ANGEL STREET CAPITAL INVESTS IN PLACESTER

Angel Street Capital, LLC recently participated in Placester, Inc’s Series Seed Preferred equity raise.  Placester, located in Cambridge, MA, participated in the TechStars Boston 2011 program.  Placester is an Ad Network for the real estate industry and it’s platform provides value to both advertisers and publishers by enabling the ordering, serving, and fulfillment of ads in the real estate vertical.

For advertisers Placester’s platform serves as a hub to plan, purchase, and monitor advertising across multiple vertical-specific and traditional publishers offering increased ROI through access and analytics. For publishers the platform is a complete solution for order management and scheduling as well as ad serving. Placester’s technology allows publishers to reduce operation costs while improving pricing through data and access.

The founders of Placester are Frederick Townes, the CTO of Mashable, and Matt Barba, a real estate veteran.

WILL ARBITRON GET INTERNET RADIO AUDIENCE MEASUREMENT RIGHT THIS TIME?

Arbitron has recently made clear it’s intention to measure Internet radio’s audience. This will be Arbitron’s second attempt at measuring Internet radio. Arbitron purchased Measurecast at the end of 2002 and then shut it down in 2004. Measurecast utilized server side audience measurement similar to what we eventually utilized for Ando Media’s Webcast Metrics (we sold Ando Media to Triton Digital). When it shut down Measurecast, Arbitron believed that advertisers and agencies would rely on panel based estimates which had been Arbitron’s methodology for measuring the Internet in other areas. I have always been amazed that one could even think of using an estimate when actual data is available. This data is one of the factors that has driven the meteoric increase in Internet advertising including search. Arbitron would like to be able to combine terrestrial radio listening with Internet radio listening and produce one collective audience number. This may be difficult due to different methodologies. This is one reason they may resort to utilizing an estimate again.

Arbitron will either purchase Webcast Metrics or start their own Internet radio measurement service. Whichever path they choose let’s hope they get it right this time. Arbitron’s involvement may lead to added credibility for Internet radio. However given their terrestrial radio customer base their thinking may be weighted more toward what’s good for their terrestrial radio clients who are streaming, rather than the Internet radio only services such as Pandora, Accuradio and others.

ANGEL STREET CAPITAL INVESTS IN LIVIO RADIO

 

Angel Street Capital recently completed an investment in Livio Radio. Livio Radio, a Detroit-based team of auto infotainment and digital audio veterans, has established relationships with key content providers, automotive companies and retail players and has a validated, scalable business model that addresses a large, global market.
Specifically, with the car being the final frontier of the rapidly growing internet radio market, Livio Radio has developed a suite of hardware products & middleware/software solutions that enables full in-car audio experience via smartphone for nearly any car – new or old.  Put simply, Livio has enable Internet radio in the car.  I recently wrote a post on Livio which can be accessed here.


ANGEL STREET CAPITAL INVESTS IN iWEB

Angel Street Capital recently completed an investment in iWeb as part of a going private transaction.  iWeb had previously been traded on the Toronto Stock Exchange  (TSX-V: IWB).  iWeb has been providing hosting infrastructure with is shared web hosting, dedicated servers, managed hosting and colocation services for over a decade.

Founded by Martin Leclair and Eric Chouinard in October 1996 and headquartered in Montreal since 1998, the company has enjoyed steady growth since its inception, currently employing more that 170 hosting specialists and operating four data centers in the Montreal, Canada area.  Today iWeb is one of the largest web hosts and Internet hosting infrastructure providers in Canada. 

INTERNET RADIO IN THE CAR


In car listening is going to drive significant growth in Internet radio listening.  In car listening to terrestrial radio represents the largest percentage of total listening and I believe the same will be true for Internet radio.  Internet radio in-car listening is already occurring by connecting your mobile phone in various ways to your car’s stereo/entertainment system.  I have always thought that it would be the phone that ends up being the device that serves as the conduit for in-car Internet radio listening.  No one wants to set up yet another interface for listening and smart phones have now become practically ubiquitous.  The collection of wires, adapters, bluetooth devices all deal with what is termed the auto after market (making a system work given what is already installed in your car).

One of the companies focused on in-car Internet radio listening is Livio Radio.  Livio has many systems for making in-car Internet radio listening a possibility.  The one I like the best is called “The Kit” which works with Blue Tooth.  You download the Livio Radio app (which has 45,000 internet radio stations) and plug the nice looking compact device into your 12 volt lighter port.  Via bluetooth the Livio phone app starts and your choice of Internet radio station plays via your car speakers.   This approach works for the auto aftermarket but I would rather not have to insert the Livio device into the lighter port.  The after market solutions will continue to be utilized for several years given the millions of vehicles already on the road today.

Only major Internet radio brands such as Pandora will be able to integrate with car manufacturers so that they are built in.  There is a multi-year lead time and Pandora has been working on car company integration for some time.  Car companies will not deal with a multitude of Internet radio providers. However, Livio Radio will make it possible for all Internet radio brands to participate.  Livio has developed  an API  (think interface) that allows this seamless integration between internet radio stations and a cars entertainment system.  The ease of use which terrestrial radio has had in the car for decades has to be present for large scale consumer adoption.

Terrestrial radio has a hard time understanding that in the end the consumer will decide what, where and how they would like to consume audio content.  I believe consumers want Internet radio in their cars.

What Pandora Contrarians Don’t Understand

There are many who doubt Pandora’s ability to become a profitable entity like this article that appeared in Inside Radio on 6/9/11.  While it is true that music royalty costs will increase the larger Pandora’s audience grows, what is not understood is Pandora’s ability to generate revenue even given its existing audience.  Pandora had an AAS in the March 2011 Webcast Metrics 2011 Top 20 Ranker (Monday- Sunday 6 AM- Midnight) of 498,135.  Assuming Pandora ran 13 units per hour like terrestrial radio would result in gross revenue of $567,276,4138 (assuming a $10.00 CPM) compared to that reported for the 12 months ending January 31, 2001 of $119,333,000.  While I have assumed the same audience for 24 hours of the day and a $10.00 CPM what I have not taken into account is Pandora’s ability to generate revenue from video preroll advertising and display (both of which it is currently doing).  I would also argue that with Pandora’s ability to target ads CPM’s will be higher than the $10.00 I have assumed.  Consequently just from in-stream advertising the potential revenue is almost 5X that of what Pandora has recently reported.  Assuming a 20% sales cost would result in income  from operations of $334,000,000 rather than the slight loss actually incurred.  Pandora’s business model is not a suicide pact but one that is waiting to blossom and bear the fruit from many years of labor understanding what it’s customers/listeners want.
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ANGEL STREET CAPITAL INVESTS IN AIRKAST, INC.

Angel Street Capital recently completed an investment in AirKast, Inc.’s Series A Preferred Stock offering.  AirKast develops mobile applications which run on its AirBridge platform.  One of the industry verticals it has targeted includes Internet radio.  AirKast clients include many of the leading radio companies.  The company’s TuneKast offering allows stations to stream their content as part of its application.  Clients include ESPN, Radio Disney, Citadel Broadcasting, Salem Communications and many more.  Members of Angel Street Capital have previously invested in earlier AirKast funding rounds.  The company is growing rapidly and is well positioned to take advantage of the explosive growth occurring in mobile.

Pandora – Let’s open the Box

There has been a significant amount of publicity since Pandora filed their S-1 to go public on 2/11/11.  Based on data available I have taken a deeper dive into their content acquisition, primarily Sound Exchange royalty rates and payment.

The bulk of Pandora’s revenue is generated from advertising.  Advertising is based on audience size.  In the most recent Ando Media, LLC (now rebranded as Triton Digital – Ando Media is the de facto standard for Internet radio audience measurement and for full disclosure a firm I co-founded) February 2011 Top 20 Ranker Pandora generated a 495,055 AAS for the time period Monday-Sunday 6 AM- Midnight  AAS or Average Active Sessions is defined as “The total listening hours divided by hours in the reported time period”.   The February report did not fully measure some of Pandora’s mobile streams so listening for February actually declined from January.  Taking the average for the last three months (Dec-Feb) results in an AAS of 520,083 for that time period.

So let’s assume the average song length is 3.5 minutes and assume promo/ads of 2 minutes per hour.  This would result in Pandora playing 16.6 songs per hour.  In the parlance of Sound Exchange, based on Pandora’s audience there would be 8.6 million performance per hour x 24 = 206 million per day x 30 = 6.2 billion performances monthly.  At the $.00102 performance royalty rate per song this equates to $6.3 Million per month in music royalties or $76 Million per year.  Pandora reported content acquisition costs for the 12 months ending 1/31/11 of $69,357,000.  While I believe the majority of this expense represents sound exchange royalties it most likely represents other expenses such as ASCAP/BMI.  My estimate is based on more recent and higher audience levels.  Also overnight listening is most likely lower than the 6 AM – Midnight daypart.

There is a linear relationship between audience and what Pandora calls Content Acquisition.  Over the next several years Pandora’s Sound Exchange rate will escalate as follows:

2012     $.00110

2013     $.00120

2014     $.00130

2015     $.00140

From January 2010 – January 2011 Pandora’s audience increased 103%.  If we assume Pandora’s audience grows by half this amount, 51.5%, Content Acquisition costs solely from Sound Exchange will increase to $96 Million  (average monthly 2011 audience 656,830 x 16.6 x 24 x 30 x $.00102).   Pandora was approximately break even for the period ending 1/31/11 with Content Acquisition costs of $69 Million.  Based on my assumptions Pandora’s content acquisition costs will increase by $27 Million.  Put another way net advertising revenue will have to increase by this amount to continue to break even.  I don’t believe break even is the goal.  Given the increase in royalty rates and assuming no increase in audience (probably not likely)  Content Acquisition costs may increase each year (by $29 Million in 2012 and a little over $11 Million each year thereafter).

One of the reasons Pandora has attained their position as the largest Internet radio service is their low ad spot load.  Pandora does not report sellout rates for its ad inventory and there is also the option of running more ad inventory although this may have a negative effect on listening levels.  Pandora is early in its life cycle and the optimal blend of ad inventory/size of audience to maximize revenue has not be determined.  Pandora also generates other revenue that does not result in higher Content Acquisition Costs, e.g. display revenue.

INTERNET RADIO MOBILE BANDWIDTH CONSUMPTION

Recently concern has arisen surrounding the cost of mobile streaming.  AT&T offers the following monthly data plans.

200 MB – $15.00

2 GB – $25.00

4 GB – $45.00

Each of these plans charge $10.00 for an additional 1 GB

Currently Verizon Wireless offers unlimited data usage for $30.00.  However, their CEO during a telecom conference in March stated Verizon will move to a tiered pricing model during the summer.  So what bandwidth is consumed when streaming?  Let’s do some math.  Bandwidth consumption depends on the quality of the stream typically expressed in kilobytes (“KB”) per second. Many stations stream at 32 KB per second so a user would consume 14 megabytes (“MB”) per hour ( 32 KB x 60 x 60 = 115,200 KB per hour, there are 8 bits in 1 byte so (32 x 6,600)/8 = 14,400 KB so 115,200 KB / 1,024 = 14.06 MB per hour).  Let’s assume a listener spends 2 hours per day streaming music so this would consume 28 MB per day or 840 MB per month.  There may be other data being transmitted which would increase the amount of bandwidth consumed.  The average time spent per session listening to Internet radio on average is approximately 2 hours.  However I believe time spent listening is lower on mobile devices.  To be conservative we’ll keep the 2 hour per day assumption.  Some wireless company websites actually has a calculator for determining data usage for various activities.  AT&T assumes a streaming rate of 64 KB per second.  Assuming 2 hours of listening per day resulted in consumption of approximately 2 GB.

T-Mobile’s data calculator computes streaming audio data consumption to be much greater:

T-Mobile does not state what bitrate was assumed.  Obviously mobile users also consume bandwidth for other purposes.  I believe most mobile users are comfortable with paying $25.00 per month for 2 GB of data.  So it appears that the cost of a monthly mobile phone bill is going to go up for Internet radio users.  Most will need at least a 4 GB plan which would add another $20.00 per month.  While cell companies lost the battle for control of content they do have pricing power and leverage.  The combination of Verizon and T-Mobile, if allowed to occur by regulatory agencies will lessen competition and could lead to higher costs.  I am rooting for more competition from the likes of Clearwire and LightSquared.

INTERNET RADIO UPDATE

We just returned from the NAB Convention in Las Vegas having attended RAIN Summit and numerous meetings with industry leaders and firms involved in Internet radio.  2011 is shaping up to be the year of Internet radio especially given the IPO filing by Pandora. However there are some new partnerships and entries on the services side of the business which I have highlighted below:

  • Liquid Compass has announced a partnership with ADSWIZZ where ADSWIZZ will provide ad insertion and impression measurement services for Liquid Compass customers.  ADSWIZZ is a Belgium based company that has been operating in Europe and has been eyeing entry into the U.S. market.
  • ABACAST has secured new funding and has launched a new Ad insertion system, Abacast Clarity. Additional partnerships have been announced with firms to assist in monetizing station ad inventory including Citadel Media and AdLarge.  ABACAST also provides audience measurement services.
  • A new company providing audience measurement has launched in the U.S., Touchcast.  Touchcast based in Belgium has launched it Casterstats product.
  • Ando Media (now known as Triton Digital) has secured Media Rating Council (“MRC”) accreditation for its Internet radio measurement service, Webcast Metrics
  • Arbitron has announced that it is going to provide audience measurement services for Internet Radio

These developments should lead to a very interesting year in the Internet Radio industry.  Given Arbitron’s dominance in measuring terrestrial radio it would be hard to bet against whatever platform they release not being the eventual winner.  Will they buy or build?

Ando Media (a company we founded in 2004) has been the dominant ad insertion and audience measurement company serving the Internet radio industry.  Triton faces heightened competition on the ad insertion side of their business and now audience measurement as well.  As in all industries, now that the market has grown competitors are emerging.