April 08, 2012

Internet radio and digital audio advertising is on track for a strong ad year in 2012 with solid CPMs and a growing local revenue base, according to speakers at Radio And Internet Newsletter's RAIN Summit West 2012, held April 15 in Las Vegas during the NAB Show. However, given that only about 15% of listeners have shown a willingness to opt for a subscription model, online music providers are experimenting with various registration programs to increase the amount of information available to advertisers and help boost ad revenues.

Panelists said advertisers are beginning to more consciously make digital audio a part of ad campaigns, with the fact that ad agencies are increasingly reaching out to Internet radio players — one sign of the growing excitement around the medium.

Part of the new interest stems from the rapidly growing listener numbers and listening hours, as well as the fact that listeners tend to fall in the coveted 18-to-34 demographic and that listening in the high-growth Hispanic demographic is strong. In addition, Internet radio tends to over-deliver in the upper-income demographics. "We are in the second inning of a nine-inning ball game," said Steven Kritzman, senior vice president of advertising sales for Pandora Media Inc.

Pandora has recently disclosed that its trailing 30-day active listeners had increased to 49 million in February versus 47 million in January, and that it had 150 million registered users as of January. TargetSpot CEO Eyal Goldwerger shared data in an earlier session that showed that 42% of the U.S. population is listening to digital audio, while Triton Media Group CEO Neal Schore said monthly Internet radio listeners would grow from 116 million in 2011 to 186.3 million by 2015.

The mobile component is also quickly growing, with smartphone users in the U.S. alone set to grow from 93.1 million in 2011 to 137.5 million by 2013, according to eMarketer. Nine of the top 10 retailers (such as Target), nine of the top 10 restaurant marketers (such as McDonalds) and eight of the top 10 financial advertisers are already on board and advertising with digital audio. Borrell Associates CEO Gordon Borrell also showed the potential for terrestrial radio players to increase their online revenues (see attached presentation).

Panelists agreed that while digital audio is one of the fastest-growing ad segments, listeners are not currently well-monetized, but using multimedia can help boost CPMs. Advertisers are just starting to learn how to best take advantage of mobile platforms, and they are eager to capitalize on the personalization of music that Internet radio offers in order to more effectively target listeners.

"Currently, Internet radio CPMs are in the range of $3 to $6 for nontargeted ads and higher for geo-targeted ads," said Alexis van de Wyer, president of AdsWizz Inc. Kritzman estimated prevailing rates of $20 CPMs for ads that involve video, with banner ads much lower. Kritzman said Pandora's advertisers tell the company that it is one of the highest-performing publishers for click-through, and in general have an 80% renewal rate for advertisers.

Katz360 President Brian Benedik estimated that while generally network radio CPMs are $4 to $6, he said that geo-targeting boosts Internet radio CPMs to the $6 to $12 range and higher ($20-plus) if the ads involve video. Panelists said local/regional sales will increase this year, particularly in the larger markets, with political revenues increasing around more local races such as gubernatorial elections. "Local will take off this year," said Kritzman. Leading categories are diverse, but include finance and entertainment as strong categories, along with auto, restaurant and retail. Jon Mitchell, Spotify's vice president for U.S. ad sales, said his company has some 1,400 different advertisers.

As for costs to local advertisers to advertise on Internet music platforms, speakers said that costs can vary from a couple hundred dollars in small markets to $5,000 to $10,000 per week in a large market such as New York City. "Local CPMs at $8 to $10 are tastier than the $3 to $5 network CPMs for online platforms," commented Kritzman. Mitchell said that for Spotify, costs for local advertisers can be $500 to $1,000 for an advertising flight.

Given that 70% of Pandora's listeners listen on a mobile device, Kritzman said, the company is working hard to better monetize those listeners. Pandora execs have recently said the company's RPMs, or revenue per 1,000 listening hours, are $60 to $70 for its desktop Internet business versus $20 for the mobile side, but mobile is expected to catch up.

Panelists also agreed that online ads should always be 15 seconds or 30 seconds, and that 60-second spots are much too long for digital audio. Streamers cannot run close to a broadcast-like 10 to 12 units per hour, but are closer to 1.5 minutes to 2 minutes per hour. Kritzman said Pandora runs three commercials an hour, one every 20 minutes. Not being buried in a long pod of ads makes the commercial much more impactful, speakers said. "We don't take 60s," Mitchell said, but Spotify will run any length under a 30-second spot that makes sense to the advertiser.

Speakers throughout the conference commented on the need to increase the procurement of registration data from listeners. "Broadcasters must require registration data," said Triton's Schore. Stitcher Radio Co-Founder and CEO Noah Shanok said his company had experimented with different levels of registration from none to forced registration and found that listener retention is better with forced registration.

Some digital audio players are getting above the 15% threshold of subscription versus ad-supported listeners. William Sanchez, director and executive producer of Web operations for FOX News Radio, said 30% of the unit's revenue is from subscription versus advertising, with the revenue coming from such things as personalized podcasts of leading talk radio shows.

Despite the upsurge in listeners and ad revenues, the economics of Internet and streaming radio are challenging due to the high level of copyright fees, which speakers called "egregious and imbalanced" and which make it difficult for services to generate positive cash flow. Still, that did not stop reports circulating recently that Spotify could have an implied valuation of $4 billion based on current fundraising plans. Conference speakers attributed such high valuations to the premium that investors put on large, aggregated audiences. Spotify has more than 10 million active users and more than 3 million paying subscribers for its on-demand service. The company offers ad-supported unlimited streaming for free, or a premium rate of $10 a month.

Upside in areas such as mobile, the developing area of the in-auto connected dashboard, and Internet radio-dedicated listening devices such as Sonos are all increasing the level of interest in digital audio. As audiences continue to grow and ad revenues increase, the focus will continue to shift to business models, ad revenues and profitability.

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