Online Radio Hears Static - Industry Trend or Event

Industry Standard, The, Nov 27, 2000 by Hane C. Lee

Internet radio stations are becoming more popular as bandwidth and audio quality improve. But the profits aren't following suit.

BY DAY, BRENT Lyles is in charge of exhibits and school programs at the Texas Memorial Museum in Austin. In his spare time, he operates an online radio station, Sounds Like Austin.

"There's not much opportunity for people to hear new Austin music around Austin, much less outside it," Lyles says. Right now, a listener from Sydney, Australia, could surf over to Lyles' station and hear a mix of alternative, rock and blues artists -- all day, commercial-free.

But a month ago, Lyles, along with the more than 21,000 Webcasters who stream their own stations using Internet-based tools from Live365.com, was notified that the company would soon start adding audio advertisements to the streams. Live365 would share a percentage of those revenues with the Webcasters, but those who opted to forgo the commercials would be required to pay Live365 $10 to $2,500 a month, depending on audience size.

Live365's plan is just one response to a problem facing the entire online radio sector: how to make it pay off. According to a recent report by Nielsen NetRatings, more than a third of U.S. households now consume some form of streamed audio or video content. But radio sites that haven't already been snapped up by deep-pocketed media companies like Viacom (Imagine Radio), Yahoo (Broadcast.com) or America Online (Spinner.com) are having trouble making money from that audience. Most listeners multitask and don't stare at their screens. And as they begin to access streaming audio via devices like cell phones, banner ads and e-commerce won't cut it anymore as revenue sources.

No one feels the sting worse than NetRadio. When the company went public in October 1999, it had a market capitalization of $110 million. Today, that has plummeted to $7.2 million. NetRadio's most recent earnings statement showed revenues had fallen 26 percent from the previous quarter and the number of unique users had dropped 22 percent.

"We have recognized the need to have other revenue streams," says Stephen Holderman, executive VP of marketing, sales and business development for NetRadio. It has been hard to attract advertisers, he adds, in part because of a lack of standards in both ad-insertion technology and audience measurement. Until there is consensus in the industry, NetRadio plans to supplement its revenue with a business-to-business strategy, hawking its hosting and technology services to brands like Comedy Central.

Other destination sites have given themselves the b-to-b makeover. In June, OnRadio unloaded its 212 radio contracts and morphed into Avevo, a targeted-marketing service. OnAir.com, formerly WWW.com, has been particularly fickle. It launched as a consumer site in July 1999, but in January began syndicating its online radio offerings to other Web sites. In April, OnAir spun off its Codec.com division, which provides digital encoding services to the entertainment industry. The company is now changing tempo again, with plans to shed its radio syndication and refocus as an infrastructure company.

Once online radio companies have figured out how to make money, it remains an open question as to how much they'll be able to keep. Unlike terrestrial radio stations, Webcasters must pay royalties to record labels in accordance with the Digital Millennium Copyright Act. A handful, including Soundbreak, OnAir and Yahoo, have struck deals with the Recording Industry Association of America. Others are relying on the Copyright Office to set rates for a blanket license and will be liable for retroactive fees that could be a cash drain.

Considering the prospects, it isn't surprising that consolidation in the Internet radio industry is picking up. Music directory Listen.com recently acquired WiredPlanet and could add Scour's MyCaster Webcasting software in its bid for the bankrupt company's assets. And a day after BroadcastAmerica.com filed for Chapter 11 bankruptcy protection two weeks ago, an obscure online radio network, SurferAmerica, agreed to acquire it.

As for Live365, CEO Alex Sanford insists the company has "quite a lot" of funding and says including commercials had always been part of the plan -- even at the risk of alienating broadcasters and listeners. "Some [users] will be upset almost no matter what you do," he says. "But we continue to give them a lot."

Still, Live365's move struck a wrong note for Sounds Like Austin's Lyles, who says he's been otherwise happy with the service. "The staff didn't ask any of us if that was 0K," he gripes. "They just said, 'Hey, by the way, guess what's coming down the pike?' I'm saddened by that."

Los Angeles' Dublab, a tiny independent online radio station, was bulit on love and pocket change.

Mark McNeill had the voice, Jon BUCK had the brains. Together, they set out to conquer Internet radio.

Well, not exactly. McNeill was running KCSR, the unlicensed student radio station funded by USC, when it started streaming on the Web in 1998. Soon after, McNeill got a call from Buck, then a UPN ad salesman with an itch to get into online radio. Buck had been a fan of McNeill's KCSR work. The timing was fortuitous: McNeill was about to finish college and had been trying to get an Web radio project together, but had no idea where he'd find the backing.