Thursday, May 31, 2007

Why HD Radio Can Really Matter

Now that the consumer electronics manufacturers have begun to introduce volume HD products (JVC, Sony, Panasonic, Alpine and Kenwood are all ramping up their efforts), it is reasonable to expect that there might be more than a handful of potential listeners by the end of this year, with decent growth momentum carrying into 2008.

The big question for radio is how to monetize this audience - scenarios span the spectrum from "run HD subchannels at a loss to prop up the primary channel" to "sell HD audiences as stand-alone targets". The bean counters reading this will note that I deliberately set extremes at each end - instead of accounting for each HD channel as its own P&L, it's easy enough to account for an HD subchannel as an expense of a "primary" channel - the net result being lower margins if no additional revenue is generated. And I don't expect a single station to set up a completely redundant infrastructure to sell and service HD subchannels.

Notice I said a "single station". But what about a large cluster, or a regional or national aggregation of stations? HD radio allows the quick and relatively easy creation of "overlay networks" on top of existing radio spectrum, and can leverage a lot of the existing infrastructure. These networks have the potential to reach large enough audiences to matter to regional and national advertisers.

So there are at least two ways to look at the HD opportunity: one is from the position of a stand-alone station or cluster, and the other is from the perspective of an overlay network builder.

Let's examine the stand-alone issues first. Is the goal of using an HD subchannel to strengthen the primary channel? If so, then we can view the HD channel like we view a station website. It's a place for additional information, footnotes, and listener interaction all tied back to the primary programming. Did a music station do a live recording of a local band? Play the best tracks on the primary and cross promote the entire broadcast on HD. Is a news station covering a visit by a Presidential candidate? Air the best sound bites on the primary, and make more material available on HD (but take care not to let this devolve into "CSPAN lite"). A critical element in both of these examples is strong cross-promotion back to the primary station, either with contests that require cross-listening, or strong programming elements that can pull accross the channels (and note to the hardware guys - make it easy for listeners to hop between the primary and the subsidiary channels, or this model won't work).

The above examples are about using HD to go "deep" to support a primary channel. But there are other uses. When WCBS-FM switched from oldies to Jack, the oldies format moved to HD. It's crying into the wilderness now, but, as HD receivers become more available, it may find its prior listeners. This is an example of the "long tail" phenomenon, which posits that markets shrink over time, but rarely go to zero. The long tail promise is that, with low cost distribution, it becomes economically viable to serve the growing number of small fragmented markets. A key long-tail assumption is that content exists, and has a long shelf life. This is but one of the reasons the "pure" long-tail model doesn't work for radio - unless you believe that the future of HD is all recordings, all the time. Even with cheap HD subchannels, filling multiple channels with pre-recorded content doesn't seem that appealing from an aesthetic or an economic perspective.

But, if small islands of interest exist in local markets, and they could be tied together by an HD overlay network, then that aggregation can result in an audience big enough to attract the interest of advertisers (and talent). In this model, the local stations are spectrum landlords - a key concern here is primary target audience overlap with the HD overlay network programming. However, that overlap could be a plus if the primary station wants a way to reach its listeners as they travel out of its coverage area (and don't have the Internet in their cars). Ubiquitous national coverage is the primary differentiator for XM and Sirius - and is why they could be vulnerable to a concerted attack from a terrestrial overlay network. An interesting tactical side issue will become how to use overlay programming to take share away from primary competition in a market - this should be fun to watch.

HD radio is a sleeping giant. Terrestrial radio would be well served to wake it up, and put it to work.