U.S. consumers are making Internet radio a bigger part of their listening experience. Research indicates that about 22% of radio listeners now spend at least part of their weekly time tuned to online stations. They are largely appreciative of the ad-free or ad-limited environment but all that is about to change.
Radio stations have real costs to cover. For now, the revenues streams from their digital efforts will bring in about $713 million this year. Large industry operators can generate enough traditional ad revenue to justify their digital expenses. But the industry start-ups, especially the online only stations, must build revenue to stay afloat. If this sounds familiar, think back to social networking sites which have largely migrated to ad-supported business models.
A new report from SNL Kagan predicts that digital revenue in the radio industry will likely reach $1.55 billion by 2021. That level would account for 7% of station revenue. Currently, digital revenue comprises a little over 1.5% of the industry activity.
Technology and related consumer behavioral changes will work in digital radio’s favor. As more consumers listen to the radio through mobile devices or in-car systems, radio companies will be able to offer better ad models with improved local targeting. And, SNL analyst Justin Nielson expects that CPM ad rates will jump from the current $5–7 to $10-$20.
SNL Kagan analysts relied on a variety of sources including reports from publicly traded Pandora in order to make their projections. One worrisome data point for Internet-only radio stations is the expense associated with royalties. As the number of listeners increase for the services, so do the fees when songs are played. To eventually become profitable, these businesses will have to find the right balance between subscription and ad revenue because as every economist knows there is no such thing as a free lunch.
Look for Internet only radio stations to be working diligently to expand their ad models in the near future.[Sources: Pomerantz, Dorothy. Expect Lots More Ads on Internet-Only Radio Sites. Forbes. 26 Oct. 2011. Web. 18 Nov. 2011; Lane, Jennifer, SNL Kagan Sees a Billion Dollar Market. Audio4cast.com. 31 Oct. 2011. Web. 18 Nov. 2011]