The Curious Challenge of Coexistence

Some Food for Thought About the Future of a Hybrid Terrestrial-Satellite Radio Marketplace
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Some Food for Thought About the Future of a Hybrid Terrestrial-Satellite Radio Marketplace

In recent issues we've been examining the relationship between satellite and terrestrial radio. This time let's consider how the two will coexist, which is likely to be the reality of the industry for some time to come.

We can base this analysis on historical precedent as well as some reliable forecasts of future consumer behavior. There's also the recent and ongoing experience of the television industry with which to contrast and compare.

Radio's "must-carry"

As most readers are aware, there are must-carry rules in the TV world, which require cable systems to carry local broadcast TV stations in their basic tier. Similarly, the carry-one, carry-all rule applies to satellite TV services. This requires a satellite TV provider to carry all the broadcast channels of any market they include in their local-channel offerings.

These and other rules are intended to provide a level playing field for broadcast and non-broadcast channels alike when presented to viewers via a Multichannel Video Service Provider or MVSP, the FCC's terms for cable, satellite, DSL, MMDS, and any other such TV-service provider.

The result is that although there are hundreds of non-broadcast channels available, the lion's share of ratings still go to the alpha-net affiliates' local broadcast channels - most of the time.

A milestone in this area was achieved recently, however, when HBO began winning some evening primetime ratings. And although they still usually win the day, the overall ratings of the alpha-net stations have dropped as non-broadcast channels aggregate ratings have grown. Clearly, no service's existing position is guaranteed, and the marketplace votes with its eyes or ears based on content choice and not much else.

In radio, an essentially equivalent level field is provided by the simple fact that satellite radios include AM/FM receivers. Yet this is a market-driven decision, and not mandated by any regulatory requirement. While it is likely to remain the case for a good while, if market forces should ever dictate, there's nothing to stop the industry from making satellite-only radios. So "must-carry" for local radio is not assured. Consider also that changing from a satellite to a terrestrial channel generally requires switching bands on the radio, an extra physical step not required in the MVSP environment.

The best news in this comparison of radio to television is that terrestrial radio continues to control its own signal-delivery destiny, and does not rely on a "multichannel service provider" to carry its signals to listeners. (Internet streaming is the only exception where radio uses such a third-party, last-mile delivery "middleman," and that sector is of far lower significance to most radio broadcasters.)

Add to this the non-mandated and unscheduled regulatory nature of the digital radio transition, plus the lack of any spectrum giveback requirements, and radio looks like it has a much sweeter deal than TV.

Competitiveness

For the time being, at least, the unified receiver platform currently provided gives terrestrial radio channels effectively equal accessibility to satellite channels for the latter's subscribers. Competition remains a matter of attractiveness of content to listeners for either service.

But metrics of success differ widely. Terrestrial broadcasters generally are interested in attracting the most listeners to a single (or a small number of) channel(s) in a given market, which is the normal approach in any environment of scarcity. Satellite radio, on the other hand, is less interested in how many listeners each of their channels attracts as they are in the satisfaction of subscribers to the aggregate experience of a large number of services, now even including some localized information content.

In addition, the primary target customer of most terrestrial stations is the advertiser, while satellite radio primarily targets the listener (for subscription fees), so marketing strategies diverge across the two businesses.

For the near term, at least, also there is a retail-promotion element to satellite radio (directed toward aftermarket electronics and/or car dealerships), which is required to educate and motivate potential customers to obtain the requisite new hardware. Naturally, terrestrial radio needn't bother itself with this expensive tactic.

This process alone will limit the size of satellite radio's audience - for a while, at least. Yet consider that cable and satellite TV started out that way, too, and today they reach 85 percent of the U.S. TV audience. Most industry analysts forecast strong growth in the satellite radio sector over the next several years, but it's anybody's guess just how far its penetration will ultimately extend.

IBOC's role

The digital conversion of terrestrial stations will also play a part in this coexistence, although it may be an unexpected one. As you've read in this column and elsewhere on numerous occasions, most listeners are not choosing satellite radio because it's digital, but because it offers uniquely available content.

The same applies to HD Radio, where the mainstream consumer will voluntarily purchase a new radio only when the value proposition is high enough. Audio quality alone won't reach this threshold for most users, so uniquely available content will be required to drive success of the format (as recent experience in the U.K. is proving; see Radio World, March 28). The only way HD Radio can manage this is if the supplemental audio functionality envisioned by the "Tomorrow Radio" project becomes broadly deployed.

Should multiple new services be offered by terrestrial broadcasters via HD Radio, it could then become a viable defense against audience erosion through the addition of new, desirable, local services, such as the full-time traffic and weather services recently added by satellite radio for major markets.

Short of this, the main accelerant to HD Radio receiver adoption could be, ironically enough, by way of its inclusion as a feature in satellite radio receivers.

Your message here

Regarding the localized services just mentioned, there is much concern of late over the potential for satellite radio to use these channels to lure local advertising dollars away from terrestrial stations in major markets. Yet consider that these channels will probably have the lowest TSL of any satellite radio channel, so their value for advertising is questionable.

These channels have far greater importance in their enhancement of the aggregate value proposition offered by a satellite radio service to subscribers. The same applies to these services on terrestrial radio, where a simple sponsorship announcement (rather than a spot buy) is the usual method of monetizing short-form traffic and weather announcements. Terrestrial broadcasters could use a full-time (at least during local drive times) supplemental audio channel to compete head-to-head with satellite providers in major markets, or offer similar but uncontested services in smaller markets.

An indication of the battle truly being joined in this space comes from Entercom's recent creation and distribution of anti-satellite radio spots. Sounding like political campaign ads, their negative tone and use of scripted pseudo-interviews read by actors has rankled many in the industry. Some observers also question the veracity of the spin made by these ads - again akin to the reactions many have to political spots.

Overall, however, the anti-satellite radio spots reveal a level of concern previously unheard among terrestrial broadcasters. They also risk inadvertent promotion of satellite radio's existence to the terrestrial radio audience - a risk Entercom says it's willing to take, further pointing out the depth of disquiet involved.

We should get used to this sparring, because it's likely to permeate the fabric of the radio business henceforth. Like it or not, terrestrial and satellite broadcasters will be radio roommates for the foreseeable future.

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