HD Radio Still Taking the Rap

High-definition broadcasting faces big rivalsiPod, satellite, broadbandfor the nation's ears, but radio executives hope folks tune in this year

The rap against the broadcast radio business has been that it was a laggard when it came to technology. As other media embraced new revenue streams, most recently those created through digital platforms, commercial radio was delivered, and listened to, in much the same way it was when the first station was licensed in the U.S. some 80 years ago. But last year was a milestone when broadcasters began in earnest to roll out high-definition, or HD, radio.

Even so, recognition of this new technology, which squeezes more programming into one frequency and creates subchannels for new niche formats, was scant, to say the least. And the receivers required to tune into these new outlets were pricey (more than $200).

Radio executives are hoping 2007 is the year when HD radio gains critical traction. On Jan. 22, the HD Radio Alliance, a consortium of broadcasters including Clear Channel (CCU), CBS (CBS), and ABC radio (DIS), announced that HD radio multicasts are now available through stations in 85 of the top 100 markets. And in early January, BMW said it would become the first carmaker to offer factory-installed HD radio receivers as an option in all of its 2007 models.

Everybody's a Critic

Indeed, the number of HD receiver models has gone from 2 to 40 in one year. And an industry-wide advertising blitz, valued at $250 million in airtime, is under way to promote HD radio. The newest campaign launches Feb. 12.

Unfortunately, it may just be too little too late for the radio industry, as such well-established diversions as Apple's (AAPL) iPod (and soon the iPhone), satellite radio, and the Internet continue to lure people away from the dial. Those hoping to be early adopters have become early critics, with bloggers and gadget reviewers skewering everything from the sound quality—promoted to be much better than standard radio—to a lack of creativity in formatting the niche channels.

One early indicator for how well HD radio is doing would be how many receivers were sold during the holiday season at outlets such as Radio Shack (RSH) and Circuit City (CC). But the HD Radio Alliance says it doesn't know, because retailers won't disclose those figures.

Why Get It Free?

The problem for the broadcasters, who continue to see their audience become fragmented and struggle to boost ad revenues, is that HD radio "is not a new offering. It's a defensive move," says Ted Schadler, an analyst with Forrester Research (FORR). "It's better radio, but it's not a whole lot better radio." He calls it a replacement product and likens it to the transition from black-and-white to color TVs.

"People still got a picture and their shows on black-and-white so they waited until their sets went on the fritz. Then they bought a color TV." For 2007, the industry will sell a few HD receivers, but 10 years from now, everyone will have one. "It's that kind of thing. It will happen without a ripple," says Schadler.

But even that kind of adoption by consumers could come with hiccups. "The industry is saying this could roll out gradually like FM did," says Robert Unmacht, a partner in radio consultancy IN3 Partners. "There's one problem with that. It's called broadband." Unmacht says he uses a Sprint broadband card in his laptop now and listens to radio streamed from the Internet when driving his car. In the coming years, he says, broadband will be delivered directly into the cars themselves. And even though radio is free, people will be willing to pay for that technology in their cars, he contends.

Stronger Together

One other problem that HD radio could face in 2007 is the potential merger of Sirius Satellite Radio (SIRI) and XM Satellite Radio (XMSR), fierce competitors burdened by huge programming costs whose executives have recently hinted that combining the two operations makes sense (see BusinessWeek.com, 1/10/07, "Wedding Bells for XM and Sirius?").

Together, XM and Sirius could become a much more formidable threat to broadcast radio by being able to shore up their combined balance sheets through cost savings. Craig Moffett, a Bernstein & Co. analyst, projects that a merged company could have earnings in 2011 of $2.4 billion, representing a 40% premium to the two entities on a standalone basis simply by paring down fixed costs. By the end of this year, Moffett is estimating that the satellite radio industry will have 18 million subscribers, nearly double what it had two years ago.

To counter the competitive threat and win over new fans for HD radio, broadcasters are hoping to soon offer plug-in converters for all radios, including satellite receivers that will enable listeners to get all these new channels. But until HD radio can do more to make a bigger impression, consumers are likely to make do with their regular old radios.

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