CES- RADIO DASHBOARD FRAGMENTATION (PART I)

We just returned from the Consumer Electronics Show in Las Vegas.  The primary theme was Internet radio in the car.   One of our portfolio companies, Livio Radio, announced FMConnect which allows terrestrial radio stations the ability to now take advantage of two-way communication (read; digital) utilizing the cell phone connected to your car’s entertainment system.   Also Kudos to Fred and Paul Jacobs for inking a deal with Ford for their Ford Sync product.  Unfortunately the car ecosystem is fragmented and confusing to a degree that is frightening.  While developing an app for Ford is an attractive idea, keep in mind that this app will not work with all the other car companies’ entertainment systems. As currently stands a station would have to develop a different app for each car platform which is what Livio Connect is trying to eliminate.  Livio is integrating with all car companies and their suppliers.  Internet radio in the car can be achieved by many means as follows:

1)  physical cable

2) Blue tooth

3) Wi-Fi

Some systems just mirror the phone with navigation still done on the phone.  Others such as provided by Livio Connect  allow listeners to control access to streams from the cars control.  This makes controlling audio options much safer.  This is also true of Ford Sync’s product but it of course is one of many in the car ecosystem and I don’t think that Chrysler is going to allow the Ford platform into their cars.  Thus the need for a company like Livio which can work with all car companies because it has integrated into the chipsets of major suppliers of the in-car entertainment systems.  Radio companies should leave getting connected in the car to auto industry experts given the vast, confusing world it represents and should partner with a company like Livio to deal with integration.

ANGEL STREET CAPITAL INVESTS IN FUNDATION, INC.

Angel Street Capital recently closed on an investment in Fundation, Inc‘s convertible note round.  Fundation provides on-line commercial loans of $50,000 – $250,000.  Fundation has developed an automated credit decision engine and will use the Internet to target its offering to select industries and geographic areas.  This is not a peer-to-peer lending model but rather a fund that will deploy capital utilizing Fundation’s platform.  The platform will launch in the 4th quarter.

ALL EYES ON SIRIUSXM MUSIC ROYALTY NEGOTIATION

Given the recent filing by Reps. Jason Chaffetz (R-UT) and Jared Polis (D-CO) of the “Internet Radio Fairness Act,” bill and the significant impact that this could have on the economics for Internet radio we should all be following the upcoming music royalty negotiation that SiriusXM will undertake.  The House Bill proposes the same standard as that governing SiriusXM’s music royalty rates.  Should the rate currently paid by Sirius, 8%, be also what governs terrestrial broadcasters that are streaming this would significantly improve the economics of the Internet radio industry.  Please see an excellent overview in David Oxenford’s blog.

WHY WE SHOULD INVEST IN INTERNET RADIO – THE LONG TERM

This morning Fred Wilson, Partner at Union Square Ventures wrote in his blog post about sustainability which applies to Internet Radio.  Some of Fred’s thinking comes from Clayton Christensen whom I have cited before in my blog.  Here is Fred’s blog post:

If you want to stay in business forever, you have to focus on the long term. You must construct a business model that builds confidence and trust with your customers and keeps them coming back day after day, year after year.

Many business schools teach executives and entrepreneurs that business is about profit maximization. I don’t believe that. I believe business is about making a profit that sustains the business and enriches the owners but is not maximized in any period (month, quarter, year). I believe the goal of a business is sustainability so that all the stakeholders (customers, employees, owners, suppliers, etc) can rely on the business for the long term.

Let’s use an example. You own a business that operates on the web. You are a leading supplier of ecommerce to a vertical market. You generate $50mm in annual revenues and make a profit of $5mm a year. You see the launch of the iPhone and Android and think that your customers are going to want to connect to your business via their mobile phones. You ask your VP Product to scope out what it would take to build a comprehensive set of mobile apps that will allow this. She tells you it will take an investment of $5mm over two years to complete this project. You gulp. That is going to reduce your profits by $2.5mm a year in each of the next two years. What do you do? You make the investment because you must invest in the long term success of the business even though that is not a profit maximizing event. It may simply get you back to the $5mm per year of profits you were making before. There may be no ROI on this investment in a positive sense. It may simply be a defensive investment. You still need to make it to ensure you will be around for the long run.

Clay Christensen talks about this kind of thing all the time. Big company executives are asked to calculate a return on investment (ROI) on the investments they want to make. If the ROI isn’t greater than some minimum hurdle, the company doesn’t make the investment. And so along comes a smaller competitor who makes the investment and they eat the big company’s lunch.

ROI is not the right framework for companies to evaluate investments. ROI is for the wall street folks. They will use it to decide if they want to invest in your company. But when you make investment decisions in your company, don’t use the tools that wall street uses. Use the tools that animals use. Survival instincts. What will it take to ensure that your company is around in ten years, fifty years, 100 years? That’s how to think if you want to stay in business.

One of the most difficult decisions entrepreneurs and executives have to make is the decision to disrupt their own business. Let’s say you are a cable operator. You are making billions of dollars of profits each year providing voice, video, and data services protected by a monopoly business model. Along comes the Internet and it allows voice and video to be delivered to your customers via any IP network (wireline, cable, wireless, etc). You know that over time, this is going to disrupt your business. What do you do? Do you invest in this new technology and drive it into the market, hastening the decline of your monopoly protected business model or do you do everything you can to slow down the advance of this technology?

Sadly most executives make the latter choice. Most entrepreneurs make the former choice. The latter choice is about short term profit maximization but can, and often does, lead to the demise of the business in the long term. The latter choice is about survivability even though it will almost surely lead to a less profitable business in the future. Tough choice. But to me its an easy choice if your goal is long term survival.

One of the reasons entrepreneurs make these hard choices when executives don’t is entrepreneurs think like owners. They have that survival instinct in their gut. They don’t want their baby to die. Executives are hired guns. They are focused on maximizing the success of the business (and their compensation) over a short period that they will in the corner office. They have no incentive to think about what happens in 20 years or 50 years. They know they won’t be around. And so the company isn’t around either.

So when you construct your business model and create the culture of your business, emphasize sustainability over profit maximization in everything you create and do. This does not mean that you don’t need to make a profit. Profits are the essence of survivability. You can’t and won’t survive without profits. They are everything when it comes to sustainability. But just because you need to make a profit doesn’t mean you need to maximize it. Balancing the need for a profit with the need to sustain the business is the art of what you must do as the leader of a business. Do both and you win.

INTERNET RADIO AD INSERTION

There appears to be a growing movement questioning the cost of ad insertion for terrestrial radio stations that are streaming.  Saga Communications recently decided not to insert different ads into their streams but to let the same programming going out over the air to be distributed on their streams as well.  This movement if successful will sound the death knell for terrestrial stations that are streaming.  Given the other Internet radio listening options consumers will not choose to listen to a stream that is running 10-14 ad units an hour complete with some 60 second spots.

I understand that many stations are not making money from their streaming operations.  What I suggest is that rather than inserting PSA’s and other filler content that music stations insert songs.  The technology exists to do this and there should not be a charge for this type of non revenue producing insertion.  Some stations are doing this and there are no audio quality issues.  Ad insertion fees are not significant when compared to bandwidth and music royalty fees.

The course that is chosen will have considerable influence on the upcoming battle for in car listening.  Stopping ad insertion may save a few shekels in the short run but long term it will have more significant costs.

IS PANDORA’S AUDIENCE GROWTH SLOWING?

Today Pandora announced audience metrics for June 2012.  While these stats represent significant growth over the prior year, June results were lower than May except for share of total radio listening as can be seen below:

Listener Hours – 1.08 Billion (- 1.8% May to June)

Share of Total U.S. radio listening ( +3.1% May to June)

Active Listeners (- 2.2% May to June)

May also includes the Memorial day holiday (listening is often lower during such periods) which makes the decline worth noting.