The Evolution of Terrestrial Radio

I received an email from a SA reader who shared his skepticism about the radio market “coming back”. A very valid opinion, but I offer this brief take to others in the financial community with similar beliefs that I shared back with him.

Terrestrial radio is evolving into a wholly new form of media, less about music and more about audio entertainment. Internet subscription services like Napster (NAPS), satellite services like XM (XMSR) and Sirius (SIRI) and nonlinear devices like Apple’s (APPL) iPod are all much better suited to be the key music sources going forward for consumers- no dispute there, whatsoever.

For radio companies that can’t afford to develop and own their own content, companies like Westwood One (WON), Clear Channel’s (CCU) Premier Networks, and Citadel’s (CDL) ABC Radio Networks, as well as a number of the smaller independent radio syndicators, will be crucial. We saw this same pattern happen in the independent television sector in the decade following the mid 1980’s, and guys like Rupert Murdoch and Roger King made a fortune from it.

Back then, “indie” television stations were hooked on movies and sports as their primary programming offerings, and those rights eventually all went to upstart cable networks. This left broadcast stations with no programming and no ratings to sell. Some ramped up their local news offerings, but for those who could not afford investments in news, in stepped the Fox Network (NWS), King World (CBS) and lots of other syndication companies.

Later, we saw the creation of the WB and UPN networks which eventually merged to form the current CW Network, co-owned by Warner Bros. (TWX) and CBS (CBS). Everyone involved came out a winner as the values of the broadcast stations skyrocketed throughout the latter 1990’s. This was on the heels of a horrible downturn in advertising spending in the early part of the decade and the hot new sectors being cable and satellite television.

Something else to keep in mind about the impact from internet radio- currently, research shows that fastest growing sector of internet radio is actually retransmission of terrestrial signals. Please see my two SA articles recently on the subject for more information there.

Finally, I would offer that while the stock prices of radio broadcasters have definitely plummeted, it is an over-reaction as the underlying business has not significantly degraded. Larger markets have suffered, but the vast majority of middle and small market broadcasters have been doing just fine.

Radio companies with diversified portfolios or that focus on smaller markets where local advertisers are a much larger component are able to utilize their deep, long standing relationships to weather the storm. They are also finding ways to be the facilitator of new media advertising opportunities at the local level, an area most large tech companies have not yet been able to tap.

As always, I welcome all comments and thoughts from SA readers- particularly those with divergent points of view.

Disclosure: None

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.

Comments

[Jeff B.:]

J.P. - I do not think that the downturn in BIG radio stocks is a temporary situation. Clear Channel & it's bretheren have all but destroyed commerical FM radio in this country. It's not about entertainment. It ONLY about commericals, dumbed-down TOP40 content and DJ's who sound as though they might not have graduated highschool. I hope Clear Channel and all the others who have sucked all quality out of the airwaves collapse into a pit of their own greed and stupidity.
Thank God for XM and college radio.

2008 Mar 26 09:42 AM

[Uncle Harley:]

AMEN Jeff B! J.P. needs to spend some time in the radio trenches. More syndicated programming from the likes of Premiere, WW1 and ABC is not going to save a medium whose strongest selling point has always been LOCAL content. LOCAL is terrestrial radio's ace in the hole. You don't need to tune into local radio for most syndicated programming. You can download the podcast, listen to online streaming, etc. Radio's USP (Unique Selling Point) is providing local content and local info to its local audience. Hopefully they'll realize that before they make themselves completely extinct.

2008 Mar 26 09:58 AM

[J.P. Hannan:]

Excellent points guys, but i am in no way advocating syndicated fare as the future. I said for companies not able to develop and own their own local content, syndication would be crucial in the future because they will never be able to compete purely on music choice.

As for CCU, I always find it interesting that the industry gets painted with that one very wide brush. There are a lot of good radio companies out there doing a complete 180 from the CCU model. CCU just happens to get all the attention.

2008 Mar 26 12:09 PM

[None-Too-Gr...:]

I appreciate the fact that J P responds to his critics with respect.

2008 Mar 26 09:26 PM

[J.P. Hannan:]

NTGH, thanks for the compliment. After 15 years in broadcasting- working "in the trenches" as a partner in 7 station turnarounds, working for the 15th largest radio company, and sitting on two broadcasting boards, I feel pretty comfortable with my credentials in the space.

I enjoy spirited discussions on the subject and have a thick skin. Hearing from the critics forces me to sharpen my positions, and frankly makes me better at what I do.

No one has the answer, but everyone has good ideas.

2008 Mar 28 09:53 AM

[User 174032:]

J.P. - What about the move towards airing sports talk radio on cable TV. Espn does this of course with Mike and Mike, but I suppose this kinda thing got it's start with Howard Stern and Don Imus. Doesn't this just play to the importance of entertainment content. Going further, why wouldn't some content from TV find itself migrating to simulcast or rebroadcast over radio. I could imagine the Daily Show or even Oprah simulcast on radio or reaired the next day or several hours later. I think the move by Washington Post to team up with Bonneville, and the news that the Tribune under Sam Zell has been hiring Clear Channel executives points the way for a morphing of radio and possibly newspapers into a cross-media format. Anyway, these are all interesting idea for morphing radio into an entertainment/informat... format.

Regards,
Roger

2008 Apr 06 10:46 PM