Peter Ferrara: Launching Radio Into Digital Space (05/08/06)
By Joe Howard, Editor-In-Chief
Considering how competitive the radio business can be, the notion of getting a large collection of radio group heads together to cooperate on a single initiative sounds unlikely. But on Dec. 5, 2005, that's exactly what happened, when the HD Digital Radio Alliance - 12 radio broadcasters working together on a nationwide rollout of HD Radio side channels, or HD2 channels - was launched.
The Alliance's members include ABC Radio, Beasley Broadcast Group, Bonneville International, CBS Radio, Clear Channel, Citadel Broadcasting, Cumulus Media, Entercom Communications, Emmis Communications, Greater Media, and Susquehanna Radio. WBEB-FM-Philadelphia owner Jerry Lee is also a member.
The man charged with guiding the initiative is HD Digital Radio Alliance CEO Peter Ferrara, a former radio station owner and Clear Channel senior vice president. Ferrara was also chief operating officer of both U.S. Radio and Granum Communications, executive vice president of the National Radio Broadcasters Association, and an NAB board member.
In taking the reins of the Alliance, Ferrara and the other Alliance members are marching into uncharted territory. However, Ferrara is excited about the future of HD Radio, and believes radio is poised to take off toward an exciting new digital future.
Radio Ink: When the Alliance was first announced, all of these group heads who compete head to head each day insisted they were on the same page with HD Radio. Now that a few months have passed, have there been any glitches?
Peter Ferrara: >Not at all. Everybody is not only working well together, or as well as they wanted to, but I think it's even working out better. These CEOs are making a huge investment in terms of money, air time, talent, and human resource, so they're focused on the objectives. As a result, they're very supportive of everything that goes into the Alliance.
There are times when somebody calls me offering a criticism or a critique, which I encourage, because that's how we improve and do smarter things. But, there is absolutely nothing but a collaborative effort on the part of these companies.
RI: You reached your goal of having HD2 channels in 28 markets on the air by the end of Q1. What's the next milestone?
PF: We're planning to add another 22 markets by the end of July, which will bring us to a total of 50 markets.
RI: Can you list some of those markets?
PF: You're getting this information way ahead of anything we're officially releasing, but they include Phoenix, Minneapolis, San Diego, Tampa, Denver, Kansas City, Charlotte, Orlando, and Norfolk.
RI: Is the Alliance actively recruiting new members, or is this the group that will be moving forward?
PF: I wouldn't say we're actively recruiting new members. When the Alliance was formed, I spent a month and a half talking to everyone on the broadcast side that was interested, and we've talked to all of the groups in one form or fashion. They've made the decision on whether or not to participate, and I'm not campaigning to twist their arm to join if they don't want to. At the same time, the CEO's of the member companies and I are encouraging others to join because we're much better off being unified. If people see what we're accomplishing and see the inroads we're making, I think more will come on line.
RI: What are some of the sticking points you're hearing from companies not interested in joining?
PF: No one we've talked to disagrees with our mission. We get applause all the way around. The reasons some companies haven't joined are focused in two areas: One is that they see themselves as highly specialized in their content. Radio One, for example, is the premier urban broadcaster. Perhaps they're concerned that if they were to get assigned or had to select an HD2 format they are not comfortable with, it could be problematic. We respect that. The other side is that the member companies have made an amazing commitment of inventory day-parted, committed, hard inventory that's not preemptable. Certain companies aren't prepared to make that level of commitment.
RI: How does that format selection process work?
PF: For lack of a better term, it works on a lottery type of system. It's not random; it's based on the individual stations' not individual companies' coverage of the 12+ population. That is then overlaid against the current ratings of the radio station, and we create an index of those two things and rank all of the radio stations in the market.
There's a senior programming representative from every company, and we spend days upon days developing a format list for each marketplace that we think fits the spectrum in that local market. From that list, the programmers use the index and select what they want to do.
RI: What trends are you seeing in selection of formats?
PF: People are mostly doing one of three things. Some are doing a brand extension of the current format. Others are choosing to do what I'm calling a demographic brand extension; if it's an AC station targeting women 25-54, they may do female talk on HD2. It's a totally different type of format, but still targets the same audience. The last example is those who want to do something that is completely unavailable in the market, like WKTU in New York, which is rhythmic AC on the analog side and country on the HD2 side.
RI: Do you think that some companies just don't want to spend the money to convert until more HD receivers are on the market?
PF: This is an investment for the future. If someone is looking at the investment in HD Radio as something that is going to accrue to their bottom line this year or next, they'll probably never convert. Broadcasters have to be much more forward thinking and goal oriented for the long term in order to make the investment. Those who have not yet converted are not doing so for a myriad of reasons, one of which is they don't see the return right away.
RI: Let's look at the flip side. What are the top reasons the Alliance members are jumping on this now?
PF: The members understand that this is where our industry is headed. Just as we went from AM to FM, going from AM and FM to HD is an equal if not greater quantum leap in technology.
As for revenue streams, there are none right now. It's a cost center but it's a cost center about building for the future. The time will come, hopefully sooner rather than later, that the member companies will look at various ways of monetizing HD Radio, from regular spot advertising to sponsored channels and data sponsorships across the screens. Also, there will be future enhancements of the receivers, like interactive capabilities, traffic information, weather information. All of that offers new and unique revenue streams for the radio industry. That time will come.
RI: There's concern that it's taking a while for receivers to hit the shelves in mass numbers. What's out there right now?
PF: There are receivers on the market, and the number is growing weekly. We've made tremendous progress in terms of both the number of receivers being manufactured and their price points, thanks in no small measure to effort from the Alliance members.
In early 2005, there were three car models on the market, priced between $500 and $1,000. In late 2005, there were six car models, priced between $200 and $900.
Also emerging late last year were the Boston Acoustic table-top radio, the Yamaha home receiver, and the DaySequerra custom receiver. The DaySequerra was originally priced at $499 and the Yamaha went up to $1,900. So, just in 2005, there was a fair amount of activity. Today, those six auto receivers are priced from $199 to $500, and the Boston Acoustics home model dropped from $499 to $299 as a direct result of the Alliance and iBiquity's efforts to drive demand for that product.
Some time mid-year, the new Polk Isonic device will be introduced. It will feature HD Radio, AM/FM, and CD and DVD capabilities, and will be priced around $599.
Since the beginning of 2006, 10 new major Asian manufacturing companies have been licensed to build HD radios. They weren't there before. In fact, since late January, Korean's Kiryung Electronics has increased its production of HD radio products four-fold.
What has happened even in the past four or five months is dramatic in terms of both the American companies at the manufacturing and the retail levels placing orders for HD Radio, and the Asian manufacturers stepping up.
RI: How are negotiations progressing with automakers?
PF: It's coming along very well. We've had, and have scheduled more, very high-level meetings at some key auto companies. We've been very well received, but there are two problems with the auto industry: First, it takes them a long time to put any new product in their cars. I don't think it's that complicated I'm a radio guy take this radio out and put this one in. But there's a lot more to it. There's engineering; there's the HMI, the human machine interface, how everything works, what bolts have to be used, and how it fits in the dash. There's a bunch of stuff they have to go through before they can put it in their cars. That means it takes 18 months to two years from the point that they make a decision before you actually see a new technology in an automobile. This is true for navigation systems, satellite radio, etc. But because the Alliance is making a lot of noise in the consumer marketplace and getting the traction we need on the retail manufacturing side, the automotive industry is realizing this really is going to be a technology. They're not afraid of it anymore. Most of them are excited about it.
The biggest thing is the time and the implementation required. Right now, we're talking with some companies about offering a dealer-installed product before the factory-installed product arrives; offering something dealers can do at the local level that is still authorized by the factory.
I come out of the radio business, where if we don't like what we're doing today, we wake up tomorrow and it's different. Now, all of a sudden, I have to understand that it takes a little bit more time, from decision to implementation, on the OEM side.
RI: Isn't BMW offering something right now?
PF: Yes. They offer HD Radio in their six- and seven-series vehicles as a $500 option, and have recently announced its availability in the five series. I'm pushing them to get it in the three series, and to make it standard equipment. They are doing everything they can to bring it to market faster than anybody else, and we're eager to support them.
RI: Do any other automakers have specific plans in the works?
PF: I can't give you details because of non-disclosure agreements, but I can tell you that eight different manufacturers and 30 different product lines of automobiles will have HD Radio as optional or standard equipment by the 2008 model year.
RI: Are any government agencies sniffing around, either on the federal or the state side, about these radio companies working together? Is this a problem that you foresee, or that you're bumping up against right now?
PF: The HD Digital Radio Alliance was very carefully crafted and designed to stay within the perimeters of all laws; the Federal Communications Commission's laws, and anti-trust laws. We are operating well within those guidelines, and are being extremely diligent in making sure we don't deviate from those guidelines. Has there been inquiry seeking information about what we're doing? Yes. Has there been any action or suggestion that we shouldn't be doing this? No.
RI: Can you say who made the inquiries?
RI: Federal or state?
RI: Are there any cooperative efforts under way between the Alliance and the RAB, NAB, or other organizations?
PF: No. The Alliance is a freestanding organization focused on a singular area. While we certainly dovetail to things that the NAB may be doing on a regulatory side, we're really not sharing information or cooperating relative to those two organizations. As far as the RAB is concerned, it is much more about the future revenue stream opportunities. The Alliance is certainly keeping the RAB and its board well informed, because we want to make sure that everybody knows what we're doing and why we're doing it, so they can maximize this opportunity going forward.
RI: Talk about the marketing you're doing to get HD Radio into the minds of consumers.
PF: We've done a couple of things. Each of the member companies has committed advertising inventory for the Alliance to utilize. We will use it in two ways: one, to create general awareness that there's something new out there called HD Radio not so much what it is, but what it can do. We're having some fun with that. Concurrently, we are creating partnerships with specific manufacturers and retailers to support them, which helps our efforts in getting consumers to buy the radios.
It's really an amazing thing: This one industry, the radio industry, is helping other industries the manufacturing industry, the retail industry, and the automotive industry sell their products so that we can be the ultimate beneficiary at some point in the future.
RI: Are we talking about trade-out deals on the analog stations for advertising?
PF: There's no trade-out; it's hard inventory that the companies have committed to the Alliance, and we have full access to use it. Here's a good example: One of the primary drivers for the drop in the Boston Acoustic radio's price was the Alliance's commitment to aggressively promote that product in our first 28 markets. We started the second wave of our campaign on April 10 with Tweeter, Crutchfield and ABC warehouse in Detroit. We said to them, “If you do those things, then we're going to promote you.” Same thing with Polk Audio; they are preparing to introduce the Isonic radio, and we're in conversation with them about how to promote it. So, it's not a barter of dollar for dollar; it's an exchange of efforts, where they're doing certain things, and we're supporting them with very aggressive advertising.
RI: So, in exchange for them stocking more HD receivers, the Alliance's ad inventory is used to run ads directing consumers to those retailers?
PF: A portion of it, yes. We're also going to be promoting HD Radio in general and hdradio.com, which is a consumer-centric site that highlights all things HD: where to buy it, what's on the air, what are the HD2 formats, how do I find them, etc. The goal of the promotion and the marketing is to raise consumer awareness of HD Radio, and hopefully drive demand for radio sales. For that effort, the member companies have committed over $200 million this year. We are carving that up in pieces and in flights that we are making available to the consumer electronics industry, the automotive industry, and retail partners, as well as promoting the hdradio.com website and HD Radio in general. That will continue to be out there for the next year and a half. This is not something we're just kind of dipping our toe in. I think that this level of advertising will make HD Radio the biggest advertiser on the radio in 2006.
RI: That's a bold prediction.
PF: I'm not aware of any radio client that spends more than $200 million a year to promote a single product. It's important to underscore that, because it speaks to how much focus, commitment, and effort is going into this. Obviously, radio time is perishable, so the people I'm meeting with understand that in order to get a piece of that action, they've got to get in the game.
RI: Are you hearing any feedback from people who have HD receivers?
PF: Others have collected some research data that we're pulling together now, and we've gotten some great feedback from people we have given radios to. It's been extremely positive. It's important to understand the HD2 formats and how the Alliance is helping the member companies decide what will be the most compelling value proposition to the consumer. All of these HD2 formats are local, and consumer- and market-driven. That is a really, really important point of differentiation between us and other audio devices, whether it is the iPod, the cell phone, or satellite radio.
All of the HD2 formats are obviously new and unique, but they are diverse; they're non-duplicative in what's being put on the air, and we are offering them initially commercial-free. We're also making a point to the consumer: You buy a new radio, but you don't get a monthly bill with it. These are locally created and managed signals and content, and that is the real strength of terrestrial radio. I think HD Radio and HD2 multi-casting will amplify that far beyond anybody's imagination.
RI: There's been a lot of talk about using the expanded band approach, instead of the side-channel approach. Cox Radio CEO Bob Neil has been especially supportive of this, and his company conducted research on the idea. Where does the Alliance stand on the expanded band?
PF: We think the research Cox did was great, and we applaud them. I participated in a number of the focus groups. What they presented to the consumer, in terms of choices, made a compelling argument that the expanded band approach had some viability.
Having said that, I don't know that it's the best possibility, because participants were only offered two choices: what exists now, and what Cox thought the expanded band might look like.
Because of the digital and data display capability of HD Radio, we can create a radio dial that doesn't look like a dial at all. It will look like your cable menu, with the names of the radio stations or the genres of the formats, or what you listened to most recently. Relative to the next generation of displays, the industry at large - manufacturers, broadcasters, consumers - need to look at what will be the next best interface for the consumer.
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