One is traded on the New York Stock Exchange. Another was recently launched by the world's leading on-demand music subscription service. And yet another has quietly accumulated 30 million monthly users.

These three Internet services are part of the resurgence of a format considered dead by many: radio. Business models built around digital downloads were all the rage last decade. On-demand services have surged recently but haven't connected with the mainstream. Entrepreneurs and established businesses have returned to the fact that people love to simply lean back and listen. There's a gold mine waiting for companies that can take all the work out of the listening experience.

Radio is heard by 241 million Americans each week, according to Arbitron. In fact, this "dead" format had $17.4 billion in advertising in 2011, according to the Radio Advertising Bureau. Internet radio is now a mainstream product, too. A study by Arbitron and Edison Research found that 29% of Americans age 12 and older listened to some form of online radio in the first quarter, up 30% from first-quarter 2011. Satellite radio is increasingly mainstream: SiriusXM finished June with 22.9 million subscribers.

On-demand services - the hot music business topic of 2011 due to Spotify's U.S. launch - can only aspire to such a following. In fact, Internet radio and other noninteractive digital music services - satellite radio, music channels on cable networks - pay out far more to labels and artists than on-demand services. SoundExchange, the organization that collects and distributes statutory digital performance royalties in the United States, paid out $292 million in 2011. On-demand services paid out about $165 million, according to Billboard's estimate.

Simply put, radio is where both the people and the money can be found. Recognizing that, entrepreneurs have infused more innovation into Internet radio. Pandora, still a market leader with 74.2% of the total sessions in May by the top 20 webcasters (according to Triton Digital), has dozens of upstarts vying to steal a sliver of its market share.

Songza is one of those services attracted to radio's reach. "By the numbers, radio is the vast majority of what people do the vast majority of the time when it comes to music," CEO Elias Roman says. "That's where people are living."

Songza's founders had previously built Amie Street - a music download service that utilized dynamic pricing, which Amazon acquired in 2010. Roman found that getting people to buy downloads was difficult because it required new behaviors. Radio is easy in comparison. It doesn't ask the consumer to buy, download, sync and manage files. On the Internet, just as with broadcast, all radio requires is pushing "play."

"We wanted to go to a space where we had less friction and a greater mass of people on the receiving end of that delivery mechanism," Roman says.

The Market Leaders: Pandora and iHeartRadio


Executives at various companies would have you believe many different things: personalized radio is the superior listening experience; personalized radio is just a feature; consumers want local radio; consumers want music to match their activity or mood. They are all correct. The market is big enough for them all - and it's growing. A fraction of the 14.6 billion hours that people spend listening to radio each month can easily be absorbed by Internet services.

Pandora is by far the leader. The company ended June with 54.5 million active users - defined as people who activated a stream in the previous 30 days - and 1.08 billion listener hours. By the company's own calculations it has a 6% share of the entire U.S. radio market.

A year ago, Pandora might've appeared to have the Internet radio market locked up. Its July 2011 initial public offering, the first for a digital music company since Napster in 2005, was made possible by the company's early dominance of Internet radio. There is a $17.4 billion U.S. radio advertising market, and Pandora had the potential to grab the biggest share of it. Clear Channel's Internet radio play, iHeartRadio, was in its infancy. Spotify was still just an on-demand service. Internet radio had practically become synonymous with Pandora. Its straightforward approach to personalized listening set the standard for competitors to follow.

But Pandora doesn't have the Internet radio market all to itself, a fact the company's investors have slowly come to realize. (They seem to have also realized that Pandora, often associated with other Internet stocks, has little in common with Facebook, LinkedIn and Zynga. The crucial difference is the company's content acquisition costs, which run at 54% of revenue.) Pandora's share price opened at $16, rose to $26 and has gently fallen ever since, except for short-term rallies. The occasional appearance of a competitive threat, no matter how big or small, seems to bring an instantaneous drop in Pandora's market value.

Each new competitor and each innovation has the potential to chip away at Pandora's market share and profitability. BTIG analyst Richard Greenfield, perhaps the most bearish of all equity analysts covering Pandora, believes the company will turn a profit next year but doesn't see as much upside as other analysts. "It's more of a function of how profitable this business is going to be given the escalation of competition over the next few years," he says.

Licensing also makes Internet radio competitive. Whereas an on-demand service requires lengthy dealings with labels - one recent academic study estimated a new service spends 18 months to get licenses - and advances that can run in the tens of millions of dollars, a webcaster doesn't need permission to play any recording. Webcasters must pay a statutory performance royalty to SoundExchange - no advances to labels required. Thus, the barriers to entry in Internet radio are low enough to invite new services with new ideas and innovations.

And yet Pandora remains the leader in Internet radio by a wide margin. According to Triton Digital, Pandora's share of the top 20 U.S. Internet radio services from 8 a.m. to 12 a.m. was 74.2% in May, down slightly from 74.6% in April. If there is any company able to withstand a growing legion of competitors it's Pandora. The company had $44.1 million in cash and cash equivalents on its balance sheet as of Jan. 31, a financial cushion that will allow it to continue to staff up its advertising sales team - it has hired away people from terrestrial radio competitors - grow market share and add such distribution partners as automobile companies.

Clear Channel's iHeartRadio, the No. 2 service, rose to a 13.6% share in May from 12.9% in April, according to Triton. IHeartRadio aggregates Clear Channel's local stations and also offers personalized and artist-driven stations. Clear Channel considers Internet radio important enough that the broadcaster struck a deal with Big Machine Label Group for both terrestrial and Internet radio performance royalties - the first for sound recordings on terrestrial radio. The company's message was clear: We want Internet radio to grow but need lower royalty rates.

Breaking Into Songza

The first six months of 2012 were filled with new features and new services. Big Internet radio companies have plenty of reason to look over their shoulders.

Songza became Internet radio's new buzzword on June 11. Its iPad app was downloaded 1.2 million times in just 10 days, which journalists and analysts declared a shot across the bow at Pandora. The company won't specify its total number of monthly active users but puts the figure in the seven digits.

Songza brings a new spin to radio listening: its Concierge feature. As the name implies, Concierge helps a user parse Songza's huge catalog of songs to find the most suitable music for any given time of day, mood or activity. It debuted in March on the iPhone app and in July became available to Android users.

Songza's adherence to the fundamentals of radio makes it a potent foe. Unlike Turntable.fm, the social listening service that exploded in the summer of 2011 but faded to near obscurity by the end of the year, Songza doesn't require people to change how they listen. All it asks is that people change how they pick music. "You want music that's going to make your commute better," Roman says. "You want music that will make entertaining more fun. You want music that will make you run faster when you go jogging."

Not every Internet radio service wants the listener to lean back so much. CBS-owned Last.fm, for example, uses information like biographies and tour dates to educate its users. Last.fm has always emphasized discovering new artists, CBS Interactive president David Goodman says. "Radio is a component of other features we provide."

Even "lean forward" on-demand services are getting into radio. Spotify is the latest Internet radio product to thrill journalists and worry Pandora investors. On June 19, Spotify added a free radio service for its mobile app to its on-demand subscription service. In fact, it's the only mobile feature available to non-paying users. Much like its predecessors, Spotify's radio feature offers customized listening based on an artist, song, album or genre. Headlines trumpeted Pandora's new challenger. That day Pandora's stock opened 6.5% lower than the previous day's close and fell as much as 9.2% before making up much of the loss.

Spotify had first tempted listeners with unlimited on-demand access to a huge catalog of music. Spotify offered free desktop listening (using an ad-supported model), but charged for mobile streaming. Then the proposition shifted: Mobile radio would be free, but on-demand mobile listening is still a premium product.

Spotify's original model - free streaming to desktop, mobile usage only for paying subscribers - worked well two or three years ago but doesn't fit today's market, says Sachin Doshi, Spotify head of special projects, content and distribution. "Increasingly, obviously with smartphone and tablet penetration, usage is shifting from the desktop to those mobile devices. In some cases, people are abandoning their desktop altogether for that kind of activity."

The solution, Doshi says, was to create "some kind of funnel and free experience" for consumers who have shifted to mobile devices. Since its beginning, Spotify has used desktop streaming to convert free listeners into paying subscribers. For every 10 people who register for the service, three end up paying. The more people try the service, the more people pay for it. Free mobile radio simply continues that approach. Spotify is betting that a portion of radio lovers will pay to enjoy radio with on-demand functions.

Internet radio is easier said than done, however. While Spotify excels at on-demand streaming, sharing and playlist creation, the early incarnation of its mobile radio service is disappointing. Problems abound: A Kenny Chesney channel played a Christmas song by pop crooner Michael Bublé and a track by Christian rock band Lifehouse. A channel on Malian duo Amadou & Mariam played tracks by indie folk group Beirut and eccentric Icelandic musician Björk. Songs by indie rock favorites the Pixies, classic rock group Thin Lizzy and jazz artist Melody Gardot appeared on a channel built around blues legend Muddy Waters. All three are guitar-based acts, but they're hardly cut from the same cloth.

A knowledgeable source says Spotify's radio product chooses songs based in part on how people arrange them into playlists. So, for example, a song by the Pixies can show up on a Waters station if people have both songs in the same playlists. This socially minded approach is exclusive to Spotify and fraught with pitfalls-it's possible that the way a playlist is built can make sense only to the person who built it.

And although Spotify can boast an on- demand catalog of 17 million tracks, that massive catalog is missing the Beatles, Pink Floyd, Metallica and other acts that have yet to license their music to subscription services. A competing U.S. webcaster can play all these artists using the statutory license provided by the Digital Millennium Copyright Act. But type in "the Beatles" into Spotify radio and you might get, as Billboard did, unrelated tracks from the Scorpions, ABBA, Frank Sinatra and Kings of Convenience. (Spotify says that it seeks a "seamless experience and catalog across all our features" and will "continue to work with these artists to bring them aboard the entire service.")

Getting Personal


Internet radio is "wickedly hard," Pandora CEO Joe Kennedy says. Maybe so, but Billboard's trials often found very little difference between personalized Internet radio services.

IHeartRadio is one of the more human services. After all, as chairman/CEO John Hogan explains, the company is filled with radio veterans with an instinct for what people want to hear. Clear Channel's message since it launched personalized features last year has been unwavering: The customization feature of iHeartRadio is merely a feature of the larger product. "We create the experience for the listener," Hogan says. "It's fundamentally different than the playlist experience."

That said, not much difference exists between iHeartRadio's personalized service and Pandora. The songs they play may differ a bit. For example, Pandora's Madonna station opted for other songs of the same era while iHeartRadio mixed in newer, yet appropriate tracks by Katy Perry and the Black Eyed Peas. But the two services were more or less identical when playing songs on stations for Waters, the Beatles, Chesney and Perry. IHeartRado actually outperformed Pandora in a brief test of a channel based on Senegalese star Baaba Maal.

Similarly, Slacker matched or exceeded its peers in song selection or overall quality in Billboard's tests. Available in free and paid versions, Slacker mixes computer algorithms and human programming when determining which songs to play. In its test, only two songs were out of place. First, "Skrillex Orchestral Suite" - literally an orchestral piece - was played in a Skrillex channel filled with dubstep tracks. The other oddity was the inclusion in a Madonna station of Cyndi Lauper's cover of Albert King's "Down Don't Bother Me" from her 2010 album Memphis Blues. A track from one of Lauper's '80s albums would have made sense; this didn't.

Slacker, which has more than 500,000 paying subscribers and 6 million monthly active users, is unique in its level of fine-tuning, however. A listener can choose between varying levels of familiarity, artist discovery, popularity and eras. Each station has check boxes for turning on and off DJ input and hourly updates from ABC News and ESPN.

"If you want to lean forward and have that next level of control, you've got that with us," CEO Jim Cady says. He also points to Slacker's "light DJ touch" - something that will become more predominant in the future, he says - that will give the listener a deeper understanding of the music. So, for example, Slacker will explain that a certain group of songs had Jack White as a common theme. "You as the listener can have context of what you're listening to and why it was selected for that station."

TuneIn occupies the side of the spectrum opposite Slacker. The Palo Alto, Calif.-based company aggregates more than 70,000 terrestrial radio stations from around the world and in a wide variety of formats. A TuneIn listener can go from WMFU New York to 88.3 FM in the Falkland Islands with just a few clicks. TuneIn also has Internet-only stations - including one from Snow Island Hill, Antarctica.

TuneIn lacks personalization - every stream is a one-way broadcast - but it tackles discovery by guiding listeners to carefully programmed channels. It's not Pandora, but that's the point. "We are a search engine for all the live audio streams in the world no matter where they come from - terrestrial radio, Internet radio or your own custom radio station," CEO John Donham says. "If you think of something like Google and [its Web browser] Chrome, TuneIn tries to achieve that same thing."

The Web- and app-based service has amassed 30 million monthly users without the fanfare of on-demand and personalized radio services. And although spoken word doesn't have the sex appeal of music services, TuneIn augments its music offerings with a huge variety of news, talk shows and sports programming. The addition of Fox News Radio and Bloomberg in June closely followed deals to stream ESPN Radio and CBS Radio.

A Game of Inches, Not Yards

Companies have different approaches for competing in the dynamic Internet radio market. Clear Channel leverages its strength in broadcast radio. Slacker is creating a holistic radio experience with music, news and a human touch. Last.fm focuses on discovery through both music and information. TuneIn specializes in quickly leading people to the content they desire. Spotify can promise interaction between its free radio and on-demand services.

Pandora sees the Music Genome Project, the propriety music database that guides its programming, as the foundation for its leadership position. "We've been working on it now for over 12 years," Kennedy says. "We feel we can continue to do so much better than how we're doing today, have more people working on it than we've ever had."

Internet radio is a game of inches, not yards. Small differences in performance will have large consequences. Kennedy believes Pandora's scale will also play to its advance. So far, Pandora users have given 15 billion pieces of input - "thumbs up" and "thumbs down" - on songs played.

"We know what people think of every song we've ever played on a Bruce Springsteen station," Kennedy says. "We know exactly how well that song was received. We can break that down by age, by gender, by geography. We know that playing 'Rosalita' to a 50-plus-year-old New Yorker on a Bruce Springsteen station is a better play than to a 30-year-old woman in San Francisco."

Pandora needs whatever competitive advantage its Music Genome Project can offer. Its days of triple-digit growth are over. The first sign of age appeared July 10 when it announced a sequential drop in listener hours to 1.08 billion in June from 1.1 billion in May. June's tally was up from the 1 billion and 1.06 billion listener hours posted in March and April, respectively.

Kennedy credits the month-to-month decline on seasonality-listening hours start to tail off in May as students leave school and Americans engage in summer activities. But for a company whose market value is largely derived from its growth potential, a month-to-month drop in listener hours demands some reflection. For Pandora's competitors, a sign of slowed growth means the market is wide open.