Analysis of the impact of personalised music internet service Last.fm on the United Kingdom commercial radio industry and the desperate attempts by some commercial radio stations to emulate the former's DJ-free offerings instead of focusing on its significant loss of audience to BBC radio, written by Grant Goddard for Enders Analysis in July 2007.

1. RADIO: LAST.FM IS NOT THE
PROBLEM
GRANT GODDARD
July 2007

2. • Audio webcasting services such as Last.fm, bought in May by CBS
for $280 million, have built sizable audiences by offering greater
choice and personalisation than traditional radio
• Pure-play internet operators presently pose little audience or
advertising threat to the UK commercial radio sector, whose falling
listenership owes much more to BBC Radio
• However, commercial radio stations’ attempts to emulate the
continuous music aspect of personalised online music services risk
undermining broadcast radio’s distinctive presenter-led appeal and
will end in failure
Rapid broadband growth has spawned a wide selection of webcasting audio
services, ranging from simple simulcasts of broadcast radio stations to more
interactive offerings that give users varying levels of control over playlists. At
the same time, usage of such services has increased, with BMRB reporting in
Q1 2007 that nearly half of all UK internet users listen to online music, up from
a third in 2004. Meanwhile comScore data show several webcasting services,
among them Last.fm, now attract over one million unique users a month in the
UK.
Last.fm has attracted particular attention since its purchase in June by CBS
for $280 million. Its success raises the question of how much it will add to the
distress of the traditional commercial radio sector and what radio broadcasters
can do by way of response. In our view, Last.fm does not need to be a
problem, but it could become one if, as appears to be happening, the radio
broadcasters continue to react with copycat strategies. The key point is that
web-based services like Last.fm are personalised media and there is no way
that broadcast services can properly imitate and satisfy the personalised
media appetite.
Launched in 2002, London-based Last.fm is an online music recommendation
and social networking service, now attracting a global audience of 15 million
users each month, of which it claims two million are in the UK. Its appeal is
that it not only lets users input songs, artists and genres that they like, but also
employs in-house technology, known as ‘Audioscrobbler’, which scans the
music files of individual users and makes tailored recommendations based on
their own and others’ music libraries. Following yesterday’s announcement of
an agreement with Sony BMG, Last.fm can now play tracks from three of the
four majors, with only Universal holding out (although talks are ongoing), and
a number of independent labels.
In our view, the commercial threat posed by Last.fm and company is limited.
First, we have seen no clear link between the rise of internet-based audio
services and the declining audiences of commercial radio. So far, increasing
use of the internet for listening to music has had little impact on offline radio
consumption. Broadcast radio still has a vastly larger audience, reaching 45

3. million adults (90% of the adult population) each week and seems to be
resilient to the impact of new media. Total listening is in decline by less than
1% per annum, whilst a survey carried out for Ofcom in October 2006 found
that internet users’ offline radio listening was broadly unchanged since they
first went online.
Second, online services like Last.fm are hardly a drain on radio advertising
revenues. Indeed, the challenge facing Last.fm (and CBS) is how to monetise
its existing audience. Revenue streams include advertising and commission
fees paid by music stores when users click through to buy a song or album.
The explosive growth in online advertising and sales of digital music
notwithstanding, we estimate that Last.fm currently generates less than 30p
per user per annum. Results will improve over time, but we do not think that
advertising will become a significant source of revenue for online music
services until the next decade and then only in the largest advertising
markets, e.g. US, UK and Japan (see Recorded Music and Music
Publishing [2007-29]). Moreover, unresolved online music royalty copyright
cases in the UK and US could severely dent the prospects of such services.
Despite the fact that the audience and advertising threat of Last.fm appears
restricted, reactions by the UK commercial radio sector and even the BBC
could be described as schizophrenic.
Commercial radio’s economic woes chiefly relate to the continuing defection
of many of its listeners to the BBC (see Commercial radio: out of tune with
London [2007-44e]), combined with the extra costs and fragmentation
associated with running digital and analogue services side-by-side. Reflecting
these factors, industry revenues have fallen by 10% in real terms since 2004.
At present, there is no reason to believe that online services like Last.fm are a
cause of the UK commercial radio sector’s problems. Indeed, the industry has
been quick to dismiss them as not radio and not a competitive threat.
Chrysalis Radio CEO Phil Riley recently declared that “Last.fm is
inconsequential to the radio industry”, while EMAP’s MD for radio Mark Story
has said “Neither the Pandora nor the Last.fm model are very sticky, as in:
you try it for three days [and] you do not go back.” Others like GCap CEO
Ralph Bernard, whose music brand Xfm launched an online music service ‘Mi-
Xfm’ in December 2006, have been equally dismissive.
And yet, there is a growing tendency for commercial radio stations to
incorporate phrases like ‘personalisation’, ‘customisation’ and ‘user generated
content’ into their programming strategies. Xfm’s marketing director Richard
Mintz promised that ‘Mi-Xfm’ was the first phase of a significant and ongoing
strategy to deliver personalised and interactive radio services across the
GCap Media network [The Guardian, 12th December 2006]. Sure enough, Xfm
announced in May 2007 that its DJs would be replaced by back-to-back music
selected by listeners between 10am and 4pm on weekdays. Station Managing
Director Nick Davidson said he was “excited about handing over the airwaves
of Xfm to our listeners” because they “are used to being able to control what
they watch or listen to as, these days, people are inundated with choice”.

4. In our opinion, this Xfm strategy is doomed to failure because it will prove
impossible for a broadcast radio station listened to by 630,000 Londoners per
week to offer each of them any kind of personalised service via a broadcast
platform. Besides, any one listener’s favourite songs are likely to be another
person’s most disliked, making listening to any individual playlist likely to be
as tedious as looking through their holiday snaps. Our belief is that some of
commercial radio’s current problems arise from having strayed too far from its
original ‘pop and prattle’ ‘Smashie & Nicie’ characterisation and having moved
too close to offering simply continuous music, something that Last.fm and the
like can do much better with their personalisation algorithms.
Similar remarks apply to Virgin Radio’s ‘Ten Great Songs in a Row’. As James
Cridland, Virgin Radio’s former Director of Digital Media, has admitted, the
industry may have concentrated a little too hard in recent times on playing
non-stop music, forgetting that a key differentiator between radio stations and
the likes of Last.fm and iPods too is all “the bits that go in between the songs”.
Indeed, the presenter is one of the aspects of broadcast radio that
differentiates it from online services. Ofcom research has shown demand still
exists among young people for traditional presenter-led radio. It found that
there are occasions when 18-30s crave back-to-back music, but there also
times when they desire “company in a way that music alone cannot” and
“opportunities to hear new music and other stimulating content”.
In conclusion, we believe that Last.fm is no more of a direct threat to the
commercial radio sector than any other media offerings that compete for
users’ time (internet, mobile phone, games). It is up to the radio industry to
play to the medium’s strengths and/or to develop new offerings as innovative
as Last.fm.
[First published by Enders Analysis as report 2007-60e.]
© 2007 Grant Goddard
Published by Radio Books
http://www.radiobooks.org
http://www.grantgoddard.co.uk