I was spinnin' 'round a dead dial
Just another lost number in a file
Dancin' down a dark hole
Just searchin' for a world with some soul
This is radio nowhere, is there anybody alive out there?
--Bruce Springsteen, "Radio Nowhere"
Considering how ubiquitous it is, particularly in the car, it's hard to believe terrestrial radio took such a brutal beating over the last decade. While industry advocates can point fingers in every direction, lack of innovation holds firm as reason number one for the near-death experiences and dismal stock prices of terrestrial companies.
By the same token, as satellite radio outlet Sirius XM (SIRI) continues to cement itself in your vehicle's dashboard, it runs the risk of acting too much like a traditional terrestrial company. Staid companies with great products and uncertain growth prospects struggle to maintain a stock price above key psychological levels.
To warrant loftier valuations, radio companies, whether free or subscription-based, can no longer run in yesterday's circles. To become attractive to investors, they need to start acting more like tech or Internet companies. I place broad meaning on that suggestion. It implies anything from breaking out of old, used-up ways of thinking to shuttering physical properties to moving away from using an actual radio as the delivery mode of choice.
A couple weeks ago, I introduced Seeking Alpha readers to radio legend Randy Michaels of Merlin Media. The company recently flipped FM music stations to all-news in Chicago and New York City. I suggested that investors in terrestrial radio companies such as Clear Channel (CCMO.PK), Internet radio pioneers like Pandora (P) and Sirius XM pay attention to Michaels' forward-looking rationale for the switch:
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.
In all fairness, Michaels is not necessarily operating out on the fringes here. For the past couple of years, terrestrial radio companies have blown up FM music stations in favor of talk, often sports talk or the conservative political talk lineups that pervade the medium. And they're not just jettisoning random FM stations; instead, they're ending the runs of local institutions.
The latest: CBS (CBS) Radio kills heritage rocker WYSP on Sept. 6, in favor of a simulcast of all-sports WIP-AM.
It's interesting to note that Sirius XM's Howard Stern took credit for the flip. Of course this is typical Stern. From an in-the-moment, micro-standpoint, it's all shtick. However, taking a macro-view, Stern hits the nail on the head.
When Stern left terrestrial radio for satellite, a good chunk of the stations that carried his show were stuck with a major hole to fill in the morning drive. Replacing Stern with Adam Carolla on the West Coast and David Lee Roth on the East Coast were complete failures. And very few markets had strong enough local shows to do justice to the number one spot (in key male demos) Stern granted them by default when he exiled.
Simply put, Stern's departure gave living, breathing people with lots of disposable income another reason not to listen to FM radio.
A year or two ago, the response to a major talent leaving, or a fourth-place showing for a station like WYSP, was to fall back on the gimmicks FM radio had fallen back on historically.
At the top of the list -- More Music in the Morning! Instead of hiring any actual compelling talent to do morning drive, you could get away with paying the cheesiest radio re-tread you could find a relative pittance to read promotional liners, tell canned jokes from Rick Dees' show preparation service, and spin the hits.
Often, companies like CBS would simply "tweak" the format of a rocker like WYSP to something like "Classic Hits" or "Modern Rock" to cater to what programmers perceived as an under-served niche in the market. This approach rarely worked, and it's because of what Randy Michaels said: Music is moving to the iPod.
If you do music in the dash, you're as good as dead going forward. Without some serious innovation, radio companies that rely largely on music delivered via the traditional radio (e.g., car stereo, standalone home receiver) to draw listeners will not only die, they'll embarrass themselves in the process.
Consider a couple of parallel examples of companies that either did not see, or still refuse to see, the writing on the wall.
It's no wonder that Hewlett-Packard (HPQ) is the laughingstock of Wall Street this morning. Great companies shut the doors on a dying business just before it really starts dying. Passive dinosaurs do what HP did and come out looking like complete amateurs.
To HP's credit, it took a lot of guts to do what Research in Motion (RIMM) stubbornly refuses to do: to tell Apple (AAPL), it's over, you win. The market's initial reaction to RIM's feeble attempt to step into the decade with a BlackBerry music service has "ephemeral" written all over it.
If terrestrial radio companies do not continue to act, they'll go the way of Hewlett-Packard. The radio equivalent of what HP did Thursday will be dead air across both terrestrial radio bands. That sounds crazy today, but the thought of all-sports radio replacing rock stations on FM would have them "waiting for you at Bellevue with their oxygen masks" (Springsteen) had you suggested it when the nation's first all-sports station took to AM in 1987.
I refer to terrestrial as "continu[ing] to act" because Clear Channel and CBS, for instance, are doing interesting things with iHeart Radio and Radio.com, respectively. But, just like Sirius XM's SatRad 2.0 will likely amount to little more than a cheap Pandora imitation, these efforts are simply unimaginative attempts, not serious game-changing stabs at innovation.
In fact, watching terrestrial and satellite merely react to Pandora and Apple looks a lot like watching RIM react to Apple. It's just not the type of competitive market strategy I want to sink my money into as an investor.
If you want to compete playing music for people on the "radio," you better bring something to the table that doesn't simply imitate the leaders. You need something that changes the rules of the game. As is the case with RIM, doing what the innovators do, but at a lower, too-little-too-late level, spells eventual doom.
There's no compelling reason for consumers to make RIM a winner in a space Apple dominates. By the same token, there's no reason for music listeners, comedy fans and (soon) spoken-word formats to turn to iHeart Radio or SatRad 2.0 for personalization when Pandora already does it so well.
Terrestrial radio deserves credit for slowly deleveraging itself from music on FM. It also should receive praise for putting on a format -- all-sports -- that can command considerable advertising dollars in music's place.
That said, there's got to be a next step or two or three. I'm not sure what that is right now. Terrestrial and satellite radio executives might not even know. As they figure things out, the smart money should keep flowing to the leaders who continue to dictate how the "radio" game gets played.
That means long plays on undervalued AAPL and "overvalued" Pandora. While no good reason exists (other than noise) for the mismatch between Apple's massive growth and dominance and its stock price, investors "overvalue" Pandora because it does not remind them of a radio company.
Pandora screams tech, Internet, new media, social, hip and cool. That might make old-school investors' blood boil, but it's reality. Today's investor slaps a high P/E on a stock or invests in one with no profitability in immediate sight because she wants to get in on the ground floor of the next Apple. Of the next company to apply wholesale changes to an entire industry, whether the industry is ready to accept those changes or not.
To say "Pandora is not radio" is a cop-out. It, along with Apple, took the term and redefined it. That's why it will eventually reward patient investors with AAPL-like returns.
Sadly, amidst the uncertainty and lack of ground-breaking innovation in traditional terrestrial and satellite radio, the only long play on radio I can make is not a radio pure play at all. While CBS Radio president Dan Mason does a formidable job of running that division, I suggest going long CBS, not because it owns terrestrial radio properties and keeps flipping FM music stations to sports, but for reasons that have nothing to do with radio at all.
At present, all of terrestrial radio as well as Sirius XM pales in comparison to Apple and Pandora when it comes to innovation. And like earnings guidance, that's all that matters. It's not about what you do for me today, it's about what I think you'll do for me tomorrow.
Disclosure: I am long AAPL, P.
Additional disclosure: I have AAPL bull put spreads open. I am long P stock.
