State of the Terrestrial Radio Industry:Rough Waters or Sinking Ship?

Prepared forSusan Soroka, Instructor

ENG 304Northeastern University

Prepared byRodney Hart

Northeastern University

October 19, 2009

INTRODUCTION

Captain, We’re Taking on Water

About a year ago there was a grim article published in Billboard Magazine predicting that the radio ad revenue would continue to decline in 2009 at a rate of about 8% (Yorke, 2008, p. 6). Well, it’s worse. At this point radio ad revenue is on pace to fall 25% on the year, over three times worse than predicted a year ago (“RAB Revenue Release”, 2009). Needless to say, when any industry loses $1.7 billion in revenue they are likely to be in dire straights. Radio companies are now scrambling, and when your only source of revenue is based on the ads you generate, it is not easy to slow the leak.

So the logical question might be, what happened? The answer is somewhat complicated, but for simplicity let’s break it down into its two most important parts: an advertising revenue model and the recession. An ad revenue model basically means all of your revenue is based on the number of advertisers who want to advertise via your service, in this case in between songs or talk radio monologues. When a recession hits, however, the number of advertising dollars become slimmer and more scrupulous. Moreover, when your top advertising category – the automotive industry – is hit particularly hard, the rough waters initially anticipated become a swirling whirlpool that may swallow you whole (“RAB Revenue Release”, 2009).

So what does an industry do to save on costs, when the ability to generate revenue is largely out of their hands? Two things, layoff employees and syndicate successful programs to fill the slots of employees who were laid off. Locally, 93.3 Coast FM and KISS 108 now carry eight identical hours of programming from 6am – 2 pm, and both of these stations largely reach the same geographic audience (“KISS 108’s,” 2009). Eventually, this will translate into a somewhat diluted product and due to the fact that radio stations are primarily owned in conglomerates (a large amount of stations per company), cannibalization of stations’ own audiences and revenues is likely to occur. Though this translates into a less diluted product than staff cuts at a newspaper, for example, stations do run the risk of chasing off listeners who prefer a more unique programming than that which is syndicated.

HOW DID IT GET SO BAD?

The Ship is Too Heavy

Over the past 10 years, companies in the radio industry have focused on consolidation with other firms, primarily to expand their geographic reach and to benefit from greater economies of scale (Kolb, 2009, p.1). The goal of expanding geographic reach and increasing economies of scale may seem like a forward-looking goal to achieve long run success, and indeed it is. The downside is in the short term costs of consolidation; assuming debt, lots of debt. Consequently, when you assume lots of debt, the cost to service the debt, meaning the cost of incremental interest payments, also increases by a lot. Servicing the debt used to be manageable with the booming advertising market and access to cheap financing, but now both of those factors have changed (Kolb, 2009, p.1).

Enemies Ahoy!

When a business model is based on ad-supported revenue, your ability to make money is inextricably tied to the firm’s ability to hold an audience. If advertisers are going to spend their money advertising through your medium, they are going to focus on the number of people they can impact in relation to the amount of money it will cost them to do so. If advertisers begin to see the medium as diminished – fewer listeners – the less they would be willing to pay. Two of the most glaring competitors who threaten terrestrial radio’s longtime stranglehold on the 74% of Americans who turn on the radio when they get in the car are MP3 players and Satellite Radio (“Radio Continues,” n.d.).

When iPods and MP3 players were first introduced, it is unlikely that radio conglomerates feared them as a direct competitor. However, with the introduction of all of the devices that allow you to listen to MP3 players in place of the radio, namely home speakers and car speakers, they have morphed into a formal source of competition. They allow for individuals to listen to their own customized lists of music and news from the sources of their choosing. If you listened to radio for the music, why not put those songs on your iPod and listen to them there? If you listened to the radio for the news, why not download a variety of podcasts that could provide you with the news from the source that you would most prefer? The continued evolution of what MP3 players offer, new music, new podcasts, will inevitably outpace what terrestrial radio is able to offer. Outside of the small additional effort on the part of the user to actually load the songs and podcasts, users have the ability to completely customize what they are listening to fairly simply and cost-effectively.

The introduction of satellite radio by XM (merged with Sirus in July 2008) in 2001, was the first major competition to terrestrial radio. With a monthly fee, listeners can hear commercial-free radio stations now matter where they were. The additional appeal of these radio stations lies in their exclusivity and uncensored content, the most popular example being Howard Stern (Manjoo, 2009). The largest competitor in this space is Sirius XM, who has 18.4 million of subscribers (“Sirius XM,” 2009). The massive number of users who subscribe to the service highlight the legitimacy of the competition, however, the ability for Sirius XM to compete long term is up in the air. Due to the massive amounts of sunk costs in the company and the consolidation of the two firms (remember back to the costs associated with consolidation of radio firms, lots of debt), the company’s ability to service the debt is largely in question (Manjoo, 2009). About a month ago, after a study done by Audit Integrity listing companies that could be headed for bankruptcy, a poll was conducted to find which endangered company voters believed most likely to go bankrupt; with 34% of the vote Sirius XM was believed most likely to go bankrupt (Moss, 2009). With the uptick in auto sales recently, Sirius XM could get a boost and become more commercially viable, but it is possible that terrestrial radio may no longer need to worry about satellite radio and be able to focus their sights on MP3 players and other competition to come (Kolb, 2009, p.10). In the meantime they may want to focus on strategies to capture the 18.4 million subscribers, who soon may be looking for something new to listen to.

FUTURE

Staying Afloat

Radio is doing and has been doing everything it can to stay relevant to be able to compete long into the future. One of the ways they are trying to better serve their listeners is by providing them with a service that would allow them to capture songs they hear on the radio for later purchase. The building blocks for this project began in the early 1990s, when radio signals began to transmit low-bit-rate data along with analog audio (Palenchar, 2009, p.1). In essence, this data that is being sent with the audio is what allows your car’s stereo to tell you the song that is currently playing. Radio stations have now leveraged that technology into iTunes-tagging. So if you have an “iTunes-tagging HD Radio,” you will be able to capture that low-bit-rate data, and the next time you plugged your MP3 player into the computer you would be able to pull up the songs you had earlier heard and “tagged” to decide if you want to purchase them.

In an announcement made by the Jeff Haley (2008), President of the Radio Advertising Bureau (RAB), the radio industry is set out to expand the reach of radio, “Our goal will be to have Radio on every mobile phone, PDA, and MP3 Player in the next five years!” With the announcement of the new iPod Nano in September of this year, I can only imagine the rejoicing that took place at the RAB offices when they learned it had an FM tuner. Though this feature has been on other devices like the Microsoft Zune before, none of those devices are nearly as popular as Apple’s iPod, the clear market share leader. Now that radio broadcasts are easily able to reach millions of iPod owners, there is no doubt that it bolsters the argument that radio is still a relevant place for advertisers to spend their money.

Will the Cork Keep the Water Out?

The only segment for terrestrial radio that has continued to grow in spite of the current climate has been their internet-derived revenues (Kolb, 2009, p.8). These revenues are based on radio stations ability to grow their online audiences by offering them free live streaming of the radio broadcast and a website with relevant content. Now a commuter listening to their favorite station on their way into work can continue listening to the station one they get to work by streaming it online. When they are listening to it online they will still get the commercial breaks, except online radio listeners are subject to a new set of paying advertisers who pay to advertise on the streaming broadcast not radio broadcast. In addition, radio stations are receiving additional revenue from advertisers who want to advertise on the station website, which stations are continuously updating so they contain relevant content that listeners to their station would be looking for like news or blogs. These additional sources of have been growing at an average rate of 5.6% over the last five years and have provided a slight boon to the stations (“Yearly Revenue,” 2009). The problem? Even with total ad revenue down 25% on the year, internet-derived revenues are less than one-tenth the amount of total revenue; though internet-derived revenue is growing, it would have to grow at that rate for over 37 years to equal the amount brought in by local radio advertising just last year.

Another question to be considered when it comes to stations internet-derived revenue, how long can the growth continue? If there is one thing that characterizes the internet when it comes to entertainment offerings, it is severe competition. Radio stations definitely stand to benefit when their audiences continue to listen to their stations online, but I think it would be a mistake for radio industry executives to believe this to be an area of consistent growth. They are growing because they are capturing listeners who enjoy the station and now have more places to listen to it, not because they have become a popular place for internet surfers to listen to music. Moving forward, talk radio stations with local talk personalities may be able to grow their internet-derived revenues, but I think that music radio stations will quickly reach a ceiling. The reason being the litany of internet music providers on the internet, namely Pandora Radio, and music stations’ inability to compete with the incredible variety consumers have at their fingertips.

Potential Torpedo

One of the most threatening possibilities for the radio industry is the “Performance Rights Act,” legislation that would force music radio stations to pay an additional fee to record companies for the music they play. Since the advent of commercial radio in the 1920s, have paid the composer for the music they play through a blanket licensing fee (Staff, 2009). If the “Performance Rights Act” was to pass and stations had to pay additional fees to record companies, I believe you would see a lot of drastic changes in the radio industry. Given the current state of the industry, I think that many stations would be unable to afford paying the fee, and to avoid paying the fee I think stations would be forced to move many music stations to syndicated or all-talk programming. However, in a revenue model that is inextricably tied to the quality of product, forcing listeners to choose between talk radio or syndicated programming would be a grim day for radio executives across America. Listeners would start customizing their playlists, podcasts, or turning on their satellite radio and advertisers would be leaving just as quickly and taking their wallets with them.

CONCLUSION

The long term future of the radio industry as a relevant place where people go to get their music and information is very much up in the air. Right now when people get in their cars they turn on the radio 74% of the time. With FM tuners in MP3 players and offering free streaming online, radio has put themselves in a position to reach more people in more places. The radio remains the only free place that you can hear music or news with no effort of your own involved. Now radio has to fight to stay relevant in a world that their listeners could customize their own news lists and music with very little effort or listen to commercial-free radio for a monthly fee. To stay relevant, radio programming has to be that much better at being exactly what listeners want and when they want it. If they aren’t, listeners don’t have to go far to have a plethora of other choices, nor do advertisers.

References

Haley, J. (Director) (2008, February 12). State of the Radio Industry. RAB2008, Radio Advertising Bureau, Phillips Arena, Atlanta, GA.

Kiss 108's Siegel brings his show to the Ocean State. (2009, May 14). Retrieved October 20, 2009, from www.bostonradiowatch.blogspot.com

Kolb, E., & Amobi, T. (2009). Broadcasting, Cable & Satellite. Standard & Poor's. Retrieved September 23, 2009, from http://0-www.netadvantage.standardandpoors.com.ilsprod.lib.neu.edu/NASApp/NetAdvantage/showIndustrySurvey.do?code=brc

Manjoo, F. (2009, February 12). Satellite Diss. Retrieved October 20, 2009, from htpp://www.slate.com/

Moss, S. (2009, September 28). Poll Says Sirius XM Headed For Bankruptcy. Retrieved October 20, 2009, from www.thestreet.com

Palenchar, J. (2009, February 9). iTunes Tagging: How Radio Stations, Radios Deliver The Best Experience. TWICE. Retrieved September 23, 2009, from www.twice.com

RAB Revenue Release. (2009, August 21). Retrieved September 25, 2009, from www.rab.com

Radio Continues to Hold Its Audience - 63% Listen Daily. (n.d.). Retrieved October 20, 2009, from www.marketingcharts.com

Sirius XM: 5 Years Later (SIRI). (2009, October 13). Retrieved October 20, 2009, from www.fool.com

Staff. (2009, September 14). Radio Free America - Bangor Daily News. Retrieved September 23, 2009, from www.bangordailynews.com

Yearly Revenue Trends. (2009, February 12). Retrieved September 25, 2009, from www.rab.com

Yorke, J., & Bachman, K. (2008, December 6). Broadcast Blues. Billboard, 120, 6.

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