Emmis' landmark deal with Apple paying big dividends: Locally based radio group now No. 2 iTunes affiliate

November 13, 2006

Emmis Communications Corp. has a new mantra when it comes to emerging technology some say will kill the radio industry: If you can't beat 'em, join 'em.

Emmis entered a relationship with California-based Apple Computer Inc. nine months ago that is paying big dividends.

Since launching one of the radio industry's first iTunes storefronts on its stations' Internet sites, Emmis officials said they have become the No. 2 iTunes affiliate based on sales. Only Internet behemoth Yahoo Music sells more.

"We're not going to combat the iPod; we're going to partner with it," said Rey Mena, vice president of Emmis' Interactive Division.

The reproduction and sale of Emmis' proprietary computer program that created its iTunes cyber-stores has as much c a s h - g e n e r a t i n g potential as commissions from the music downloads themselves, radio experts said.

"[Apple officials] have indeed talked to us about perhaps coming up with some kind of white-label business that we could take out to the rest of the broadcasters who have expressed interest," said Rick Cummings, Emmis Radio Division president.

Emmis officials believe the potential for reselling its iTunes interface is great enough to justify putting it in the hands of other stations, thereby jeopardizing a portion of the company's iTunes sales commissions.

"If we could redefine the value of radio, why not?" Mena said. "We think a rising tide will lift all boats."

But Mena said Emmis might decline to sell its iTunes program to stations it competes with head-to-head.

Emmis CEO Jeff Smulyan told investors recently that developments with the company's Interactive Division-which has grown from one to 65 employees in four years-could lead to new business ventures.

"[Our Interactive Division] is growing by leaps and bounds I think because ... they have been able to engage our consumers-our listeners-in our Web site," Smulyan said.

Radio slayer or savior?

Apple makes the iPod, a hand-held device that stores and plays music downloaded from a computer. The iPod, which has been hailed as the radio slayer, can hold thousands of songs to be played by the listener on-demand.

In April 2003, Apple launched iTunes, a computer program that allows users to download music through Apple-approved Web sites. Since launching iTunes, Apple has sold more than 1.2 billion songs for 99 cents each.

The growth in sales of Apple's iPod players and iTunes downloads remains explosive. More than 65 million iPods have been sold in the last four years, and the sale of iTunes downloaded music increased 300 percent from 2004 to 2005, according to New York-based Nielsen NetRatings. Nearly 15 percent of people who access the Internet have accessed an iTunes store site, Nielsen reported.

"The rapid growth of iTunes is an important phenomenon in the online media marketplace," said Jon Gibs, Nielsen director of media analytics. "Consumers have clearly indicated that they are eager to control their own music libraries, one song at a time."

Industry analysts estimate Apple has 75 percent of the music download market, valued at more than $1.5 billion worldwide. Apple has deals with record companies and artists that give it access to 3.5 million songs for its library.

Positioned for growth

Music industry analysts think Apple's online music presence will only grow, and that Emmis is positioned to grow with it.

"This is a big deal for Emmis, because it brings real revenue-generation potential to their Web site," said Tom Taylor, editor of trade publication Inside Radio. "For the first time, you have radio stations becoming involved in the commerce of music."

Emmis has 19 of its 23 stations outfitted with iTunes storefronts, including WNOU-FM 93.1 and WLHK-FM 97.1 locally.

Emmis uses a software package designed in-house for its storefront, which is featured prominently at the top of its stations' Web sites. Though few other radio stations are iTunes outlets, Emmis has flown to the top of the class of more than 25,000 iTunes affiliates worldwide, Apple officials said.

Emmis and Apple make odd bedfellows, some radio experts said. Since the iPod burst onto the market, radio broadcasters and Apple viewed each other as rivals, with the thinking that the popular pocket device was stealing radio listeners.

The rivalry was so strong until recently that Apple officials never considered developing their own iTunes package specifically for the radio industry. And even if Apple had wanted to develop such a package, it didn't have the inside knowledge of the radio industry that Emmis has, Taylor said. Those factors opened the door for Emmis.

"This is a natural fit," Mena said. "Radio is the best medium to connect to the community, and it's where people come to sample new music. And the iPod lets you play it whenever you want."

Emmis' relationship with Apple could signal a shift in radio.

"I think record companies, musicians and radio station managers, as well as Apple itself, will begin to see just how beneficial this relationship can be in the coming months," said Robert Unmacht, principal of iN3 Partners Inc., a Nashville, Tenn.-based media and investment banking consultancy. "I think that will trigger more radio stations getting involved in this."

Generating cyber cash

Emmis gets less than 10 cents for each song sold through its iTunes store, said industry experts, but the revenue potential is still sizable. Emmis officials declined to say how many iTunes have been downloaded from their sites.

"If you consider the number of iTunes Apple has sold in relatively short order and the reach of radio-94 percent of people in the United States-it could eclipse any other Internet revenue streams radio stations now realize," Unmacht said.

To date, radio station Web sites have been largely anemic revenue generators. Even the most successful stations have been able to squeeze only 5 percent of their revenue from the Web, and industry experts say the standard is closer to 1 percent.

"Until now, a radio station's Web site has been the place to go to see pictures of the on-air personalities, and maybe drop them an e-mail, and that's about it," Unmacht said. "This deal suddenly makes Emmis' Web sites profitable, and that's unusual for this industry."

The Emmis deal was a test for Apple, Unmacht said.

"It's a good test, because Emmis is a relatively small radio group, but they have strong radio stations in major markets like New York and L.A.," Unmacht said. "I think now that you see this working, Apple will move to expand this, and that's where Emmis' [iTunes] template could come into play."

But Apple might have a difficult time coming up with better partners than Emmis.

"Emmis is a nimble company known for technological advances," Unmacht said. "At Emmis, you can talk to Jeff [Smulyan] and Rick [Cummings], and you can get things done. It's not that way at larger radio groups."

Revenue from promotional tie-ins to the iTunes stores could be another significant sales driver, said Jay Schemanske, associate media director in the Indianapolis office of Optimedia, a division of the advertising and public relations firm Paris-based Publicis Group.

Record companies, musicians, concert promoters, radio stations and even corporate partners could all come together to drive traffic to the iTunes Web sites, Schemanske said.

Already, Bob Dylan and the Red Hot Chili Peppers have marketed iTunes downloads with concert ticket and merchandise sales. Music-loving Internet users were also enticed to download music with the promise of bonus content and the chance to win giveaways.

"This is another way to engage consumers, not just for radio stations, but for record labels and artists as well, and that's invaluable," Schemanske said. "I think the full benefit of that is starting to be realized. That's why I think this model could catch fire."
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