Advertising agencies, pundits, and radio’s own leaders regularly castigate radio for being woefully behind the times. They harangue stations to spend more on developing an Internet presence, spend more on social media, spend more on streaming, spend more on multimedia, spend more on mobile. Spend, spend, spend.
We’re assured that if we just throw enough money at new digital opportunities, then radio will be relevant and hip again. They claim the cost of doing nothing is far greater than spending all this money.
This is calledthe First-Mover Advantage. The theory is that you can’t let the other guy do something first. Being first at something gives us a leg up on those that follow. It is why venture capitalists threw money at every half-baked idea during the dot-com bubble.
The tremendously expensive failures during the bust that followed the dot-com bubble should serve as a warning to those broadcasters who believe the pundits. There’s little evidence to support the first mover advantage. Waiting to act, being a second mover, is generally safer and more profitable. And you still won’t miss the digital revolution.
History has shown that while some first movers succeed, the majority who are first pay a very high price, and still often fail. If you lived in New York City at the turn of the 20th century, would you have been better off owning one of several horse-drawn hack businesses or the only automobile taxi service? It turns out that the first New York taxi service went bankrupt. Then the second taxi service went bankrupt too. It took three tries before motorized taxis became profitable.
While the world moves a little more quickly a century later, the pitfalls of moving first remain.
Apple’s Newton, the first PDA, was a failure. Palm Pilot dominated the category for years. In contrast to the first-to-market Newton, the iPod wasn’t the first MP3 player, and the iPhone wasn’t the first smart phone. Both the iPod and iPhone were huge successes because Apple waited, read the market, and then produced products better than the earlier entrants.
How many times have we heard that over-the-air radio is dead? We’re told that the Internet is where everything is happening. The problem is that it isn’t clear what economically viable Internet radio will look like. A number of Internet-only radio companies are burning through a lot of cash in search of revenue, let alone profits.
Two different Internet products are emerging. The first essentially recreates terrestrial radio on the Internet. New-media visionaries have dismissed this model, arguing the future of radio is more along the lines of Pandora.
Pandora is a first mover in creating an entirely new type of radio. Started in 2000, private investors have so far sunk $56.3 million in Pandora, $35 million this year alone. For more on Pandora, go here and here.
Pandora has burned through millions of dollars to attract a claimed 30 million registered members. You can listen to it on your computer, some Internet appliances can stream it, and now there’s an iPhone and Blackberry app. Daily use is something like 50,000 users, but less than 4% of users make up over half of the visits.
Pandora has been advertiser supported, but recently started charging for excessive use and has created a pay tier of members. Revenue was $25 million last year, and are on track to reach $40 million this year. Pandora has yet to turn a profit, but it’s founder claims that the service will be profitable by the end of this year.
The nine year old company has yet to make a dime, but another has already replaced Pandora as new-media’s newest fascination, just based on the buzz in Europe. It is called Spotify. Spotify is not yet available in the US, and it may never be, but its fate says a lot about the status of music on the Internet.
We pointed out recently that pundits rarely predict radio’s death at the hands of today’s inventions. They always claim that radio will die at the hand’s of tomorrow’s invention. Pandora was supposed to kill traditional radio, but we hear less of that today. Now it’s Spotify. Spotify is tomorrow’s death-star for radio.
Maybe, maybe not. Here’s what one British blog noted a couple of weeks ago after the service froze memberships on rumors it was running out of money:
There's no firm evidence that people will ever be willing to pay to stream music in significant numbers and this in turn, exposes a fundamental flaw in the business model: the more people pay for a subscription (thus avoiding the ads) the less attractive the service becomes to potential advertisers. And the more ads it runs, the less music lovers will want to use the service.
The free aspect of Spotify is unsustainable. Across the media, people's faith in the ad-funded free content model is faltering. Advertising will never cover Spotify's costs: its only hope of success is in attracting (paying) subscribers in huge numbers.
More recently, Daniel Ek, founder of Spotify, confirmed the speculation, saying flatly that the service can't keep giving away free music, and wants cheaper music (talking about royalties paid to the labels) and a cut of concert revenue to keep it going.
So to say that the future of Internet Radio is a little murky is an understatement, particularly on the business side. It isn’t clear whether ad supported radio works on the Internet was well as it does on terrestrial radio. It also isn’t clear whether people will pay for a subscription. As we noted some time ago, Rhapsody is suffering massive defections.
We also have to consider whether establishing a more aggressive Internet presence has any potential for a financial return in the near future. One can find considerably more optimistic estimates, but a generally agreed upon estimate for 2009 puts Internet radio billing at about $260 Million. Terrestrial radio did over $17,000 Million last year. That’s 65 times more revenue. No one knows Internet radio’s potential, but even its boosters don’t expect explosive revenue growth from this point forward.
To commit substantial resources to something with so many unknowns is rather premature. It makes sense for station owners to watch and experiment, but not devote resources that might be better deployed on the terrestrial side, where the listeners are. There’s no evidence that Internet radio’s first movers have gained any advantage over late arrivals. Witness Rhapsody’s faltering and the (possibly misplaced) buzz about Spotify.
One can analyze each digital initiative and come to a similar conclusion. Don’t discount anything, but don’t spend a lot of money based on rosy predictions of pundits and vendors.
Harker Research works with clients testing digital concepts and approaches in search of viable digital solutions. Using simulations and controlled environments, we can gather useful qualitative and quantitative information, develop a business plan, and fine-tune the concept without the risks of launching a flawed product financial black-hole.