Online Radio Moves Toward Profitability.

Local Finn's Technology Allows Precise Ad Pitches

A local company is hoping to turn up the volume in the growing but heretofore largely unprofitable world of Internet-only radio with a new technology that enables broadcasters to insert narrowly targeted advertisements into live streams of content.

In a move that is attracting widespread attention among advertisers and online broadcasters, downtown-based Hiwire Inc. has completed a groundbreaking revenue-sharing deal with advertising and media giant Clear Channel Communications Inc. to introduce its proprietary live-stream ad-targeting technology on Clear Channel's flagship Internet-only radio station, WorldClassRock.com.

Terms of the deal were not disclosed, but industry watchers said it gives Hiwire a leg up in the race to develop new means of reaching advertisers via the Internet while adding substance to claims that streamed media sites can operate in the black.

"An exclusive deal with Clear Channel makes them the gorilla," said David Cremin, a partner at the Los Angeles venture capital firm Zone Ventures, which invested $2 million in Hiwire during its initial round of fundraising in 1999. "This is a brand new space. By landing Clear Channel, it puts (Hiwire) on the map."

According to a new report by Edison Media Research and the Arbitron Co., which began tracking and publishing streamed media ratings in 1999, more than one in four Americans are now "streamies," people who listen to music or watch video online. About 25 percent of streamies -- tens of millions, of listeners -- tune in to online radio.

But while listenership has been expanding exponentially in the past two years, the long-term viability of streamed content remains in doubt due to the inability of most streaming ventures to turn a profit.

Clear Channel, armed with Hiwire's proprietary ad-insertion technology, is betting that is about to change.

The huge media company -- owner of some 1,200 traditional radio stations and numerous other assets in addition to its Clear Channel Internet Group, which includes 750 Web sites -- was initially slow to embrace streaming media. But it is quickly becoming a major proponent.

Earlier this month, Clear Channel Internet Group announced that it has acquired Enigma Digital, a Santa Monica company that owns several Internet-only radio stations, including two of the most popular stations on the Web, KNAC.com and Grooveradio.com.

"There are considerable hopes that streaming ads can succeed where banner ads couldn't get any traction," said Steve Vonder Haar, a Dallas-based analyst with The Yankee Group. "Content providers need partners who are focused on the issue of generating revenue in support of their content."

Staying on target

Generating revenue is exactly what Hiwire says its new technology will do.

CEO Warren Schlichting said that people who log on to stations on the Hiwire network are required to fill out an electronic form with their age, gender, income range and other demographic information. Using the data gleaned from those surveys, Hiwire's delivery system targets ads to specific individuals, theoretically increasing their effectiveness and enabling broadcasters/cybercasters to charge substantially higher rates for airtime.

"If Honda has a car they think is perfect for women in the 21-to-34 age group who live in California, we can use our data to send targeted ads so that only women 21 to 34 who live in California receive the ad," Schlichting said. "Advertisers love that."

The significance is that advertising time that broadcasters once sold for between $5 and $15 per 1,000 listeners is now (with the Hiwire technology) worth $30 to $60 for 1,000 listeners, he said. In addition, streamed advertising is almost always run in tandem with banner ads, boosting their click rate several fold, he said.

Hiwire, which was founded in 1997 and now has 61 employees, operates both as a technology company and an advertising agency. Once its encoder software is installed at a customer station, that station can rely on Hiwire to sell its advertising or simply use the Hiwire system to insert ads sold in-house.

Industry analyst Vonder Haar said that advertisers and broadcasters will be closely following the Clear Channel/Hiwire alliance.

"For online radio, the business models are still in the formation stage, but all the pieces are starting to come together and Hiwire is part of that evolution," Vonder Haar said.

The Hiwire system -- which is applicable to personal computers and, increasingly, portable devices such as cellular phones and hand-held computers -- is already demonstrating its worth, Schlichting said.

"The problem with the medium is that you can broadcast all over the world, but what good do listeners flung hither and yon do for you?" he said. "What we are able to do is take all the people and aggregate them, to target our ads to the individuals our advertisers want to reach.

Market forces

Jupiter Research, which tracks Internet commerce, estimates that the streamed advertising market will be worth $1.4 billion annually by 2005, as the technology becomes more portable and the use of broadband, high-speed Internet connections becomes more prevalent.

Nationwide, about 4,500 stations are streaming radio programming online. Some, such as KNAC, a heavy metal station, resorted to streaming after losing its local radio frequencies. Most, however, are streamed versions of traditional radio broadcasts that rely on a cross-platform synergy that many insist is essential for developing an audience.

Schlichting pointed out that it's not necessarily the size of an audience but the makeup of the audience that counts. He called the alliance with Clear Channel "a seal of approval" for Hiwire's insertion technology that will leave it well positioned as the market grows. Hiwire, which received $16.3 million in a second round of funding last February, has thus far been operating at a loss. Schlichting said he expects the company to reach profitability by mid-2002.

"It's an emerging industry and there are scads and scads of folks out there," he said. "Will it consolidate? Absolutely. We think that will benefit us."

The key question, according to Vonder Haas, is whether Hiwire's technology will make streaming profitable for broadcasters.

"For (streaming) to succeed over the long haul, there needs to be a perception with marketers that it's a viable vehicle for delivering branding messages," he said. "There's no one magic formula for succeeding in this space. Success is going to be driven by who can generate the dollars."