HD Radio - what's the holdup?

Back in 1990, my wife and I went to Europe to explore the land of our forefathers (and foremothers) by car. The first thing I noticed when we got in our Audi rental was that it didn't have air conditioning. It was August; what were these people, barbarians?

Then I turned on the radio. The display had all this text information that identified songs and other stuff. Now that was cool. I was sure that, before long, American broadcasters would adopt similar technology.

Seventeen years later, I'm still waiting.

Last year I was asked to do a minuscule amount of consulting for iBiquity, the developer and exclusive licensor of digital radio technology in the U.S. I was dying to find out what had delayed my ability to identify a Jane's Addiction song on the radio, not to mention hear it in CD quality. Here's what I learned, but first, some background.

In 1991 CBS, Gannett(publisher of USA Today), and Westinghouse (which is now owned by Toshiba, in case you didn't know) formed USA Digital Radio Partners. I'm guessing it was some sort of joint venture. In 1998, a Westinghouse executive and former McKinsey consultant named Bob Struble led the company's spinoff with backing from a horde of broadcasting companies. Two years later, the company merged with Lucent Digital Radio and iBiquity Digital was born.

iBiquity calls its product "HD Radio." No, HD doesn't stand for high definition. It originally meant hybrid digital, but the company now claims that HD doesn't stand for anything. That's probably because it's easier to get a trade mark if the term is a name as opposed to a generic term. Intel did the same thing with MMXtechnology, which originally stood for multimedia extensions, although you couldn't get anyone at Intel to admit that now.

An eclectic laundry list of companies has, to date, pumped $150 million into iBiquity. That list includes ABC, Ford, Intel Capital, J.P. Morgan Partners, New Venture Partners (the former investment arm of Lucent), Pequot Capital, Texas Instruments, and Viacom. As for when those companies are going to see a return on their considerable investments, that's an unknown, at this point.

The way I see it, there are at least two very large barriers standing in the way.

The first is a sort of "chicken and egg" problem on steroids. Common to intellectual property licensing companies, it goes like this: iBiquity has to get broadcasters, chipmakers, system manufacturers, car companies, and finally end users to commit to its technology, even when each level in the food chain is faced with high entry costs and no customers. For example, system manufacturers don't want to commit unless chipset prices are cheap and end-users are lining up around the block. But chipset prices only come down when volumes are high. And it's kind of hard for end-users to line up around the block when there are no systems for sale.

Unfortunately, that same chicken and egg problem is replicated up and down iBiquity's food chain.

The other problem is the business model. Unlike HD Radio, satellite radio, satellite TV, cable TV, and even wireless phones, are subscription based services. Marketers call that a subsidized model, in which system and development costs are largely offset by ongoing subscription fees. There are other examples, but the first I'm aware of was giving away razors and charging for blades.

Digital radio is the first media-based service to come along in a very long time that isn't subscription based. Broadcasters must have concluded that it would be tough to get users to pay for what they get free today. But, by charging subscription fees, broadcasters could eliminate many, if not most, commercials. Also, the HD Radio compression scheme allows for multicasting - offering several audio channels in addition to on-screen data. Consumers might have been comfortable paying a few bucks a month for that kind of value.

The chicken and egg problem can usually be dealt with over time. The lack of subsidies, however, has really made it difficult for iBiquity to move things along. Moreover, the slow adoption rate has kept the company's operating expense burn rate high, which has in turn delayed investors' payoff. If the burn rate is high enough and the rate of adoption is slow enough, well, let's just say that's not a good thing.

To add to the company's woes, last year the broadcasting industry ponied up $200 million in advertising funds to promote the new service, but nobody seemed to notice. Maybe that's because the advertising was on broadcasters' airwaves, which strikes me as a relatively narrow media plan.

Late last year, Struble hired the former president of the Washington Redskins - Stephen Baldacci - as his head marketing honcho to accelerate the adoption of HD Radio. I could be wrong, but I would have gone with someone from the chip world - perhaps from Qualcomm- who has successfully conquered these kinds of complex issues before. But again, that's just me.

Nevertheless, after all these years, iBiquity does have loads of broadcasters broadcasting, a bunch of chipsets and after-market systems in production, and car manufacturers committing. But it's been hell on wheels getting all that to happen - the company's had to drag everyone along, kicking and screaming. What with XM and Sirius and MP3 players, there's plenty of competition for the ears of the American consumer.

In case everything doesn't go as planned from here, there are several possible fall-back positions. After all, both Sirius and XM are licensees of iBiquity's technology. The company might consider laying down its arms and doing a deal to get satellite to bring HD Radio along as an option for an additional subscription fee. Alternatively, iBiquity can do a deal with Apple to incorporate digital radio into some iPods. Of course, there's the added cost, size, and power, but hey, I never said it was going to be easy.

I'm still hoping to get digital radio someday. But in the mean time, my new car came with Sirius satellite radio. Even after the free grace period expired, the subscription is cheap, the content is rich, and there are no commercials. And you know what? You just can't beat Howard Stern 24x7. I guess I'll just have to live with that, for now.