As Radio Changes, Invest in Innovators, Not Has-Beens and Never-Will-Bes

by: SA Editor Rocco Pendola

Most investors probably never heard of Randy Michaels. Michaels does not have the best image. And I don't think he cares. Frankly, that makes two of us.

Bottom line: Randy Michaels is a radio genius. And when he makes a big move, it matters.

If you invest in any of radio's major players - terrestrial powerhouses such as Clear Channel (CCMO.PK), CBS Radio (NYSE:CBS), Disney (NYSE:DIS) or Cumulus (NASDAQ:CMLS), or Internet pioneers like Pandora (NYSE:P), or satellite radio's Sirius XM (NASDAQ:SIRI) - it might make sense to park the name "Randy Michaels" somewhere north of the back of your mind.

I could go on all day about Michaels, having very informally crossed paths with him when I was cutting my teeth at WGR in Buffalo at the ripe age of 18. At the time, Michaels had already become a radio legend, after heading up Jacor Communications, which would later morph into Clear Channel. Jacor was "The Noise You Can't Ignore," best illustrated by the aggressive radio wars it waged in Tampa, Florida. Fast forward to 2011 and the type of radio Michaels let rip effectively died when Clear Channel took over.

After a well-publicized controversy at Tribune in Chicago, Michaels is back with Merlin Media. Long story short, Merlin has acquired several major market FM stations. It recently flipped the format of one of them, in Chicago, to all-news. Part of Michaels' rationale for the format should matter to investors in the above-mentioned companies:

My favorite format has always been spoken (word) radio. I've had a nostalgic love affair with the big AM stations known for the format, and today, as music moves to the iPod, it's time for spoken word to move to FM.

Following Michaels' logic, you can apply my favorite quote to radio:

I don't know what a radio is anymore. It's kind of an anachronistic term.

The radio becomes little more than a delivery device in this world. Clearly, Apple (NASDAQ:AAPL) is not radio, but it's a competitive threat to any company that fancies itself radio, be it terrestrial, Internet or satellite. Consider the following takeaways from Michaels' quote and the notion that radio is an anachronistic term.

Unless you are age 55- to- 65-to-death or listening to a niche format like sports radio that targets young- to middle-age males, AM radio is dead. FM radio, particularly as a delivery system for music, is dying. To that extent, I agree with Michaels and see his logic. We diverge, however, on one key point.

Just as the television industry - movie studios, other programmers, cable companies, etc. - realizes that you have to make content available to viewers on any device they want to view it on, radio needs to take the same approach. I believe in the heart of Michaels' contention, but why does he believe that only music is moving to the iPod? And I will take the liberty of broadening out the meaning of "iPod" to include mobile devices, such as smart phones and tablets, and even computers.

I hope Michaels is not banking on the idea that spoken word radio on FM will win because millions of listeners are captive to their cars every day. This speaks to a reliance on a radio, or more specifically a button in a car's dashboard, as the primary means for delivering content to the consumer. It's the same line of thinking that will ultimately doom Sirius XM. Being in the dash does nothing to guarantee you'll get a prospective listener's ear.

If people have made the move away from FM radio and inanimate dashboard buttons for music, what's stopping them from doing the same to seek spoken word programming? My guess is that Michaels and Sirius XM loyalist longs would point to content. It's a valid argument, but it's also an incredibly risky proposition.

The news station Michaels put on the air in Chicago better be damn good. Just as Sirius XM better hope that more than its loyal core considers its content superior to everything else that's out there. Michaels' new endeavor, as well as Sirius XM's channel lineup, operates within an old paradigm. Sure, it's spoken word on FM or satellite, which is sort of, but not completely new, but it's still the same old push button wars that Michaels won with Jacor in the 1980s.

Will the listener punch up Merlin's all-news station in Chicago or listen to WBBM or WGN or WLS? Or will that listener plop down 20 bucks a month and get something other than dead air when he or she hits the "SAT" button in a new car?

To really find success as a programmer of audio entertainment, radio people need to move in the direction television is heading. The radio receiver can no longer serve as the focal delivery method. The only device Apple does not use to transmit content (whether it licenses it or stores it on a device or, soon, in the cloud for one of its customers) is a physical radio. Yet, music, in Michaels' view, is moving to the iPod. Spoken word is not too far behind, assuming it's not already there.

AM, FM and satellite radio might just snarl themselves in a meaningless bar room brawl that nobody cares about, particularly prospective listeners and advertisers. Meantime, the innovators not only operate from multiple platforms, but they put significant energy and resources toward growing the most prolific platforms - online and mobile.

That's the key. Pandora can show advertisers meaningful ratings in the nation's largest markets as it offers access to a dynamic mobile/Internet advertising platform. With iHeart Radio, Clear Channel can use its stable of hundreds of millions of terrestrial listeners to add value to the same. Other terrestrial operators and Sirius XM, largely due to scale and lack of aggressive innovation, simply cannot do the same.

An over-reliance on out-dated models, be it a subscriber-based scheme or the placement of 30- or 60-second spots on terrestrial radio, will render most traditional radio companies as well as Sirius XM non-competitive, barring a major innovative push away from the old ways of doing things. At this stage, with the exception of iHeart, neither terrestrial or Sirius XM has indicated that it intends to move fast enough to compete with innovators such as Apple and Pandora.

Merlin Media's endeavor in Chicago, which will spread to other major markets, sounds great in theory. But, in action, it's a small illustration of a much larger issue: If you do not own, as in dominate, online and mobile platforms on a grand scale, you might as well not even waste your time trying to compete. You simply cannot compete effectively in 2011-12 with a business model stuck somewhere between 1980 and 2000-something or another.

In closing, a cheat sheet of sorts:

  • Innovators: Apple, Pandora, Clear Channel.*
  • Has-Beens: Terrestrial companies without scale that rely on the traditional radio as a delivery method.
  • Never-Will-Bes: Sirius XM.

*Clear Channel's balance sheet makes it a tricky proposition. If it sells off a good chunk of its physical properties and focuses on top 10 markets and online/mobile, I might go long.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.