AdGrove.com MARKET ANALYSIS 4.1 MARKET AdGrove.com's market intersects two industries: the $17 billion business-to-business electronic commerce industry and the $190 billion advertising industry. Although AdGrove.com's vision is to become the small business hub for online advertising buying and selling, AdGrove.com will initially just represent the transactions of the $17 billion radio industry. The competitive space we have defined for AdGrove.com overlaps that of one direct competitor, BuyMedia.com, and a number of indirect competitor groups. Our markets, customers, and competitors are further defined below. 4.1.1 Business-to-Business E-commerce Market Business-to-business e-commerce revenues for 1998 were $17 billion and are projected to grow to $1.7 trillion in 2003.8 It is projected that by the year 2002 almost one-third of all business-to-business transactions will be performed via e-commerce (1998).9 In 1998 41% of small business used the Internet, this was double the use in 1996.10 According to a survey conducted by IBM and the U.S. Chamber of Commerce, (Exhibit 9.2) 63% of small businesses (less than 100 employees) use the Internet for research, 37% use the Internet for online ordering, 30% use it for promotion/advertising, and 9% pay suppliers. Small businesses have been slow adopters in the e-commerce industry.

4.1.2 Radio Industry Analysis

Radio Stations
The radio industry includes 12,275 radio stations in more than 238 major markets.¹¹ Although there has been consolidation since the Telecommunications Act of 1996, the radio industry is still highly fragmented and managed by many small mom-and-pop operations.¹² Radio stations derive 75% - 100% of their revenues from advertising. In 1999, the US radio advertising market represents a $17.7 billion industry with expected 8.5% continued annual growth. This growth had been fueled by radio industry marketing campaigns, the growth of the Internet, and the use of radio as a primary communication medium to drive consumers to the web.

Radio & Technology
Radio stations have been slow to adopt the use of the Internet as a broadcast, advertising, or ecommerce medium. Realizing the lack of development of an Internet strategy among radio stations, CEO Gary Fries called on radio stations to be "E-Born" at the September 9, 1999 Annual Radio Advertising Bureau (RAB) conference. However, even Mr. Fries, like many radio stations, is not seizing the power of the Internet as a channel to automate traditional sales and expand the market reach and size.

Radio Advertising Process
Approximately 75% of radio advertising is purchased at the local level.¹³ Buyers of radio advertising space include national advertising agencies, local advertising agencies, businesses, and media brokers (representative firms). Most radio stations have their own personnel to manage sales within their respective markets. However, national media representatives or "rep firms" are contracted to sell to national clients. There are currently two major radio "rep firms," Katz Communications and Interep Radio Store.
Radio advertising can be purchased on a national network and individual local market spot basis either direct or through advertising agencies. Spot radio programming formats vary widely from market to market, from talk shows to music. Prices also vary depending on the size of the market, from $601 cost per thousand in New York City to $58 in Austin, Texas.

Radio Listeners
In 1996, 99% of all households owned a radio. Ninety-five percent of all adults not only listen to radio each week, they listen for more than 3-1/4 hours per day (Table 2). One-third of people surveyed indicate they listen to radio at work. (Table 3). Radio reaches over 80% of professionals and managers each day. Radio is also one of the only mediums that can reach the increasingly mobile American at home, from their commute to and from work, as well as throughout the day at the office.

Radio Listeners: Research

Consolidation
The 15 largest radio broadcasters, which own about 11 percent of all U.S. stations, accounted for about 42 percent of all industry advertising revenues in 1997, up from six percent of stations and 34 percent of revenues in 1996. With the relaxation of federal station ownership regulation, a radio station operator can own as many as eight stations in one market, but no more than five of one kind (AM or FM). The ensuing consolidation has allowed for the centralization of back-office functions such as sales, billing, and marketing, and investment in new product and sales efforts. The concentration of ownership across markets appeals to advertisers who can make one station "block" ad buy then negotiate on a station-by-station basis. This one-stop shopping concept boosts the attractiveness of radio as an advertising medium, no matter whether the advertiser is a local merchant, or national advertiser.

4.1.3 Advertising Agencies

4.2 TARGET MARKET

1. Radio Stations
   The 12,375 radio stations in the U.S. are AdGrove.com's critical customers. AdGrove.com will create a strategic alliance with Radio Advertising Bureau to reach their 4,800 members, which represent 80% of annual advertising revenues.
2. Small Businesses
   AdGrove.com will target a cross section of small business segments that represent 1.) Industries that advertise on the radio, 2.) High-growth sectors, and 3.) Firms that are currently on the Internet. The top 10 industries that purchase radio include: retail, business, and consumer service, automotive, entertainment, media, food, travel, hotel, real estate, computer, and snack sectors. Because the decision making tools that support radio advertising purchases are currently costly, time-consuming, and require familiarity with radio, AdGrove.com's services will provide the most value to the buyers who are time, money, and data impoverished and are in a growth phase. High-growth small business sectors include high-tech and computer retail, new businesses, and the consumer service industry. Internet companies represent a niche within this sector and on average ".com" companies spend 60% of their advertising budget on radio. According to a study by Visa of 350 small businesses, 34% of small businesses are early technology adopters and represent those potential online customers. The profile of the owners of these businesses are typically 30 - 49 years old, male. Adgrove.com will seek owners meeting this profile.

4.4 Competitor Analysis

AdGrove.com has defined a unique competitive space as the high-service, low-cost provider of advertising and advertising services for small businesses (Graph 1). However, the market is not devoid of competitors. Our key direct competitor includes radio advertising sales websites. AdGrove.com also has identified indirect competitors: traditional radio sales people, media representative firms, advertising agencies, market research firms, and other advertising sales websites.

Graph 1: AdGrove.com's Competitive Positioning

1. Direct Competitors

   Radio Advertising Sales Websites - As of October 29, 1999, the major national online resellers included: BuyMedia.com, and AdOutlet.com. BuyMedia.com caters to the needs of 2,500 media buyers representing major clients and advertising agencies and sells BuyMedia.com sells premium television and radio advertising space. BuyMedia uses an Internet and fax-based purchase system and operates on an auction-negotiation model. BuyMedia does not offer discounts or comprehensive advertising tools.

   AdOutlet.com sells leftover advertising space in a number of mediums including: billboards, television, and radio. AdOutlet does not offer discounts or comprehensive campaign planning tools and targets high-end media buyers.

2. Indirect Competitors

   Traditional Radio Sales - Although the partnership of AdGrove.com with radio stations is critical to the success, the continued traditional radio sales channels (local and representative firms) represent a competitive threat to AdGrove.com. However, Adgrove.com will position itself as the low-cost, convenient, high-customer service center for small business.

   Advertising Agencies Advertising agencies, primarily small ad agencies, will compete with AdGrove.com for customers. Although many small business ad agencies do not target a national market, they do offer highly customized services for their clients at the national level. AdGrove.com will replace much of the outsourced services for a fraction of the price.

   Market Research Firms - Market research firms such as SRDS that provide market research data to high-end media buyers will be threatened by our ability to aggregate data across the country and provide it to customers in the format that meets their campaign planning needs, on an "as needed basis". There are a number of market research firms that service the radio industry including: SRDS, Telmar, Arbitron, and LNA Market Research.

   Advertising Websites Selling Other Media - A number of websites, such as AdKnowledge, offer services for the Internet, television, billboard, and outside advertising. Although not a direct competitor, these sites are substitutes of radio advertising and do compete for ad dollars. However, most of these websites do not target small businesses, but rather fairly sophisticated or high-dollar customers.

4.5 Meeting Customer Needs

1. Information - AdGrovers need information on advertising buying decisions, ratings, customer / radio station demographics, reach, costs per rating, trends and ad space prices. AdGrove.com will provide users with access to a depth of information not found elsewhere on the Internet or in other channels.
2. Speed and Ease - AdGrovers are using the Internet to increase the efficiency of their buying decisions, and reduce transaction costs. AdGrove.com will provide customers with a friendly, easy-to-use interface that delivers advertising package options to meet the needs of the client.
3. Radio Ad Space Selection - AdGrove.com will forge partnerships to secure premium and discount advertising space from a majority of radio stations in the top 260 markets. In doing so, AdGrove.com will provide the user with the best selection of spaces available for a discount.
4. Pricing Options - AdGrove.com realizes that the technique of negotiation used in traditional advertising purchasing deals may provide the buyer with a discounted rate on advertising. Because AdGrove.com's mission is to reduce transaction costs by eliminating negotiations, AdGrove.com will price all ad space at 10% below market rate, discounts for bulk purchases, and deep discounts for "over capacity space". This will provide more flexibility to the customer at a discount in one-fourth the time of traditional pricing negotiations.
5. Community - AdGrove.com will bring together a community of small business owners and marketing directors with experienced advertising agency account managers to provide one-on-one consulting. In addition, small businesses can participate on the grove's chat board and exchange questions and ideas with each other.

Table 4 - Customer Needs Fulfillment: AdGrove.com vs. Competitors

⁸ B2B eCommerce report, BancBoston Robertson Stephens, September 29,1999
⁹ Olbeter, Erik R. "The Strategic Economic Importance of the Internet," Economic Strategic Institute (November 1998), Washington, DC
¹⁰ International Data Corporation
¹¹ U.S. Industry and Outlook `99
<sup>12</sup> U.S. Industry and Outlook `99
¹³ Radio Advertising Bureau (www.rab.org)
¹⁴ Bureau of the Census, U.S. Department of Commerce.