Internet radio is the sole bright spot in the declining radio industry

Radio industry in the U.S. has been in a decline phase for some time now. Listeners, specially younger ones under 35 yrs. of age, have less reasons to tune in amidst a plethora of choices. The broadcast radio has pushed them away with one bad decision after another that has led to diminishing quality in programming, songs, and commercials.

Any recovery in the radio business will need to understand the potential of digital media, adjust programming for today's consumer, and deliver to advertisers something that is unique and very different from what they've received in the past.

Digital media has been the only silver lining for the radio industry. Internet radio has seen impressive growth in both audience and advertising over the past five years. Ability to target and track ads online vs. terrestrial radio is the obvious reason for increased advertiser interest. While at AOL, I was involved in launching one of the largest radio service on the Internet with a base of ~14M monthly listeners through a partnership between AOL Radio and XM Satellite Radio. AOL recently ended that XM relationship and replaced it with a broader deal with CBS Radio. The AOL/CBS deal also brought together synergies for both party's advertising inventory and streaming ad sales partners. TargetSpot, a CBS-backed startup that sells targeted local advertising for online-radio stations, and Ronning Lipset Radio, AOL's partner for over four years that sells national advertising, gained access to the combined AOL/CBS inventory.

According to yesterday's Wall Street Journal, TargetSpot has acquired Ronning Lipset Radio. The deal makes sense because the two companies bring complimentary capabilities to the table (local plus national advertising). Additionally, increased scale will help TargetSpot to better capitalize on the fast growing mobile advertising market. Its audio advertising solutions will be highly relevant & effective for streaming radio services for mobile devices, whose popularity will only increase with the full rollout of the 3G network, increase in the number of streaming mobile devices and their adoption.

I've included some numbers on the radio industry's advertising figures from the WSJ article.

U.S. advertising revenue in general will probably shrink 0.8% this year, says Wachovia analyst John Janedis. The radio industry seems on track for an even worse performance. Local spot radio advertising revenue, the medium's bread-and- butter, has declined every month this year compared with a year earlier, with August's decline reaching 11%, according to the Radio Advertising Bureau.

Last week, CBS Corp., one of the nation's largest radio-station owners, revised its full-year business outlook because of declining advertising.

But online radio advertising -- much of it the audio ads listeners hear when they tune into a station on the Internet -- is rising at a double-digit pace. Last year, radio sold $21.3 billion in advertising, including about $1.7 billion in the "off air" category that is chiefly online advertising.

The detailed full-year industry revenue comparison for 2007 vs. 2006 from the Radio Advertising Bureau can be found here.

Google Chrome may re-ignite the Web browser war

Google yesterday launched its Web browser called Chrome. Compared to dozens of products that Google now offers in its mission "to organize the world's information and make it universally accessible and useful," Chrome may be one of the company's most significant launches since Google Search, the company's debut product which generated 99% of its total revenue of $16.6Bn last year.

If Internet is the revolutionary land of new opportunity, browser is the "car" everyone needs to explore the "land" and enjoy the journey. The Web browser therefore is the ultimate Trojan horse a company can use to influence users' online experience and introduce new products & services. Chrome will enable Google to tie together its major products into a seamless user-friendly experience (e.g., Search, Gmail, maps, docs, analytics, etc). Some of its products will work more efficiently with Chrome. For example, Google Analytics has relied on server-side information to provide analytics data to clients. Chrome will allow Google to gather and provide much stronger analytics data by grabbing browsing information from the client side.

Additionally, by developing its own browser, Google can speed up releases of its own Web software, which have always hinged on working with Internet Explorer and were therefore dependent on Microsoft's development cycles. Now, Google can release new applications that initially run just with Chrome, providing it an alternative product launch platform, and simultaneously driving Chrome's adoption through popular Google applications.

On aggregate, Chrome should increase adoption of other Google products and significantly boost its revenue potential beyond Search. The ultimate mission for Google is to optimize revenue streams by having all of users' data all the time - search data, publisher ad-serving data (thru DoubleClick) and now browser data.

Why now? While above reasons sound quite compelling, some may wonder why did not Google develop a browser sooner. There are new browsers on the market and in development (Microsoft's Internet Explorer 8) which give consumers the option to surf the Web in anonymity. Anonymous browsing, which allows users to have an online experience without leaving any trace/digital footprints, is probably the single biggest threat to Google's monetization model. Its revenue generation is based on its ability to collect information from its users as they search, and serve them targeted ads and search results.

Microsoft IE 8, expected to launch in Q1 09, has developed "InPrivate Browsing," a feature that allows users to surf in private. There has been a long-expected threat that Microsoft (IE) or Apple (Safari) could mess with the Web cookies that are critical to the functioning of online advertising networks/exchanges, such as DoubleClick (now owned by Google). Competitive threat, including recent U.S. government efforts to make a stink about Google's privacy policies, probably pushed Google to make a proactive effort in launching Chrome and including its own "incognito mode" in the browser.

Chrome in all likelihood will be the default browser on Google's soon-to-be-released Android mobile operating system. The launch timing therefore makes perfect sense.

Google apparently had been working on the browser for two years, and the launch over the long weekend was leaked through its comic explaining the product rationale.

Chrome, an open-source Web browser, faces a tough market with three players currently controlling 98%+ of the browser market. Microsoft's Internet Explorer (IE) has a dominating 72%+ share, which has however decreased from over 90% share during the past three-four years due to the success of Mozilla's open-source Firefox browser.


Source: Net Applications, August 2008

I know a bit about the Web browser space. I led the marketing and distribution of AOL's Web browser (one of my several roles at that "constantly transforming" firm).

Yes, AOL did launch a Web browser in late 2004. The goal was to promote AOL.com when AOL opened its content walled garden for free consumption through an open portal. The secondary goal for AOL Browser was to generate search revenue through AOL Search. Microsoft's IE at the time commanded a powerful 90%+ global market share (post Netscape's demise), but had not introduced a major new version after IE 6 for over three years - a lifetime in the Web world. That's what monopoly does. The AOL Browser was built on the IE 6 rendering engine, given IE's ubiquity, and a royalty free license that AOL won from Microsoft. AOL introduced several industry leading features in its browser - a separate search box, tabbed browsing, back/forward preview button, arguably the fastest speed for browser launch and page rendering, separate pull-out side panel for bookmark management & previews, etc. Initially Microsoft openly encouraged AOL to innovate, and later on copied most of the AOL Browser features when it rolled out IE 7 almost a year and half later - a typical Microsoft response.

Power of default: The best way to distribute a new, free, utility software is to make it the default application on the hardware users buy to use that software. Web browser is a classic example of such a software. The majority of users don't actively pick their Web browser - it's an utility application to surf the Internet, and as long as the default browser on their PC does an OK job, users do not actively download and try a new browser. And the default browser on almost 100% of PCs is Microsoft's IE. Even though the U.S. Justice Department has clearly mandated that Microsoft cannot use its monopoly power in one area, say, the Windows Operating System, to bundle new Microsoft products in a manner that limits competition, PC OEMs, who have 100% freedom to choose the software they bundle with new PCs, hesitate to take on Microsoft head-on unless the stakes are very high. Almost all PC OEMs therefore make the Microsoft IE the default browser, not least because its monopoly power is self sustaining - since IE is the dominant browsing platform, all Web sites and third party applications are designed to work on IE, which is not true even for Firefox, the #2 browser. Even if OEMs bundle a new browser, it is added as the second browser to IE, and IE is the default browser, the definition of which is the browser launched by default if the user, say, clicks on a Web link in a Word document. Some PC OEMs let users choose their default browser (if more than one are bundled) during the set-up process of their new PC when it's taken out of the box.

Since browser is a free product (ever since Microsoft started distributing IE for free in order to kill Netscape, the first Web browser), its distribution economics are governed by Web search generated through the browser. We had built a separate search box in the AOL Browser chrome. Revenue share with OEMs for distribution was therefore based on search revenue through the browser. Having a persistent and separate search box right at your finger tips on the browser chrome was a big convenience for users (no need to open another window and go to, say, google.com), and the default search engine in that box ended up being a big winner (again, the power of default). Even though users could change the default search to the search engine of their choice, most never did. Google therefore made a huge fuss when Microsoft made its MSN Search as the default search engine in IE 7 when it was launched in 2006.

It'll therefore be interesting to see how Microsoft responds to Google making its search as the default search on Chrome, which has also merged the browser address and search box into one. We should not expect any complaints from Microsoft until Chrome gets some traction.

While Chrome may seem a threat to Microsoft given IE's 72% market share, I believe Chrome's adoption, at least initially, will come at Firefox's expense. As discussed above, only tech savvy users will experiment with Chrome in the beginning - the kind of users who switched to Firefox from IE at the first place.


On my first use, Chrome provides a very clean experience and appears fast. While Google may offer better features rolled out with faster frequency, better technology does not necessarily guarantee a win in the browser war (remember, Netscape). The power of default as discussed above and the entrenched distribution of IE present a tough hurdle.

While Google has not discussed Chrome in relation to social networking, where Google has been a laggard in the U.S., making a user's "social graph" (network of contacts) as part of the browser, and allowing 3rd party plug-ins and applications can be an easy product extension. Users potentially can access their social graph from a variety of Web services such as Facebook, MySpace, Flickr, Twitter, etc., all hooked into the browser itself. Chrome can shift the battle for the default Web platform from social networks to Web browsers.

Theoretically, a browser is a better platform compared to social networking sites like Facebook to aggregate various Web services. But it still faces all the basic challenges discussed earlier, that have to be overcome in order for browser to become the default platform on the Internet. However, Chrome's attempt to become users' and developers' common platform on which Web applications & services can be aggregated and built on may be another of those futile efforts from companies that have tried their proprietary products to become the common standard on the Internet. As argued earlier, the Web itself is the ultimate Internet platform, that is open and free for anyone and everyone without any potential conflict of interests. Having said that, Chrome may have a better shot than any other product thus far to become the Web operating system.

How can a Platform succeed in the long-run?

The rage in Silicon Valley today is all about platforms - platforms which are vying to become industry standards in their respective categories. Apple is pushing iPhone (cell phone applications) and iPod/iTunes (discovery, purchase and consumption of music and video). Google, Yahoo, Microsoft and AOL want their products (online advertising, maps, widgets/gadgets, etc) to become platforms in their respective categories. Facebook is hoping its social networking site to essentially become a communications platform on the Internet.

Here are three key criterion any company has to meet in order to make its product (platform) an industry standard:

1. Solve a problem for users and players in your industry.
2. Allow 3rd parties to easily build on top of your platform in order to continue innovation and expansion of the value the platform creates.
3. Fairly share the created economic value with 3rd parties which are developing products on top of the platform and thus enhancing platform's value to its users - the most difficult of the three criterion to execute successfully.

The above rules apply for any industry, though you'll find more examples in the technology industry, where speed and scope of continuous innovations often rely on establishing common standards.

General Motor's failed experiment with its OnStar system to make it a standard platform in the automobile industry for a wireless system that can provide new communication capabilities to vehicles is an example where customers and industry players agreed with the value (criterion #1) but GM's competitors could not trust it on the third criterion.

Facebook has checked the boxes on all the three above criterion. Its ability to succeed on (3) is however still questionable because it's too early to judge how Facebook will balance the very fine line and the difficult task of profiting from its own innovations on its platform while letting 3rd parties have unfettered and equal footing access to the Facebook platform in the long run - the economic incentives for the two to happen simultaneously can clash very easily. Then, Facebook is operating in a space where it is competing with the ultimate industry platform, the Internet itself. No points for guessing the winner in that fight.

Similarly, Apple has failed thus far in playing win-win with content firms whose content it needs to sustain early success of its iPod/iTunes platform in the long run (3rd criterion).

MIT's Michael Cusumano, along with Annabelle Gawer, wrote The Elements of Platform Leadership in 2002, a book that I'd recommend folks to pick up given its relevance in the industry's current love affair with Facebook & Apple. The book provides lessons from Intel, Microsoft and Cisco - pioneers in their respective industries, which succeeded in establishing their platforms as industry standards.

The Facebook Economy

Facebook is clearly the new darling of Silicon Valley. It's the "new Google" (based on traffic growth); it's the "new Microsoft" (based on its Platform); and its estimated valuation is a staggering $15B for a company less than three years old.

Some quick Facebook stats from its site:

• >48MM active users (20ok new registrations every day)
  
• 6th most traffiked site in the U.S.
• 54B pageviews per month
• Over half of its active users visit the site daily; average daily time spent is 20 min
• Over 5,000 applications added to its Platform within 5 months since launch (100 new per day)

For me, the last stat is the most striking one. Opening of the Facebook Platform, that now allows 3rd party developers to build applications for the Platform and leverage site's massive user base and its social graph, is one of the most exciting developments on the Web today. It has spurred creativity and innovation in a capitalist-style free-for-all manner that has been unprecedented in its speed and success. A vibrant developer community has evolved with dedicated blogs called Developer Garages where participating developers and others share their insights and information. The Platform has quickly become the most efficient user acquisition channel on the Internet. Several startups have shifted 100% of their resources to the Platform. "What is your Facebook strategy?" is a question every firm in this space (small or big) is asking. For several VCs, it's now a pre-condition for funding. Below are related developments that illustrate the resulting frenzy:

• VCs have started funds specifically for Facebook application development: Bay Partners, a Silicon Valley based VC firm, has created AppFactory, a fast-track program for entrepreneurs developing applications for the Facebook Platform.
  
• fbFund: Facebook announced its own $10M fund (open to expanding it further if required) that will provide $25k - $250k grants to developers for building Facebook applications. Developers can apply through, of course, a Facebook application built for the purpose (after the initial application process thru e-mail did not work out).
  
• Buddy Media, a NY-based startup plans to make money by building a business around Acebucks, a virtual currency for the Facebook platform.
• In order to monetize Facebook applications, at least three dedicated ad network experiments have started, valuing each application user at $0.30 (in contrast, the company valuation of $15B translates to $375 per active Facebook user).
• Global wealth creation: Developers around the globe now have an opportunity to earn a living thru the Facebook platform. The Wall Street Journal reports about one Agarwalla brothers team in Kolkata, India, that has built Scrabulous, an online game that resembles the traditional Scrabble. Since its Facebook debut in July, Scrabulous has grown to about 950,000 players, 36% of which are daily active users, or people who have logged in every day over the last 30 days. In contrast, only 7% users for Facebook's top 50 tools and games are daily active users. The game is generating $18k per month in advertising revenue for the Agarwalla brothers, a very good amount from Indian standards given country's low cost of living.
• Multi-million dollar valuation for popular Facebook applications: Lee Lorenzen, a VC in Monterey, CA, who describes himself as “the first Facebook-only VC,” started a $25 million Facebook investment fund this summer and introduced a Web tool, Adanomics.com, that lets you track application growth, activity, and valuation. The tool applies a stock-market-style analysis, using variables like the number of users, frequency of use and advertising revenue, and assigns a monetary value to Facebook applications. Some popular applications like Where I’ve Been (lets users show which countries and states they have visited), Texas Hold ’Em Poker and What’s Your Stripper Name (suggests what you and your friends would call yourselves on stage) have been valued at around $2 million each.

Despite the above facts, I'm still not convinced about the sustainability of these businesses built on top of the Facebook platform. In the long run, any such business will compete with Facebook itself, which can easily replicate popular applications or own their development thru its fbFund.

Then, there is this whole debate about sustainability of the Facebook platform itself. We know that the Web is the ultimate platform. It's open. It's not owned by a corporation or a government, and it provides a common standard for innovation to everyone around the world. The history of closed, proprietary platforms tells us that such innovations, while may be ground breaking at the time, succeed only during the temporary period taken by alternative/replicating innovations to be developed on the open Web. Anil Dash from Six Apart provides a detailed account of this theory on his blog. He eloquently argues:

Think of the web, of the Internet itself, as water. Proprietary platforms based on the web are ice cubes. They can, for a time, suspend themselves above the web at large. But over time, they only ever melt into the water. And maybe they make it better when they do.

As an example, Anil cites two proprietary innovative platforms launched in mid-90s by the Internet trailblazers of the time to create rich online experiences, both of which were ultimately taken over by similar/better innovations on the Web: Blackbird by Microsoft and Rainman by AOL.

Having worked at AOL, I can elaborate on Rainman, its proprietary platform that was used to create the walled garden Web experience provided within AOL's desktop client (remember those free AOL CDs you'd get in the mail). I was at AOL at the time when we sunset Rainman, and in my opinion it should have been done much earlier. Several old-timers within the organization kept insisting that AOL's desktop client built on the Rainman platform can stay as a differentiator for the company. It worked wonderfully during the early Internet years in mid-90s when standards for organizing information on the Web were either non-existent or awfully pre-mature at the best. However, by early 2000, innovation on the Web had made Rainman unnecessary and inefficient. AOL dragged its feet with Rainman until 2005. It finally had to adopt HTML (open Web standard) and re-write all of its content. AOL's content built on Rainman did not show up on Web search results - a significant and increasingly important source of traffic for the publishers by that time - a proof that innovations on the open Web platform (search engine spiders, in this case) force out proprietary closed platforms in the long run.