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Spirit of the Internet radio
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August 18, 1998: 9:14 a.m. ET
Analysts say this online venture has a real future, but what will it sound like?
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NEW YORK (CNNfn) - The day will come when you'll boot up your computer, log on to the Internet and crank up the speakers to listen to the radio.
Yes, it sounds like one of those pie-in-the-sky "in the 21st century" type of scenarios, but investors are banking on the Internet becoming a new radio broadcasting medium.
Analysts say online radio isn't just another passing Internet fancy, but a legitimate future opportunity for investors. Exactly what the business will look -- or sound -- like in the future, however, is up for debate.
If you need an example of how investors feel about Webcasting, witness last month's wildly successful initial public offering of Broadcast.com Inc. After opening at 18, its shares skyrocketed as high as 74. It has since hovered in the $60 range.
Broadcast.com (BCST) is hardly the only site offering radio Webcasts. Sites such as Spinner.com, SonicNet and NetRadio provide custom and original music programming.
Also, more and more traditional radio broadcasters are increasingly offering their programs on the Internet, a crop of new Internet-only radio stations have launched in the past year, and record companies are increasingly issuing samples of new songs over the Internet before distributing them to stores.
The advantages to online music programming: Listeners can access hundreds of channels organized by genre, or set up custom listening programs to hear only specific types of music.
Additionally, Internet radio programmers can reach a worldwide audience because they're not limited by frequencies, which is why so many local stations have taken to making their programming available on the Internet. N2K Inc.'s (NTKI) Jazz Central Station site Webcasts Newark, N.J.'s WBGO jazz station via RealNetworks Inc.'s RealAudio streaming software, for example.
The quality of Webcast music, however, leaves much to be desired, and there are legal issues that must be resolved for these companies to succeed. Nonetheless, analysts say that unlike other Internet sectors de jure, Internet radio has a real future.
In the future…
Clay Ryder, chief analyst at Zona Research, said investors shouldn't expect great returns anytime soon on such companies as Broadcast.com and N2K, but the groundwork is being laid for long-term benefits.
"Asking whether there is a market for this is like asking in 1941 whether there's a market for this new TV thing," Ryder said. "It was 15 years before television took off. I don't think this industry will be wildly profitable any time soon, but over time there's good potential as more bandwidth becomes available."
There's also the oft-mentioned "Internet Factor"--that is, the Internet is changing the face of just about every business, including radio stations and record companies.
"I think investors in that particular segment of electronic commerce are anticipating the future of the music business rather than focusing on what's happening now," said Erica Rugullies, electronic commerce analyst at Giga Information Group. "In the future, record labels will have no choice but to distribute music via the Internet."
There also are real marketing opportunities, according to Mark Hardie, a senior analyst at Forrester Research.
"They can drive consumers from listening to a song to clicking a button which will enable them to buy the CD on the spot," he said. "This is for real. Ultimately, it will mature to being a complimentary promotional medium."
No static at all?
Despite the fact that the audio quality of Webcast music is worse than your average Grateful Dead bootleg tape, analysts say it won't be long before that changes.
"Bandwidth is increasing and becoming less expensive, streaming technology is becoming mainstream, and other audio technologies are being developed," she said.
Hardie pointed out that RealNetworks' (RNWK) upcoming RealPlayer G2 software significantly improves audio quality. The company said RealPlayer G2 provides FM-quality audio, but analysts say CD-quality audio won't be available for at least another two years.
On the high-speed front, TCI Music Inc.'s (TUNE) DMX subsidiary provides 24-hour, subscription-based digital music programming via cable and satellite transmissions. (Cable giant Tele-Communications Inc. owns 81 percent of TCI Music.)
Because DMX's content is digital, the audio quality is superior to what streams through such software as RealAudio. But Mark Mooradian, group director of consumer content at Jupiter Communications, said that type of business model isn't likely to become the prototype.
"Some companies are proposing pay-per-play jukeboxes and subscriptions to commercial-free broadcasts," he said. "But radio works pretty well as it is right now. People are willing to have commercials so they don't have to pay for it."
Mooradian said streaming audio--which doesn't require users to download files in order to play them--will emerge as the future model.
Copyright and royalty issues, however, could be major stumbling blocks to the success of Internet radio providers.
Earlier this month, Congress passed an amendment to the Digital Performance Right in Sound Recordings Act, which stipulates that Webcasters must pay a license fee to record companies for playing their artists' music on their sites.
Companies such as Broadcast.com already pay a fee to music publishers such as ASCAP and BMI. Those fees, however, benefit the songwriters; the new act benefits the record companies themselves.
Mooradian said the amendment could pave the way for traditional radio stations to step in and knock Webcasters off their collective pedestal.
"Most of these ventures are not terribly well funded," Mooradian said. "Radio stations have the deep pockets and stock valuations to pay (for the extra royalties). For these guys with revenues tricking in, it's challenging. They don't need to be giving away their revenues on extra royalties."
E-commerce opportunities
Like just about every other type of Internet or e-commerce segment, Internet radio is currently a profoundly unprofitable venture. Despite Broadcast.com's killer IPO, the company lost $6.5 million in 1997 on $6.9 million in revenues.
But Hardie said that would change if radio Webcasters develop partnerships with retail outlets.
The leading Internet radio sites already have retail partnerships for selling CDs. Imagine sells CDs through CDNow Inc. (CDNW), Spinner.com through Amazon.com (AMZN), and NetRadio through its own online shop, CDPoint. But Hardie said these companies will have to think bigger than selling records.
"They need relationships with retailers that would drive revenues," he said. "A lot of retailers are looking to buy positioning on these types of sites. If, say, NetRadio could establish a deal with a J. Crew-sponsored event, you could click a button, which would lead you right to J. Crew's site."
Crank up the PC
Aside from Web-commerce opportunities, analysts maintain varied outlooks for the future of Internet radio. Ryder of Zona Research said Internet stations could become the radio equivalent of cable television, with local stations gaining a national audience.
"Fifteen years ago, how many people heard of TBS?" Ryder said, referring to the local Atlanta station that blossomed into a "superstation" in the mid-80s thanks to cable. "When we get to the point when there's persistent bandwidth to people's homes, then this segment will really grow."
Hardie, meanwhile, can foresee the day when your computer becomes another component of your entertainment center.
"I think it will develop its own niche," he said. "There are places and times where its good to receive this type of programming. If you're having a dinner party, you may want to crank up a Web-based program because you can get three hours of uninterrupted music."
In other words, turn up the PC--it's party time. 
-- by staff writer John Frederick Moore
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