Note to Radio Companies: It's About Innovating More, Not Sucking Less

by: J.P. Hannan

The constant theme you hear in the earnings conference calls of most radio companies these days is solely how the company performed versus its peer group. CEOs brag about how well they did against the other guy, and they further qualify their results by eliminating faster growing niche broadcasters like Hispanic stations from the comparisons.

However, peer performance should be but one measurement of a company out of many benchmarks. How these companies compare against other media sectors or the corporate landscape at large is rarely discussed. It has become as if, as far as financial performance and shareholder value is concerned, there is no other place for money to go, and radio shareholders should just be happy they aren't holding shares of the other guy. This attitude is exactly why radio shareholders are running for the doors, pushing every major public radio company's shares to 5 year lows with significant losses while the broader averages continued to post modest gains in 2007.

Somehow in the business plans of many radio companies, this pervasive attitude of "We Suck Less", as Sirius Radio's (NASDAQ:SIRI) Mel Karmazian once described it, has become standard operating procedure. Somehow many executives in this industry have grown complacent in their thinking that so long as their heads are still inches above the guy drowning next to them, they should declare victory. Ultimately, whether you fall off the cliff at the slower rate as the other guy makes no difference once you both hit the ground.

This attitude is not solely limited to radio companies, though. One can look at many other industries and see similar periods of the same complacency; however, what you will also see is one or two companies that broke the mold, changed the game, and finally moved the ball forward. Whether you look at computers, airlines, athletic wear or coffee houses, at some point all had someone change the business model. Unfortunately, it is this catalyst that is exactly what radio is missing today.

One only needs to take a look at the personal computer industry over the past five years to see it is possible to break from the pack in a stagnant industry. By the end of 2002, the PC industry was declared saturated and growth prospects limited by many Wall Street analysts. Despite this (and previously once struggling and left for dead), Apple (NASDAQ:AAPL) was a superstar in 2007, not only blowing away the performance of peer group members like Dell (NASDAQ:DELL) but just about everyone else, everywhere else. In fact, one could argue that Apple really has no peer group anymore, transforming itself from being simply a manufacturer of high end personal computers to being the world's premier entertainment technology company. While not neglecting their core business, Apple innovated. In addition to the fantastic success of the iPod and iPhone, they had some not so stellar products such as Apple TV. Overall though, they kept investing, kept innovating, and kept showing investors returns like few others.

There is no reason why any individual radio operator can't break from the pack and its current malaise if individually radio operators would stop worrying about what the other guy is doing and start innovating. Radio operators have an opportunity to change their companies from being just about the terrestrial radio signal and spot sales to being able to offer the ultimate local interactive proposition to both listeners and advertisers. Local is where radio is at its best- frankly it's hard to think of anyone better, and it already has a day to day pervasive audience connection that is spectacularly unique, albeit unidirectional.

Instead of worrying about inventory loads, audience measurement, and adding digital channels, radio should be building its interactive capacity. The other things are all wonderful initiatives but all are ancillary issues that shore up weaknesses, not capitalize on strengths. Radio operators need to widen their view of interactive beyond simply selling advertisements on expanded digital platforms which has become really nothing more than finding new places to sell additional cheap inventory. Many times, these "interactive" sales simply come out of existing spot sales and just go into a different column where the commission is higher or there is a corporate directive to perform. What interactive should mean is allowing listeners to communicate with the stations, listeners to interact with each other, and ultimately listeners interacting with advertisers. By focusing on this, radio operators will vastly enrich the radio user experience, subsequently gain more overall radio users, and ultimately be able to sell more products at a much higher rate.

The biggest innovation radio can offer is also one of the simplest by adding true social networking capacity to station websites. Radio already has the ultimate social network with vast numbers of people who share musical and personality tastes, who are demographically similar, and live in a general geographic area. For whatever reason though, stations don't allow these individuals with so much in common to communicate with each other, and consequentially they've created new media competitors in MySpace (NASDAQ:NWS) and Facebook. Enabled with robust social networking capacity, radio could offer advertisers much richer advertising opportunities, understand the rapidly changing tastes of their audiences in real time, and provide a community forum for even the most highly localized issues.

For major groups, the social networking opportunity is even greater by being able to link markets into a nationwide social networking platform. There is a cost to build out this capacity, but radio would not have to go it alone if they would invite technology providers in as their partners. For companies like Facebook, there would be no greater ally, but radio operators must adopt a sense of coop-etition rather than the long standing industry ideals of isolationism and trying to do it all themselves. Perhaps there will be a day where just as there is an ABC or NBC (NYSE:GE) affiliate in each local market, there will also be a Facebook and MySpace affiliate, and there would be no better candidate for the job than local radio stations that already have the local presence, relationships and knowledge.

Another innovation that is far from revolutionary is adding video streams of all radio shows on station websites, Google's (NASDAQ:GOOG) YouTube and the myriad of video sharing sites, and for viral email distribution. Radio doesn't have to simply mean audio anymore, and users want a complete entertainment experience much like you see in the Additional Features portion of any DVD. That personal connection the radio listener already has is only expanded by allowing them "back stage" access into the studio. This not only would be an engaging feature, it could also be profitable. Companies like Brightcove, Revver, and Google sell national advertising against these clips and create an ongoing ancillary stream of revenue for stations who are already investing heavily in talent and content creation. There are also long form opportunities in video for stations willing to partner with local television operators who could simulcast the show in real time, or replay it to late night audiences who probably don't catch a 6am radio show. While the top news station in a market may not have an interest in a radio show, the independent broadcasters or FOX, CW, or MyTV affiliate may find it a compelling and cost effective way to bring locally originated programming to their air. On demand cable operators may also see it as a compelling way to broaden their program offerings. There would need to be an upfront investment, ongoing overhead and some modification to the content formats, but it would give radio operators a badly needed second stream of revenue and allow them to build a library of content that would have longstanding value.

Radio operators have seen many challenges come before them over the course of the last century. Whether from television, FM frequencies, taped entertainment, or now satellite and the iPod (AAPL), radio has always been able adapt. Radio operators have always figured out how to innovate by putting the radio in the car, creating unique formats, or streaming stations online. One thing certain is eventually a radio operator will break out from the current industry malaise and the sector will become desirable again to investors. To do so though, it may require many of them to leave the public stage for a period to be able to make the investments needed without constant analyst scrutiny. Though not a requirement- as Apple showed in staying a public company entirely during its turnaround, it would give groups like Clear Channel (CCU-OLD) and Cumulus (NASDAQ:CMLS), who are already in the process of going private, a chance to innovate "Off Broadway" and come back to the public markets later with a much more compelling story for investors to buy into.

The future of radio is bright, but as the saying goes, there is no future in the past. Simply talking about the way radio innovated in the past is no way to build for the future. "We suck less" is not a corporate strategy, but rather a company's epitaph. Times have changed and competition is fierce for radio's valuable local audiences. Someone needs to break out and lead to give listeners a continued reason to love their local radio station and investors a reason to love radio stocks.

At this point, it's simply radio's game to lose.

Disclosure: none