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.

[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.

[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.

[None-Too-Great Hits]

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

[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.

[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

[Sir Sid]

Over-billing, lack of decent programming and the demise of localism are probably the biggest complaints consumers have (I don't know why the exec's at CCU, CDL, COX and others don't understand this.

Even some of the mom and pops that I have worked with seem to suffer from rectal cranial inversion as far as the programming is concerned. Radio isn't anything like it was when I got into the business (or like it was when I listened to it as a kid). There were real "mavericks" on the airwaves and the music was fantastic!! Now it has become: Play what we want you to play, say what we want you to say and play and say what we want you to play and say WHEN we want you to play and say it. How boring!!! You can train a chimp to push buttons and hire morons for minimum wage to read liners.

I understand that it is all about the bottom line but, all of the passion is out the door. I could never sell advertising on radio because I no longer believe in the product. No one listens anymore. Thats what they (GM's OM's and execs at the major broadcasting companies ) seem to overlook You can't sell a product that is substandard (or doesn't exist).

Radio is a creative medium but it has been "homogenized"... The music is pure pre-packaged drivel.. Outside of the news/talk format, there isn't any room for creativity. It is not wanted.

I finally left the business in 02'. I simply couldn't stand what radio has become. I put up with the b.s. for twenty years and all along the way I felt that the main reason why radio is sooooo bad is because sales people and accountants are in charge of programming. Another reason may be due to the command control structure of these big broadcasting companies.

They think that they have a clue as to what the listener in Farmington NM. wants to hear as they sit in their chairs in L.A. and New York. Programming decisions must be made locally and they must be made by people who specialize in programming concepts as opposed to sales sleezes with a tin ear.

Cookie cutter approaches like CCU has attempted lower the bar as well. A one size fits all approach like this results in stations that play the same four songs by the same four artists at the same time each day...ok, I am exaggerating a bit (but not by much). It also makes stations across the country sound the same. As I was driving across country a few years back, I found a station called big dog (can't remember the calls) in Oklahoma City. It sounded exactly like the Big Dog in Farmington NM. The only difference was the name of the jocks. The liners were the same and so were the recorded images. Ah.. clear channel strikes again! I said as I promptly put a cd in my player and tuned out.

Just because a song "tests" well in L.A. doesn't mean that the folks in Colo. Spgs. or Tucson will be receptive.The listener has suffered greatly due to this and has found substitutes (such as Ipods, cd's and internet programming). What does this mean for advertisers? No one is listening to the station that they spent their ad dollars on. What does it mean for the listener? More substitutes.

As a radio vet, I can sympathize with the listeners and the advertisers. I can't even turn on the radio anymore due to the mediocrity. It is all garbage! Television will soon go the way of the radio waves due to the reasons aforementioned. Diversification will not help them (the major broadcasting companies) if they have simply acquired radio and television stations. They also must de-centralize their programming on these media outlets and get the bean counters and sales pigs out of the programming chairs.