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Tech bolsters Webcasting's new era

Web radio stations are making substantial technological strides to reduce once-crushing bandwidth and other costs. Can the savings offset the new royalty expense?

Can Web radio stations afford to put another dime in the Internet jukebox?
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Costs for the nascent Webcasting business shot up Sunday when an online broadcast took effect, throwing a spotlight on the economics of an industry that is still struggling to prove its viability.

Although much of the news is bad, there is at least one bright spot: Webcasters today pay dramatically less to distribute audio feeds than they did just a few years ago, a trend that is likely to continue because of technology improvements and cheaper carrying costs.

Webcasters struggling to sell their services to advertisers and consumers are now weighing whether technology-driven savings can offset the new royalty expense, which could run to millions of dollars a year for large players such as America Online.

"The rules are basically set, and people can determine whether this is the right business for them to be in," said Zack Zalon, general manager of Radio Free Virgin, one of the Web's larger radio services.

It's still far from clear whether Webcasting is a viable industry or if any but a few companies can survive. Many members of the first generation of hopefuls, from iCast to NetRadio, were driven out of business as soon as a chill settled over the Net advertising and venture capital market. A few medium-sized Net companies remain, but for the most part the market has already settled out into a few large, well-capitalized companies, a myriad of tiny Webcasters, and the online versions of terrestrial radio stations.

The revenue side of their business equation remains relatively bleak. Companies are increasingly experimenting with subscription radio services, with signs of success from a handful of companies, including Musicmatch and RealNetworks.

In advance of the new royalty payments, however, the industry has made substantial technological strides that have reduced once-crushing bandwidth and other costs to what may be manageable levels, analysts say.

"Over the past couple years they have ground costs down in a very impressive way," said Paul Polumbo, principal analyst with AccuStream, a research firm focusing on the streaming media market. "Nothing happens overnight, but the successes have been there if you look at it in terms of getting bandwidth costs under control."

Moving to the edges
In the early days of streaming media online, bandwidth costs could be crushing. For the most part, each individual listener represented another strain on a small company's budget.

By early 2002, long-distance bandwidth prices had fallen to as little as 10 percent to 15 percent of 2000 prices, according to research firm TeleGeography. Prices have stabilized in 2002, however, and the cost of buying network space between New York and Los Angeles has even climbed by more than 25 percent over the past few months, the research company said in a recent report.

Some of bandwidth's burden has been lessened simply by oversupply. The telecommunication industry's frantic network construction in the late 1990s left the market with a bandwidth surplus, and prices have fallen dramatically as a result, often dropping by half or even more.

The rise of content distribution networks such as Akamai Technologies and Speedera Networks has also dramatically lessened the load on companies with large bandwidth needs. These companies' services distribute streaming content through networks scattered around the world, easing the burden on a Webcaster's central servers and reducing the chances of network traffic jams snarling the demand for popular content.

In the last several years, newer services have sprung up that expand on the idea of distributing content around the Web, making it cheaper still.

Radio Free Virgin, one of the most popular free Webcasters, was one of the first large companies to take advantage of peer-to-peer Webcasting technology created by Blue Falcon Networks. That company's technology uses individual listeners' computers as relay points, so that one listener can draw a stream of music from another listener's PC, instead of from central servers.

The technology doesn't wholly replace the content delivery networks. But it can replace up to 80 percent of the traffic that would ordinarily go through a company like Akamai or Speedera, for a substantially lower price. Blue Falcon CEO Josh Goldman says companies can typically save between 50 percent and 60 percent on their bandwidth costs. Radio Free Virgin's Zalon says his results have varied with different audiences and content, but that the savings have been substantial.

Smaller files, better quality
Webcasting companies have also benefited substantially from simple progress in the audio compression technologies.

RealNetworks and Microsoft each have made substantial strides in providing the same quality sound in smaller packages. Microsoft's test version of Windows Media 9, released just last month, has reduced file sizes by 20 percent while keeping the same sound quality. RealNetworks' newest technology offers a 30 percent gain over its previous versions.

Those smaller file sizes translate directly into lower costs, because the Webcasters are paying to send less bits over the networks.

None of these technological advances guarantee a business. Few if any Webcasters will admit to having an unambiguously profitable business. Advertising revenue remains paltry, and subscription fees are still too new to be deemed a success story.

Few of the companies break out actual expenses. A look at defunct NetRadio's balance sheets shows the scale of the industry's potential problems, however. In its last full reporting quarter, closing in September 2001, the company made about $58,000 in advertising revenue, while paying nearly $1.3 million in operations costs, the bulk of which were for communications costs and technical personnel.

Nevertheless, surviving companies say, the future is looking positive, for at least a small number of players.

"We think this is going to be a very lucrative business for a few people to be in," Zalon said.