Monday, June 6, 2011

From FM to www

Following this growing trend of Internet IPO's we have the new entrant. Pandora, the Internet Radio has recently filed to raise 142$ million dollars in Stock Exchange. The company serves as a virtual radio station that offers users to stream in a "freemium" model, where they can stream for free supported by ads or paying a yearly fee and receiving this service without ads.

Looking at traditional radio, this is a break from the past, a clear example of how distribution of a product changes and interesting given the case for tech IPO's in the tech industry. The industry used to work very differently than what we are seeing now. The value chain of the industry used to hold a special place for radio stations but now it is fading away.

In years past, due to frequency issues stations had to gain a permit to operate in a certain frequency for a specific radius. This permits for around 100 different stations in a metropolitan area, regardless of their size or population. These stations would purchase or create content and transmit it to the public with advertising behind it. Thus their revenue's were driven through advertisement by content distribution. This is very similar to Television broadcast, with the great differentiation that content is much easier and cheaper to produce and reproduce (ie: cost of a TV set vs. a radio set). This created a highly localized industry with a certain type of natural monopoly with limited amount of stations in different genres of content. Due to cost savings, some stations consolidated into larger holdings, but the individual stations stayed mostly the same.

Then came the disruptive business of satellite radio and now internet radio. Satellite radio, which I will not focus on, simply played on the idea that a person could buy a special receiver that received a satellite signal instead of radio frequency. This allowed for national stations that had a much larger coverage, didn't need government permits and allowed for a seemingly unlimited number of stations. Potential drawbacks is the need to pay for this service and a more costly hardware (which is provided by the company that offers the service). This was the first disruption to the industry but the real one came with internet radio.

Internet radio solves most of the distribution problems: it is not necessary to buy a specific piece of hardware (thus removing them from the value chain), just to have a device that connects to the internet and can reproduce audio; there is a seemingly unending stream of these apparatus with smartphones, tablets, laptops, pc and others, though none is specifically for radio. There is another dependence on hardware which is the dependency on bandwidth and thus network providers; without this infrastructure, it probably wouldn't exist. Another issue is the amount of stations you can have due to limited frequency, in the internet your limit is endless, since it consumes much less bandwidth than video for example. In terms of content is becomes much easier for talk radio to flourish since production cost in virtually non existent and in terms of distribution as well (where bandwidth is the major driver) while for music content it is more difficult since they have to negotiate with the music industry same as radio.

With this new IPO we're seeing an industry as old as many of our grandparents fade away into a more modern different way of doing business. One thing is for sure, the demand for audio content is not diminishing any time soon, and radio as well hasn't died. What is changing is how this service is distributed and it is another of the industries that are going from analog to digital, and give way to new companies. Saying that radio is dead is not correct, a quick glance at Arbitron's (the Nielsen comparable to radio in the US) study for last year and radio is still going strong and has high penetration within the country no matter the demographics. Undeniably though the advent of network technologies and personal computing devices have allowed software to be developed to change the way we listen to radio, and apparently it has been successful as Pandora can demonstrate. Whether the company will be successful long term is yet to be seen but the industry is promising and continuing IPO's no doubt prove for an interesting tale of digital business

As always I would like to thank the following sources for their valuable information:

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