Summary
Radio ad revenues falling of the cliff
Analysis
January 08, 2009
The radio industry is clearly under siege. It is being attacked on multiple fronts. Certainly, the economy is the biggest culprit. With Detroit’s auto makers in severe economic distress and cutting ad budgets dramatically, the impact on radio is dramatic. Almost 25% of local radio revenue is derived from either auto manufacturers, auto dealers, or related services.
The next barrier to radio’s future is the continued growth of new media, specifically online advertising. After several years of little to no growth, radio revenues began to fall last year (2007) and then more precipitously in 2008. While internet advertising growth for 2009 is projected to slow, its continued rise directly affects dollars that would normally be spent on radio advertising.
The third issue radio faces is one of its own making: consolidation. Since the Telecommunications Act of 1996 was put into effect, the consolidation of the industry has created a homogeneous, far less creative industry. Innovation and new talent simply are not being drawn to the industry.
In part, the reason for this begins with younger people. I am 48 years old. I was bitten by the radio bug when I was 13. All I wanted to ever do was be in radio. Today’s teenagers, have no such love affair with our industry. They are consumed with texting, social networking, television, and cellular telephones. There is no up and coming group of people for our industry.
My alma-mater, Northwestern University, offers a degree in Radio, Television and Film, in its School of Communications. Yet, it does not offer a single course in radio. The Dean of the School says, “It is because students are not interested in radio.” If students are not interested in radio, where is the next generation of our industry going to come from?
Consolidation also took away what radio always had that no other medium did. A farm system. If you wanted to be in radio, you would go to work for a station in a small town somewhere in the middle of nowhere, and work your way up to the major markets. Today, those small market radio stations are laying off employees, getting rid of most if not all of their local programming, thus eliminating the farm system altogether.
Yet, radio does have some very positive stories to tell. More than 230 million people listen to the radio for an hour or more each day. That listening takes place in the car. Do not be worried about satellite radio. It is a business that is on life support, and was doomed from its very beginning. Every pay radio service since the first was created in 1940, radio for 5 cents per day, has failed.
XM/Sirius have done a wonderful job of accumulating billions of dollars in net. The car manufacturers embrace them. Why? They had real estate to sell them inside their car. The satellite companies paid to have satellite radios installed as factory built. With car sales at record lows, new listeners to satellite radio have dramatically dropped. Retail sales of satellite radios are near stand still. For those receiving satellite radio in the car when they purchase a new vehicle, most receive a free subscription for at least one year. The conversion rate, that is the number of people who turn into paid subscribers after their free trial period expires, is less than 25%. There are people who are true audiophiles that love the service: certainly long-haul truck drivers, and people who spend an inordinate amount of time in their cars benefit from it. Yet, it is a business that likely will be out of business within the next two to four years.
The reason for that is simple. That is the growth of internet radio. As Wi-Fi, and Wi-Max get built out, and internet radios are installed in automobiles, people will have access to thousands of radio stations at no cost. That eliminates any reason for anyone to pay to receive a radio service. Internet radio today is more or less where cable television was circa 1980. It took ten or so years for the infrastructure to get built out, but here we sit today in 2009, and 80% of all television viewing be it over the air television or cable networks, takes place either via cable or satellite. Only 20% of television viewing takes place over the air. Television stations have preserved their values because of “must carry”. Local cable systems are required by law to carry all of the local television stations on their cable systems. Radio, has no such equivalent. That means that when wireless broadband is built out, radio stations will face challenges from anyone who chooses to go into the broadcast business and the value of the radio station “sticks” will plummet. Wall Street has already seen this writing on the wall. In part, that is why there is no pure play radio stock that is above $1.00.
What that means for the radio industry, is it needs to use the power of the brands that they have today when only 78 million people are listening to internet radio each day, to stake out beachfront property on the internet now. If stations fail to embrace this opportunity they will be swallowed up in the next six to eight years and overtaken by internet radio services such as Pandora, Accu-Radio, and others.
Internet radio is already being made available as a factory installed option in many automobiles. Chrystler, General Motors, Saab, BMW and Mercedes-Benz already offer internet radio receivers as factory installed options. It is simply a matter of time before the infrastructure takes hold.
So how does all of these relate to the precipitous drop in radio revenues? It’s a perfect storm. The economy, the growth of the internet and other new media, the lost of automotive advertising and related industries, as well as radio having lost its “coolness” along with the lack of a new generation coming into the industry, have resulted in radio being in the place that it is it.
Radio, is not going away. It will find a way to redefine itself. There are enough forward-thinking minds in our industry that will creatively take advantage of the opportunities I have described above to reinvent this industry. It will not come without a great deal of pain. Industry revenues will likely drop again in 2010. My belief is that radio will end up somewhere around $13 to $14 billion a year in ad revenue. Profit margins which are already being preserved through layoffs of talent and staff will continue to allow radio to sign off significant free cash flow of 30% to 40%. However, the local flavor of the industry will be dramatically reduced. I have been involved in the radio industry for 35 years. I love it dearly. This past November I attended the Radio Hall of Fame ceremony and broadcast in Chicago. I found myself with my peers following the event asking this question: “Will this event still be here 10 years from now?” The answer is I am not sure.
This is a defining moment for our industry. Creativity, hard work, and innovation have to be employed to keep this industry vital. If radio sits on the sidelines and does not try to reinvent itself, it’s future will be rather cloudy.
