Tuesday, March 11, 2008

Whatever happened to the Future of Digital Radio?

Last month, Fru Hazlitt, the Chief Executive of Gcap Media - Britain's largest commercial radio group - decided to pull the plug on Gcap's ambitious adventure into the world of Digital Radio.

It was a surprising move - since Gcap Media has been the leading commercial champion of Digital Radio since the very beginning. This has led many people to wonder: 'If Digital Audio Broadcasting (DAB) isn't the future of radio... What is?'

What is DAB all about?

The technology behind Digital Radio was invented back in the 1980s. Very simply, it offered digital broadcast of audio transmissions, as opposed to the old fashioned FM broadcasting that has given commercial radio it's voice since the 1920s.

[Militant Ginger's father pointed out that FM only came in during the 1950's. Before then, radio was broadcast exclusively on AM. Seems a radio-industry veteran like Ginger ought to have known that! - Editorial Bear.]

The advantages of Digital Radio seem obvious. With a digital signal, reception and clarity are much better - with no hiss or crackle like traditional radio. Additionally, stations can transmit on a much narrower band - meaning there's the opportunity for more radio stations to exist within the same geographical area.

But there are are two disadvantages to commercial digital radio. Firstly, it can only be picked up with a special digital radio - which is considerably more expensive than a regular FM receiver. Secondly, the costs of running a digital radio station are even higher than running an FM station - and by limiting your audience to digital-only receivers, a DAB radio station is also limiting it's revenue stream through advertising and sponsorship.

And that's what really killed Digital Radio. Despite a decade of digital broadcasting, only 9% of radio listeners have adopted digital radio in their home or car - and only 4% of British radio stations transmit on digital frequency alone.

What's the alternative?

There is a market in which a form of digital radio is proving to be astonishingly successful - but not in the limited way the European DAB market would have imagined.

In the United States, two companies are broadcasting a digital audio signal from space - and it's this fascinating technology that might well be the Future of Digital Radio.

Satellite Radio.

XM and SIRIUS are two American companies offering nothing less than 'Satellite Radio.'

Broadcast from a series of satellites orbiting the Earth, SIRIUS and XM offer digital radio signals that can be picked up anywhere in the mainland US through a dedicated SIRIUS or XM radio.

So just like DAB listeners in the UK, a special radio is required to listen to satellite radio. But why have consumers adopted XM and SIRIUS, while listeners have shunned Digital Radio in Britain?


DAB stations in the UK are limited by geography, in much the same way a traditional FM radio station is. Their DAB signal is broadcast from a transmitter and can only be received within that transmitter's radius.

This presents two problems. Firstly, that digital station's audience is limited to within the transmission area - meaning a commercially-funded station is limited in the amount of advertising revenue it can collect. Secondly, the costs of transmitting a digital signal are very high - meaning the operating costs of a local Digital Radio station are actually higher than a traditional FM radio station.

Satellite Radio eliminates both of these problems with an ingenious - but fiendishly expensive - solution. Sending their transmitters into space.

Although the cost of designing, building and launching satellites is ridiculously expensive, once the satellite transmitters are up there, floating above the Earth, they can transmit hundreds of individual radio stations at very little cost and they can be heard practically anywhere in North America.

And this is where satellite radio trumps DAB. Instead of a Digital Radio group owning twenty stations, each with their own headquarters, presenters, sales teams, vehicles and transmitters, XM and SIRIUS radio can run hundreds of radio stations from a single location - dramatically reducing their overhead.

What's more, each one of those stations can be heard anywhere in the country - while DAB stations are always limited by the range of their transmitters.

Less cost. More listeners. Despite the outrageous start-up expense, it's immediately obvious that satellite radio has a much healthier business model than a DAB radio group.

But it gets better...

One of the major obstacles facing any commercial radio enterprise in the UK is the BBC - which is why satellite radio in the US jumps out of the starting-box with a good head start.

In the UK, every single television-owning household has to pay the 'Licence Fee,' which goes towards the funding of the British Broadcasting Corporation. They're a state-funded television and radio company - and a crippling rival for any commercially funded radio station.

It was the BBC's decision to adopt digital radio that gave DAB such a leg-up in the British marketplace. The BBC is not held accountable by any shareholders or advertisers - and with a whopping £4 billion annual budget, they can afford a digital adventure in a way no commercial enterprise could hope to match.

But companies like Gcap Media DID try to match the BBC - and did a sterling job in the face of overwhelming odds. But one of the reasons Gcap's digital broadcasts have failed is because they're struggling against a well-funded, commercial-free competitor that steals listeners and robs them of revenue. It's very difficult to compete.

Radio Rivals

Satellite radio, on the other hand, doesn't have the BBC breathing down it's neck. Their major competitors are the traditional FM radio stations (of which there are thousands, all across the United States.)

The satellite radio model has adapted to compete against traditional radio by offering a package that's just as attractive as what the BBC offers British listeners.

You see, since the first radio advertisement was aired in 1922, commercial radio in the USA has been driven almost exclusively by advertising revenue - which is good for the advertiser, but bad for the listener. Stations are chock-full of adverts, sponsorships, promotions and tie-ins, leaving barely enough time for an increasingly generic playlist of popular middle-of-the-road songs.

What XM and SIRIUS have done is to ignore advertising as a source of revenue almost entirely - instead charging listeners about twelve bucks a month to enjoy their satellite radio service.

So a consumer has to not only purchase a satellite radio (costing from between $39.99 to upwards of $300) but also commit themselves to a subscription. A daunting prospect, given that the UK's listeners couldn't even make the commitment of buying a digital radio.

But by offering subscribers access to hundreds of unique channels (which they can listen to anywhere in the United States) SIRIUS and XM have managed to attract almost twenty million subscribers - who can enjoy an enormous choice of music (anything from the latest pop songs to channels dedicated to bluegrass, Frank Sinatra or Elvis) with no commercials whatsoever - plus dozens of talk and sports channels (although some are subsidized by advertising revenue.)

It seems twisted at first - but then it makes a lot of sense. In the UK, DAB radio stations were asking potential listeners to shell out cash for a digital radio in order to receive the same advertising-funded radio they could enjoy for free with an FM receiver. Less than 10% of British radio listeners were willing to do that.

SIRIUS and XM made the same demand - but offered the incentive of better radio, with more choice and less commercial interuption - giving listeners a real advantage in switching to satellite. That's why satellite subscription took off, while DAB listening in the UK has never really succeeded.

So is Satellite Radio the future?

The last decade or so has seen an explosion in the audio entertainment industry.

For decades, FM radio was the only way to get a constantly updated, portable source of audio entertainment. But now, with the invention of the iPod and MP3 player, plus Internet radio and mobile phone technology that delivers music right to your handset, there are dozens of other ways to hear the music or chat you want without ever going near a radio.

But I think satellite radio has them all beat - for the next few years, in any case.

One of the reasons why satellite radio is so competitive with traditional radio - and has succeeded where DAB has failed - is because of the solid infrastructure.

The XM and SIRIUS satellites broadcast a one-way signal that can be picked up anywhere in the United States - and adding additional listeners doesn't cost the company anything. In fact, at this point in time, we're reaching the stage at which there are enough subscribers to keep satellite radio in the black - and each additional listener is pure profit.

In fifty years time, everyone in America could have a portable satellite radio with them and enjoy the same quality of signal that the early adopters do now.

There isn't really an audio entertainment medium currently going that can compete with that.

Mobile phone companies are offering Internet radio or music downloads through the cellular network - but every additional consumer eats more bandwidth, meaning cell-phone networks needs to keep building and maintaining additional transmitters to keep up with the demand. New listeners cost money.

Traditional FM stations are losing listeners to the likes of the iPod and satellite radio - and they still suffer from an audience limited by geographic area and a revenue stream dependent on the number of 'pairs of ears' they can offer advertisers.

Because of the sheer scale of the United States, DAB has never really taken off here - and I doubt it will, given the prohibitive cost-per-listener.

No, for the time being, satellite radio offers the best audio entertainment to the most people for the least cost - and as time goes on (and the enormous initial outlays involved in setting up the XM and SIRIUS satellite network are repaid) the strengths of the satellite radio concept will continue to shine.

SIRIUS Satellite Radio.

XM Satellite Radio

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