Like a hyper kid hopped up on sugar in an antique store, the Internet has broken some things: big-box stores, bookstores, video stores, government secrecy, and taxi cabs, to name a few. Now, it's throwing the vintage definition of radio around, redefining what it means to entertain through sound and how to make money off such a venture.
It's early on in the fight to win the next form of radio -- meaning there can still be unexpected winners and losers.
Traditional radio purveyor Clear Channel Communications, owned by CC Media Holdings (NASDAQOTH:IHRT) after a buyout in 2008, sums up the one strategy that could win the industry's transformation in its annual report:
We continue to expand the choices for our listeners. We deliver music, news, talk, sports, traffic and other content using an array of distribution technologies, including broadcast radio and HD radio channels, satellite radio, iHeartRadio.com and our stations' websites, our iHeartRadio mobile application on smart phones and tablets as well as in-vehicle entertainment and navigation systems.
Clear Channel is making the broad bet on every new technology out there.
Meanwhile, there are pure-play bets on certain technologies and formats. Sirius XM Radio (NASDAQ:SIRI), with its 25.6 million paying subscribers, utilizes satellites to deliver a wide range of content with the help of big personalities like Howard Stern. Pandora Media (NYSE:P), with 72 million monthly active users of its free service and 3 million paying subscribers, entertains listeners anywhere a device can connect to the Internet, but has no disc jockeys or personalities as it relies on its algorithms and user preferences to play what users want to hear. Spotify works in the same fashion, and boasts a larger global footprint than either Sirius or Pandora in terms of countries served, with 6 million paying subscribers and 24 million monthly active users.
The new contenders
The most significant players have just begun, however. Apple (NASDAQ:AAPL) released iTunes Radio over the past month, and easily brought on 20 million users with what amounts to an add-on to its already-ubiquitous software. And now, Google (NASDAQ:GOOGL) is readying a paid YouTube music service, which is in addition to its already-released Google Play All Access music service.
These huge companies could fund a music service at a loss for a long, long time with the revenues they make from other segments, most likely longer than the small upstarts like Pandora and Spotify could survive. Spotify's losses grew from $60 million in 2011 to $77 million in 2012. The chart of Pandora's profitability plays mostly in the bass clef with losses as it spends more on content acquisition and sales:
Combatting the giants
Not all is lost for the smaller competition, as a recent survey shows that while Pandora still fights for consistent profitability, its music-pleasing algorithm outdoes what iTunes Radio offers. For the question "Plays songs I want to hear," Pandora won with 72% in agreement compared to iTunes Radio's 63%.
For companies like Clear Channel and Sirius, capitalizing on their radio personalities will be important for survival. While Internet radio has defined itself mostly as streaming music with no human DJ presence, classic personalities and news from AM, FM, and XM stations can fill a niche in listeners' lives. Apple has leaked documents hinting it would add news, weather, and talk stations in the future.
The future radioscape
With any industry that sees increased competition, margins can fall. With Apple and Google in the mix, margins can fall beyond what is profitable and sensible for streaming music. If listeners end up defining radio as solely a music delivery service, the niche of radio personalities and the companies that depend on them, like Clear Channel and Sirius, will find themselves in the same profit-thin position.
Radio travels across many different frequencies and devices now, including Wi-Fi and satellites. Consumers are willing to pay for the service, through fees or attention to ads. But the combination of devices and services and payments that ends up dominant still sounds muddy this early on.
Fool contributor Dan Newman owns shares of Apple. The Motley Fool Pandora Media. It recommends and owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.