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Radio slayer?

February 28, 2005

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The 3.6-ounce iPod could become a 500-pound gorilla


 

By Anthony Schoettle  Indianapolis Business Journal
IBJ Reporter

Will digital music devices decimate the radio industry?

Radio's death knell has tolled before.

In the 1950s, television was supposed to kill radio. And in the last 30 years, there have been a cavalcade of challengers from cassette tapes and Walkmans to compact discs and portable disc players.

Even though a record $20 billion was spent nationally in radio advertising in 2004, a new predator on the landscape has the potential to take a serious bite out of the industry's lifeblood.

The digital age has ushered in the MP3 player, and California-based Apple Computer Inc. is aggressively marketing the iPod, the latest so-called radio slayer.

"Times are changing," pronounced Robert Unmacht, principal of iN3 Partners Inc., a Nashville, Tenn.-based media and investment banking consultancy. "The iPod is an amazing device, and its potential is just starting to be realized. If you're a radio station operator and you're nothing more than a jukebox, you're doomed."

Chris Wheat, Indianapolis market manager for Clear Channel Communications--which operates WFBQ-FM 94.7, WRZX-FM 103.3 and WNDE-AM 1260--has weathered many onslaughts.

"Yes, this is a new opportunity for people to leave radio--hopefully temporarily," Wheat said.

He has seen the exodus of listeners before, only to see them return to sample new music and listen to extensive collections radio stations provide.

The iPods' impact to date, Wheat said, is minimal.

"It's like Wile E. Coyote," Unmacht warned. "You run off the side of a cliff, and for a second or two, nothing happens. Then you look down and the ground is gone from beneath you."

With the 3.6-ounce iPod capable of downloading and holding more than 1,000 tunes from compact discs or Internet sites, close to double the playlist of most radio stations, this new challenger looks like a contender.

iPods even appear to be a more serious threat than the much-ballyhooed satellite radio. While XM Satellite Radio has sold 3.2 million subscriptions nationwide and Sirius Satellite Radio has 1.1 million subscribers, iPod's total sales recently topped 10.2 million domestically, according to New York-based Jupiter Research. Sales of MP3 players--with iPod nabbing more than two-thirds of the market share--are projected to grow more than 50 percent annually over the next three years.

Songs can be cataloged in an MP3 player in a number of ways, including alphabetically, by artist or genre. While iPods retail for about $250, other brands--usually with less capacity--sell for as little as $50.

Tim Medland, vice president for Entercom Communications, which operates WZPL-FM 99.5, WTPI-FM 107.9 and WXNT-AM 1430, senses a calm before the storm. Nationally, radio advertising was up 4.3 percent in January and Medland said Entercom fared even better.

"I think the younger stations are feeling the impact the most right now, stations like WHHH and WNOU," Medland said. "But we've all got our eye on this technology."

Radio's fragile future

Scott Uecker thinks he's seen the future, and unless radio stations--especially rock, pop and hip-hop stations--change course, it isn't pretty.

"Working on a college campus gives you great insight into what the next generation of radio listeners will do," said Uecker, general manager of WICR-FM 88.7 and instructor of communications at University of Indianapolis. "I see iPods everywhere."

Unmacht, a former radio station owner with more than 30 years in the business, said the industry is about to pay for neglecting younger listeners.

"I see stations making an earnest effort at getting the younger listeners back, but it may be too late," he said. "Advertising agencies and media buyers long sought the 25-54 age group. Now the 18-34 age group is hot, and radio might be losing that war."

Frank Friedman said his kids don't go anywhere without earpieces to their iPods plugged in their heads. Friedman, a locally based media buyer, wonders if the effectiveness of radio is waning.

"I don't see how we couldn't take into account the siphoning off of these young listeners," said Friedman, senior vice president in the Indianapolis office of Optimedia, a division of Publicis Group. "The way kids interact with music is changing altogether."

Tale of the numbers

Radio executives said radio is holding its own locally, but Uecker said an examination of listenership numbers shows otherwise. According to studies by Arbitron Inc., an international media and marketing research firm, 94.6 percent of people ages 12 and older in the metropolitan Indianapolis area in 2004 were radio listeners. That's only a slight drop from 95.1 percent in 2000. But the Arbitron figures also show a 5-percent decline in the amount of time people listen, from 18 hours and 45 minutes per week in 2000 to 17 hours and 45 minutes per week in 2004.

"There are almost as many people listening as there were five years ago; they're just not tuning in as often or listening as much," Uecker said. "That's a serious issue and it's showing a significant drop."

The growth of the iPod correlates to a decrease in radio's AQH rating, which measures how many people are tuned in during an average quarter hour. The overall AQH measured by Arbitron decreased 5.9 percent from 2000 to 2004. Age-group breakdowns are telling, with the AQH for 12- to 17-year-olds dropping 8.5 percent, 18-24 year olds declining 11 percent, and 25-34 year olds dropping 8.2 percent.

Looking to speed iPods' proliferation, Apple is pursing deals with carmakers. It has already signed agreements to install iPods in BMWs, Ferraris, Mercedes, Nissans and Volvos. Industry observers said Apple's push into the high-end auto market shows it's expanding to an older generation. And its deal with Nissan shows an eagerness to infiltrate a mainstream audience.

"If it has Nissan, you can bet Honda and Toyota will be the next targets," Unmacht said. "That opens up all kinds of new iPod listeners."

Apple is also brokering deals to integrate the technology into cell phones.

"A lot of people in radio feel like they're getting hit on all sides," Uecker said. "The Internet and expanding digital technology [are] making the iPod much more formidable than previous challenges to radio."

If Apple integrates advertising along with music downloads available for iPod users, Friedman said, radio has an even more serious problem.

"Like anything else, we'd have to measure a return on investment for advertisers," he said. "Depending on format, I think there would definitely be appeal [to iPod advertising]."

Alive and kickin'

Despite iPod's threat, radio still has its merits and there's no shortage of industry optimists. Studies by Radio Advertising Bureau, a New York industry group, show Americans ages 12 and older still spend more time listening to radio than watching network and cable TV combined.

"Radio is still the most cost-effective way of advertising," Uecker said. "It reaches a relatively large audience and can reach a targeted demographic and geographic region."

On-air talent's ability to inform and entertain an audience, sources said, will be paramount to stations' profitability. Unmacht said stations may need to decrease profit margins--which can run as high as 40 percent to 50 percent--to reinforce investment in the medium.

"I think if we go back to our roots and create compelling original content that connects listeners between the songs, this industry will be fine," Uecker said.

The role of the DJ, Clear Channel's Wheat said, has never been more important.

"The localization of a radio station is as important now as it's ever been," he said.

That's easier for stations whose staples include news, weather, traffic and sports, Entercom's Medland said, but even rock and hip-hop stations have to look for a local bent.

"People come to radio for more than one purpose," said Jimmy Steal, vice president for locally based Emmis Communications Corp., which operates four stations in central Indiana. "The emergence of this technology is a reminder of the fundamentals of great radio. It's what kind of experience you craft around the music. That's where the magic is."

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