Its been 5 years . . . I've missed you.
Where they are, what's driving them, and what to do: Insight, Analysis, Data
Bruised by earlier failures to embrace new technologies, big media companies are rushing into the two-year-old field of podcasting -- audio programs for downloading onto computers or portable music players. The high-stakes goal: grab young listeners, even at the risk of cannibalizing existing audiences or wasting time and money on a technology that may never go mainstream.
Radio giant Clear Channel Communications Inc. is selling memberships to a Rush Limbaugh club that includes podcasts and offering free podcasts of popular radio shows preceded by a 15-second ad. Walt Disney Co.'s ABC News offers a podcast of Nightline and other programs. National Public Radio is offering podcasts of shows from "Latino USA" to "All Songs Considered."
For listeners, the advantage of a podcast is convenience. Their favorite programs download automatically from the Internet, usually free of charge, and they can listen to the programs any time they wish. They can also listen wherever they wish, if they have an iPod or other MP3 player to receive the downloads.
Like many new technologies, podcasting may be snubbed by the wider public or fail to spawn a profitable business model. But the media industry's scramble signals its determination to avoid a repeat of earlier debacles when companies were slow to deal with new technologies.
Tough lessons from the past include Napster and other music file-sharing programs, which damaged CD sales even as the music industry dallied in offering ways to buy music online because of copyright issues. Another example is satellite radio, with its hundreds of channel choices. Its emerging popularity surprised regular radio companies, who dragged their feet on developing technologies to fight it such as squeezing more channels onto the regular radio spectrum.
For traditional media companies, one danger of promoting podcasts is cannibalization: People who are listening to podcasts on their iPods aren't sitting in front of the TV or listening to a regular radio station. But executives say if they don't push their podcasts, somebody else will and they'll lose these listeners altogether.
Tim Brown, a biology graduate student in Salt Lake City, uses a gadget that allows him to play podcasts over his car radio. "I basically don't listen to the radio any more when I drive around," he says. The technology has increased his loyalty to some NPR shows, he says, because he can listen to them on his own schedule.
At the recent Los Angeles Digital Hollywood conference, where entertainment and technology movers and shakers gather to discuss trends, panel members waxed eloquent on "clipcasting," or podcasts delivered to mobile phones. Media executives speculated on how quickly video podcasts would emerge, perhaps to be played on a video iPod that Apple Computer Inc. is developing.
There are still plenty of hurdles to clear before podcasting becomes ubiquitous. Just 15% of American homes own a portable MP3 audio player like an iPod, according to the Consumer Electronics Association of America. And because of rights issues that make it expensive and time-consuming to podcast copyrighted music, podcasting is largely limited to talk radio and unlicensed music.
"All podcasting is about is making it easy for the [small percentage] of the population that owns an iPod to record to a specific device," says Bob Neil, president and chief executive of Atlanta-based Cox Radio Inc., which is not yet podcasting any shows. "People have been recording their favorite radio shows since the age of the cassette."
Begging for Feedback
Even one podcaster is unconvinced. "Is anybody out there?" asked John Montone, a reporter at New York's 1010 WINS, in a recent podcast. He said his regular radio show on WINS, which is owned by Viacom Inc.'s Infinity Broadcasting, inspires many phone calls and emails every day, but on "this new, emerging, cutting-edge technology, where I give out my email and practically beg for feedback, I get nothing." In an email interview, Mr. Montone says the podcast has brought about 20 emails from fans assuring him they're listening.
Podcasting first made it onto the map a little over a year ago when Adam Curry, a former presenter of music videos on MTV, and software developer Dave Winer started a short-lived talk show called "Trade Secrets." It was available only on the Internet, and the site offered listeners a way to download the program automatically each day so they could listen to it at their convenience.
The technology got a big jump when Apple in late June introduced a new version of its iTunes software, which people use to organize songs and audio files. The new version simplifies the process of finding and installing podcasts on iPods. Apple's popular iTunes Music Store, which sells songs for downloading, now includes 15,000 free podcasts ranging from amateur shows to slick mainstream programs by commentator Al Franken and others. Users have subscribed to more than seven million podcasts.
In a development that could further boost the medium, Yahoo Inc. today introduced a podcasting directory akin to Apple's. Yahoo intends to eventually link to relevant podcasts from movies, news and other sections of its sprawling Web sites.
In May, ABC and General Electric Co.'s NBC announced podcasting projects from their news divisions on the same day. Jeff Gralnick, a veteran television news producer and consultant to NBC, said the network felt compelled to announce its podcast plans before its shows were officially released because ABC had announced its own efforts. Both networks offer mostly edited clips from existing television news shows such as Nightline, along with some content available only in podcast format.
Mr. Gralnick says NBC approved its podcasting project quickly, without hand-wringing over whether the network can make money from the effort. "You need to become a stakeholder and you need to be a first adopter of technology," he says. "As it becomes a generally adopted technology people know you are there. Revenue for podcasting is over the horizon."
While the term podcasting evokes the iPod, most podcasts, including many available through iTunes, will play on any MP3 player or computer. Those familiar with the technology draw a distinction between a true podcast, which connotes the regular, automatic downloading of an audio program via special software, and the mere posting of an audio file on the Internet, which users can click on once and never return to. However, the distinction sometimes blurs when audio program makers offer their content in both forms. From their perspective, it doesn't matter which listeners choose so long as they listen.
Few companies are doing more than Clear Channel, the nation's largest radio broadcaster. It offers material from nearly 40 different stations as podcasts. Another part of the company, Premiere Radio Networks, is experimenting with paid podcasts of popular hosts such as Mr. Limbaugh and comedian Phil Hendrie. Fans pay around $7 a month to belong to a membership club that includes podcasts of the full shows.
The moves come as Clear Channel, like other radio companies, is trying to redefine itself. "We're not limited to a single distribution platform," says John Hogan, Clear Channel's head of radio. He argues that radio should start thinking of itself less as a collection of over-the-airwaves stations and more as a content provider. Frequencies and transmission towers, he says, are "the foundation of the business, but they're not the limitation of the business."
"If we take our best pieces of programming, and we brand them, and put them out there, we're going to grow our audience," adds Evan Harrison, Clear Channel's head of online music and radio, whom Mr. Hogan hired away from Time Warner Inc.'s America Online. Mr. Harrison says stations receive feedback every day from people who stumbled across a podcast and now plan to tune into the station regularly over the airwaves or online. Jonathan Clarke, host of the Sunday night "Out of the Box" new music show on New York's Q104, cites emails from podcast listeners as far away as Brazil.
Besides drawing more listeners, Mr. Harrison says podcasting can bring in advertising. That's key for a company that saw radio revenue grow just 2% last year after shrinking slightly the year before. At first ad-free, Clear Channel's podcasts now include a 15-second advertisement before the programming -- short enough that people won't fast-forward through it, Mr. Harrison believes. Sponsors include Virgin Mobile, a prepaid cellphone service; a Phoenix car dealer, and a Dayton, Ohio, Apple store.
Mr. Harrison sees a day when Clear Channel can add another profit source by encouraging listeners who hear a podcast interview or song to visit a station's Web site and buy a full album through a retailing partner. Clear Channel already has a partnership with Amazon.com Inc. He's less enthusiastic about charging for podcast subscriptions in his part of Clear Channel's business. Paid podcast clubs are about "skimming to the core" of the fan base, he believes, whereas he wants to create new fans.
Rather than quick profits, the main driver of podcasting is concern about holding onto listeners, especially among the crucial teenage audience radio executives worry they are losing. A recent survey from Yahoo and OMD Worldwide, a top media buyer that is part of Omnicom Group, shows that 47% of people under 24 prefer to listen to music on the Internet. Only 27% said they preferred radio.
Mr. Harrison has faced skepticism from some of Clear Channel's radio producers, who feared people might skip regular broadcasts in favor of podcasts. "The last thing we want to do is give people a reason not to listen to that appointment media," says Mr. Harrison.
So he is mixing things up. A podcast called "Phone Tap" is based on a regular spoof involving a prank phone call aired on Z100 in New York. But the podcast doesn't replay that day's call. Instead, the clip podcast listeners get might have aired a few weeks earlier or might be created exclusively for the podcasts. Podcasts of "Out of the Box," the Q104 new-music show, typically don't include the entire one-hour show.
Many people listen on computers via a one-time download instead of a true podcast because they don't own portable audio players. "They just click and listen while they work, and don't even worry about getting an iPod," says Tom Jackson, manager of Internet services at Jefferson-Pilot Corp., a Greensboro, N.C., radio company that just started its first podcast.
Thursday, June 2, 2005; Page A23
The transistor. In 1947, scientists at AT&T's Bell Labs created the world's first silicon transistor. Three of its scientists would later win the Nobel Prize in physics for the invention. Bell Labs obtained a patent for the device, but the invention was licensed to, among others, IBM, Texas Instruments and the forerunner of Sony. The goal was to avoid antitrust problems with the U.S. government. (In a 1956 consent decree, AT&T agreed to license the transistor freely.)
But relatively easy licensing terms cost AT&T millions in royalties.
Owning a bit of the Internet. Back in the early '90s, Robert Cailliau of the European Organization for Nuclear Research, or CERN, contacted venture capitalist Sven Lingjaerde to see whether the lab could get funding for its World Wide Web project.
At the time, Lingjaerde was at Swiss firm Genevest; now he's a co-founding partner at Vision Capital.
"When the project grew in size, more money was needed, and the top management of CERN then decided to cut the budget, claiming it was not directly linked to fundamental research and it was starting to cost too much," Lingjaerde said in an e-mail. "We were considering putting money behind the project, but only if a strong U.S. VC would join. We knew that our small means (would) not be enough. The business model was also not clear."
Onsale. Jerry Kaplan had burned through $75 million while running GO Computing, a foiled attempt at pen-based computing chronicled in his book "Startup: A Silicon Valley Adventure." But in 1994, he co-founded Onsale, one of the first online-auction companies. Backed by Kleiner Perkins Caufield & Byers, it became an early leader.
"It's like money from heaven," he described Onsale to BusinessWeek.
Jerry KaplanCo-founderOnsale Heaven was short-lived. In 1995, eBay was born. A few years later, Onsale went on to merge with Egghead and got auctioned off in pieces.
"If you don't get the model exactly right, capitalism can be unforgiving," Kaplan said in an interview. eBay created a forum for people toRelational database software. IBM's engineers can take credit for inventing the hard disk drive, the RISC (reduced instruction set computing) chip and speech recognition software, among other technology. The company has been granted in excess of 22,000 patents in the last decade, more than its top 10 competitors combined. But the company doesn't take all of its inventions to market successfully. Take the relational database, for instance.
They're a fact of market economics, and they can lead to much good -- if managers understand and avoid the pitfalls. At the fifth anniversary of the popping of the Internet bubble, a long shadow remains over businesses and the economy: The cycle of creative destruction is not yet complete. A number of key measures, from the stock market to employment, remain far below levels reached in 2000. More strikingly, individual businesses are still fighting the same underlying strategic battle that confronted them during the bubble -- the disruptive effects of digitized information.
How so? The music industry is being transformed by Apple's iTunes. Television is facing pressures from digital video recorders, online downloads, and now the video-clip searching abilities provided by Google and others. Print media faces a challenge from blogs. Telecommunications continues to be altered by the rollout of voice over Internet protocol (VoIP). Electronic trading exchanges are altering the economics of stock markets. And radio frequency identification tags (RFID) are transforming the management of supply chains.
Emerging from the trough, we realize now that the bubble was not all froth and nonsense. It wasn't like the Dutch tulip mania of 1635, a purely speculative run-up in prices for exotic flowers with no underlying value created along the way. The Internet bubble, like so many business bubbles of the past, continues to create positive changes in business and consumer marketplaces. We have moved out of the hyperactive revolutionary period and into the slower, more significant, evolutionary phase.
BUBBLES AS R&D. The frenzy of business bubbles is like an overexcited learning exercise or a giant research and development effort. All the failures teach the marketplace what works and what doesn't. We learned at an accelerated clip about how the Internet could be deployed as a technology, what new business models might work, how consumer behavior can change and at what speed. What was proven wrong during the crash wasn't the overall vision. No, many of the ideas about how to profit from the vision and how long it would take to become reality were proven wrong. But the vision remains. The dot-com bubble followed historical patterns. Bubbles pop because they're the product of a cascade of bad investment decisions. But bubbles aren't attributable just to irrational exuberance -- although obviously that plays a role.
BUBBLE PATTERNS. In addition to the standard ideas of greed and irrational exuberance, bubbles are fueled by other unexpected forces. They're based on systematic distortion of information, which erodes managers' ability to distinguish the good, the bad, and the ugly. They're based on a competitive marketplace that feeds the frenzy and forces even the wise to jump into the game in order to meet their benchmarked returns. And lastly, they're based on the day-to-day decisions by investors that collectively oversaturate the entire market with capital, leaving a market with too much money chasing too few quality opportunities.
BUBBLES ARE EVERYWHERE AND ACCELERATING. Making sound business decisions is extremely difficult during tumultuous markets. And as we continue to see, the business challenges they introduce last for decades. Business bubbles are the driving force of capitalism, innovation, and change. They're the fuel for the creative destruction that's the engine of explosive change in our economy. Bubbles aren't aberrations to normal economic functioning. They occur all the time -- some big, some tiny. In recent decades alone we've seen business bubbles in biotechnology, PCs, and semiconductors, and in regions such as Southeast Asia. Many more bubbles lay ahead. Since the 1960s, there has hardly been a year where there has not been a bubble somewhere.
In fact, we're likely to see a lot more of them in the future, as the speed and scale of both global investment and innovation accelerate. Several bubbles are already percolating in China, in nanotechnology, VoIP, real estate, private equity, hedge funds, US debt, and perhaps elsewhere so far undetected.
COSTS AND RISKS. For all the benefits bubbles can produce by financing giant shifts in technology and new market opportunities, they do so at great costs and risks. The immediate costs are the obvious and painfull loses that occur when they crash. The risks are far larger and more ominous. Since the 1980s, bubbles have repeatedly brought the US or world economy close to collapse (LDC Debt, S&L Crisis, Asian Miracle turned Asian Economic Crisis, Russian Debt Crisis, Long-Term Capital Management, Argentina, the Internet). Each time we narrowly avoided disaster, frequently thanks to a complex rescue package. Fortunately, so far they worked. We may not be so lucky in the future.
Business managers must improve their ability to navigate these periods of innovation and change by recognizing the patterns and avoiding some basic but common mistakes. Those who plan now for the next big bang can avoid making the major mistakes we saw so often in the last go-round.
Myth 1: Bubbles are rare aberrations to normal rational and efficient economic functioning.
Reality: Bubbles occur all the time. They are not aberrations to normal economic functioning. They are normal. Since the 1960s there has hardly been a year where a bubble has not occurred somewhere. Today, we swimming in bubbles see: China, hedge funds, real estate, US debt, nano-technology.
Myth 2: Bubbles are just “irrational exuberance” seizing the whole market.
Reality: Exuberance plays a role but its just one part of the story. There are both rational and irrational aspects to bubbles. They are based primarily on a cascade of bad investment decisions that follow some classic patterns throughout history fueled by 4 things: 1) distorted information and analysis that appears to justify inflated valuations for many; 2) distorted competitive marketplace that force everyone to play the game in order to earn competitive returns in a hot bubble market; 3) distorted allocation of capital that over-saturate investment opportunities; 4) easy access to money deteriorates sound business decision making leading to waste, bad business, lower return on capital and in the end a crash.
Myth 3: Bubbles are a big Ponzi scheme in which savvy investors take advantage of naïve investors who are consumed by enthusiasm and do not understand what their investments.
Reality: A lot of naïve investors do fall pray to savvy investors, but a lot of savvy investors get sucked in too. There are 3 types of investors regardless of how savvy they are: Believers, switchers and speculators. Believers truly have faith that they are making good investment decisions because they have a “vision” of the future of some new technology or market opportunity. Often the long-term potential of this vision is correct. What they tend to get wrong is how long it takes for this vision to become reality and where profits can actually be derived. As bubbles last for years, many investors switch from being skeptical and staying out of the market to investing. Some do this because they are converted and become believers. Others capitulate, they are forced to invest because in order to meet competitive returns in bubble markets they have to play the game. Speculators are timing the market and trying locate the fools who will hang on to inflated assets longer than they will.
Myth 4: Bubble are caused by excess liquidity driven by Federal Reserve policy that sets interest rates too low.
Reality: Liquidity is a key driver of bubbles, but interest rates are not always the primary source of liquidity for bubbles. Low interest rates can help provide a ripe capital market environment for bubbles and can tip the balance for some marginal investors to put in a little more money than they would otherwise. However, while low rates do lower risks of capital, they do not eliminate risk altogether. No interest rate justifies the kinds of bad investments that occurs during bubbles such as dot.coms that never should exist, Chinese companies that are scams, condo construction in super saturated markets like South Florida. Many bubbles occurred during rising interest rates including: The bubble leading to the 1987 crash, the Go-Go years of the 1960s, personal computers in the early 1980s. The primary source of liquidity for during many sector specific bubbles is investment portfolios targeting bubble assets that rise dramatically with the bubble, reinvest their gains creating self-perpetuating capital spiral that only ends when the bubble bursts. The more important cause of bubbles is not low rates, but a cascade of bad investment decision making.
Myth 5: Bubbles are bad.
Reality: Purely speculative bubbles like the Dutch Tulip mania, certain stocks, commodities, currency, don’t produce anything and typically crash leaving more people worse off. They are bad. However, business bubbles based on new technologies like the Internet or new market regions like China, are the driving force of capitalism. They finance innovation, change and accelerate learning about new opportunities.
Myth 5.5: Bubbles are good.
Reality: Speculative bubbles tend to leave more people worse off than when they started. Even productive business bubbles have great costs and carry great risks. The costs are obvious in the form of money lost during the crash. But the risks can also have sweeping effects in the US and global economy. The last 25 years has seen bubbles that have rocked the US or world economy (LDC Debt, S&L Crisis, Asian Miracle turned Asian Economic Crisis, Russian Debt Crisis, Long-Term Capital Management, Argentina, the Internet), each time nearly bringing the globe to an economic crisis.