Internet Radio Poised for a Tune-Around

Back in ye olden days of the World Wide Web -- the mid-1990s -- Internet radio seemed full of commercial promise.

Major media companies, including broadcast giant Clear Channel Communications Inc. and Viacom Inc.’s MTV, jumped into the game. The only problems: no workable business model and no way to reach listeners away from their computers. That made Internet radio, for the most part, a commercial flop.

But now there are signs of a turnaround. Ratings services are beginning to take Internet radio seriously as an advertising medium, entertainment companies are investing in it again, and new technologies are promising to let it reach people whether they are in the car or on the jogging trail.

Arbitron Inc. and ComScore Networks Inc. have just begun jointly producing monthly ratings of online radio services from America Online Inc., Microsoft Corp. and Yahoo Inc. Virgin Digital, a division of Virgin Group Ltd., has begun to turn a profit with a subscription service featuring 60 music channels produced by its staff in Los Angeles.

Clear Channel, which dropped its Internet-only division in 2001, recently said it would be getting back into the business of producing original radio content for the Web. And several companies, including AudioFeast Inc. of Mountain View, Calif., are working to make Internet radio portable by letting subscribers download programming to MP3 players for later listening.

“A number of factors are coming together right now for Internet radio,” said Fritz Messere, chairman of communications studies at the State University of New York at Oswego and coauthor of the book “Broadcasting, Cable, the Internet and Beyond.”

“No one is absolutely sure it will work out this time around -- but a major player like Clear Channel doesn’t want to get left out if it does,” he said.

Cheap to launch and cheap to run, Internet radio is appealing to individuals and businesses alike. No transmitter necessary: All you need are a computer, an Internet connection and inexpensive software.

Live365 Inc. and other online networks made it even easier beginning in the late 1990s by offering to serve as host for stations for a monthly fee, eliminating many of the technological and copyright hurdles.

Today, about 38 million Americans listen to the radio on their computers at least once a month, according to a 2004 study by Arbitron and Edison Media Research. Internet users can hear music, programs from National Public Radio and an array of obscure fare. Channels currently on the Web include one that is all accordion music all the time and another that features only karaoke; a station out of Seattle consists solely of air traffic control transmissions.

The highly specialized nature of Internet radio means programming can be tailored to deliver precisely targeted audiences to advertisers. Still, commercial online broadcasters have struggled to make money.

The tech downturn of 2000 dashed many Internet radio ventures. Another blow was delivered in 2002 when many commercial broadcasters stopped simulcasting on the Web after a ruling by the librarian of Congress that said they had to pay music royalties.

Internet powerhouses such as America Online, Microsoft and Yahoo have kept radio services as sidelines. They don’t disclose how much revenue these services pull in, and analysts doubt it’s significant.

Back in the 1990s, “there were a lot of comments floating around about how great of a business Internet radio would become,” said Virgin Digital President Zack Zalon. “And some of them came from me.”

The evolution of Virgin’s radio service illustrates the problems. From its launch as Radio Free Virgin in 1999, it had grown by 2002 to reach at least 30,000 listeners -- comparable to the audience of a metropolitan radio station.

But the ads didn’t follow.

“We thought that if we could get as many listeners as a traditional ... station in L.A., it would be enough of a critical mass to attract advertising,” Zalon said. But “advertising on the Web had a terrible reputation after the bubble burst,” and the company couldn’t draw enough business.

So Virgin moved to a mostly subscription-based service similar to those offered by Yahoo and Internet radio pioneer RealNetworks Inc., which have more channels, better-quality sound and less advertising.

Although some divisions of Virgin Group have gone public, Virgin Digital is privately held and Zalon declined to disclose its earnings. He said the company’s 60-channel radio service -- programmed and operated in Los Angeles by a staff of 26 -- became profitable in 2003 as a result of subscription revenue.

Part of the division’s marketing plan is to offer live performances from the company’s Los Angeles studio, said Aaron Grosky, head of digital content for Virgin Digital.

“It gives us a way to give people listening online something they could not get otherwise,” he said.

In September, the online radio service was merged into Virgin’s music downloading site; the company plans eventually to enable listeners to buy songs heard on the channels.

Not everyone is giving up on Internet radio advertising. Two radio marketing veterans who formed New York-based advertising agency Ronning Lipset Radio in 2003 say it can work if advertising is packaged properly and backed up by persuasive demographic data.

Co-founder Eric Ronning says the agency uses the tools of traditional radio, such as ratings data, to sell ads online. The company expects its billings to exceed $1 million in 2005. The agency sells ads that play on four major online radio networks: AOL, Live365, Microsoft and Yahoo -- letting advertisers reach, collectively, a sizable audience.

“The unique advantage of online radio is that it gives people clear-cut choices,” Ronning said. “But we can sell whole groups of those choices as a package.”

Many experts say Internet radio will take its biggest step forward when it can reach listeners in their cars, in the backyard and on the beach -- not just on the desktop.

“That’s the holy grail,” said Raghav Gupta, chief operating officer of Live365, based in Foster City, Calif. “When you can get Internet radio everywhere, we can start getting the kind of penetration of FM. It will bring it a lot closer to being a mass medium.”

One approach to portability has been to turn cellular phones into Internet radio receivers. But cellphones have their drawbacks: As the signal varies, so does the audio quality. And the phones currently available in the United States can’t be used for calls and radio at the same time.

AudioFeast has taken a different tack. Subscribers to its service, which began in September, download Internet radio programming to MP3 players for later listening. They can choose from 450 online music, news, talk and sports channels.

Founder Thomas Carhart said the privately held company, which raised about $10 million from Silicon Valley venture capital firms Mayfield and Worldview Technology Partners Inc., believes that consumers will give up the immediacy of live radio for control over content.

“We know that people love time-shifting their video programs,” said Carhart, formerly head of marketing at D&M; Holdings Inc.’s ReplayTV, which helped pioneer the digital video recorder. “They can pause when they want, skip parts, go back and see something again.”

AudioFeast works with MP3 players made by three manufacturers, most prominently Iriver Inc. Carhart said his company was in talks with others.

So far, Carhart said, AudioFeast has attracted 7,000 subscribers -- a tiny number in the portable music player field. He declined to disclose how many had chosen to pay for the service after their free trials ended.

The company also faces competition from others with the same idea, notably Virgin Digital, which plans to announce a downloading service this year.

Many experts think the best hope of commercial success for Internet radio lies with the development of ubiquitous wireless access. Once users can count on that, portable devices could deliver Internet channels as easily as a transistor radio receives traditional broadcasts.

A step in that direction is coming with the spread of so-called WiFi networks, which provide wireless Internet access over a limited area. Another technology, known as WiMax, may someday provide similar access over a broader area in many parts of the country.

“If you were driving around a city covered by a WiMax cloud, you could theoretically get Internet radio in the car, everywhere,” said Julie Coppernoll, director of marketing for chip maker Intel Corp.’s wireless group.

Laura Behrens, an analyst with Gartner Inc., which consults on technology business strategies, said that someday, people won’t care if radio “comes from a station with call letters, direct from satellite or streamed from some guy in a basement in another continent. For radio, that’s the world to come.”