State of the Terrestrial Radio Industry:

Rough Waters or Sinking Ship?

Prepared for
Susan Soroka, Instructor
ENG 304
Northeastern University

Prepared by
Rodney Hart
Northeastern University

October 19, 2009

 INTRODUCTION

Captain, We’re Taking on Water

About a year ago there was a grim article published in Billboard Magazine predicting that
the radio ad revenue would continue to decline in 2009 at a rate of about 8% (Yorke,
2008, p. 6). Well, it’s worse. At this point radio ad revenue is on pace to fall 25% on the
year, over three times worse than predicted a year ago (“RAB Revenue Release”, 2009).
Needless to say, when any industry loses $1.7 billion in revenue they are likely to be in
dire straights. Radio companies are now scrambling, and when your only source of
revenue is based on the ads you generate, it is not easy to slow the leak.

So the logical question might be, what happened? The answer is somewhat complicated,
but for simplicity let’s break it down into its two most important parts: an advertising
revenue model and the recession. An ad revenue model basically means all of your
revenue is based on the number of advertisers who want to advertise via your service, in
this case in between songs or talk radio monologues. When a recession hits, however, the
number of advertising dollars become slimmer and more scrupulous. Moreover, when
your top advertising category – the automotive industry – is hit particularly hard, the
rough waters initially anticipated become a swirling whirlpool that may swallow you
whole (“RAB Revenue Release”, 2009).

So what does an industry do to save on costs, when the ability to generate revenue is
largely out of their hands? Two things, layoff employees and syndicate successful
programs to fill the slots of employees who were laid off. Locally, 93.3 Coast FM and
KISS 108 now carry eight identical hours of programming from 6am – 2 pm, and both of
these stations largely reach the same geographic audience (“KISS 108’s,” 2009).
Eventually, this will translate into a somewhat diluted product and due to the fact that
radio stations are primarily owned in conglomerates (a large amount of stations per
company), cannibalization of stations’ own audiences and revenues is likely to occur.
Though this translates into a less diluted product than staff cuts at a newspaper, for
example, stations do run the risk of chasing off listeners who prefer a more unique
programming than that which is syndicated.

HOW DID IT GET SO BAD?

The Ship is Too Heavy

Over the past 10 years, companies in the radio industry have focused on consolidation
with other firms, primarily to expand their geographic reach and to benefit from greater
economies of scale (Kolb, 2009, p.1). The goal of expanding geographic reach and
increasing economies of scale may seem like a forward-looking goal to achieve long run
success, and indeed it is. The downside is in the short term costs of consolidation;
assuming debt, lots of debt. Consequently, when you assume lots of debt, the cost to
service the debt, meaning the cost of incremental interest payments, also increases by a
lot. Servicing the debt used to be manageable with the booming advertising market and
access to cheap financing, but now both of those factors have changed (Kolb, 2009, p.1).
Enemies Ahoy!

When a business model is based on ad-supported revenue, your ability to make money is
inextricably tied to the firm’s ability to hold an audience. If advertisers are going to spend
their money advertising through your medium, they are going to focus on the number of
people they can impact in relation to the amount of money it will cost them to do so. If
advertisers begin to see the medium as diminished – fewer listeners – the less they would
be willing to pay. Two of the most glaring competitors who threaten terrestrial radio’s
longtime stranglehold on the 74% of Americans who turn on the radio when they get in
the car are MP3 players and Satellite Radio (“Radio Continues,” n.d.).

When iPods and MP3 players were first introduced, it is unlikely that radio
conglomerates feared them as a direct competitor. However, with the introduction of all
of the devices that allow you to listen to MP3 players in place of the radio, namely home
speakers and car speakers, they have morphed into a formal source of competition. They
allow for individuals to listen to their own customized lists of music and news from the
sources of their choosing. If you listened to radio for the music, why not put those songs
on your iPod and listen to them there? If you listened to the radio for the news, why not
download a variety of podcasts that could provide you with the news from the source that
you would most prefer? The continued evolution of what MP3 players offer, new music,
new podcasts, will inevitably outpace what terrestrial radio is able to offer. Outside of the
small additional effort on the part of the user to actually load the songs and podcasts,
users have the ability to completely customize what they are listening to fairly simply and
cost-effectively.

The introduction of satellite radio by XM (merged with Sirus in July 2008) in 2001, was
the first major competition to terrestrial radio. With a monthly fee, listeners can hear
commercial-free radio stations now matter where they were. The additional appeal of
these radio stations lies in their exclusivity and uncensored content, the most popular
example being Howard Stern (Manjoo, 2009). The largest competitor in this space is
Sirius XM, who has 18.4 million of subscribers (“Sirius XM,” 2009). The massive
number of users who subscribe to the service highlight the legitimacy of the competition,
however, the ability for Sirius XM to compete long term is up in the air. Due to the
massive amounts of sunk costs in the company and the consolidation of the two firms
(remember back to the costs associated with consolidation of radio firms, lots of debt),
the company’s ability to service the debt is largely in question (Manjoo, 2009). About a
month ago, after a study done by Audit Integrity listing companies that could be headed
for bankruptcy, a poll was conducted to find which endangered company voters believed
most likely to go bankrupt; with 34% of the vote Sirius XM was believed most likely to
go bankrupt (Moss, 2009). With the uptick in auto sales recently, Sirius XM could get a
boost and become more commercially viable, but it is possible that terrestrial radio may
no longer need to worry about satellite radio and be able to focus their sights on MP3
players and other competition to come (Kolb, 2009, p.10). In the meantime they may
want to focus on strategies to capture the 18.4 million subscribers, who soon may be
looking for something new to listen to.
 FUTURE

Staying Afloat

Radio is doing and has been doing everything it can to stay relevant to be able to compete
long into the future. One of the ways they are trying to better serve their listeners is by
providing them with a service that would allow them to capture songs they hear on the
radio for later purchase. The building blocks for this project began in the early 1990s,
when radio signals began to transmit low-bit-rate data along with analog audio
(Palenchar, 2009, p.1). In essence, this data that is being sent with the audio is what
allows your car’s stereo to tell you the song that is currently playing. Radio stations have
now leveraged that technology into iTunes-tagging. So if you have an “iTunes-tagging
HD Radio,” you will be able to capture that low-bit-rate data, and the next time you
plugged your MP3 player into the computer you would be able to pull up the songs you
had earlier heard and “tagged” to decide if you want to purchase them.

In an announcement made by the Jeff Haley (2008), President of the Radio Advertising
Bureau (RAB), the radio industry is set out to expand the reach of radio, “Our goal will
be to have Radio on every mobile phone, PDA, and MP3 Player in the next five years!”
With the announcement of the new iPod Nano in September of this year, I can only
imagine the rejoicing that took place at the RAB offices when they learned it had an FM
tuner. Though this feature has been on other devices like the Microsoft Zune before, none
of those devices are nearly as popular as Apple’s iPod, the clear market share leader.
Now that radio broadcasts are easily able to reach millions of iPod owners, there is no
doubt that it bolsters the argument that radio is still a relevant place for advertisers to
spend their money.

Will the Cork Keep the Water Out?

The only segment for terrestrial radio that has continued to grow in spite of the current
climate has been their internet-derived revenues (Kolb, 2009, p.8). These revenues are
based on radio stations ability to grow their online audiences by offering them free live
streaming of the radio broadcast and a website with relevant content. Now a commuter
listening to their favorite station on their way into work can continue listening to the
station one they get to work by streaming it online. When they are listening to it online
they will still get the commercial breaks, except online radio listeners are subject to a new
set of paying advertisers who pay to advertise on the streaming broadcast not radio
broadcast. In addition, radio stations are receiving additional revenue from advertisers
who want to advertise on the station website, which stations are continuously updating so
they contain relevant content that listeners to their station would be looking for like news
or blogs. These additional sources of have been growing at an average rate of 5.6% over
the last five years and have provided a slight boon to the stations (“Yearly Revenue,”
2009). The problem? Even with total ad revenue down 25% on the year, internet-derived
revenues are less than one-tenth the amount of total revenue; though internet-derived
revenue is growing, it would have to grow at that rate for over 37 years to equal the
amount brought in by local radio advertising just last year.
Another question to be considered when it comes to stations internet-derived revenue,
how long can the growth continue? If there is one thing that characterizes the internet
when it comes to entertainment offerings, it is severe competition. Radio stations
definitely stand to benefit when their audiences continue to listen to their stations online,
but I think it would be a mistake for radio industry executives to believe this to be an area
of consistent growth. They are growing because they are capturing listeners who enjoy
the station and now have more places to listen to it, not because they have become a
popular place for internet surfers to listen to music. Moving forward, talk radio stations
with local talk personalities may be able to grow their internet-derived revenues, but I
think that music radio stations will quickly reach a ceiling. The reason being the litany of
internet music providers on the internet, namely Pandora Radio, and music stations’
inability to compete with the incredible variety consumers have at their fingertips.

Potential Torpedo

One of the most threatening possibilities for the radio industry is the “Performance Rights
Act,” legislation that would force music radio stations to pay an additional fee to record
companies for the music they play. Since the advent of commercial radio in the 1920s,
have paid the composer for the music they play through a blanket licensing fee (Staff,
2009). If the “Performance Rights Act” was to pass and stations had to pay additional
fees to record companies, I believe you would see a lot of drastic changes in the radio
industry. Given the current state of the industry, I think that many stations would be
unable to afford paying the fee, and to avoid paying the fee I think stations would be
forced to move many music stations to syndicated or all-talk programming. However, in
a revenue model that is inextricably tied to the quality of product, forcing listeners to
choose between talk radio or syndicated programming would be a grim day for radio
executives across America. Listeners would start customizing their playlists, podcasts, or
turning on their satellite radio and advertisers would be leaving just as quickly and taking
their wallets with them.

CONCLUSION

The long term future of the radio industry as a relevant place where people go to get their
music and information is very much up in the air. Right now when people get in their cars
they turn on the radio 74% of the time. With FM tuners in MP3 players and offering free
streaming online, radio has put themselves in a position to reach more people in more
places. The radio remains the only free place that you can hear music or news with no
effort of your own involved. Now radio has to fight to stay relevant in a world that their
listeners could customize their own news lists and music with very little effort or listen to
commercial-free radio for a monthly fee. To stay relevant, radio programming has to be
that much better at being exactly what listeners want and when they want it. If they
aren’t, listeners don’t have to go far to have a plethora of other choices, nor do
advertisers.
References

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