Radio Industry Challenges and Opportunities

I was asked recently by a SeekingAlpha.com reader why so many of my articles focus on the radio sector when in actuality the bulk of my career has been spent in television. It was a good question, and I think the answer will help explain why I think the death of radio stocks has been greatly exaggerated.

While the end game in broadcast radio and television is basically the same- achieving ratings to sell advertising spots- the means by which they get there could not be more different. As a media executive, radio is a far more interesting sector to be in right now as it has a lot more moving parts. The radio medium is much more targeted, more dynamic, and there is much greater control over a company’s destiny than in television right now. Radio is also a much more tactical medium as a result, and constant research and development is imperative for success. These are all elements that will help it survive and thrive again in the digital world, once it gets beyond the current trough the industry is experiencing.

There is an interesting parallel to be drawn to the issues radio is facing today versus what television went through earlier this decade. At that time, broadcast television stocks were all sitting at 52 week lows while the radio sector couldn’t have been hotter amidst a massive consolidation period. Internet companies flush with cash from venture capital companies were choosing radio as their advertising medium of choice, while television was dealing with flat revenues and the increased costs and confusion associated with its move to a digital standard. Broadcast television was also dealing with audience fragmentation, and the perception of being overtaken by mass consolidation of cable companies-not to mention a proposed merger in the satellite television space. Anyone who follows the radio sector closely knows this scenario sounds all too familiar.

Eventually, television got through the digital build out and next year flips the switch permanently, forever leaving the analog world. It also figured out how to leverage itself to create additional revenue streams through retransmission consent, and used its news and multicast signals to launch new digital businesses. Radio is grasping with these issues just now, but it will get there too eventually.

The biggest change that has occurred in the television space since then is, simply put, that people generally watch television shows now and not television channels anymore. I have no more affinity for NBC (GE) today than I do Spike TV (VIA). If the new Versus Channel has a movie or football game on that I want to see, they get my attention over whatever is on CBS (CBS). Now, in the age of the digital video recorder [DVR], I don’t even have to know what channels my favorite shows are on. I just set the guide to find them. Further, with video on demand programming, I can just pop on a show whenever I want and not even have to use an electronic programming guide. After moving two years ago to a new television market, I know there is a CBS affiliate somewhere here, but I honestly could not tell you what channel it broadcasts on as I pretty much watch all CBS shows that I care about using Comcast’s (CMCSA) (CMCSK) On Demand feature. With box set DVD’s, I can watch a whole season of a series if I want, and if I don’t have a TV handy can watch a large number of shows online instead.

This aspect of television viewing is challenging to the more established networks. It also offers some significant opportunities to upstarts that can focus their resources on acquiring good content first, and promoting a brand second. It’s not going to put the major networks out of business anytime soon though, and they seem to be finding ways to capitalize off of these changes in the business as well and working with their affiliates to accommodate them.

The one aspect of television that still tends to stand out as heavily influenced by channel affinity is news programming. When something big breaks nationally and I want the facts, I tune into CNN (TWX). If I am looking for financial news, it’s CNBC (GE) and if I want political analysis and commentary on a subject, my choice is Fox News (NWS). I rarely watch local news and find myself seeking out weather and other local information exclusively online where I can access it 24/7 in real time. I do tend to laugh though every time I am flipping through the channels and hear a local news tease declaring “major such and such happening and the five things you need to know about it… tune in at 11”. For me, that’s free advertising for Google (GOOG) because I just take those key words they’ve given me, run a quick search, and read about it right then. In the digital age, no one has to wait until 11pm anymore to get their local news. By the end of the day its old news anyhow, though I don’t think that point has trickled out to a lot of news directors in smaller markets yet.

Radio, on the other hand, is all about affinity for a particular station. Branding and promotion are crucial to ratings. As Darrel Goodin, a highly respected and somewhat maverick radio general manager in San Diego once told me, “Radio isn’t about what you listen to- it’s about what you think you listen to”. His point was that listeners who fill out Arbitron (ARB) diaries that supply ratings information in local markets are highly influenced by marketing and the overall images radio stations have in their communities and individual lives. A diary holder may not remember what exactly they were listening to yesterday at noon, but they may write down the station that they think they usually listen to around lunch time hoping to win a contest, get concert information or catch a favorite regular bit.

In fact, new evidence from early trials of Arbitron’s Personal People Meter [PPM] system, a real time digital ratings tracking system only in select major markets right now, reveals that many of the long held beliefs about radio listening habits are plain wrong. The industry is finding that people listen to much more radio, and many more radio stations in much shorter segments than previously thought. Formats like oldies and rock previously thought dead are actually proving to be rather vibrant, even though the diary holders obviously weren’t writing them down, and urban and ethnic formats are proving to not have the overwhelming loyalty of listeners they once claimed.

As the PPM continues to roll out nationally, there will be constant format changes attempting to fine tune exactly to listener habits. This can already be seen in New York, Los Angeles and especially Atlanta where the radio dial has been spinning from all of the on air changes occurring lately. This is exciting stuff for a media executive as radio really tries to target a specific demographic all day long, to offer them exactly what they want in their lives from morning to night, every day of the week. In broadcast television though, one show may target women 18-34 on Sunday and men 25-54 on Thursday on the same channel. Cable is more finely tuned than broadcast, but also tends to gravitate towards lowest common denominator, wide reaching shows to achieve maximum household ratings.

Radio is an ever changing mixture of local players that develop most, if not all of the content heard in between the songs. A new morning show can come out of nowhere and be a hit, taking down a multi decade dominant player if it strikes the right cord or is positioned appropriately to listeners.

You would rarely see this occur in television, where the number one and two local news programs are probably the same as they were ten years ago and probably will be ten years from now. They may switch places or gain a little share from each other, but there is definitely a pecking order in local TV that then spills out into what other syndicated programming a station may find in their reach. The top local affiliate in each market will probably be offered Oprah first, and if they pass due to price it goes to number two. The new hot weekend action hour series will probably be offered by a distributor to the Fox affiliate first, and then onto the CW and MyTV stations depending on prior overall ratings strength. As a result, change is slow to come in the local television business whereas change is the hallmark of radio.

The most significant difference between the two, in my opinion, is the tactical nature of radio versus television. In a television duopoly (two station combination) the second station must not be in the top 4 market stations and is usually a source of extra inventory and program clearances for a dominant player in the market. Occasionally, one might drop its MyTV affiliation in exchange for a competitor’s CW affiliation, and though an NBC affiliate could switch to a CBS affiliate, that is very rare and has not happened in recent memory.

Radio though, is a battle ground of different formats and signals. In some radio markets, a group can own up to 8 stations together in a cluster, of which 5 can be in the FM band. This gives the radio broadcaster a large arsenal to use both offensively and defensively. For example, a dominant Country station may use one of its weaker signals for a Classic Country format, seemingly cannibalizing its own brand, but in actuality it is using it to prevent others taking the format ... better to deal with the devil you know versus the one you don’t, of sorts. In other cases, Cluster A may hold off on launching a new Sports Talk station for fear of retribution from Cluster B (with the incumbent Sports Talk station in the market) who may decide to retaliate by launching a format competitor for Cluster A’s Top 40 station.

A radio market manager has to see all sides and protect their flanks from the competition while still looking for holes in the market to capitalize on. For these reasons, it is highly important in radio to constantly research individual markets and reinforce local brand identities through vibrant marketing and promotions. Because of the downturn in ad spending and new competition from interactive players, radio companies have had to cut back on these investments, but many are now realizing the error of their ways here and restarting these efforts.

Radio is fine tuning itself right now and reinventing itself for the digital age. Television is as well, but the nature of the two beasts is so different, and television has many more protections like cable must carry and network non-duplication that radio simply doesn’t. Because of these regulatory protections, television satellite services are also more aligned as additional distribution mechanisms than outright competition. The TV industry and Nielsen, the its ratings provider, also have been much more ahead of the curve historically in upgrading ratings methodology and systems, and also in coming together as an industry to figure ways to deal with new technologies like HDTV and DVRs.

Radio by its sheer size and fragmentation is less protected, more disjointed, and therefore has to work a little harder to get around this current bend. It will make it in the end because radio largely controls its own content creation and still has a direct connection to its listener base. That could change if satellite truly were to become a major competitor to over the air radio, but right now it seems satellite’s bark is much worse than its bite. Radio is working on getting more accurate ratings data for its advertisers to match the capabilities of the internet companies, and most groups have ramped up their interactive offerings to have new compelling products to sell their advertisers.

I am fortunate to get to swim in both pools here as well as in the interactive space. Just like one’s children though, there are no favorites. Each sector has its strengths and weaknesses, and right now radio is a bit of an underdog so it gets a little more of my attention as I try to point out different ways of thinking and untold stories about the sector in these series of articles.

Disclaimer: This article reflects the individual views of Mr. Hannan and may not be attributed to any person, company or other entity with whom Mr. Hannan is affiliated.

Disclosure: No positions

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[J.P. Hannan]

Thanks for the emails I got this morning and all of the links to this over on the Yahoo message boards. Please keep the feedback coming.