Kayla, a college student, no longer listens to traditional radio, preferring instead to use a smartphone to listen to her favorite Pandora stations. Because she does not pay for Pandora’s premium ad-free service, she knows they will play an occasional advertisement, which she mostly ignores because the ads are for products and services she cares nothing about. The ads are simply irrelevant to her, in fact, she often mutes them.

Then Kayla learns about a new smartphone app that overlays Pandora’s ads with audio content that actually interests her: local weather, local traffic reports, and ads offering deals for things she is likely to buy, like concert tickets, jewelry, and pizza. The app “knows” her interests because Kayla used a web site from the same company that built the app to voluntarily convey her personal interests. The company then filters the ads, inserting only those that best fit Kayla’s interests. Her smartphone’s GPS ensures that appropriate local content gets inserted, no matter where she is.

When Pandora’s ads are finished playing, the app restores control to Pandora and the music resumes playing just as it would have without the app. Kayla loves the app and tells all her friends about it.

Please understand — I like Pandora. I am a fan. Building the app described above would not be my first choice for them, as it would sandwich a third company between them and their advertisers. It would be much better for Pandora and other Internet radio services to control their own ad pipeline and natively offer me customized (narrowcast) ads instead of indiscriminate (broadcast) ads. Pandora, through the genius of the Music Genome Project, is especially good at giving me exactly the kind of music I like. They of all companies should be equally good at doing the same with ads. So why don’t they? The answer is — they can — and here’s how to do it.

When advertising agents buy radio for their clients, they secure air time (spots) on a collection of radio stations most likely to target a certain market demographic, say urban males from ages 18 to 25. Once the ad gets created, it is distributed to those stations and rotated through playlists for as long as the ad campaign runs. This has been a standard business process for decades and it should remain so, for even though Internet Radio will eventually replace traditional radio, with its one-way, 100 year old analog technology, traditional radio still has far more ears tuning in (over 90% of the listening public) and is still a viable business. We should not rock that boat any time soon.

But to make Kayla’s app work, and for the radio advertising industry to migrate to the vastly superior, all digital and interactive Internet Radio, agents would need to make a few changes to their business process. Specifically, they would need to attach three additional attributes to their client’s ad before distributing them.

First, refine target markets much more specifically than they do now. So for example, instead of “urban males from ages 18 to 25,” the target market might be “urban males from ages 18 to 25 who snowboard, buy Thai food twice a month, and play electric guitar.” This kind of refinement is possible through a technology based technique calledAudience Based Advertising” (ABA) that enables content delivery services to tailor ad campaigns precisely for single person’s unique tastes and preferences…and no one else’s. Using ABA, of which there are many practitioners (Audience Science being one), advertisers come to know the person, either by asking them to volunteer information about themselves or by mining the personal informations from sources like Facebook. This practice is commonly used for for web display ads but has yet to be adopted by music delivery services.

Second, geo-tag the ad to identify its range of appeal, that is, create a “geo-fence” inside of which the advertised product has its greatest appeal. An ad for a nationally distributed product, Bud-Lite for example, would have a coast-to-coast geo-fence, whereas an ad for a local pub offering Bud-Lite for a dollar on Tuesday nights might have a geo-fence of just a few miles. Once so tagged, Kayla’s app can pull in ads that are local to wherever she happens to be at the moment.

Finally, add an attribute that allows the listener to bookmark, or better yet buy, the advertised product instantly. I have written about this in another post, as it was the goal of my first start-up, and I still believe the idea has legs. Now, over ten years after my effort, I see promising signs of this radio bookmarking service becoming a reality. Apple’s iTunes radio tagging, currently used for bookmarking music only (not ads), integrated with their newly announced Passbook app, has all the ingredients for success. Imagine bookmarking an ad for the above mentioned pub and having the deal instantly drop into your iPhone’s Passbook wallet. Very cool. Colorado based Clip Interactive has an interesting effort underway as well.

I am confident Kayla’s app will come to be in my lifetime as kind of a Groupon, Facebook, Pandora mash-up. The technical underpinnings are all in place, the market is rich, and the timing is right. With the right visionary and team, we can create both a vastly superior way of delivering audio content and an exciting new business opportunity.