Internet radio: The sound of money?

Hundreds of millions of dollars have been poured into Internet radio this year by companies like America Online, Yahoo! and Viacom for one simple reason: It finally works.

The technology has progressed from ham-radio quality to FM-radio quality, even over 28.8Kbps modem lines -- a leap in broadcast quality that, to industry insiders, sounds like the next big thing in advertising and music sales.

"This year is really the year for audio to fulfil its promise of being one of the most important parts of the Internet," said Michael Latham, director of productions for entertainment and media with Yahoo! . "It can target a lot of people with high-bandwidth potential in the office, and now we're able to successfully reach the 28.8 [modem] crowd."

Yahoo! recently purchased Internet-media distributor Broadcast.com for $5bn (£3.05bn), and used the company to create Yahoo! Music. Internet radio has been around for years, with several smaller companies proving the medium's viability. But this year has seen a remarkable degree of interest in the format, followed by major commitments from some of the Internet's biggest names.

Foremost among the investors have been the big Internet hubs, such as Yahoo! and Lycos Inc. -- both have launched radio offerings in recent months. AOL followed Tuesday with its $400 million acquisition of Spinner Networks Inc. and Nullsoft Inc. Spinner operates an Internet radio network, while Nullsoft develops software for radio broadcasting and playing high-fidelity music files. "Music is the killer app, just as in radio, but we'll also have sports, news, weather," said Ted Leonsis, president of AOL Interactive Properties. "This gives us the competencies to get into that business, much like the acquisition of Broadcast.com by Yahoo! We're going to get a head start by taking these people and putting them all in one place in San Francisco, and giving them distribution, and letting them do their thing."

AOL plans to roll out music in four distinct categories, Leonsis said. These are Internet radio, a la Spinner.com; music-related news and information on AOL.com, Netcenter and ICQ, a chat application; music-oriented community on Netcenter and ICQ; and music applications that can be integrated with client software such as Netscape Navigator or ICQ. AOL and Yahoo! aren't the only heavyweights wanting to buy cyber radio stars: Lycos last month launched Lycos Radio; CMGI, backer of Lycos, GeoCities and Planet Direct, said in February it will spend $100 million on a Broadcast.com rival called Magnitude Networks; and MTV Networks purchased Imagine Radio, which it will relaunch with a new brand next month.

If technology is the enabler, the draw for these investments is potential profits from e-commerce and advertising. Radio is an extremely profitable and, compared to television, low-cost medium -- raking in around $6bn a year. While local radio has the advantage of an easily targeted demographic, online stations can drive e-commerce sales of CDs or, potentially, downloadable music. "How often have you listened to a song and thought, I wish I had this album?" said Rotem Perlmuter, former CEO of Imagine Radio, now vice president of strategy for MTV Online. "If you can buy it with one click, then your dream just came true."

That promise is partly realised with e-commerce links to such CD stores as Amazon.com or CDNow, but could really take off if record labels begin authorising sales of downloadable singles and albums.

The next battle for cyber DJs might pit Internet brand names like AOL and Yahoo! against real-world music brands that also purvey online radio, for example, Rolling Stone Radio, from Tunes.com, and MTV's as-yet-unnamed radio project. "We were laughing about AOL's deal today, it's like, 'There goes the neighborhood,'" said Jo Sager, vice president of marketing for Tunes.com. "This just reinforces what our instincts have been about Rolling Stone Radio. There are already a gazillion music sites, and consumers are going to go to brands they know."

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