How bad IS radio's business model?

[Steven21]

We've been seeing, hearing and feeling many cuts post-consolidation for quite some time now, yet there is apparently STILL more to be cut?

How is this still necessary?

How bad is/was radio's busienss model that even after so much slashing, there is still more that needs to be cut?

**By the way, unlike many businesses that have temporarily downsized during these difficult times, radio stands to permanently dislodge listeners and lose them to other audio sources in the course of cheapening the product. THAT will be irreparable damage. I know the powers-that-be don't care, but I thought I'd mention it.

 

[Goat Rodeo Cowboy]

Most of us have no idea because we don't get to look over anyone's shoulders as they do the accounting books. The most widely held opinion is that the big problem is that during the consolidation which began when, 1996?, the buyers were willing to pay too much to get the stations they wanted and they used borrowed money to make the purchases.

Now they (should) know that they paid too much. If you can't make the loan payments, then you paid too much. In their panic to try and super-charge the business model and somehow still make the payments they have possibly disrupted the market place for radio. What is the old bit of crude humor over a situation like this? "Who pee'd in the punchbowl?"

There are a lot of other lines of business that will have some difficulty getting customers to return once the difficult times are over. If you were raised by parents who were young newlyweds during the depression circa 1932, you know that people sometimes NEVER get over that lifestyle of doing without. But radio may be doing a better job of alienating its customers than most other lines of business are.

 

[TheBigA]

They didn't overpay in 1990s money. I've gone back and read old Broadcasting Magazine accounts of the purchases back then, and no one felt they were overpaying at the time. They were able to make the payments then. That wasn't the problem.

The problem is that when the advertising world went bust a few years ago, revenues started dropping. Very consistently. So we've gone through a few years where revenues have gone down from the year before. They're all still making money, but just not as much as the year before.

So say you bought a house with mortgage payments of $1K a month, which you could easily afford ten years ago. But then you were fired and took a job that paid 30% less. It's more difficult to afford that $1K mortgage payment. Add to that the fact that the collateral you had, your car, is worth less than it was before. That is the situation these companies have. My point is they didn't overpay then. But circumstances no one expected happened, and they're stuck holding the bill.

The other problem is that they can't keep spending on salaries as though the revenues haven't stopped. Or the money will run out. So they have to cut costs. The funny part is that even if they "cheapen the product," it is still more expensive than the alternatives. They're competing against internet stations run by one person from their basement. There are no DJs on internet radio. There is no local content on the internet or satellite radio. But the general image of radio is that it's old, bloated, bad, and cheap. So even though they're still spending more on content than the competition, their image is hurting growth. The fact is it wouldn't matter if they doubled the amount the spend on content and/or staff, because the image would stay the same. People have made their minds up. That won't change.

So in answer to the topic of this thread, the business model has to change. But the public has certain expectations from radio, and there are certain regulations they must meet. Neither of those things are problems for new media. And then there's the whole "free economy" thing, where the public doesn't want commercials (even on Pandora), and they don't want to pay a subscription price. So they want what they want, and they want it for free. Explain to me how anyone can work with that business model.

 

[Steven21]

First of all, back in the 90s, consolidators didn't think they were overpaying because they thought their manipulation of marketplaces was going to pay off in spades. I know many who, at that time, disagreed and believed some of the prices paid were insane.

Secondly, and no offense, but of all the alternate audio sources to be concerned about, internet "radio stations" aren't one of them. Have you even heard the garbage the "guy in his basement" is doing? Believe me, THAT is not where the trouble lies.

You wanna talk trouble? Heightened expectations--you know, the Wall St. kind---are at least as big a problem as the revenue downturn. Wall St. is all about GROWTH. If you are making a profit, but don't show GROWTH, investors and CEO's get panicky.

Radio was best left to smaller operators who would be more willing to accept less revenue in the short term rather than destroy the product for the long term.

 

[Element9]

BigA, I've read your posts on many boards, for the most part thoughtful and well presented. But here, I take a different stance. The home-buying analogy which you present is close to the mark in describing what happened to the radio business. Yet you omit one critical component of the bust-cycle equation. Regulatory agencies looked the other way.

I'll not make this a political rant, but clearly over the last eight years there have been government and quasi-government agencies which allowed the wolves to guard the sheep pen. Fannie Mae and Freddie Mac are two fine examples, as is the SEC. The FCC also should bear some blame. To be fair, Congress was a co-conspirator as well.

A few years ago, Alan Greenspan, apparently smitten with the economic theories of Ayn Rand, told Americans that we were on a course to unprecedented prosperity. Later, he sounded a more cautionary tone when he described the stock market as being driven by "irrational exuberance." This was followed by an apologetic, "we don't know what went wrong."

Ask anybody who works or worked in the bowels of radio what went wrong and they'll give you a street level view that's not far off the mark, if not dead ON the mark. I find that my local bank officer has a better view of the economy than the bank's CEO.

These radio executives made stupid business decisions all in the name of being the guy with the biggest d!ck at the country club. WABC hires Joe Scarborough and Mika Brzezinski for big bucks while cutting staff in Providence, Syracuse, San Francisco and Buffalo. Yeah, you'll tell me that WABC bills more than some of Citadel's entire clusters. Rubbish. Good money after bad. Another stupid business decision. News talk on AM is going the way of the cart machine. The decision makers at WABC should be thinking about moving the format to FM.

How 'bout that alleged bidding war between Citadel and Entercom a few years back for the "rights" to buy the weak signal of 107.7 for nearly $10 million. How's that workin' out, David?

We've seen that the corporate officers of Clear Channel, CBS, Entercom and Citadel (full disclosure, I own Entercom stock) became victims of radio's Ponzi scheme while the men and women in the front lines were caught in the middle. Buy big, buy more and get out. There will always be a buyer and a greater fool.

Caveat emptor.

I'm told thousands of employees have taken major hits on 401k plans and stock purchase plans that involved buying into their companies' exuberance. In some companies (e.g., Salem), even after massive layoffs the employees who remained took substantial pay cuts of 10 to 20 per cent.

Not long ago a broadcast exec interviewed on CNBC asked incredulously, "Who could have seen this coming?" Huh? If Dave the DJ in Des Moines with a two year Liberal Arts degree "didn't feel good about this mission," then how does a CEO with an MBA misread the entrails?

Housing bubble? What housing bubble?

You'll accuse me of having 20-20 hindsight, but I had some good sense to re-organize my 401k last summer. Still, like most Americans, I've taken a hit. You'll say that the Clear Channel-Bain deal or Citadel's Reverse Morris Trust stock swap-purchase of the ABC stations from Disney looked good on paper, especially as Farid Suleman re-negotiated the purchase price in the 11th hour. I'll say it was all smoke and mirrors and ABC may soon regain possession of the stations which ABC "sold" to Citadel.

You'll talk about buying with 90s money and projected rates of CPI and GDP. Auger wanted, MBA not required.

Clearly, the experts weren't experts. Witness Arthur Madoff and those who invested hundreds of millions with him. Madoff, unchecked, bilked thousands of investors and organizations.

Dave the DJ living in a Cheektowaga raised ranch had more good economic sense not to buy a $300 thousand home in East Amherst on his salary because he knew he could afford it. Too bad the idiots running the radio companies didn't exhibit the same approach to operating their businesses. The sad part is, the men and women who are DJs, in sales, traffic or production will be the ones to pay for the mistakes and poor decisions made by the platinum parachute crowd. So Dave the DJ living in Cheektowaga, despite his good sense not to buy that McMansion in East Amherst, may lose his home because he lost his job, thanks to the stupid decisions made by the CEOs at Regent, Entercom or Citadel.

It's disgusting and inexcusable. Moreover, it's indefensible.

-9-

 

[cee]

They didn't overpay in 1990s money. I've gone back and read old Broadcasting Magazine accounts of the purchases back then, and no one felt they were overpaying at the time. They were able to make the payments then. That wasn't the problem.

I think E9 pretty much said it all in his post above. But let me mention again(as I have before) what my old PD(someone many of you on this board know and respect - in fact one of you may be him for all I know ) told me about 10 years ago when this was all happening: the rule of thumb for figuring a station's value was traditionally annual cash flow X 3. After the passage of the TelCom Act, it became annual cash flow X 10. I am no expert in this area, just repeating what an informed person told me.

 

[Mike Sheridan]

The problem with radio might be even more simple.

Yesterday I saw a nice display of car radios including a couple of HD radios. I took the opportunity to ask the sales guy at the car audio store if they were selling. He said not really, not as much as they expected. He said more people were going to satellite radio since there were more choices in programming. Then he dropped the bomb.

He said personally he was only interested in a CD player, that's all he needed. He likes having control over what he hears.

So there you have it. With the current technology if you are interested in music you can hear exactly what you want where and when you want. Music radio just can't touch that.

 

[ThePickleReport]

How 'bout that alleged bidding war between Citadel and Entercom a few years back for the "rights" to buy the weak signal of 107.7 for nearly $10 million. How's that workin' out, David?

Well, that's the price you pay to run interference against your competitors. All of those fringe frequencies around Rochester that Clear Channel owns are a good example. Does it add to the bottom-line? Nope. Just change the format to the flavor-of-the-month and hope someone is listening to you and not the competition.

Radio isn't a bad business model. Radio is a bad business model if you own stations in New York City and Burlington, Vermont and try to run them the same way. Radio is a LOCAL medium and the market ultimately should and will decide what is an acceptable way to conduct business based on expectations.

 

[TheBigA]

Radio was best left to smaller operators who would be more willing to accept less revenue in the short term rather than destroy the product for the long term.

Unfortunately, small operators simply can't deal with the technological issues that keep changing every few years. There also aren't enough small local owners to support the number of radio stations that exist in every market. And my analysis of the small operators is they aren't better programmers. Take a look at what Mapleton has done with KPIG. They haven't flipped the format yet, but they've gutted the personnel. Entravision is a small owner they just killed Indie 103.

I think there's this idealistic and romantic view that small operators are smarter and less financially motivated than the big ones, and I simply haven't found that to be the case. One other example is Red Zebra, owned by billionaire Dan Snyder, who also owns the Washington Redskins. He runs the sports radio station in DC, and is using his station to control the coverage of his football team. He's also gone through staffs as often as he's changed the coach of the football team (which is about every year). Snyder is an example of a small owner with a specific agenda (not necessarily financial) who uses his radio stations to promote himself and his other businesses. I think this is a model for small owners of the future.

People in radio want a benevolent owner, who will pour money into the station, and leave it alone. That's what some of the big corporate insurance companies did with radio in the 60s and 70s. As long as the station made money, the owner was hands off. I think those days are over for radio, because it's difficult to find a sugar daddy who doesn't want something in return. No one in this world is idealistic enough to "accept less revenue." If you own a house and you put it on the market, you want top dollar. That's not greedy. That's human nature. Same thing with debt. No one wants to get in the hole on their expenses. No one wants to live beyond their means. But it happens. People do it, and it has nothing to do with Wall Street, corporate ownership, or anything else. There's no reason to believe small local owners, faced with declining revenue, won't do exactly what the big companies are doing now. It's why it is very unlikely that radio will find itself with more benevolent owners in the future. The models I've seen, the ones buying up the weak AM stations in the northeast (many of which had once been AM powerhouses) are far worse than the current group of owners in terms of their programming abilities and how they rape the stations for profit. Sometimes the devil you know is better than the devil you don't know.

 

[TheBigA]

He said personally he was only interested in a CD player, that's all he needed. He likes having control over what he hears.

I think he's right. The boomer generation was satisfied having its content presented to them, top down, like a professor delivering a lecture. Today's younger generations want interaction. They want to pick and choose what they hear. They were raised by parents who gave them choices. "Honey, what do you want to eat tonight?" Boomers never got that choice. It was meat loaf even if they hated it.

So while this isn't the business model, radio content needs to change from being top down, we tell you what you like, to a style that's more interactive. That requires technical infrastructure that most of these radio stations don't have. It means transitioning from a staff of program directors, music directors, and air staff who act as gatekeepers, to a staff that acts as enablers and community leaders. It has nothing to do with the size or location of ownership. It has to do with the needs of the audience. That's not a GM or owner decision. That's a change within the programming staff, and I'm not sure anyone in programming now is ready or willing to give up that control. At least not without someone above forcing them to change.

 

[Goat Rodeo Cowboy]

But let me mention again(as I have before) what my old PD(someone many of you on this board know and respect - in fact one of you may be him for all I know ) told me about 10 years ago when this was all happening: the rule of thumb for figuring a station's value was traditionally annual cash flow X 3. After the passage of the TelCom Act, it became annual cash flow X 10. I am no expert in this area, just repeating what an informed person told me.

If my memory is working correctly, I think there have been instances of Cash Flow x 16. (SIXTEEN!)

And when you are buying smaller market stations owned by corporations that ARE NOT publically owned but privately held by owners who also have other businesses, There is some room to pump up the cash flow over a two year period in a way that corporations long under the thumb of SEC regulations cannot do. So, pump up the cash flow a bit, get 16X and you have a recipe for disaster.

 

[TheBigA]

Radio isn't a bad business model. Radio is a bad business model if you own stations in New York City and Burlington, Vermont and try to run them the same way. Radio is a LOCAL medium and the market ultimately should and will decide what is an acceptable way to conduct business based on expectations.

The successful stations weren't run as local stations. Anyone who has ever seen Howard Stern's movie Private Parts remembers the meeting of NBC Radio execs in NY running their station in DC. That was typical. I worked for NBC at that time, and I can tell you it was a centrally run company, with NY deciding what LA and SF put on their stations. Same with ABC and all other other MSOs (multiple station owners) at the time. Based on what I saw with CC in this latest round of cuts, the local management has a lot more autonomy in the way the stations operate.

The other side that people aren't factoring is that before the rise of big radio groups, we had a lot more national programming companies. These were independent consultants like Burkhart-Abrams, Mike Joseph, and Drake-Chenault,, who designed national formats for radio. These companies didn't own any stations, but they ran the content. I believe that if we returned to pre-96 ownership rules, you would see an explosion in those kinds of companies again. Heck, we still have some of them now. Premiere Radio Networks may be a CC-owned subsidiary. But if CC was forced to divest all it's stations, Premiere would still offer Rush Limbaugh, Steve Harvey, Delilah, and Ryan Seacrest to radio. And cheap owners (most of them) would still run them.

 

[Goat Rodeo Cowboy]

Radio was best left to smaller operators who would be more willing to accept less revenue in the short term rather than destroy the product for the long term.

I think there's this idealistic and romantic view that small operators are smarter and less financially motivated than the big ones, and I simply haven't found that to be the case. One other example is Red Zebra, owned by billionaire Dan Snyder, who also owns the Washington Redskins.

Small owner? A billionaire who can own a professional a professional football team is not what the rest of us are talking about when we tout the possible benefits of a "small owner".

A guy who has to mortgage his house, borrow a few bucks from his dad, and and sell his youngest child into indentured servitude to own three stations with a combined market value of three million dollars is the prototype and vision many of us have when we extoll the virtues of tilting the playing field away from the consolidators and toward the "small owners".

Small Owners of that ilk cannot play in markets like NYC, Chicago or L.A. In a more perfect world stations in markets like that would be owned by guys who started out with the 3 million dollar spread and work their way up.... if the BIG market is of any interest to them.

 

[TheBigA]

If my memory is working correctly, I think there have been instances of Cash Flow x 16. (SIXTEEN!)

That was extremely rare, and I think a top rated station in a Top 5 market might still command that multiple, once the banks start lending again. In the 90s, the average was 10 times cash flow, with an occasional 12.

Consider that 10 times cash flow is based on cash flow at the time the station is sold. If you're confident you can increase cash flow, then the multiple isn't so bad. A 30 year mortgage on a house is taking the amount of money you can afford to pay on your house and spreading it out over 30 years. A lot can happen during that time. Your income can change. But you're still on the hook for the payments you agreed to at the start of the plan.

 

[TheBigA]

After the passage of the TelCom Act, it became annual cash flow X 10. I am no expert in this area, just repeating what an informed person told me.

Nope. The ten times multiple became popular in the 80s, long before 1996. Three times cash flow may have been the rule in the 60s, but there were also a lot less station sales then.

A lot of history re-writers talk about what radio was like in the 60s, and then bring up 1996, and they forget about everything that happened in between. If you want to understand the 96 Act, you need to understand what happened to broadcasting in the 1980s. THAT is the key.

 

[TheBigA]

A guy who has to mortgage his house, borrow a few bucks from his dad, and and sell his youngest child into indentured servitude to own three stations with a combined market value of three million dollars is the prototype and vision many of us have when we extoll the virtues of tilting the playing field away from the consolidators and toward the "small owners".

And as you correctly point out, those people will not be able to operate or staff a station any better than the current owners.

As I've said many times, I was part of a group that got a single FM license for free. It was donated to our non-profit group. So we didn't have to get in debt to buy the station. But within a year, after buying a building, some land for a transmitter site, hiring a staff of ten, and some new equipment, we were over a million dollars in debt. Did I mention the lawyer and consulting engineer fees? All the FCC paperwork? If you don't have deep pockets, you cannot own a radio station, regardless of the purchase price.

 

[Goat Rodeo Cowboy]

In the 90s, the average was 10 times cash flow, with an occasional 12.

Consider that 10 times cash flow is based on cash flow at the time the station is sold. If you're confident you can increase cash flow, then the multiple isn't so bad.

When the people who talked about cash flow multipliers and has an idea what that meant were dealing with big metro markets where the advertising market is like a big ship in the water.... changing direction somewhat slowly... the program worked.

It appears to me that when the consolidators went to places like Fayetteville AR, Dalton GA, Ft Wayne IN, and comparable markets where the closing of ONE carpet mill, or ONE poultry processing plant or ONE auto plant can put the local economy into a tail-spin is when the 10x, 12x and a now-and-then 16x formula is what put the nails in their coffins.

 

[TheBigA]

ONE auto plant can put the local economy into a tail-spin is when the 10x, 12x and a now-and-then 16x formula is what put the nails in their coffins.

No one paid 16 times cash flow in those markets. And even in markets that size, you have more than 25 local radio stations! That's insane!

What happened in those markets was bad properties were lumped in with good ones. The 96 Act required companies buying additional FMs to buy AMs. We all know that AM radio was in the toilet in the early 90s. That's why Congress loosened up ownership laws. So a company comes into Waco, buys the #1 FM station at 10 times cash flow, but also has to buy some crappy AM as part of the deal. The law stipulated they had to hold on to the crappy AM for a while. I think most of them are gone now.

 

[TheBigA]

Regulatory agencies looked the other way.

You think the peanut butter you're eating is safe, since the FDA monitors quality? Need I say more?

This country has become too big to regulate. Too big to micromanage, and Obama is going to find that out. It will be very frustrating to him, too. Because every time you come up with a law that is supposed to control bad behavior, the public finds some way to worm around it. Just as Microsoft comes up with patches for its operating system, and some high school kid comes up with a virus that bypasses it. That's just how it is.

We are a country that wants personal liberty. We all have a dream of one day making a lot of money and retiring to Tahiti. But we resent it when someone else gets there first. The only way around that is a top-down system of government, with wage and price controls, where the government tells corporations how much their CEOs can earn. That's great if you're not a CEO. But isn't Brad Pitt the CEO of his own empire? No one tells him, as an independent contractor, how much he can earn. So the big companies would simply restructure as sub-companies to get around corporate rules.

 

[Goat Rodeo Cowboy]

No one paid 16 times cash flow in those markets. And even in markets that size, you have more than 25 local radio stations! That's insane!

What happened in those markets was bad properties were lumped in with good ones.

Lest you and I get into a frenzy to outshout each other, let me drop back into punt formation and say: My point would be that even 6x (SIX-x) may be too much in smaller rural markets. The fragility of the advertising economy out here does not necessarily support the same multipliers that may or may not make sense in the metro areas.

And those of us who have worked our way into a frenzy about the consolidators would point out that if those guys were good citizens, they would have recognized that the local advertising economy of markets like Dalton and Ft. Wayne and Fayetteville were fragile. Rather than polluting the well by running the orphan AMs they really didn't want to own as predator stations, they would have, through the NAB, led the charge to get congress to enact some new and additional provisions to make broadcasting out here in the sticks a bit more vibrant.