HD Radio's Next Bling Things

The closure of Tessera Technologies’ purchase of DTS Inc., the owners of iBiquity’s HD Radio system for just one short year, is set for sometime in December, and the combined companies will adopt a new name and stock symbol on NASDAQ in the new year. But just how much did the HD system itself drive its sale twice in 14 months, and what are the prospects for its future development?
Turns out, not very much on both counts: buried at the bottom of a story published by iHeartMedia-owned Inside Radio in early November was this gem: “DTS had been in sale mode since June 2014 when it was first approached with a $29-$32 per share buyout offer that proved to be too low for the board’s approval. But it set into motion the process that ultimately led financial advisors to shop the company. Tessera first appeared on the radar in August 2015 — two months before DTS bought the HD Radio business from iBiquity — and those discussions continued for months [emphasis added].”
In other words, DTS had put itself up for sale before negotiations began to acquire the United States’ troubled digital radio broadcast platform. And in fact, two months before DTS actually bought iBiquity and the HD system, it had already received acquisition-inquiries from Tessera. At the time, DTS’ board of directors considered the sale-price per-share too low…but what better way to bump that up to a more lucrative level then to acquire some additional intellectual property for the corporate portfolio?
Seen in this regard, the DTS acquisition of HD Radio was a move purely designed to sweeten the purchase-price of DTS – not, as DTS’ executives claim, a long-term strategic investment in new audio technologies for the benefit of broadcasters or anyone else. For the relatively low price of $172 million, DTS was able to inflate the acquisition-value of its stock by a cool $11 per share — well more than worth the initial purchase price of the HD System itself. So much so that DTS’ senior executives will reap nearly $30 million in additional compensation simply for doing these deals.
This maneuvering’s also been quite lucrative for DTS in the short term, which reported an $18 million revenue-bump to the Securities and Exchange Commission for the third quarter of this year relative to 2015. A goodly portion of this is directly due to the revenue-stream of licensing fees from the HD Radio system, which costs thousands of dollars for every radio station to adopt (and in some cases, includes recurring license payments for the use of some features) and as much as $12 per new vehicle when an HD-capable receiver is installed by the manufacturer.
It should be noted that absolutely none of this involves any work on DTS’ part; once the intellectual property and user-contracts were in hand, all DTS has had to do is sit back and collect the licensing-checks. Which makes it suspect that the company, even after its marriage with Tessera into an even larger IP-reservoir, plans to make any priority-investments in HD Radio going forward.
Yet two examples of this “act like you’re working and call it ‘progress'” mentality were announced earlier this month. First, DTS crowed that the HD system will become the exclusive traffic-data provider in “select” models of Hyundai cars. While this sounds impressive, it pales when you realize that HD-traffic services aren’t provided by DTS/iBiquity, but rather by broadcast company Emmis under the auspices of the “Broadcaster Traffic Consortium.” That’s tantamount to airlines charging hefty fees to cut-rate subcontractors to brand their planes with their logos but make no investments in the service that they actually provide.
The braggery is further diminished when contextualized to the actual size of Hyundai’s new-vehicle fleet. According to HD Radio’s own listings, the system is included in just 10 Hyundai models; however, the company offers 12 base models, of which there are multiple derivatives (Limited, SE, GT, etc.), making for a total of 38 distinct model configurations. So, for example, if you want to buy a 2017 Hyundai Tucson crossover SUV, HD is only standard in the Limited model (the most expensive of the four available).
Looking at the larger automotive market, Hyundai is by no means a juggernaut — ranked #7 in U.S. automotive sales this September, with a 4.5% share of the entire U.S. automotive market for the year. So, of those Huyndais sold that actually have HD Radio onboard, how many of them will use the “exclusive” traffic data? All Hyundai models come with Bluetooth compatability, and I can count on one hand and still have fingers left over the number of times I’ve been in an automobile this year where the driver eschewed the much more accurate and user-friendly traffic/navigation app(s) on their phones for what is generally a more clunky navigation experience using the onboard service.
The bottom line is just a fraction of Hyundais sold have HD on board, and of those, a fraction of those drivers will utilize the “exclusive” HD-supplied traffic data. But, hey, “progress.”
Finally, there’s DTS’ recent announcement that it is working on a “hybrid radio” scheme for the HD system. Hybrid Radio is already a thing: spearheaded by the non-profit consortium RadioDNS, which has been around since 2010, the system uses open standards to allow the seamless melding of broadcast and streaming radio signals as well as ancillary data features. In overly simple terms, RadioDNS allows a listener to switch between over-the-air and online listening as a station’s FM/DAB/HD signal begins to weaken (as when one leaves a station’s coverage area), while also providing a data-backchannel for the serving of additional content and functionality beyond just the audio programming.
Why has it taken HD Radio more than six years to think similarly? You can thank the closed nature of the platform for that: the high license-fee cost-per-unit, in conjunction with DTS/iBiquity’s penchant for secrecy regarding how its technology actually works, has curtailed any meaningful, concerted development efforts between HD and RadioDNS. In fact, recent reports suggest that because of this, DTS/iBiquity are pretty much going it alone on their own hybrid radio solution, and only exploring its use in the automotive realm. Not surprising considering that HD has zero footprint in the mobile-device space, and that’s not expected to change anytime soon.
Much like the HD system itself created a separate-and-unequal market for digital radio nearly exclusive to North America, its hybrid radio development is similarly sequestered to its own miniscule footprint, relative to the rest of the world. It’s become standard fare regarding HD Radio’s other developmental “accomplishments,” which have done much more to inflate the apparent lucrativeness of the system’s business model than to advance the art and science of radio broadcasting itself, much less the service it provides. I’m still of the belief that whatever the new corporate configuration of DTS and Tessera post-acquisition, this too is just a temporary home for a technology relegated to bling-status among tech investors looking to bundle-and-dump.