Why Would Radio Give Up Its Digital Inventory?

by John Rosso, President, Market Development

Most broadcast radio stations can also be heard streaming on the internet. It seems broadcasters came to the conclusion long ago that it made sense to provide their station’s programming to the growing portion of the audience that expects to listen online. While some stations began experimenting with streaming back in the 1990’s, widespread adoption happened in the middle of the last decade. At that time, rights issues related to the online use of talent, music, and other components of radio commercials emerged. In response, stations began to extract those commercials from their internet streams. This was a technical hurdle to be sure, but once overcome, one that made radio safe to stream, and provided the industry with the unexpected bonus of a new tier of inventory to sell. This streaming inventory is unique in that it is the only digital audio advertising play available to radio.

The rights issues described above still exist. Notwithstanding that fact, one mid-sized radio company recently announced a decision to discontinue the practice of replacing over-the-air commercials with internet-only commercials on their streams. The company’s leadership publicly laments the cost of ad replacement and cites technical issues that reduce the quality of the user experience. They also complain that there is no clear path to adequately monetize the internet-only audio spots. Given the inexorable transition of advertising spend from “broadcast” media to connected, targetable, track-able, digital media, why is radio’s digital audio play still under-valued, and why are some operators even thinking about giving up on it altogether?

Let’s parse the issues. As a percentage of the overall cost of streaming, the cost of ad replacement is inconsequential. This alone should not be reason enough to stop the practice. Further, with careful setup and normal maintenance the claimed technical issues are not insurmountable. So let’s get to the real problem: revenue.

One of the traditional barriers to streaming revenue is the lack of audience scale related to any individual station. For that reason, and in order to liquidate their streaming inventory, broadcasters have turned to the national rep firms. These rep firms do a good job of selling the inventory, but that inventory is largely being sold in the network radio marketplace. Network radio exists at the lowest point on our industry’s pricing spectrum, largely because of its reduced capabilities vs. spot radio. When a local station operator complains about getting a $5.00 effective CPM for streaming inventory, what they may not realize is that $5.00 is actually the high end of the scale for network radio. Streaming audio spots are already selling at a premium, just in the wrong marketplace.

So, if a $5.00 CPM for streaming inventory is not enough (and it’s not) how do we raise the price? Some streaming radio operators, both traditional broadcasters and pure plays, have achieved the scale necessary to move out of the low price point network market and sell their inventory in spot. This new scale, combined with the metro-market level measurement produced by Triton Digital’s Webcast Metrics Local, will enable internet radio’s entry into the spot market where its inherent capabilities will command higher CPM’s. This is a logical next step in the evolution of internet radio. However, even with this new scale and capabilities, we’re likely just re-slicing the same stagnating (0.3% CAGR 2012-2017) radio budgets. Eventually, the industry must set its sights beyond the undeniably challenged broadcast radio budgets and access the increasing digital media spend.

Consumption of streaming radio on smart-phones and tablets is growing at a remarkable pace. Video pre-rolls and display ads don’t work well in the mobile environment (see the disappointing results Facebook and others have had in monetizing mobile display inventory). Digital audio will be the pre-eminent ad type for reaching people on the move. Radio needs to own this space.

While radio ad spending is flat, digital is growing both nationally and locally. This local growth should be particularly troubling for radio. The digital capabilities driving this growth are targeting, accountability, and attribution. Much of the growth in digital is being powered by programmatic trading; which provides an advertiser with direct access to highly segmented audience and targeted impressions in real time. In the television business, virtually all of the growth is in the national cable segment, with many companies focused on providing targeting and performance data that leverages the inherently connected nature of cable television. These still-nascent segments of the market improve efficiency for the buyers, and increase yield for the sellers. They match the campaign to the consumer with the greatest efficiency in the history of advertising.

The key factor that differentiates digital inventory from broadcast inventory is its connectedness. That connectivity provides a two-way path, enabling all of the targeting and accountability that marketers have come to expect. Simulcasting a radio station’s analog and digital inventory constrains the digital inventory to the capabilities of the analog. The only way broadcast radio can participate in the high-growth segments of the advertising marketplace is if it has the right type of inventory to sell, and this means connected, digital inventory, such as provided by discreet audio streaming.

There is a huge transformation underway in media today. While there will likely always be a market for broadcast advertising impressions, it is unlikely that the value of those impressions will increase. If radio wants to escape the perils of flat revenue projections it will have to find ways to participate in the growing digital marketplace with something other than over-the-air commercial inventory. Measured against GDP, and probably even in absolute dollars, there is an inevitable decline coming to radio ad spending. If the industry is to slow that decline, and eventually return to growth, it will have to sell what advertisers want to buy. Radio has started down the path to a digitally connected future. Why are some thinking of turning around now?