August 28, 2004

Radio's Long Term Decline

Sandra Ward on our declining interest in radio (I completely agree with is article):

IT'S HARD TO SAY EXACTLY WHEN radio started to lose the love and the power and the magic celebrated in that 1975 rock anthem, but a good bet would be 1996. Landmark telecom legislation back then unleashed a powerful wave of consolidation that left the airwaves cluttered with commercials -- and investors set up for disappointment down the road.

Though many radio stocks soared seven- or eightfold during the merger frenzy, the excitement proved ephemeral. The stocks came back to earth with a thud, and the industry has since reverted to its former status as a generator of steady but unspectacular returns, with revenues growing little more than the economy as a whole. Worse, there's increasing concern that radio is entering a long-term decline, the result of new competition and technologies and changing consumer tastes.

Younger adults -- the key targets of radio advertising -- have clearly been losing their ardor for the medium. By one key measure, the number of listeners ages 18 to 34 has declined by about 8% in the past five years, as portable digital-music players, Internet radio programming and other innovations have started to take hold. And while the dollars spent on radio advertising have been essentially flat for the past few years, competing media like cable TV, the 'Net and outdoor advertising have been gaining steadily.

"It's over," Larry Haverty, a media specialist at State Street Research and Management in Boston, says of radio stocks' big run. "Something good happened in the 'Nineties; something less good has happened in the '00s. Every retailer is blowing its budget on advertising and radio is not getting any of it. If they don't get it now, they're not going to."

Clear Channel Communications, the big daddy of the industry, has seen its share price fall by nearly two-thirds since 2000 -- including 17% in just the past year. Citadel Broadcasting is off 33% this year and Cumulus Media is down 29%. But investors have by no means given up; the group is trading at multiples to cash flow that are higher than both their historic norms and the valuations of other media companies.

Investors, along with radio executives, may not be facing up to the full extent of the industry's challenges. While radio has always weathered past threats -- video did not kill radio's star, as a group called the Buggles prophesied in 1981 -- things could really be different this time.

Across the country, listeners are changing how they choose to receive music and news and talk radio. They are turning to portable music players like Apple Computer's iPod, streaming audio over the Internet and the emerging field of satellite radio to hear what they want, when they want to hear it.

Anne Kershaw, a 46-year-old lawyer who travels weekly between her home in Tarrytown, N.Y., and an office in Richmond, Va., bought an iPod in May, partly because "there is no decent radio station in Richmond. I was tired of being preached to." She still uses the radio -- but not in the old way. By attaching a transmitter to her iPod and setting it on a certain FM frequency, she can play the 983 tunes she has downloaded to the iPod through the radio, whether at home or in the car.

Music downloading is one of the "fastest-growing digital phenomena ever," says Forrester Research Group. It predicts download services will generate more than $200 million in revenue this year, $40 million higher than forecast and up from just $36 million in 2003. In all, some 35 million U.S. adults have downloaded music, according to the Pew Internet & American Life Project, a nonprofit initiative.

Trends like that are causing companies to reassess advertising choices, to ensure they're getting the most bang for their buck. Accountability and return on investment are the priorities in advertising right now, and it's hard to say radio is providing much of either as listeners start tuning out. Among all people older than 12, only 14.6% are listening to radio during an average 15-minute period, down from 16% in 1998, according to Arbitron.
About the only bright spot: niche programming. Radio operators that provide Spanish-language, urban or religious programming are seeing ratings improvements and gaining share. Advertisers are starting to notice: The nation's largest advertiser, consumer-product giant Procter & Gamble, struck a multimillion-dollar pact in June to sponsor the Tom Joyner Morning Show, the most widely syndicated African-American show in the country, with eight million listeners.

Companies specializing in niche programming, such as Florida-based Spanish Broadcasting and Maryland-based Radio One, which is focused on the urban market and also has cable operations, could offer some trading opportunities. But many investors already have flocked to such stocks, leaving the valuations high compared with those of other radio shares.

BY AND LARGE, the industry's revenue prospects remain quite grim, even though the economic recovery has been under way for two years. Robert Coen, media-spending forecaster for ad giant Universal McCann, had expected 7% growth in national radio advertising this year. The figure is running below 1%. He thought local advertising -- the source of 80% of all radio revenue -- would show a 6% jump from last year. Instead, it's closer to 4%.

Any thoughts that radio advertising would rebound after the Olympics, which is a television-dominated event, and ahead of the election are fading in the face of weak September ad sales. The current softness comes on the heels of a capricious second quarter, when radio stocks had the rug pulled out from under them yet again. After ad revenue began to pick up in the first quarter, bookings in May, typically the best month of the year, fell off a cliff as advertisers, auto dealers in particular, canceled spots. The reason some gave for cutting back: Business was so good there was no need to advertise.

Only recently have radio executives begun to own up to the fact that the dynamics surrounding the business have changed.

Radio titan Mel Karmazin lost his job as president and chief operating officer at Viacom this year not simply because of personality clashes with Chief Executive Sumner Redstone. It was also because he failed to realize the ground was shifting, and continued to cheerlead a strategy that was no longer working for Viacom's Infinity Broadcasting, the No. 2 radio operator behind Clear Channel.

Ted Forstmann's investment vehicle, Forstmann Little, brought Citadel public exactly a year ago, hoping to capitalize on the strategy that propelled radio stocks in the wake of deregulation: Use a strong share price to snatch up properties and slash costs, boost revenue and increase earnings and cash flow. Forstmann's timing was way off. Citadel shares, which came out at 19, have lately been trading at 15. Instead of buying radio stations, Citadel has announced plans to buy back shares.

In another sign of the times, San Antonio-based Clear Channel, with annual revenue of $8.9 billion, announced this past summer it would reduce the number of ad spots it runs per hour. It also stopped reporting weekly sales data to Miller Kaplan Arase & Co., which tracks radio-network ad revenue, on grounds that the reports were useful when times were good -- but not now. The data create "volatility in the financial markets by inviting exaggerated interpretations of normal sales cycles, and puts the radio industry at a competitive disadvantage to other media sectors," the company said.

Many operators are still hoping the good times will return. Cumulus CEO Lew Dickey continues to talk up the case for consolidation, declaring at an industry conference in Manhattan in June that "consolidation will continue," that it will "pick up as the economic expansion continues" and that there are "compelling reasons to create scale in this business now."

At the same conference, David Kennedy, president and chief operating officer of Susquehanna Radio, maintained that the slump in radio "is a cyclical thing rather than a secular thing," and Rick Cummings, president of the radio unit of Indianapolis-based Emmis Communications, agreed.

"I don't think the sky is falling, just slowing down," adds Mary Catherine Sneed, chief operating officer of Radio One. She says the industry is in a "recovery mode," but that it might take two years to "see what kind of recovery" this is.

Investors, too, seem reluctant to let go of the past. Despite the huge price drops in recent years, the valuations of many of the stocks are richer now than in the past. The group's enterprise value (market capitalization plus net debt) stands at about 15 times earnings before interest, taxes, depreciation and amortization, or Ebitda -- well above historic levels of about eight to 10 times. Investors typically use Ebitda to determine a radio company's valuation because it better reflects how the companies manage their operations.

Radio looks expensive compared with not only its own past, but also with other media sectors. Media giants such as Disney, News Corp. and Time Warner trade at Ebitda multiples closer to 10. Among radio companies, Citadel trades at 17.5 times; Cumulus at 17 times and Cox Radio at 14.5. You get the picture.

Little wonder that some top investors are tuning out. "Why pay more for radio if it's only growing in line with national averages?" says Mario Gabelli, longtime media investor and founder and principal of $27 billion Gabelli Asset Management, who is shunning the sector. "Radio as a medium isn't worth 18 to 20 times."

The best hope for investors may be increased stock buybacks and the possibility that some companies go private. Like Citadel, many radio operators have come to see buybacks as one of the best uses for their still-considerable free cash flow. Clear Channel initiated a share-repurchase program for the first time this year, and that may be only the beginning. Bear Stearns estimates that in the next five years, Clear Channel could buy back 34% to 39% of its shares, Entercom could buy back up to 32% to 37%, and Cox Radio could buy back 21% to 26%.

That marks a huge shift from the boom years, when industry leaders were spending their capital on one acquisition after another. For a sense of the scope of that activity, just look at what Clear Channel did. It bought its first radio station in 1972, and 23 years later owned only a total of 43. Yet in the year following the Telecommunications Act of 1996, the number of stations owned by Clear Channel quadrupled. At the end of last year, the company, founded by two Texans -- one a Harvard MBA and the other an auto dealer -- controlled some 1,182 radio stations in the U.S., not to mention a radio network.

Wall Street jumped for joy at all the consolidation. The buying spree kept investment bankers happy, and investors often scored big. The Telecom Act, which basically let any company enter the communications business and any communications business compete against any other, also helped usher in entirely new categories of advertisers. All manner of Internet startups and cellphone carriers started buying air time. Drug companies also took to the airwaves in droves to promote their products in dramatic fashion.

Suddenly, staid radio stocks had a fast-growth glint to them that caught the eye of momentum investors, those swashbuckling types willing to pay a premium for a stock as long as quarterly earnings and cash flow continue to rise.

Multiples on radio stocks soared to the stratosphere from more modest historical levels. As the companies grew in size and might, managements envisioned capitalizing on their new clout by commanding higher ad rates. And ads started to crowd out programming: It became typical to run 15 to 20 spots an hour, many back-to-back.

The years "1996 to 2000 were a music bubble defined by Lowry Mays [chairman of Clear Channel] and Mel Karmazin [then of Viacom's Infinity unit]," says Gabelli, referring to the acquisition strategy pursued by the two radio giants to garner 30% of the market between them.

Then Wall Street's larger bubble burst. And the radio bubble really burst.

What had been music to the Street's ears was lost on listeners. That is, if they bothered to listen at all. More people may be driving to work than ever before, but most prefer to chatter on cellphones during the rush hour or fire up an MP3 rather than endure the endless commercials and shrinking playlists on their radios.

Advertisers began to balk, too, as their promotions were drowned in a sea of spots. Pricing discipline went by the wayside, as radio operators cut generous deals to keep advertisers in the fold. So much for the theory that industry consolidation would lead to higher and firmer pricing.

And just as swiftly as dot-com ads surfaced in the boom years, they vanished after the bust. No new advertisers have emerged to fill the void. Radio's more traditional advertisers, such as retailers and automobile dealers, are cutting back or rethinking their strategies. "With 30% to 40% of all car sales enabled by the Internet, auto dealers aren't getting a run for their money on radio," says State Street's Haverty.

He says local cable television and the Internet are much more formidable and effective competitors to radio than they might have been in the past. The 'Net will figure out how to do local advertising, he contends. And there's no question cable's clout has increased with consolidation.

Consider, says Haverty, that Comcast is now the sole cable provider serving the Boston market, whereas five years ago there were four cable companies. And Comcast, the nation's largest cable-TV operator, has made no bones about going after local advertising, targeting an increase of $5 billion in local ad revenue. Earlier this year, Comcast expanded a service that lets advertisers tailor ads to certain target audiences based on geographical location or programming preferences.

"We assume Comcast will have an impact, as will the Internet," Cummings of Emmis said at the conference in New York, sponsored by radio-ad firm Interep. Cummings called for a "new cooperation" among radio operators "because the enemy isn't each other but local cable and Internet."

The death of radio has been heralded many times. Yet since its introduction to the mass market in the early 1920s, radio has survived -- and thrived -- because no other medium has been able to match its formatting flexibility, its local appeal, its immediacy and its low overhead. Not until now, at least. Cable companies, commercial-free (though fee-based) satellite radio, MP3 players and other digital wonders may at last be giving radio a run for its money.

Many radio investors and executives dismiss the threats of advances such as satellite radio. They note that while the two satellite leaders, XM Radio and Sirius Satellite, sport a combined market capitalization about equal to that of the top five, pure-play radio outfits, they together are losing about $700 million a year, in marked contrast to radio's solid cash flow. But that kind of analysis is missing the larger point: Consumers have changed.

"It may not be a change in radio's value, it may be a change in consumer demands and taste," says Kurt Hanson, CEO of, an Internet radio site and publisher of RAIN, the Radio and Internet newsletter, which focuses on radio's malaise. "Consumers maybe got tired of the 300-song play list. That's not a change in the radio product, but a change in the perception of the product."

Now it's possible, via the Internet, to hear a 3,000-song playlist from a U.K. station or 1,000 songs from a country-music station in the U.S. It's even possible to get streaming music over a personal digital assistant such as the Treo. Says Hanson: "It's not years down the road, it's here."

While the nation's radio operators yearn for the good old days -- Sinatra, anyone? -- listeners are increasingly doing it their own way.

Posted by James Zellmer at August 28, 2004 7:30 AM | Subscribe to this site via RSS:
Posted to Culture