I’ve spent a lot of time in the past eight years working with the radio broadcast industry on the conversion of their business from analog to digital. That work is largely related to my role as a director and financial investor in a company called iBiquity, which was formed by the broadcast radio industry over ten years ago to build a digital system for broadcast radio (now called HD Radio). I have met many of the executives from the leading radio station groups and have talked to them about the challenges and opportunities that arise from the conversion of their business from analog to digital. I have written about many of these challenges and opportunities on my personal weblog over the years.

Last year, I was attending a meeting at CBS Radio and saw their new tagline – CBS Radio – Broadcast, Streaming, On Demand – and I realized that the radio business was headed in the right direction. CBS Radio and the other large station groups now recognize that they are in the audio programming business not the broadcast business. And CBS Radio’s tagline explicitly makes the point that their audio programming is available over the air digitally (via HD Radio), over the internet via streaming, and on demand through digital downloads.

I consume radio content via all three digital distribution channels. I have several HD Radios and frequently listen to the new stations on the HD2 channel. I subscribe to my favorite radio shows like Morning Becomes Eclectic via podcasts in iTunes. But more and more, I listen to the radio over the internet, both on my computer and via my Sonos system.

Streaming radio is very popular already. A recent comScore study reported the cumulative monthly audience of the top four online radio networks at 6.2mm US listeners. If you include all internet radio, that number is certainly well over 10mm montly listeners and could be larger than the subscriber base to satellite radio (~13mm subscribers at year end 2006). And as more and more stations come online with streams and more digital devices support internet streams, streaming radio is going to get even more popular.

But streaming radio isn’t yet a profitable business for broadcasters for several reasons. First and foremost, the broadcasters haven’t had a good monetization system for streaming radio. Because internet radio isn’t an inherently local service (I listen to KCRW in Santa Monica over the internet in my home in NYC all the time), the local advertisers who populate the “over the air” service have a hard time with the internet stream. In addition, streaming is more expensive for a broadcaster than putting out a signal over the air. Each stream costs them incrementally, which is not true in the broadcast world. And the new royalty rates make music programming delivered over the internet potentially more expensive than music programming delivered over the air.

So broadcasters have a challenge. How do they embrace internet radio without piling up losses?

That challenge seems like an opportunity to us. And so Union Square Ventures has participated in the creation of a new company called TargetSpot that has been built specifically to solve this problem for broadcasters. TargetSpot is an advertising system built from day one for internet radio. The technology was developed by our portfolio company Oddcast and was designed by David Goodman and his team at CBS Radio. A number of others involved in the internet radio business also provided input into the design of the system. TargetSpot is a full-featured ad network that supports a wide range of hyper-targeting technologies that make it possible for local and national advertisers to comfortably place, target, and buy internet radio. TargetSpot also features a self serve bidded advertising market like what is provided by Google and others in the search advertising world to make it easy for the small business to purchase audio advertising. With TargetSpot, a local plumber will be able to create audio ads with a short phone call (like leaving voice mail) and then target them to listeners in a specific zip code on popular radio stations like 1010 WINS and WFAN. With the hyper-targeting in TargetSpot, a thousand listeners to a particular radio show could hear a thousand different ads.

TargetSpot was very fortunate to attract Doug Perlson, a veteran of the internet advertising network business, to join the Company as its founding CEO. The Company will be owned initially by CBS Radio, Oddcast, Doug Perlson, Union Square Ventures, and Milestone Ventures.

While TargetSpot is initially focused on streaming radio, the technology already works exactly the same in streaming video and we believe that TargetSpot’s long term opportunity is to serve advertisers and content companies who are delivering their ads and programming using Internet streaming technologies. That is a big opportunity and certainly full of well funded competition. But we are confident that the management team, founding partners, and technology platform that TargetSpot s its life with will serve it very well and we are excited to be part of this exciting new Company.

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