Full stream ahead
The future of audio media is on-demand, following the explosion of online streaming and mobile services. But can the business models live up to the hype? James Silver investigates
When 20-year-old American music fan Sam Steele realised he couldn't access his favourite music-streaming site Last.fm on his new iPhone, he did what any self-respecting technology geek would do: he designed his own bootleg application.
Last.fm liked the bootleg version so much it hired him to work on the real thing, as well as Last.fm's app for the Google Android G1 phone. Miles Lewis, Last.fm's senior vice-president, international sales, recalls: "This was before most people - including me - really knew what an iPhone app was."
Steele, who now has the job title mobile developer, is an extreme example of the fast-growing breed of music fans who have helped drive the extraordinary rise of on-demand or self-scheduling services, such as Last.fm, Spotify, We7 and the BBC iPlayer- as well as their mobile app spin-offs.
Once the preserve of music nerds, the arrival of Last.fm in 2002 - which today claims 30 million monthly users "in every market on the planet" and became a media darling through its rags-to-riches acquisition by CBS Interactive in 2007 for £140m - has sparked an audio media revolution, allowing users to build their own radio stations, become part of a fan community and listen on the move via mobile apps.
And with "360-degree online player" My Space Music poised to launch imminently, Microsoft's Zune HD media player on sale in the US, Spotify's expansion into paid-for mobile apps on the iPhone and Android platforms, and Last.fm's move to broadcast on CBS Radio's HD multicast stations in New York, Los Angeles, Chicago and San Francisco, the market is becoming increasingly congested.
Lewis says: "I've just come back from the US where I was speaking to a number of people about this, including executives at CBS, which is a huge player in commercial radio. Consumers are expecting to run mission control, and the younger generation is demanding media on their terms - it's about ‘Give me what I want now'."
The success of such platforms among teens and twenty-somethings offers advertisers distinct advantages, including the tantalising prospect of targeting consumers with laser-like precision.
Simon Daglish, Fox Interactive Media's UK vice-president of commercial, with responsibility for MySpace, says: "We know our users extremely well because they actively offer details about themselves. So, in terms of targeting, when we use these new online players, we can be far more specific than pretty well any other medium out there - and that's very attractive to advertisers."
Also compelling to marketers is the treasure trove of user data that music streaming sites offer, including traffic numbers, new visits and average time per visitor. Greater accountability allows media teams to quickly assess the relative success of a campaign and tailor marketing messages accordingly. Anthony Mann, group head of radio at Starcom, says: "In the current climate, every media pound is under scrutiny, so it is becoming imperative that media channels can provide tangible results in terms of response and interaction."
He adds: "Radio hasn't traditionally tracked well in this department, even though research shows consumers actively search for subject matter online after hearing it on the radio. Digital streaming formats allow you to combine the engaging, informative and immediate strengths of radio, with the accountability of online." Mann's view is endorsed by MediaCom's head of radio Richard Jacobs, who comments: "Spotify, in particular, has proved of great interest to advertisers."
However, the buzz surrounding the sector has also sent shockwaves through the commercial radio industry. Music streaming's ability to capture a younger demographic - and for longer periods - has led some to question whether "traditional" radio delivery has a viable future.
Last.fm's Lewis says: "Commercial radio will take a different place within daily media needs. This will lead to more consolidation [among radio groups] and it will leave them less focused on the national experience. Do I want to put the radio on at the weekend and hear an ad for Lynx? No. Actually, what I want to hear about is my local area or my community."
Commercial radio groups have been quick to emulate their digital-only cousins. Today, few major radio brands are without streaming or app offerings, alongside FM, DAB, podcasts and the boom in live branded events. Recent innovations include NME Radio's iPhone app, which allows listeners to make click-through "impulse" music purchases, and Bauer Radio's Kiss, which made streaming versions available on the iPhone and iPod Touch platforms earlier this year.
MediaCom's Jacobs says: "It is absolutely right that forward-thinking companies should embrace new technology. Global Radio signed a deal with iTunes earlier this year for its chart show The Big Top 40, which allows listeners to interact through iTunes and influence the top placements each Sunday. That's a great example of radio demonstrating that it is not trying to beat these services, but to work with them."
But is all as rose-tinted as these digital services claim? Scratch beneath the PR gloss and it becomes apparent the business models of Last.fm and Spotify are still something of a work in progress. Ad-funded and free in the US, the UK and Germany, Last.fm is now subscription-only for music outside those markets.
As part of the CBS machine, the service has sales teams in New York and San Francisco, as well as in the UK, Germany, Russia, Ireland and, via Yahoo, in Spain and Italy. But, Lewis admits that selling ads "isn't easy, because we haven't got reach and a lot of advertisers want reach".
Moreover, the success of smartphone apps will require further changes to the site's business model. While Lewis won't confirm that Last.fm will soon switch to subscription for its mobile service, he hints strongly this is on the cards.
"The strategy for the past 12 months has been to build the apps and get the usage," he says. "Spotify's model is to say if you want to stream music on your phone, you have to be a subscriber. I'm not saying that's our strategy, but it doesn't take much to work out that's the way the market is going"
Andrew Harrison, chief executive of commercial radio body the RadioCentre, argues that despite the hype, these businesses are as yet unproven: "Once every seven or eight years, there is a new media fad that people say presages the death of radio and it has always been nonsense. Those in the digital space are currently trying to market business models that are fundamentally unproven. They'd like to imply there's been some huge shift in consumer behaviour, but that's just wrong."
Harrison adds that Spotify has "about two million registered users worldwide", compared to UK commercial radio's weekly audience of 31.9 million. "It will be interesting to see which out of [US online service] Pandora, Last.fm, Spotify and the others wins out in the end," he says. "Because, let's face it, some will fail."
Indeed, two well-placed sources interviewed by Media Week indicate that Spotify, founded in 2006 in Sweden by Daniel Ek and Martin Lorentzon, is struggling to live up to its media profile.
One media buyer alleges: "Spotify ain't making any money. It can't take enough advertising revenue to fund the amount of money it owes in royalties to record companies, because there are too many punters streaming music, which is why it has just put a cap on the number of users. Spotify looks great on paper and fantastic on screen, but its business model is flawed."
A leading commercial radio executive adds: "I know Spotify is struggling to get the cash in. With the best will in the world, how long can one keep selling a dream to investors in this economy?" Spotify declined to comment on its financial situation.
Nevertheless, with the on-demand genie out of the bottle, Lewis predicts that in 10 years' time, portability and self-scheduling will be the norm in the audio media landscape. He says: "[Former GCap Media chief executive] David Mansfield saw this coming. When he was ousted from GCap in 2005, he said: ‘People are going to want media on their own terms.' And he was right.
"Why should an editor tell me to watch a TV programme at a certain time? The future is Sky+ for broadcast TV, the BBC iPlayer on my laptop and music when I want it. When we look back a decade from now, the way commercial radio used to work will seem fairly quaint."
Mobile disco: can media owners cash in on mobile apps?
Spotify predicts that within five years, its service will be accessed via smartphones and other mobile devices more than any other platform.
A spokesman for the digital music streaming service, which launched its own iPhone and Google Android apps on 7 September, told Media Week: "As computers and mobiles continue to converge, it is very likely that in the near future the majority of music will be accessed via some sort of mobile device."
Other media owners, both commercial radio groups and online music sites, have scrambled to enter the mobile app market. NME Radio's iPhone app, which launched on 3 August and costs 59p to download, features an instant-purchase facility that allows listeners to click through to snap up songs they like.
Similarly, all Global Radio's brands, which include Capital FM and Heart, have a presence on mobile devices. Mike Gordon, group commercial director, comments: "We were one of the first, if not the first, to have apps on the Apple iPhone.
"Last Christmas, the Capital Radio app was the UK's most downloaded app. There is now a downloadable application across every one of our stations and almost 600,000 people have downloaded our content."
However, there is scepticism that, in the rush to embrace the latest techno-logy, enough thought has been devoted to the revenue-generating potential of mobile apps. Arguments rage between the relative merits of subscription - Spotify charges £9.99 a month for its premium service - versus advertising.
The free US music streaming service Pandora has attracted ads from leading American brands, including Best Buy, Target and Nike. But not everyone is convinced advertising on mobile music services works.
Miles Lewis, senior vice-president of Last.fm, which has launched iPhone, Android and BlackBerry apps, is one such sceptic. He asks: "Do you really want a banner ad when you log in to your Last.fm account on your phone?"
Internet jukebox: online audio ads receive mixed reception
Spotify claims online audio advertising is set to boom, although it should be noted the music-streaming site depends on the revenue stream, alongside its new premium subscription service.
Spokesman Andres Sehr says: "There are now many audio campaigns coming in. In general, online audio ads have performed incredibly well for advertisers and brands keep coming back. Some of the best-performing campaigns in recent months are the ads for Fiat, Audible, GSK, Fairview Homes and Peugeot."
Sehr's claims are supported by Starcom's group head of radio Anthony Mann, who points to the success of ads he has negotiated on behalf of the Central Office of Information.
He says: "Their campaigns vary from recruitment (armed forces), change in behaviour (stopping smoking or starting to give blood) or prevention (burglary).
"Using audio-streaming formats provides advertisers with frequency of message at relevant times while providing an instant, easy pathway for consumers to find out more.
"Our tracking has shown that consumers are hearing our ads regularly and reacting to them, and click-through rates are well above the industry average."
But others, including Simon Daglish, UK vice-president of commercial, Fox Interactive Media, are less gung ho about online audio marketing. "I'm not sure I agree with Spotify," he says. "Online audio ads are enormously intrusive and they haven't had a great deal of success. I just don't think they have taken off."
Another leading media buyer, who declined to be named, adds: "There is a lot of buzz about online audio advertising in our business right now. But the reality is that Spotify is just not generating enough advertising revenue from online audio.
"Spotify needs to sell more ads and charge more for the ones they do sell. Or it needs to get more subscribers. I'm not too sure either of those things are going to happen any time soon."
This article was first published on mediaweek.co.uk
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