#DigitalSkeptic: No One Knows How to Make Money in Local Online Radio

NEW YORK (TheStreet) -- The way Jason Finkelberg sees it, online streaming services such as Pandora (P), Spotify and Songza have opened an advertiser's pandora's box.

"We compete with Pandora every day," Finkelberg told me on the phone last week. "And I absolutely assure you, it has yet to be figured out how money is going to be made selling local advertising with online radio."

Finkelberg has the choreography down cold for the ad-supported, radio business song and dance. He's a general manager at Pamal Broadcasting, an Albany-based independent radio station group with roughly $40 million in revenue from a couple dozen AM and FM stations throughout lower- and mid-New York State, Vermont and Western Florida.

And over his 20-some-odd-year radio career, Finkelberg has been able to evolve with the changing digital radio environment free from the shackles of short-term, expense-hostile, publicly traded radio station groups such as Clear Channel Communications or Cumulus Media (CMLS).

For Finkelberg there has never been a tension about if his stations would move to digital platforms. It was rather when and how.

"We understand that digital is the future," he said. "We will follow our listeners on any platform." He is proud of the fact that his stations support a full suite of modern Web offerings including a sophisticated website, an online feed, complex tie-ins with social media and ad inventory for on-air and online. But even after six or seven years of trying to make digital radio fatten his bottom line, he's still struggling to make Web radio as profitable as its on-air relatives.

"At leaston-air you are serving a local community," he said, "The audience and the profits run away if you start doing radio on the Web."

The high cost of selling "no-cost" radio
Profit margins for traditional on-air radio spots still fetch the same 50% they always have, he said, but online streaming radio is at best, a break-even business.

"We've been making money on the radio side for eight of the last 10 years," he said. "And while we do cover the costs for our digital products, the digital side of the business is not something we've figured out."

Finkelberg's laundry list of margin killers include richer rights and royalties for music programming on the Web and higher costs for staffing and managing online content. But the biggest hidden cost is the major expense of marshaling his sales force to get local advertisers to pay for online inventory.

"It's just as much work to get a Web ad sold as a traditional ad," he explained. "And what we can charge for those ads is a fraction of what we get for on-air."

As an example, Finkelberg points to a station he manages in the lower Hudson Valley, WXPK, branded as the The Peak, which competes head to head with streaming radio advertising dollars with Pandora. Both go after major local media buyers -- mostly suburban car dealers such as Cortlandt Manor, N.Y.-based Curry Automotive. Even though Finkelberg chases Curry's significant online media buys, including dollars spent on Pandora, he still finds more profit sticking with traditional radio advertising.

"Events and local tie-ins is where the audience and the money still is," he says.

Humans are what humans pay for
Remarkably, the notion that when it comes to local advertising, cutting-edge Web-based streaming radio such as Pandora struggles to compete with nimble independent local radio stations such as WXPK is confirmed by Finkelberg's media-buying clients.

"The idea that local radio can compete on the Web with the likes of Pandora is grasping at straws," says Ray Lahey, president of Market Masters Media Group, a regional media advertising and buying services in Whippany, N.J., that counts Curry Automotive as a client.

Lahey says that though he is very happy with what Pandora provides in terms of targeting and efficiency on the Web, he still pays for modern radio-driven live events. For example, to drive buzz to a new Curry Toyota dealership, Lahey arranged for a live remote for The Peak where the first 100 people who attended were given a free music CD -- with one CD owner walking out with a free new car.

"What will never go away is how local radio can engage an audience with live remotes and promotions," he said.

For the foreseeable future, that's perfectly fine with Finkelberg.

"Down the road that may change," he said. "And I hope to be there, But as of now, nobody has figured out how to make digital pay. People serving other people is still our business."

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.