Streaming Music Has a Problem—It's a Huge Success

Pandora, Spotify and others need revenue—and where they want to get it from is ruffling feathers

“As much as [Pandora and Spotify] would like to dress it up as something else, it’s a playlist. It’s a music collection and a jukebox,” says John Hogan, CEO of radio at Clear Channel. (Music collections and jukeboxes have never had advertising before.) And while Clear Channel, which owns 800 broadcast stations, has sunk several million dollars into a glitzy, star-studded relaunch of iHeartRadio—now more Pandora-like than its predecessor, with customization functionality and 150 digital-only channels—Hogan says, “[iHeartRadio] is not a business. It’s a feature, one part of what we can do.”

Streaming music services are “not radio substitutes any more than your Walkman, CD collection or iPod ever was,” adds Lew Dickey, CEO, president and chairman of Cumulus Media, the second-largest radio operator in the country with 570 stations. They are threats to CDs and downloads, and not free local radio, which 93 percent of Americans listen to each week, he says.

Still, that has not stopped Dickey from wading into digital streaming, with Cumulus attaching itself to radio behemoth Clear Channel to do so. In December, the companies announced an alliance where Cumulus’ stations will stream digitally through Clear Channel’s iHeartRadio service. (In return, Clear Channel’s terrestrial radio stations will promote sales from Cumulus’ daily deals arm, SweetJack.) The partnership’s news bulletin made no effort to pussyfoot around its intention: “Clear Channel Radio and Cumulus Media Announce Partnership to Compete With Pandora in Digital Radio and Groupon in Daily Deals.”

As consumption of all media shifts online, both sides—their respective diss wars aside—will likely need to act more like the other in order to sell their ad inventory.

“Broadcast versus digital is a misconception,” says TargetSpot’s Goldwerger. In fact, a study from the firm shows that when an advertiser adds digital audio ads to an existing broadcast campaign, it increases the average response by 3.5 times, and the reverse equation—adding traditional radio to an Internet campaign—increases response rates twofold. Meanwhile, the groundwork for cooperation is being laid. The 62-year-old RAB is working with the IAB to spread awareness of digital radio with the hope of also spreading the spending ad love, Haley says.

Advertisers will have no choice but to go where the listeners are, digital or terrestrial. The problem for the streaming services is that they need to stick around long enough for that eventuality. The cost of failure is high. Spotify has more than $237 million in venture investments, the latest round valuing the company at $1 billion. Pandora’s market cap, which spiked at $4.2 billion on its first day of trading, now hovers around $1.65 billion. And Rdio, MOG, Slacker, Grooveshark, Myxer and Turntable have gathered $130 million—no small feat—in investments among them.

In the same way online video and search created entirely new streams of ad revenue, the industry hopes—even needs—online radio to do the same thing. It’s a common—and catchy—refrain.