Digital Radio From Around the World, Not Above It

Dec. 19, 2008— -- For years, XM and Sirius engaged in a subscriber acquisition war that resulted in low prices for receivers and high prices for talent. It was a war that both sides lost.

Despite attracting millions of customers willing to pay $12.99 or more per month for access to digital commercial-free music programming and exclusive content, the high costs of subscriber acquisition forced the companies to merge.

Receivers that can tune into both XM and Sirius may revive the aftermarket for these tuners, which has plunged 24 percent in units in the past year, according to NPD's retail tracking service.

Terrestrial radio fought back with the adoption of its own digital standard -- HD Radio. It doesn't offer as much variety as satellite radio, but it doesn't require a subscription because it uses the same advertising-based model as conventional radio. That's good for people who have an HD Radio receiver, but bad for convincing people to get one, because unsubsidized prices are still relatively high and the selection of products that feature HD Radio is still relatively limited. For example, so far this year only 3 percent of in-dash players sold had an HD Radio built in.

Internet radio, however, would seem to deliver the best of both worlds -- a virtually unlimited selection of genres, most of it delivered free of charge. These have generally come in three flavors. The most flexible are on-demand music services such as Rhapsody that allow you to choose any music in their library to play but require a subscription.

Free managed services such as Pandora, AOL Radio, Slacker, last.fm, Grooveshark, Deezer and others offer personalized radio stations based on genre or the music or an artist. These also frequently offer basic interactive features such as giving a song a "thumbs up" or "thumbs down" or skipping past a song you dislike.

Finally, there are the Internet equivalents to terrestrial radio stations that simply play back music streams or may have a deejay or talk programs. Some of these are simulcasts of actual terrestrial radio stations from around the world. Aggregators such as Live365 serve as a guide to these streams.

Once confined to PCs, these music services can now be heard around the home as companies such as Logitech and Sonos have expanded the feature set of products that deliver PC-based music around the home to Internet-based services. Standalone home Internet radios are also entering the market, including those emphasizing audio quality and style from European entrants such as OXX Digital and Sonoro as well as from Brooklyn-based Com-One, which offers the Phoenix Wi-Fi radio for $149.

But challenges remain. Many of the free services have publicly bemoaned the high costs of music licensing they must pay, in contrast to conventional radio broadcasters who do not have to pay licensing fees. These expenses may cause netcasters to fade from the scene if they cannot generate enough advertising revenue.

Second, while several Internet radio services have created applications for Apple's iPhone and other cell phones that can play music wherever you have cellular coverage, the path to playback in the car -- the primary setting for radio listening -- is still not as simple as for alternatives. Faster cellular networks may facilitate in-vehicle playback, but high-speed wireless connections can cost up to four times as much as a satellite radio subscription. One service, Slacker, had been planning to create a satellite link for use with its Internet radio product in order to facilitate music delivery in the car, but now believes other approaches will provide a superior alternative, at least in the U.S.

In an economy that is leaving consumers hungry for entertainment without a lot to spend on it, Internet radio can further stretch dollars being spent on broadband. But business model pressures and technological limitations may place limits on where it can reach and for how long.

Ross Rubin is director of industry analysis for consumer technology at The NPD Group.