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Thoughts on Radio's Digital Future

Thoughts from CES: Radio's Competition Increases, but Pandora is not the Death Star

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Bob StrubleA month after the latest, greatest Consumer Electronics Show in Las Vegas, here are some observations on what I saw at the Show and what it may mean for AM/FM:

Most probably know that CES is the largest consumer technology trade show in the world and is used as a launching pad for the hottest CE products and services. This year was no different. The headlines were 3D everything and internet everywhere, with a slew of connected and converged devices. More on that in a bit.

HD Radio CES Booth Tour Video

In yet another blatant bit of self-promotion, I'm linking to a profile of HD Radio technology at CES done by a great radio guy, Dave Graveline of ‘Inside Tomorrow'. Hopefully it gives you a sense of the strong HD Radio progress over the last little bit.

At a high level, CES provided convincing evidence that the economy is improving. Show attendance was up substantially from last year, exceeding the expectations we had on the CEA Board. [Disclosure: I have served on the Consumer Electronics Association Board of Industry Leaders, so have a (small) vested interest in successful CESs.] And the vibe was completely different from last year. I felt a palpable sense of optimism and enthusiasm on the floor. No one is convinced we are back to business as usual, but there was a strong belief that we are returning to a growth path.

CES is critical to HD Radio Technology. Our booth displayed all the latest HD Radio devices and applications. We met and planned with all our key partners: automakers, consumer electronics manufacturers and retailers, chip makers, regulators, and yes, broadcasters. We hosted a delegation from the NAB Executive Board and met with other radio folks. I think it is very healthy that radio leaders are engaging in the CE and device arena, as it is key to their future.

I also observed the continued development of new competition for AM/FM. I believe this trend will intensify in coming years. A few specific examples from the floor:

  • Mobile DTV is here. Manufacturers launched the first devices supporting Qualcomm's FLO TV service and the first portable TVs incorporating the ATSC mobile DTV standard (including one with HD Radio Technology built in).
  • The next wave of internet radios, devices which look and act like regular radios but use WiFi networks to tune in thousands of internet stations, were displayed.
  • Automakers upped the ante on new infotainment services for cars with integrated in-vehicle mobile phone and internet, iPod/MP3 functionality, satellite radio and real time traffic and navigation.

A dominant theme at the Show was a truly pervasive and converged internet. Virtually all CE manufacturers are building internet connectivity into all their devices, the carriers are working furiously to build additional high speed network capacity and our government is looking high and low for additional spectrum (including existing broadcast spectrum) to enable nationwide broadband. We will soon have the full multimedia internet experience enabled anywhere, anytime.

These developments have spooked a lot of broadcasters, and to a large degree, rightly so. They further validate a long term trend which has seen radio go from being the sole source of mobile information and entertainment to being one of dozens of choices.

Ford's CEO Alan Mulally's keynote served as a clarion call here. The new Sync platform fully integrates pretty much every infotainment source a driver might want – AM/FM/HD Radio Technology, mobile phone, internet with popular apps like Twitter and Pandora, iPod connectivity, Sirius XM Satellite Radio, real time traffic navigation and concierge services. The implementation is intuitive and avoids driver distraction. You could feel the excitement in the audience and the sense that we were present at the unveiling of the next big thing.

But, as I again counseled broadcasters at the Show, let's not get carried away here, especially with the threat to AM/FM coming from internet radio. Radio needs to adapt to for sure, but Pandora in Fords does not spell doom.

Let's not forget reliability
In times of crisis, broadcast radio has been the most reliable source, often the only source, for emergency information. We saw it in Haiti, we saw it in Katrina: AM/FM was the only place for folks to tune in their time of greatest need. Broadcasters embrace this role and go to great lengths to deliver the crucial information people need.

Let me state it as clearly as I can: internet radio cannot and will not replace over-the-air broadcast radio. New and tough competition for stations: absolutely. A listening time and ad dollar share stealer: for sure. Armageddon for AM/FM: most definitely not.

As I have touched on in past columns, the reasons boil down to simple economics centered on bandwidth efficiency. Broadcast radio's advantage in cost and distribution efficiency will keep it competitive over the long term with internet radio's greater personalization and targeting capabilities. We are seeing more and more evidence to back up this conviction.

Let's look at those bandwidth efficiencies. An AM/FM radio station can support an infinite number of users within its coverage area – they broadcast their signal in their assigned frequency and an infinite number of listeners can tune in. The broadcast cost is basically fixed and relatively low, and there is no incremental cost to add listeners. This is the ultimate efficiency of a one-to-many broadcast architecture.

Internet radio, on the other hand, relies on a one-to-one architecture. Indeed, this is the strength of the service. Listeners can grab stations from anywhere around the world to cater to their unique tastes, or with service like Last.fm or Pandora, serve as their own program director, utilizing some pretty great software to customize a playlist to their individual preferences. These are very powerful concepts which are rightly and quickly gaining traction. This specific targeting and verification will also be attractive to advertisers, like other online services.

But this one-to-one architecture leads to some pretty tough economics. Each user requires a unique network connection. That means each listener brings incremental costs in the form of additional servers and network access costs. More listeners may not necessarily be a good thing.

We have seen instances of internet broadcasters turning off or limiting access to their streams, and I believe these cost issues have a lot to do with those decisions. As Kurt Hanson (who knows a lot more about streaming economics than I do) said about CBS's decision to block its streams to international users: "shutting down the streams will save the company bandwidth costs (and the company loses virtually no ad inventory, as U.S. advertisers are largely interested in U.S. audiences only)". I won't pile on by talking about the rights fee differences; let's just understand that presently streaming fees are a lot higher.

But it's on the network side where the one-to-one inefficiency is most dire. Each additional listener requires an additional slice of bandwidth (unlike broadcast where added listeners require no more spectrum). Bandwidth is scarce, and streaming audio (or video) is bandwidth hungry, so mass market listening, certainly in mobile environments, is hard to envision.

Again, simply stated, there are currently no existing or planned mobile networks which can support anything close to mass market internet radio listening. If rush hour commuters tried to use internet radio like they enjoy broadcast radio, the network would seize up. Whether 3G, Edge, Wi-Fi, or in the future, WiMax or 4G, there is nowhere near the capacity to support the number of listeners broadcasters serve routinely. I heard one wireless analyst recently say that if mobile internet listening comes anywhere close to broadcast levels, it will be a "nightmare of unmitigated network disaster."

We are seeing the front end of that disaster right now on the AT&T network. Those 9 million iPhone owners using those bandwidth hungry apps including streaming audio and video have driven headline grabbing network capacity problems. Business Week, in an article titled "AT&T's iPhone Mess" recently asked "Can AT&T escape the iPhone quagmire?" Reports confirm that 3% of AT&T's smartphone customers use 40% of all smartphone data but represent less than 1 percent of AT&T's total customer base (um, that can't scale), and now AT&T is limiting iPhone subscriber's access to certain particularly bandwidth hungry apps. Note this is all being caused by a small fraction of 9 million users. So how does this work for the 235 million AM/FM listeners? It doesn't.

To be fair (and geeky), there is network technology evolving to do multicasting. This would allow multiple users to listen to the exact same stream at the exact same time (so it won't work for Pandora or Last.fm) and use less network capacity. The technology looks to be fairly limited to smaller geographic areas or a smaller number of pre-selected streams. In my mind, this solution defeats the basic value proposition of internet radio – hyper customization and personalization, and it won't come close to addressing the capacity issues.

So just add more capacity, some might say. Well, I can't get the numbers to come remotely close to working. According to TownHall, AT&T's capital expenditures on its wireless network from 2006 through September 2009 totaled about $21.6 billion. That got them to the questionable performance we see today. It would take hundreds of billions more to build a network that would support a broadcast-level usage of streaming audio. And how would one hope to generate a return on that investment with incremental revenue from a service that is provided for free by radio broadcasters?

Because of these basic network capacity and economic issues, I predict that carriers will increasingly move to (1) restricted levels of service – not allowing access to certain apps, and/or (2) pricing plans which charge more for heavy data usage. The $29 unlimited data plan my wife has will not support the increasing volume of heavy users. Usage-based pricing is even coming to the home, as Verizon has announced plans to add data fees onto monthly bills over a defined maximum usage level.

If that is the way wireless pricing evolves, then users who want to listen to streamed audio content will be paying extra for the privilege. And mobile streaming audio begins to feel a whole like… class?, anyone?, anyone?… satellite radio - a premium paid service. We have seen that movie already. Sirius XM has built a viable long term business. But it is a niche business with less than 20 million users, certainly not a broadcast radio killer. That is more or less where I believe streaming will end up: a highly effective premium niche service which competes and grabs some share from broadcast radio, but exists alongside mass market AM/FM.

A related and important additional consideration: unlike over-the-air broadcasters, internet audio streamers do not control their distribution network. AM/FM broadcasters control their bandwidth, streamers rely on a carrier to distribute their content. As highlighted above, that means that streamer's content can be restricted or charged extra for. Yes, there is regulation around ‘net neutrality' that attempts to limit carrier's ability to restrict content distribution, but most everyone acknowledges that it's fair game to charge extra for services which cost more to distribute. Economics are economics.

So add internet radio to the growing list of radio competitors, but don't view it as death sentence for the industry, view it as driver for broadcasters to make AM/FM even better: by creating compelling programming, addressing local audience needs, and promoting their product like crazy. And yes, by upgrading to a digital broadcast infrastructure using HD Radio Technology, to offer more of what listeners have come to expect in a digital world.

Thanks for reading, and let me know what you think: email to thoughts@ibiquity.com. I do read, consider and try to respond to all of them.

Bob Struble
Columbia, MD
February 2010

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