I read, with great alarm, Ed Ryan?s article in Radio Ink on Friday about Saga abandoning ad insertion and, more importantly, their decision to stop selling their digital separately from their broadcast signal. Alarm, not because of my own vested interest, but because in my view this is the wrong message to send to the market about the future of radio. Please note: Saga is not now nor have they been in the past, an Abacast customer.
I suppose my response could be expected and it isn?t without prejudice. Abacast has been supporting the radio industry since 2000. We?ve invested heavily in the industry, filing four patents this year alone and releasing multiple new products. But please, overlook my prejudice for a moment and hear me out. We?ve invested heavily in digital products because they are the future. I don?t think anyone will debate that fact.
Analysts and stock owners have given Pandora a market cap that exceeds $1.6B. This is because the markets always pay for where things are going, not where they are today, and shareholders see what Pandora is doing as one of the future possibilities for radio. Radio pundits have complained that Pandora isn?t profitable and that proves that digital isn?t a good model, but it is hard to believe that anyone really means that. Of course they aren?t profitable today -- but they could be, easily in fact. All Pandora would have to do, right now, is increase their ad load to six minutes an hour and they would become highly profitable. That?s on a third of the broadcast spot load. Note that Pandora isn?t the only way forward. The radio industry today has, at best, a muddy message about its digital future, and the choice to simulcast looks like a step backward.
What is wrong with this decision? Saga said they are making this change because they are concerned about the listener experience, the quality of the insertion, and the number of PSAs. I don?t read it that way though. What I hear them saying is that digital has no value, that they can?t make money with it, and so they are going to stop; that digital isn?t worth the investment to get it right. Analysts are going to read it that way too. They?ll read it that they don?t want to invest in the future, can?t figure out how to execute a digital strategy, and aren?t going to be prepared as audiences continue to shift online. This is not the message the industry wants to promote.
Regarding the audio quality issue, I can?t speak for other company?s products, but the issues described, leveling, insertion accuracy, etc. are issues that Abacast dealt with long ago. If a broadcaster uses our ad insertion system, AAC+ encoder, and streams at a bit rate of 48kbps or higher, the stream will be indiscernible from the broadcast stream. We have worked really hard to deliver products that a broadcaster can rely on and that have a very high quality level. I?m sure other vendors strive to do this too. Years ago this wasn?t always possible but we are in the third decade of streaming and many, if not most, quality issues have been addressed. That?s not to say that Saga is wrong, perhaps their current vendor still had some of these legacy issues, but I don?t believe it is the norm today.
Saga said they are going to simulcast their broadcast spots and just roll the digital into their broadcast -- but we all know that?s probably not going to amount to real revenue. Let?s be honest: 99 percent of the time the salesperson gives away the digital to get the broadcast buy, thereby wiping out any value that the digital numbers would have. Further, Saga will still be paying Sound Exchange fees, and these outweigh the cost of streaming and the software by a huge margin. So in all likelihood, streaming is going to become a huge money pit for Saga with little to no hope of ever creating meaningful revenue.
I don?t want to pick on Saga, I think they are just an example of how radio is torn between the past and the future and I think Saga is indicative of how these macro issues are impacting radio today. Saga has plenty of smart people on their payroll and they?ve been very successful. They?ve been around a long time and they obviously run a solid business.
So why did they take this tack and why is it being considered by others? Getting digital right has been difficult for many broadcasters, Saga isn?t alone here. When I first started running Abacast a couple of years ago, I noticed that customers never spoke about how much profit they were making from digital. The more customers I spoke with the more I noticed that digital seemed to frequently be treated as something that was a necessary evil, not something to get excited about. Additionally, many of the people I spoke with were trying to apply the way they sold and managed broadcast to digital and that clearly didn?t and still doesn?t work. We?ve done extensive customer surveys, and what we?ve learned can be summed up succinctly: If a broadcaster has a strategy and plan that is differentiated from their broadcast strategy and plan, they can be very profitable with digital. If not, they will almost universally not make a profit.
What is the difference? The stations that have been successful have all had a solid strategy, a good working plan and have executed it well. Make no mistake, it is harder to make money streaming and until the radio industry acknowledges the fact that a.) digital is here to stay and the growth is only going to accelerate; and b.) as a group, a team, the radio industry needs to get together and fight for lower rates from Sound Exchange or it will continue to be challenged in creating growing digital businesses.
Despite these challenges, some stations are growing their digital businesses. Need proof? We?ve published two customer case studies detailing profitable digital efforts (available at www.abacast.com), one with Federated Media and the other with Neuhoff. What I like in particular is that both of these groups are in mid markets and don?t have a singular advantage. What they did do was decide that they were going to make a concerted effort around digital and that effort had to be different from their traditional broadcast initiatives. They looked at digital not as a burden but as a new revenue source.
They didn?t spend a lot of money to accomplish what they did and most tellingly they didn?t hire a separate sales force, they just had their salespeople sell the digital inventory using a different program and they didn?t bundle it in with their broadcast. When stations apply these principals, we consistently see profit margins, after paying Sound Exchange and streaming fees, of 60-80 percent. These are meaningful numbers that I believe any broadcaster could attain.
Think about it. Not only can you sell in-stream but you can also sell pre-roll video, accompanying banners, you can target the ad delivery and provide advertisers a distinct, trackable call to action. The startup costs are low; no tower, land lease, FCC license, etc. All you need is a PC.
So why aren?t more groups doing well? The best part about this story is that more groups are doing well with digital. Since we published our case studies over a year ago we?ve continued to follow up with Federated and Neuhoff and not only have they continued to prosper but other groups have adopted the same model and they too are creating real profits with digital. Further, their digital audience is growing and as more cars become streaming-enabled, that growth will explode ever faster.
My distinct impression is that it isn?t that broadcasters don?t want to do something, it is that they frequently just don?t know what to do. When you add in capital restrictions, debt loads, cutbacks, etc. creating a meaningful digital offering adds up to something difficult to envision -- and that?s a shame. Because this is where the audience and advertisers are going and to turn your back on it will surely be a disaster in the long run. I?m sure Saga struggled with their decision, and I encourage them to revisit it.
Rob Green is the CEO of Abacast and can be reached at robgreen@abacast.com
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