IPod threatens $20B radio-ad biz

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They said TV would destroy the radio industry and it didn't. But now there's another potential radio-killer on the loose-the iPod.

As the traditional radio industry, which takes in about $20 billion in advertising a year, keeps a watchful eye on its satellite competition, it may be overlooking a more immediate threat: the millions of people tuning into their iPods in the car, at home, the office and the gym.

Sales of the iPod and other portable digital-audio players significantly outnumber sales of satellite-radio subscriptions. While XM recently surpassed 3.2 million subscribers and Sirius boasts 1.1 million, Apple-which owns two-thirds of the portable digital audio player market-has sold more than 10 million iPods. Jupiter Research predicts U.S. MP3 player shipments will swell by 50% annually over the next several years and, following the leads of Sirius and XM, Apple CEO Steve Jobs recently announced iPod is partnering with auto makers, including BMW, Mercedes, Volvo, Nissan, and Ferrari.

The iPod's increasing popularity correlates with a decrease in broadcast radio AQH ratings, which measures the number of people tuned during an average quarter hour as a percentage of the population. Consider Arbitron's latest People Using Radio survey: Overall AQH ratings dropped 5.9% between 2000 and 2004. Declines in younger demographics proved more severe: 12-to-17-year-olds decreased 8.5%, the 18-to-24 range fell 11%, and 25-to-34-year-olds dropped 8.2%. Predictably, research indicates those age groups are the most likely to consume digital music-and most likely to own iPods.

Digital music was born as a product of Gen X and Gen Y and primarily targets those demographics, said Tim Bajarin, principal analyst at Creative Strategies, a Campbell, Calif.-based tech consulting firm. Yet he's heard anecdotal evidence that digital audio players are spreading to older demographics as well. "The digital-music market has been growing at about a 100% to 150% clip for the last three years," he said. "Those trends suggest music on demand or command is something the radio industry is going to have to watch closely."

Even satellite radio is testing the digital waters with XM's new MyFi product, which has a time-shifting memory mode that stores up to five hours of radio.

Not surprisingly, the general radio-industry opinion is that it's unlikely digital-music devotees will ever tune out of AM and FM completely. Cume numbers haven't declined and the Radio Advertising Bureau touts that persons ages 12 and older devote 44% of their 6 a.m. to 6 p.m. media time to radio-still more than TV and cable combined.

owning and exploring

"The iPod is all about music you already own and radio is often about music exploration and exposes people to music they might like," said Ross Rubin, NPD Techworld director-industry analysis. "Ultimately, I think consumers want both."

Irene Katznelson, VP director-network radio at Universal McCann in New York, agrees, but notes marketers are no longer satisfied with "spots and dots." Two to three years ago, the marketing industry instituted a widespread shift to a more integrated approach. Today "it's all about cross-marketing," she said. Most advertisers also incorporate promotions, online ads and a presence in other local media.

That, of course, mirrors the strategy many marketers are adopting with TV. But, just as network TV has competition from cable, DVRs and DVDs, portable digital audio players give consumers another listening option when they tire of traditional radio's extended commercial breaks and tight, focus group-tested playlists.

And, unlike radio's previous competitors-TV in the `50s, Walkmans in the `80s and Discmans in the `90s-iPods allow users to carry with them their entire music collection. If a station has a 1,000-song playlist, why not load up an iPod and listen to your 1,000 favorites rather than the radio station's?

boredom

Dave Lange, VP-rock of McVay Media, a Cleveland radio-consulting group, points out in his analysis of Arbitron's People Using Radio report that focus groups often cite boredom with playlists as a source of discontent. He also believes audiences may be losing their connection to radio's talent. "Personalities are a major part of creating radio's overall entertainment package. I can't imagine how you'd recreate that with an iPod."

Despite the cloudiness of iPod's impact on radio, some in the industry see a silver lining in the potential to capitalize on digital music. According to Mr. Lange, every week radio stations lure hundreds of thousands of music lovers to their Web sites and very few of those sites dabble in digital music downloads. "We're the ones who should be talking to Wal-Mart about promoting its digital music service," he said. And if you can't beat `em, join `em. Radio stations can lobby for the development of MP3 players with FM tuners, just as the satellite radio industry has done with automakers and stereo manufacturers.

The Edge 103.9, an independently owned Phoenix-Scottsdale station, proves radio stations can embrace new media and even foresees its own digital music downloading service in its future business plan. In November, The Edge launched its Internet streaming service, which features the same playlist that goes out over the airwaves, except commercials are supplanted by three song slots. The first slot is sold to a record company trying to promote a new tune, the second is chosen by the station's on-air staff, and the third is plucked from iTunes most-downloaded song list.

The Edge's managing partner, Scott Fey, believes the digitalization of music and advance of iPods and other portable players opens up a new world for everyone. "We're just starting off," he said. "Eventually, you could be listening to a stream, hear a song you like, press a button, and instantly you're downloading it."

Outside the studio, radio has been slow to capitalize on technology. Yet once the industry recognizes their potential impact, portable digital music players could prove to be the impetus that increases sales opportunities and boosts programming quality. Mr. Lange is optimistic: "If in the end iPods heighten awareness and interest in music and make it more important in people's lives, radio has real potential to benefit."

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