Why Radio Companies Should be Private Not Public

Implications: Radio can no longer afford to serve 2 masters- Wall Street investors and its core audience.

Analysis: In the radio sector, there is increased evidence that radio companies will attempt to, and arguably should, go private. On the surface, it sounds like an easy task. The Credit Crunch caused by the crash of the housing market has put many of the large private equity deals in question. Whether it is the Thomas Bain and Thomas Lee Privatization of Clear Channel or Sam Zell’s ESOP of the Tribune Company, no one is certain if and when these deals will close.

As a footnote, Jeff Smulyan, the CEO of EMMIS tried more than a year ago to take his company private at $14.00 per share. The investors and stockholders in the company balked. Now, the stock pays at or slightly below $8.00 per share, and two of the largest investors are calling for sales of substantial assets of the company. That is not likely to happen given the super voting power of the stock in EMMIS that Smulyan controls.

For radio to continue to perform with the margins that it has historically demonstrated, it necessarily will have to attempt to cut costs even further. That is a bad idea. A failure to cut costs, will not allow margins to remain at historical levels, putting even more downward pressure on radio stock prices. The truth is, almost without exception, no radio company should be a public entity anymore.

There is no doubt that a 40% fine gross margin in any industry is attractive. However, it is not always something that is realistic. At this point, attempts to cut costs even further, reducing the quality of the on-air product, which has already suffered a great deal, will only hurt the industry even more. If radio were to return in large to private ownership, investor pressure for maintenance of high gross margin would no longer be an issue. Companies could worry more about the quality of their products and initiate local content to a greater degree. While margins may drop to 25% or 30%, for private industry, that is still a pretty solid business.

Commercial radio has already suffered a serious public relations loss to the satellite radio industry. Though neither XM nor SIRIUS at any hope of ever seeing a profit in the near future, they continue to dominate the trade journals and advertising columns in newspapers. It is truly ironic that an industry that knows only about 14 million receivers in use, compared to more than 100 million radio receivers, can generate so much ink. Radio’s lack of timely response has left it in an awkward position. The hope is that HD Radio will prove to be a panacea for the industry. Thus far, that has not proved to be the case. IT will take getting HD Radios into automobiles as well as programming creativity to generate any serious listenership. It is unclear whether HD Radio can be a sustainable business model for commercial radio.

Increasingly, the radio industry has come to understand that business the way it has been conducted for decades is no longer a viable business model. It has taken getting hit over the head with a sledge hammer repeatedly for the industry leaders to understand this, but I suppose it is better late than never. Continuing to focus on building out internet platforms is key. Wireless internet via WI-FI or WY-MAX is not far away. In fact, CBS just announced that they will test free WI-FI access in midtown Manhattan making internet radio available at no cost for anyone with either a laptop computer or cellular phone device capable of capturing and listening to audio streams.

Its wireless internet radio that will both be commercial radio’s biggest challenge and largest growth area. If the industry fails to grasp quickly that it must seize on the stability of its brands and extend them online in a timely fashion, not only will listenership erode, but will damage to our revenues and will become widespread.

In summary, the bad news for radio is that it has come to the party very late. Inspite of the good news of a slower erosion of revenue to online media, the challenges of redefining its business model not only are imminent, but necessary. Along those lines, it has become increasingly clear that radio must make a fundamental decision. If companies continue to try to please Wall Street, the quality of the audio product will suffer, and listenership will continue to decline. Privatization, will allow for greater creativity, but more importantly investment in the product and recruitment of talent to the airwaves.

The attempted resurrection of Rick Dees at KMVN in Los Angeles has been a resounding failure. In Chicago, the return of Jonathan Brandmeier has not proven successful either. Both of these strong personalities peaked in the 1990’s, and now as they enter the 50-plus demo themselves, are finding it more difficult to attract listeners.

The consolidation of the radio industry necessitated by the pressure of Wall Street has created a dearth of quality talent coming in to the business. There is no longer a fun system to create new major radio stars. For the industry to maintain, much less grow, an emphasis must be placed on the quality of the product. If radio fails to grasp that it is about the product, it won't become obsolete, but it will likely won't deteriorate into obsolesence certainly to an after thought on the part of consumers.

The industry is at a crossroads. It is not too late, but the leaders of the industry to change course, grasp the new paradigm and seize the opportunity that is in front of it. Radio has historically been successful in reinventing itself time and again over its nearly 100-year existence. New technology coupled with new distribution channels poses the biggest hurdle yet for this industry. Returning to serve a single master - the audience- rather than the audience and Wall Street, will allow the industry to grow productively.