Radio Perceptions ‘Challenged,’ as Ad Growth Return Debated

One challenge is to keep existing listenership, which all insiders we spoke to last week agreed has held up well despite an onslaught of new media. Live online streams of everything that’s broadcast are one way to retain audience, and executives at CBS, Emmis, Entravision and Greater Media said many of their outlets (CD Aug 7 p5) are doing this. A smaller array of such stations also broadcast digitally, which executives said allows the signals to be received along with information on songs and artists. HD Radio means drivers can get “metadata” about what’s on-air, which will keep radio competitive with newer media, said executives including Milford Smith, Greater Media vice president-radio engineering.

Some are optimistic that FM chips will be activated in a wider array of smartphones and that Sprint Nextel’s agreement (CD Jan 10 p10) to do that will spur other carriers to follow. If that happens, “you may even see growth” among all age ranges in audiences, said President Ezra Kucharz of CBS Local Digital Media. “We want to be able to deliver the feed and the signal wherever we can.” Carrier activation of FM chips, “a plus for the industry,” doesn’t negate that radio is “kind of later to the market given how successful Pandora is and other radio apps on mobile phones” are, said Jeanne Shoesmith of Standard & Poor’s. Rather than a “growth opportunity,” such broadcasts to mobile devices are “more of a protection of the current revenue stream,” said the analyst.

A backdrop to Auction 94 is a 29 percent decline in terrestrial ads from their zenith in 2006 to $14.2 billion last year, according to our review of Radio Advertising Bureau figures. Radio, a “mature industry” with “limited growth prospects,” may never return to pre-recession terrestrial ad levels, said Shoesmith. “Challenges to ad-rate pricing” remain, and “the radio broadcasters are still facing challenges in improving the perception of radio advertising with advertisers,” she said. Some executives agreed, but others said there’s no problem.

At CBS’s 126 radio stations, “the business as a whole is in growth mode” and that can continue for many years, said Kucharz. “We're not at our all-time high, but the business is growing.” Ads on the stations’ websites and on its live online streams of terrestrial broadcasts -- at all stations and for all but play-by-play announcements on some sports -- “is a growth business for us,” he said. Website ads, “only in the first couple of innings,” have some “runway -- you're looking at a number of years, before this is ever of the same magnitude as the terrestrial business,” Kucharz said: “You're changing the culture with the marketers and ad agencies,” which are becoming “more comfortable” buying ads not just on CBS stations, but on their online streams and websites. Industrywide radio digital ads rose 60 percent from 2009 when RAB first began recording them to $767 million last year, its website said (http://bit.ly/11IUVwp). Spot sales rose 1 percent last year. Terrestrial ads may rise about 2 percent annually for the next five years, with online revenue rising much more quickly from a smaller base, said BIA/Kelsey Chief Economist Mark Fratrik. RAB had no comment.

Online ads pose hurdles, too, to broadcasters, some executives said. It’s “the same challenge that everybody has with digital,” said Chairman Jeff Smulyan of Emmis. There are low barriers to entry and “it’s hard to monetize it,” he said. Radio-station “costs to stream are dramatically higher before we even get to royalty rights, and our cost to customers is also higher” for those with wireless plans charging them more for more bandwidth usage, Smulyan said: Stations also must pay for bandwidth to stream such programming. Broadcasters won’t back off streaming, they said. “You never stand in the way of an idea whose time has come, and we know people like to stream,” said Smulyan. “We know everybody loves Pandora, and everybody loves streaming everything. But we don’t know how they'll respond to” carrier data caps, he continued. “That’s the real ... question.”

That “the perception of the industry is challenged” is seen “in the limited coverage by Wall Street” analysts following radio stocks and bonds, “and people buying stocks,” said Smulyan. “It is capital challenged, more than I've seen it. ... We have not had the growth that we'd like.” The “economics from all sources are just showing slight gains,” he said. Another industry official half-joked that unchanged revenue growth “is the new up.” Another executive, Entravision Chief Operating Officer Jeffrey Liberman, expects terrestrial and digital ads to grow, and noted Entravision on-air ad sales rose 2 percent last year and were up 6 percent in Q4 2012 versus the year-ago quarter. Last spring “saw an acceleration in business, and that acceleration continues now,” he said. Display ads on Entravision websites are “something that our customers are comfortable with, probably in some respects more than some other areas, like streaming, so we continue to have a client acceptance of display ads,” said Liberman. Smulyan is hopeful that ad sales will expand with the economy, he said. “The industry is off to a pretty good start this year.”

Once consumers see a coming smartphone terrestrial tuner from Emmis Interactive, “people will love it” and want their carrier to include the product in their mobile device, Smulyan said. “As people become more aware of data plans” and see the interactive features, “it will all of a sudden change the perception for all wireless carriers and a lot of device manufacturers,” Smulyan said. “When people experience the interactive radio tuner ... it will become ubiquitous in the United States.” The “single-biggest game changer” could allow location-based services and download coupons and the like, he said. Smulyan declined to comment on Emmis’s deal with Sprint.

FCC auctions of FM CPs have raised decreasing amounts of money for the U.S. Treasury. Auction 93’s $3.83 million of net winning bids in 2012 (CD April 9/12 p11) (http://fcc.us/ZABCaf) was less than half the previous auction (CD April 28/11 p9) (http://fcc.us/ZMVdCE). The ongoing auction had $2.92 million in net winning bids after 19 rounds on Monday, a 2.4 percent increase from the previous round (http://fcc.us/12NDDzz). “It’s kind of hard to start a radio station right now,” said Fratrik. “When you didn’t have as much competition for audio listening, when you didn’t have as much competition for advertisers,” it was easier, he added. “Radio faces increasing competition.”

As with other recent FM auctions, some CPs -- 25, or 22 percent of the total -- had no bids in excess of the minimum, commission data showed. Twenty-five of the permits up for sale now were left unsold from previous auctions, said communications lawyer and auction expert Raymond Quianzon of Fletcher Heald. “As of mid-day on Friday, more than two dozen licenses have had only one bid. There are likely some happy bidders who will get by with paying the FCC the minimum due.” Fourteen CPs had bids below $2,000, data showed. “Many of the permits at auction are in rural area or markets with limited population density,” but “a handful of the permits up for auction can cover good-sized radio markets,” said Quianzon. A permit in Lake Park, Fla., had a top bid of $1.5 million from Ricardo Arroyo. The other top CPs were Mecca, Calif., with a $254,000 high bid from Sunnylands Broadcasting, and Silver Springs Shores, Fla., at $202,000 from Central Florida Educational Foundation, auction data showed (http://bit.ly/ZMWx8x).

The costs of running small-market stations, especially when not part of an existing group of outlets in an area, and existing competition are among reasons for the muted bids, said analysts and executives. Because much of a licensee’s costs are fixed, making it not much less expensive to power a small- versus big-market outlet, “you're not going to have as much interest in smaller-market stations that are being auctioned off,” said Fratrik. Auctions “were never our thing,” said Smulyan. Liberman said there’s “no economic model that you can build to support a very small community, unfortunately.” The company won a CP for what became KPST(FM) Coachella, Calif., a market where Entravision had other stations, he said. The station began broadcasting in June, the owner of Spanish-language outlets has said, and FCC data show the company paid $678,000 for the CP (http://fcc.us/11xlL96).

Purchases of radio stations have been picking up in recent months, with the head of the industry’s top broker expecting an increase this year from last. M&A is now “better than last year,” said President Frank Kalil of Kalil & Co. “The industry is solid as a rock. There’s no problem with the industry, and no dearth of buyers and no dearth of sellers.” What had hampered deals was a lack of money being lent for M&A by banks and other lenders, said Kalil. “As soon as there is liquidity -- and there’s more and more right now -- that liquidity will in tandem increase the M&A activity.” There remain too many “inferior stations,” because the commission has licensed too many of them in some markets, Kalil said: “If the pie has grown faster than the number of signals, then everything is okay,” but now “it brings the value down of everything in the market.” He is optimistic that the industry can return to the terrestrial-ad growth of years past, saying it will take better programming and commercials.

Don’t judge radio’s business prospects on the years since the recession, said Smith. “The recovery from the recession has been lumpy,” and there are “more audio delivery systems competing with us than we have previously,” but radio “still dominates all other audio delivery mediums,” he said. The industry is “still headed in the right direction, in terms of the slope up. It has been a little slower than some people expected, but it does seem to be going in the right direction.” Kucharz sees a “bright future for radio as a very integrated media” encompassing broadcasts in analog and HD and streaming-media and websites, he said. “Radio isn’t going anywhere. It’s just the beginning of another age of local media, and radio is poised probably just as well as anybody else to really capitalize on it.”