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.
Archive for year: 2012
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.
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.
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.
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.
Ad targeting in Internet radio does not deliver for advertisers at the local level. No it is not rooted in a problem with technology. As recent announcements from Triton Digital and Abacast make clear, the technology exists. However, since most station’s audiences are small and a significant amount is out of market listening (often over 40%) targeting will not yield impressions needed to generate significant revenue. As a result targeting at the station level makes little sense other than possibly to guarantee to an advertiser an ad won’t be heard out of the metro. Targeting is useful on a national basis as a combination of stations on a network can deliver results as long as the target is not too narrowly defined. Pandora is probably the only service that can target locally without aggregation due to the size of its network.
Most radio stations do not collect listener data for their streams so the only targeting that can be done is geographic based off of an IP address. Listeners will give up this data for something they value if it cannot be obtained from other sources, e.g. Facebook. Some targeting is done based on station format, e.g. an AC station’s audience is primarily 25-54. This is not always accurate. IP addresses are not always correct as well which can result in lack of delivery of the campaign.
Mobile targeting is perhaps the holy grail as you can reach consumers closer to the point of purchase. As with targeting to desktops the problem of scale is even a greater issue in mobile. We have heard that Pandora is having difficulty monetizing its mobile audience which is 70% of their total audience. I don’t quite understand this as I would argue that engagement is greater with a mobile phone than on a desktop (you may leave your desk but typically you don’t leave your phone). I believe that longer term we will see premium CPM’s for mobile. Effective ad creative and proper delivery will help.
Tunein is perhaps one of the largest directories of Internet radio stations with over 50,000 stations listed with most available to be streamed. The company has been signing up stations to be part of their directory although we do not know the business terms of these deals. I think it is safe to assume that they are not exclusive. Tunein was created by the merger of RadioTime (on line station guide) and TuneIn (mobile Internet radio app). While Tunein provides information about radio programs and can stream your favorite station, for many years they allowed users to connect to a station’s stream through their guide without having the station’s explicit approval. Some radio station companies such as CBS have asked Tunein not to carry their streams. Although obtaining a $6 Million investment from Sequoia, they struggled for many years on how to monetize the service. Since they did not have a relationship with the underlying station they had no way to insert audio ads. The revenue component could only come from preroll ads (audio or video), display ads, and featured listings. Even preroll ads are questionable as many stations insert preroll video so Tunein would have to insert a preroll video ad in front of another preroll video ad, something that would not make for a great user experience. They appear to be running only ad network display ads. There were preroll videos in front of some streams but again these are most likely the ones inserted by the stations themselves.
While no public data exists on the size of the Tunein network in a press release dated 3/22/12 announcing the carriage of The Wall Street Journal Radio Network, Tunein claimed to have 30 million listeners and be in the top five in Apple’s App Store’s music category. It would be great if Tunein would release more audience metrics but I can only surmise that they need to develop their business model first by entering into an agreement with stations whereby they can obtain part of the ad inventory or solidify premium placement for accessing streams. Any measurement would a duplicate of that also measured at the individual station level but at least we would have a better feeling for the use of the Tunein platform. Tunein is a great service and one that we watched the founder, Bill Moore, develop and where we came close to investing on several occasions. Whether we made the right decision or not remains to be seen.
I have received numerous comments about the post I wrote last week entitled “What do Broadcasters’s see in iHeartRadio”. My post has been interpreted in a number of different ways. Let me first state that iHeartRadio is a great service and one that I have loaded on my iPhone. Clear Channel has markedly improved the user experience, especially on a mobile device. In order for terrestrial radio to continue to be successful I believe these elements are key:
1) Reduction in number and length of ad breaks – iHeartRadio’s decision to run no ads was a great decision. When ads are introduced hopefully the spot load will be low.
2) Customization – With its newly designed customized listening experience iHeartRadio is on the same playing field with other services such as Pandora and Spotify for the first time.
I would like to highlight one reader’s excellent point. For smaller stations that can’t afford to invest in a mobile platform iHeartRadio is a way to for their listener’s to access their streams on mobile devices. Also integration with Facebook may be beyond smaller broadcasters capabilities. Further, due to its larger scale, iHeartRadio’s potential access to in-car systems would give smaller stations in-car presence.
My intention with last week’s post was to have readers take away that stations looking for monetization should not rely on iHeartRadio’s platform to deliver meaningful revenue.
Is it extension of their brands? Is it increased advertising revenue? A new distribution platform? A number of broadcasters have agreed to have their internet streams added to Clear Channel’s iHeartRadio platform. Even though I believe in added distribution channels, there simply is very little benefit for stations to join and distribute their programming via this platform. Being added just means that you are one of more and more stations/channels on this increasingly fragmented platform. While stations may get to keep their in-stream audio ad revenue I’m sure Clear Channel is keeping all pre-roll and display revenue. Will this platform result in some added ad impressions and therefore revenue? Yes but not enough to buy a cup of coffee. Of the five featured stations today, all were owned by Clear Channel.
For Clear Channel this is a beautiful thing. They get content for free to add to the offerings on their platform to the consumer and take advantage of the effects of “the long tail” (No one broadcaster will benefit dramatically but Clear Channel may in the aggregate).
It appears that this is more a feel good strategy that terrestrial radio is doing something in digital. As I have noted before, Clear Channel is tiny compared with Pandora’s audience (about 15%). Based on Triton Digital December 2011 Internet Audio ranker, even if you added all of the top 20 terrestrial stations’ audience including Clear Channel it would still only be 42% of Pandora’s audience . What’s more, Pandora’s audience is increasing rapidly while the terrestrial stations audience has not increased over time.
For the most part there is nothing compelling on radio station websites. The primary reason that most people visit is to start the station’s stream or find information about what a station is playing. In a just released survey by The Media Audit, visits to station websites declined YOY from 17.7% of U.S. adults to 17.6%. As more and more options exist for listening to a station’s stream off website (through mobile app, Facebook, etc.) traffic will continue to decline. Most stations don’t promote their website because there is no original content and when the station’s website is mentioned it’s usually due to a contest which in my view artificially drives traffic to a site. Tweets and posts show up in a listener’s stream in many cases so no need to access the website. So how can radio develop unique content? Without investing a considerable amount of funds I don’t think there is much that can be done. However, I do believe there are other opportunities to create content and develop other brands. For example, one company I am working with Inner City, has for many years put on a weekend event in New York City called Circle of Sisters where over 40,000 people attended. There is an opportunity to further develop this well known brand apart from the radio station.
At Angel Street Capital we have invested in a local news site called GoLocal Providence (www.golocalprov.net) and they are in the process of rolling this same platform out to Worcester, MA. The site has been incredibly successful in challenging the local newspaper. Initially GoLocal launched in Providence with a local radio station partner. This opportunity exists for radio companies but I would suggest partnering rather than trying to develop it internally. Radio stations have a giant megaphone to launch other brands as they have been doing for their advertisers for many years. It’s time to use this megaphone themselves to develop brands they have an equity stake in.