare this to IBOC, where conversion costs are fixed regardless of if and when any listeners actually tune in.

Perhaps even more appealing to broadcasters is that both high quality and unlimited quantity of new service are possible online, and there’s no tradeoff between them, as there is with IBOC. Want more bits in the payload? Just sign up and pay the bill to your hosting service.

Of course, the one big downside with Internet radio is its lack of portability . today. If Internet radio does indeed become widely and cheaply available on mobile and portable platforms, however, as many observers forecast, it would appear to be the winner of the sustainability sweepstakes. So could the real future of digital radio be online? Clearly the radio industry has a lot riding on the promise of the wireless Internet.

And what exactly will that world be like? More about that next time.