The Decline of Radio

[David Farber <dave () farber net>]

Begin forwarded message:

From: Jim Zellmer <zellmer () virtualproperties com>
Date: August 28, 2004 8:33:03 AM EDT
To: dave () farber net
Subject: The Decline of Radio

Good Morning, Dave:

I thought you'd find this interesting:

Losing the Signal
Radio may be in a long-term decline. Time to tune out the stocks?
Sandra Ward

http://online.barrons.com/article_print/SB109364644941303432.html

IT'S HARD TO SAY EXACTLY WHEN radio started to lose the love and the
power and the magic celebrated in that 1975 rock anthem, but a good bet
would be 1996. Landmark telecom legislation back then unleashed a
powerful wave of consolidation that left the airwaves cluttered with
commercials -- and investors set up for disappointment down the road.

Though many radio stocks soared seven- or eightfold during the merger
frenzy, the excitement proved ephemeral. The stocks came back to earth
with a thud, and the industry has since reverted to its former status as
a generator of steady but unspectacular returns, with revenues growing
little more than the economy as a whole. Worse, there's increasing
concern that radio is entering a long-term decline, the result of new
competition and technologies and changing consumer tastes.

Younger adults -- the key targets of radio advertising -- have clearly
been losing their ardor for the medium. By one key measure, the number 
of
listeners ages 18 to 34 has declined by about 8% in the past five years,
as portable digital-music players, Internet radio programming and other
innovations have started to take hold. And while the dollars spent on
radio advertising have been essentially flat for the past few years,
competing media like cable TV, the 'Net and outdoor advertising have 
been
gaining steadily.

"It's over," Larry Haverty, a media specialist at State Street Research
and Management in Boston, says of radio stocks' big run. "Something good
happened in the 'Nineties; something less good has happened in the '00s.
Every retailer is blowing its budget on advertising and radio is not
getting any of it. If they don't get it now, they're not going to."

Clear Channel Communications, the big daddy of the industry, has seen 
its
share price fall by nearly two-thirds since 2000 -- including 17% in 
just
the past year. Citadel Broadcasting is off 33% this year and Cumulus
Media is down 29%. But investors have by no means given up; the group is
trading at multiples to cash flow that are higher than both their
historic norms and the valuations of other media companies.

Investors, along with radio executives, may not be facing up to the full
extent of the industry's challenges. While radio has always weathered
past threats -- video did not kill radio's star, as a group called the
Buggles prophesied in 1981 -- things could really be different this 
time.

Across the country, listeners are changing how they choose to receive
music and news and talk radio. They are turning to portable music 
players
like Apple Computer's iPod, streaming audio over the Internet and the
emerging field of satellite radio to hear what they want, when they want
to hear it.

Anne Kershaw, a 46-year-old lawyer who travels weekly between her home 
in
Tarrytown, N.Y., and an office in Richmond, Va., bought an iPod in May,
partly because "there is no decent radio station in Richmond. I was 
tired
of being preached to." She still uses the radio -- but not in the old
way. By attaching a transmitter to her iPod and setting it on a certain
FM frequency, she can play the 983 tunes she has downloaded to the iPod
through the radio, whether at home or in the car.

Music downloading is one of the "fastest-growing digital phenomena 
ever,"
says Forrester Research Group. It predicts download services will
generate more than $200 million in revenue this year, $40 million higher
than forecast and up from just $36 million in 2003. In all, some 35
million U.S. adults have downloaded music, according to the Pew Internet
& American Life Project, a nonprofit initiative.

Trends like that are causing companies to reassess advertising choices,
to ensure they're getting the most bang for their buck. Accountability
and return on investment are the priorities in advertising right now, 
and
it's hard to say radio is providing much of either as listeners start
tuning out. Among all people older than 12, only 14.6% are listening to
radio during an average 15-minute period, down from 16% in 1998,
according to Arbitron.
About the only bright spot: niche programming. Radio operators that
provide Spanish-language, urban or religious programming are seeing
ratings improvements and gaining share. Advertisers are starting to
notice: The nation's largest advertiser, consumer-product giant Procter 
&
Gamble, struck a multimillion-dollar pact in June to sponsor the Tom
Joyner Morning Show, the most widely syndicated African-American show in
the country, with eight million listeners.

Companies specializing in niche programming, such as Florida-based
Spanish Broadcasting and Maryland-based Radio One, which is focused on
the urban market and also has cable operations, could offer some trading
opportunities. But many investors already have flocked to such stocks,
leaving the valuations high compared with those of other radio shares.

BY AND LARGE, the industry's revenue prospects remain quite grim, even
though the economic recovery has been under way for two years. Robert
Coen, media-spending forecaster for ad giant Universal McCann, had
expected 7% growth in national radio advertising this year. The figure 
is
running below 1%. He thought local advertising -- the source of 80% of
all radio revenue -- would show a 6% jump from last year. Instead, it's
closer to 4%.

Any thoughts that radio advertising would rebound after the Olympics,
which is a television-dominated event, and ahead of the election are
fading in the face of weak September ad sales. The current softness 
comes
on the heels of a capricious second quarter, when radio stocks had the
rug pulled out from under them yet again. After ad revenue began to pick
up in the first quarter, bookings in May, typically the best month of 
the
year, fell off a cliff as advertisers, auto dealers in particular,
canceled spots. The reason some gave for cutting back: Business was so
good there was no need to advertise.

Only recently have radio executives begun to own up to the fact that the
dynamics surrounding the business have changed.

Radio titan Mel Karmazin lost his job as president and chief operating
officer at Viacom this year not simply because of personality clashes
with Chief Executive Sumner Redstone. It was also because he failed to
realize the ground was shifting, and continued to cheerlead a strategy
that was no longer working for Viacom's Infinity Broadcasting, the No. 2
radio operator behind Clear Channel.

Ted Forstmann's investment vehicle, Forstmann Little, brought Citadel
public exactly a year ago, hoping to capitalize on the strategy that
propelled radio stocks in the wake of deregulation: Use a strong share
price to snatch up properties and slash costs, boost revenue and 
increase
earnings and cash flow. Forstmann's timing was way off. Citadel shares,
which came out at 19, have lately been trading at 15. Instead of buying
radio stations, Citadel has announced plans to buy back shares.

In another sign of the times, San Antonio-based Clear Channel, with
annual revenue of $8.9 billion, announced this past summer it would
reduce the number of ad spots it runs per hour. It also stopped 
reporting
weekly sales data to Miller Kaplan Arase & Co., which tracks radio-
network ad revenue, on grounds that the reports were useful when times
were good -- but not now. The data create "volatility in the financial
markets by inviting exaggerated interpretations of normal sales cycles,
and puts the radio industry at a competitive disadvantage to other media
sectors," the company said.

Many operators are still hoping the good times will return. Cumulus CEO
Lew Dickey continues to talk up the case for consolidation, declaring at
an industry conference in Manhattan in June that "consolidation will
continue," that it will "pick up as the economic expansion continues" 
and
that there are "compelling reasons to create scale in this business 
now."

At the same conference, David Kennedy, president and chief operating
officer of Susquehanna Radio, maintained that the slump in radio "is a
cyclical thing rather than a secular thing," and Rick Cummings, 
president
of the radio unit of Indianapolis-based Emmis Communications, agreed.

"I don't think the sky is falling, just slowing down," adds Mary
Catherine Sneed, chief operating officer of Radio One. She says the
industry is in a "recovery mode," but that it might take two years to
"see what kind of recovery" this is.

Investors, too, seem reluctant to let go of the past. Despite the huge
price drops in recent years, the valuations of many of the stocks are
richer now than in the past. The group's enterprise value (market
capitalization plus net debt) stands at about 15 times earnings before
interest, taxes, depreciation and amortization, or Ebitda -- well above
historic levels of about eight to 10 times. Investors typically use
Ebitda to determine a radio company's valuation because it better
reflects how the companies manage their operations.

Radio looks expensive compared with not only its own past, but also with
other media sectors. Media giants such as Disney, News Corp. and Time
Warner trade at Ebitda multiples closer to 10. Among radio companies,
Citadel trades at 17.5 times; Cumulus at 17 times and Cox Radio at 14.5.
You get the picture.

Little wonder that some top investors are tuning out. "Why pay more for
radio if it's only growing in line with national averages?" says Mario
Gabelli, longtime media investor and founder and principal of $27 
billion
Gabelli Asset Management, who is shunning the sector. "Radio as a medium
isn't worth 18 to 20 times."

The best hope for investors may be increased stock buybacks and the
possibility that some companies go private. Like Citadel, many radio
operators have come to see buybacks as one of the best uses for their
still-considerable free cash flow. Clear Channel initiated a share-
repurchase program for the first time this year, and that may be only 
the
beginning. Bear Stearns estimates that in the next five years, Clear
Channel could buy back 34% to 39% of its shares, Entercom could buy back
up to 32% to 37%, and Cox Radio could buy back 21% to 26%.

That marks a huge shift from the boom years, when industry leaders were
spending their capital on one acquisition after another. For a sense of
the scope of that activity, just look at what Clear Channel did. It
bought its first radio station in 1972, and 23 years later owned only a
total of 43. Yet in the year following the Telecommunications Act of
1996, the number of stations owned by Clear Channel quadrupled. At the
end of last year, the company, founded by two Texans -- one a Harvard 
MBA
and the other an auto dealer -- controlled some 1,182 radio stations in
the U.S., not to mention a radio network.

Wall Street jumped for joy at all the consolidation. The buying spree
kept investment bankers happy, and investors often scored big. The
Telecom Act, which basically let any company enter the communications
business and any communications business compete against any other, also
helped usher in entirely new categories of advertisers. All manner of
Internet startups and cellphone carriers started buying air time. Drug
companies also took to the airwaves in droves to promote their products
in dramatic fashion.

Suddenly, staid radio stocks had a fast-growth glint to them that caught
the eye of momentum investors, those swashbuckling types willing to pay 
a
premium for a stock as long as quarterly earnings and cash flow continue
to rise.

Multiples on radio stocks soared to the stratosphere from more modest
historical levels. As the companies grew in size and might, managements
envisioned capitalizing on their new clout by commanding higher ad 
rates.
And ads started to crowd out programming: It became typical to run 15 to
20 spots an hour, many back-to-back.

The years "1996 to 2000 were a music bubble defined by Lowry Mays
[chairman of Clear Channel] and Mel Karmazin [then of Viacom's Infinity
unit]," says Gabelli, referring to the acquisition strategy pursued by
the two radio giants to garner 30% of the market between them.

Then Wall Street's larger bubble burst. And the radio bubble really 
burst.

What had been music to the Street's ears was lost on listeners. That is,
if they bothered to listen at all. More people may be driving to work
than ever before, but most prefer to chatter on cellphones during the
rush hour or fire up an MP3 rather than endure the endless commercials
and shrinking playlists on their radios.

Advertisers began to balk, too, as their promotions were drowned in a 
sea
of spots. Pricing discipline went by the wayside, as radio operators cut
generous deals to keep advertisers in the fold. So much for the theory
that industry consolidation would lead to higher and firmer pricing.

And just as swiftly as dot-com ads surfaced in the boom years, they
vanished after the bust. No new advertisers have emerged to fill the
void. Radio's more traditional advertisers, such as retailers and
automobile dealers, are cutting back or rethinking their strategies.
"With 30% to 40% of all car sales enabled by the Internet, auto dealers
aren't getting a run for their money on radio," says State Street's 
Haverty.

He says local cable television and the Internet are much more formidable
and effective competitors to radio than they might have been in the 
past.
The 'Net will figure out how to do local advertising, he contends. And
there's no question cable's clout has increased with consolidation.

Consider, says Haverty, that Comcast is now the sole cable provider
serving the Boston market, whereas five years ago there were four cable
companies. And Comcast, the nation's largest cable-TV operator, has made
no bones about going after local advertising, targeting an increase of 
$5
billion in local ad revenue. Earlier this year, Comcast expanded a
service that lets advertisers tailor ads to certain target audiences
based on geographical location or programming preferences.

"We assume Comcast will have an impact, as will the Internet," Cummings
of Emmis said at the conference in New York, sponsored by radio-ad firm
Interep. Cummings called for a "new cooperation" among radio operators
"because the enemy isn't each other but local cable and Internet."

The death of radio has been heralded many times. Yet since its
introduction to the mass market in the early 1920s, radio has survived 
--
and thrived -- because no other medium has been able to match its
formatting flexibility, its local appeal, its immediacy and its low
overhead. Not until now, at least. Cable companies, commercial-free
(though fee-based) satellite radio, MP3 players and other digital 
wonders
may at last be giving radio a run for its money.

Many radio investors and executives dismiss the threats of advances such
as satellite radio. They note that while the two satellite leaders, XM
Radio and Sirius Satellite, sport a combined market capitalization about
equal to that of the top five, pure-play radio outfits, they together 
are
losing about $700 million a year, in marked contrast to radio's solid
cash flow. But that kind of analysis is missing the larger point:
Consumers have changed.

"It may not be a change in radio's value, it may be a change in consumer
demands and taste," says Kurt Hanson, CEO of AccuRadio.com, an Internet
radio site and publisher of RAIN, the Radio and Internet newsletter,
which focuses on radio's malaise. "Consumers maybe got tired of the 300-
song play list. That's not a change in the radio product, but a change 
in
the perception of the product."

Now it's possible, via the Internet, to hear a 3,000-song playlist from 
a
U.K. station or 1,000 songs from a country-music station in the U.S. 
It's
even possible to get streaming music over a personal digital assistant
such as the Treo. Says Hanson: "It's not years down the road, it's 
here."

While the nation's radio operators yearn for the good old days --
Sinatra, anyone? -- listeners are increasingly doing it their own way.

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