Internet Radio Races To Break Free of the PC.

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June 18, 2007 GOING WIRELESS Internet Radio Races To Break Free of the PC. By SARAH MCBRIDE Front Page. WSJ

Pushing Portability In Cars, Music Players; Static Over WiFi

In January, a recreational vehicle in remote West Texas suddenly started blasting the Steve Miller Band's "Space Cowboy." It was a triumphant moment for Slacker Inc., a start-up trying to move Internet radio out of the computer and into the car. Parked on the side of a road near Fort Stockton, Slacker's 36-year-old founder Celite Milbrandt uncorked a 1982 Chateau Lafite Rothschild to celebrate. A few hours later, he pointed the RV toward Las Vegas. There, Mr. Milbrandt demonstrated the mobile service for potential investors at the annual Consumer Electronics Show and ultimately raked in an additional $40 million in investments for his company. Even so, the nascent industry has yet to capture the biggest prize -- portability. Some halfway solutions exist, such as music devices that allow people to stream Internet radio on speakers, or software that allows technology buffs to access Internet radio from their phones. But results can be glitchy, expensive and technically against the terms of contracts with mobile-phone service providers. Now, start-ups and giants are jockeying for position in mobile Internet radio, in a race that could rearrange the business model of music and broadcasting. MOBILE MUSIC What's New: Start-ups are racing to move Internet radio, largely listened to via computers, into mobile products. What's at Stake: Portability could make Internet radio operators a greater threat to the traditional radio industry. What's Next: The next big goal is integrating Web radio into car dashboards. Two companies -- Slacker and Pandora -- say they're talking to auto makers in Detroit.Internet radio, which can draw on vast troves of music from around the world and customize them to a listener's personal tastes, is growing. While ratings for traditional radio broadcasters have been lackluster, Internet radio listenership in the U.S. has risen to 29 million a week, up from 20 million three years ago, according to Arbitron Inc. and Edison Media Research.

Even so, the nascent industry has yet to capture the biggest prize -- portability. Some halfway solutions exist, such as music devices that allow people to stream Internet radio on speakers, or software that allows technology buffs to access Internet radio from their phones. But results can be glitchy, expensive and technically against the terms of contracts with mobile-phone service providers. Now, start-ups and giants are jockeying for position in mobile Internet radio, in a race that could rearrange the business model of music and broadcasting. One promising entrant is SanDisk Corp.'s new Sansa Connect digital music player. Released earlier this year, it allows users in wireless Internet zones to listen to online radio stations from Yahoo Inc. When users wander out of WiFi range, the $249.99 Sansa can play songs from its music library, which holds up to 1,000 songs. Last month, Oakland, Calif.-based Pandora Media Inc., one of the biggest players with seven million registered users, announced it is working with Sprint Nextel Corp. to make its service available on mobile phones. Pandora says it is also working on its own player as well. One of the field's newest aspirants, Slacker says its hand-held will be out by summer's end. Slacker is also pushing hard into automobiles. The company says it is close to introducing a car kit that will play Slacker-selected tunes in any vehicle. Chief Operating Officer Jim Cady says he is in early talks with unidentified auto makers about building Slacker technology into car dashboards. Traditional broadcasters have taken a number of steps to keep pace with the burgeoning world of online radio. CBS Corp., owner of a big traditional radio operation, agreed last month to pay $280 million to acquire London-based Internet radio provider Last.fm Ltd. Most major radio companies are moving aggressively onto the Web and other platforms such as mobile phones. Web sites from radio giant Clear Channel Communications Inc. now account for some 20% of all online radio listening, according to J.P. Morgan. The broadcasters say listeners want to connect with the hosts and formats they know, whether it be online or over the airwaves. "That's a big distinction that we have, marquee value and brand name," says Dan Mason, head of CBS Radio. But portability could make Internet radio operators a greater threat. Internet radio "will sweep into the car, and the traditional station is going to have to think about how they reprogram to compete," says Jonathan Jacoby, an analyst at Bank of America Securities. Unlike satellite radio, Internet radio offers the potential for greater personalization without the cost of monthly subscriptions or satellite receivers. Gary Parsons, chairman of XM Satellite Radio Holdings Inc., concedes Slacker has the edge in certain areas, like lower capital costs. But he adds it has "significant technical limitations" because it relies so heavily on stored programming. XM sends out an uninterrupted stream of material. Indeed, the upstarts still face many hurdles. It's unknown how many Internet radio fans will be sufficiently enthused to install Slacker's kit, which includes a 4-inch antenna that must be mounted on car roofs. Earlier this year, regulators announced a dramatic increase on the royalty rates Internet radio operators must pay recording artists, a move some companies complain will severely undercut their businesses. Internet radio companies pay royalties to performers, songwriters and other rights' holders to avoid copyright lawsuits. And the reach of WiFi, the technology widely used to transmit Internet outdoors, remains patchy. Companies like Sprint Nextel are vowing to improve WiFi's reach down the road. Until they are closer to that goal, however, many Internet radio providers are skipping the car for now, focusing instead on other portable devices. That's Pandora's strategy. The company, known for a technology that tries to learn the musical qualities a listener likes and serve up songs accordingly, is working with Sprint Nextel to deliver its service to users of high-speed data phones for $2.99 a month. Tim Westergren, the company's co-founder and chief strategy officer, notes the phone will already play Pandora through a car stereo using an adaptor, and adds he also envisions a future where Pandora is integrated alongside the car radio tuner. "We've had conversations with a huge number of car companies [and] car audio manufacturers that are all very eager to start making this more a part of the dashboard," says Mr. Westergren. The company is also working on portable Pandora-branded players that will rely on WiFi or its emerging cousin, WiMax, which promises greater reach. But Mr. Westergren isn't sure when the company will roll them out. Mr. Westergren is aware of Slacker, but dismisses many of its forthcoming products as "vaporware," the term for the technology industry's notorious practice of announcing products that aren't ready. Slacker says its devices are on track and will soon hit the market. Founded in 2004 by Mr. Milbrandt, a former networking executive, Slacker has 100,000 registered users since its launch in March. The company has raised about $50 million from backers like Sevin Rosen, the Dallas-based venture capital fund that helped spawn Compaq and Lotus, and Austin Ventures. Its planned car kit reflects a technical advantage. While most other Internet radio providers are reliant on WiFi, Slacker's portable devices will use both WiFi and satellite technology. That's because Mr. Milbrandt never intended to start an Internet radio company at all. Instead, the Led Zeppelin fan was searching for a lower-cost alternative to satellite-radio providers XM Satellite and Sirius Satellite Radio Inc., which sell their services for $12.99 a month. While XM and Sirius spent billions building and launching satellites, Mr. Milbrandt planned to lease a fraction of the satellite space from TV companies and other entities. Rather than beaming programming live to radios, as XM and Sirius do, Mr. Milbrandt planned to transmit programming that would then be stored on devices -- a much cheaper approach that involves far less satellite capacity. With seed money from investors who had backed a broadband networking company he founded in 2001, Mr. Milbrandt spent months holed up in a laboratory to see if he could successfully beam songs up to a satellite and then back down again to a device. Once he thought he was close to succeeding, Mr. Milbrandt leased blocks of satellite time at a cost of $1,000 an hour. "We didn't have a lot of money," says the shy engineer, who says his unusual first name "Celite" generated much ribbing in high school. "It was always very stressful." After months of trial and error, Mr. Milbrandt hit a breakthrough in late-2005 when the sound of a jangling cash register from Pink Floyd's song "Money" came through a radio receiver. Mr. Milbrandt and his team cracked open some Bud Lites to celebrate. After that, Slacker recruited 46-year-old Dennis Mudd. A former chief executive of Musicmatch Inc., a jukebox-style music service that was sold to Yahoo for $160 million in 2004, Mr. Mudd had recently been spending his time painting and biking in Tanzania, Vietnam and other far-flung places. After a few weeks of brainstorming with family and friends, Mr. Mudd pitched a business plan with two key planks. First, Slacker needed to sell its own portable devices. To do that, it brought in executives with experience with music players. Jim Cady, formerly chief executive of D&M Holdings Inc.'s Rio, the digital music-player company, signed on as Slacker's president, and Jonathan Sasse, formerly chief executive of iriver America Inc., another digital music-player company, joined as Slacker's marketing chief. Jim Smith, a former partner in Musicmatch, became vice president of engineering. Mr. Mudd also suggested setting the company up as an Internet radio operator. Web services have the potential to provide a richer experience than either broadcast or satellite radio, he noted, because of the Internet's ability to personalize playlists, skip songs, display cover art and deliver artist biographies. "It's not so much that [radio] got worse," Mr. Mudd says. "I think expectations got set higher by what you could do with Internet radio in particular." The executives dubbed the service Slacker because listeners don't have to do anything to bring in a steady stream of new music. It calls for users to provide the site with a few examples of artists or songs they like. The site then creates customized stations that play what it thinks will appeal based on musical genre and overall analysis. Like Pandora, Slacker is free. But down the road the company will offer a choice of a free ad-supported service or a paid ad-free service at $7.50 monthly, with other perks such as the ability to save songs. Slacker says the first hand-held devices, which will start at $149, will refresh automatically when they're in WiFi zones, pulling in more music for listeners' radio stations and socking it away. That way, the stations can keep drawing on the stored music even when the device is nowhere near a wireless hot spot. The car devices, which Slacker says will be introduced later in the year, will use Mr. Milbrandt's satellite efforts. Subscribers will be able to drive around with a docked Slacker and receive a stream of songs beamed down from a satellite and stored on the hard drive. Once the antenna picks up the satellite signals, Slacker says it will transmit the songs to the device, which will save appropriate songs and reject those that don't match a listener's taste. Because it isn't streaming in real-time, Slacker's devices for now won't offer newscasts, traffic or sports scores. Slacker says it has another advantage. Most Internet radio operators are currently facing a major increase in the royalty rate they owe to artists whose songs they play, an increase so dramatic that royalty rates in some cases eclipse the company's total revenues. Most operators, including Pandora, are complaining that the higher costs may put them out of business. They're busy lobbying Congress to change the recent rate increase, imposed by the Copyright Royalty Board, a Washington, D.C.-based panel of judges. But Slacker says it already has a higher royalty rate built into its business model. Rather than paying statutory license fees, Slacker cut deals directly with record labels. Like satellite-radio broadcasters, Slacker will turn over an undisclosed percentage of revenue in royalties, rather than paying per song and per play.

Write to Sarah McBride at sarah.mcbride@wsj.com

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