Denial on the Radio Dial

The terrestrial radio industry globally has plausible deniability on its side. Broadcasters are losing listeners slowly enough that they can continue to claim credible and dominant reach among key demographic segments throughout the world.

But the inexorable advance of listening alternatives is impossible to ignore.

The majority of radio listening in the U.S. and, increasingly, elsewhere in the world occurs in the car. Once the sole province of the in-dash car stereo, the automotive audio environment has become a free fire zone for satellite radio, digital terrestrial radio, good old fashioned analog radio, streaming audio, Internet radio and pre-recorded content.

Still, terrestrial radio dominates, commanding billions of dollars in advertising revenue based on a predominance in hours of listening and reach. Radio wins for being already in the dashboard and easy to use.

But radio is increasingly irrelevant among young people (pick your study, there are many). And as those young listeners age they are moving like a plague of locusts across the listening landscape toward IP-based alternatives.

In the U.S., recent financial reports from SiriusXM and Pandora, two of the strongest contenders for the ears of vehicle occupants, find both organizations adding listeners and listening hours. SiriusXM reported a total of 1.5M new net subscribers, climbing to a new record of 26.7M. Pandora reported 76.5M active monthly users, up from 72.7M, with a 13% increase in active daily users of the service up from 22M to 25M.

While the numbers were impressive for both SiriusXM and Pandora they reflected declining rates of growth for both companies. The reality is that terrestrial radio remains strong and can be expected to remain strong for the foreseeable future even as alternative sources of audio content continue to slowly erode the listening population.

What is missing is a clean break or shift in listening behavior. This simply is not going to happen. But the pressure is on and the insurgents, SiriusXM and Pandora (and their equivalents elsewhere in the world) have more cards to play.

As public companies, SiriusXM and Pandora must drive growth. SiriusXM hinted at the leverage it foresees coming from its connected car initiatives as well as its attempts to convince used car buyers to take advantage of the service with 14,000 dealers participating in the company’s certified pre-owned program.

SiriusXM therefore has a variety of means to stimulate growth from both new and used cars and from creatively bundling its existing services. The company could also opt to give away its data services (news, weather, traffic, gas pricing) for free in new and pre-owned cars (so equipped) in order to make it easier for customers to add channels or channel bundles in an ad hoc manner.

SiriusXM probably collects no more than $150M from its subscription-based data services for traffic and weather and the rest. The upside potential of having those customers connected for free to the data services and able to add other audio content on demand is hard to ignore. Of course, if the data services are delivered from a separate box from the audio services, it may offer no advantage to provision these standalone devices. (SiriusXM is also offering up its satellites to support the public key infrastructure associated with the Department of Transportation’s V2V initiative.)

With its acquisition of Agero’s former ATX division in Irving, TX, and that organization’s relationships with half a dozen car makers for connected services, SiriusXM is in position to enhance its satellite-delivered content with IP connectivity. An IP connection could deliver valuable location or context data that might allow SiriusXM to alter its content delivery or to add a contextual advertising play.

For Pandora, the upside comes from regional expansion as well as increased active users and increased hourly usage by existing users. Pandora’s powerful brand recognition in the U.S. has allowed the company to begin to displace SiriusXM as an advertised enhancement to new cars.

So far, Honda Motor America is the only auto maker that has seen fit to emphasize the integration of Pandora among its app services, but car makers including Toyota and General Motors have featured in-vehicle displays with Pandora icons in their television commercials. Car makers recognize the marketing influence of the well-known and easy to use streaming app.

In fact, both SiriusXM and Pandora have ease-of-use working in their favor. In addition, SiriusXM emphasizes premium content including popular talkers and live sports. Pandora leverages its more personalized listening experience.

Both SiriusXM and Pandora are vulnerable to the location relevance and curation of live terrestrial radio. SiriusXM will continue to see subscriber gains thanks to its aggressive renewal campaigns and creative pricing. Pandora is the greater threat, though, since it is riding the youthful wave of smartphone enthusiasm.

Pandora, and its streaming brethren, also benefit from the IP delivery model. Broadcasters can sit back and laugh at today’s in-vehicle smartphone integration solutions with lousy voice recognition and confusing menus, but car makers are looking for IP-based platforms that can enable global delivery of content via connected mobile devices or embedded telecom modules.

In fact, the European Commission’s efforts to refocus the wireless industry on improving regional coverage is a direct threat to broadcast radio listening in cars. Free though it may be, radio listening is hard to leverage as a competitive advantage for a car maker.

Whether they connect through the AUX IN, Bluetooth, a USB or simply listen directly, young people are opting to listen to their own stored content or to apps like Pandora via smartphones. Pandora is the critical gateway app for the automotive industry as it is available as a standalone app from nearly every car maker on multiple programs and it is the go-to app for demonstrating a connected smartphone in the new car showroom.

The downside risk for Pandora is a potential loss of interest or enthusiasm from young people experimenting with a range of service options including Rhapsody, Slacker, TuneIn Radio, Amazon Cloud, Itunes Radio, iHeartRadio, Rdio, Beats Music, and Spotify. But as first mover with the broadest user base and name recognition, Pandora has solid momentum.

But the omnipresence of Pandora and SiriusXM means these two organizations will take center stage in the U.S. in the battle for the ears of drivers. As an outcome of that struggle, terrestrial radio will see a steady, though nearly imperceptible, decline in listening. And for the time being, the deniability of that decline will be preserved.

I am speaking tomorrow morning on Mobile Advertising at the National Association of Broadcasters 2014 NAB Futures event at the Montage in Laguna Beach, Calif.