May 22, 2012
For upwards of 30 years, BIA/Kelsey has been doing research projects, consulting and producing forecasts on the financial of various media, as well as spotlighting the major issues impacting them. As VP/Chief Economist, Mark Fratrik has been the company's leading expert on the radio and TV industries for the past decade. Here, he offers insight into radio's current state of affairs.
How long have you been studying the radio industry?
I've been at BIA for over 11 years and prior to that, I worked at the NAB for 16 years, so all told, for I've been looking at radio, TV and related media for 27 years.
How have the prospects for radio growth changed over the years?
It's certainly different than when I first started. Over the past two or three years, radio faces incredible, new forms of competition for listeners and advertisers. Consumers can select online entertainment; they've got their own mp3s and iPods to hook up in their cars now; you have Internet streaming, Pandora and satellite radio ... consumers now have so many different choices for audio and information that radio finds itself in much more of a challenging position
At same time, there's also an increased competition for advertiser revenue. Radio has always competed against TV; now it can compete against local cable, online sources, as well as new entities out of the home. We now have advertising at gas pumps and at movie theatres before the films begin. Because there's so much competition for both listeners and advertisers today, radio stations face greater challenges to generate more business.
How do you see radio best adapting to those new challenges?
Smart radio operators realize that that they have to do more than sell over-the-air to compete against these new rivals. Many are getting involved in online activities and sponsorships of off-air activities. We always tell our radio clients that they're not just radio stations anymore, but local media companies that provide access to their audience for advertisers in so many different ways. Smart radio operators recognize that it's a new environment -- and they're employing sales staffs to do multi-platform sales. They have to be more than spot sellers today.
Even so, more than a few operators still believe that many of those new platforms, such as webcast streaming, do not generate a worthwhile ROI. What would you tell those hold-outs?
ROI can be a slow slog; it takes a while to see a decent return. But the important thing is that multiple platforms can offer far more opportunities for advertisers and advertising. Does it bring in lots of money? Certainly not yet, but if they don't get involved with these new platforms, others will. Radio will be competitive with other media if they take part in that - even if it doesn't offer immediate gratification. It's definitely necessary to engage your listeners beyond what you do over the air.
I have already pointed out that radio's advertising revenue growth will be around 2-3% this year and over the next few years, so you're not going to get very strong growth solely with over-the-air revenues. You'll have to get into new areas to expand your portfolio of options.
How will election-year advertising positively impact radio's growth?
It's not so much radio enjoying the political ads, but TV. Radio will get some additional revenue from political campaigns, but it'll vary by market, whether it's in a "battleground state," or whether a particular radio station format targets a demo group that a political campaign wants to reach.
My point about radio's slow and steady growth is that they can still be an important part of a local advertising mix. If a local car dealer has a 72-hour sale this weekend, it can advertise on 20 different cable channels, the newspaper or many online opportunities, but radio offers better ways to generate excitement for advertisers. Does radio have the clout it once had? Certainly not, but it can still help advertisers meet local audiences and engage a good number of people
What do you believe will be the best ways for radio to accelerate revenue growth?
It goes back to thinking not as a radio station but as a local media company that leads audiences in many different ways. I'd also try to hire a few 18-year-olds with no radio experience. The emphasis is on trying to target a younger audience by bringing in people with open minds. They'd try new things; not all of them will work, but not everything on a station website right now works. But odds are that something they come up with will work. It'll bring back lot of excitement to radio -- make people want to work at radio stations as well as create some excitement about the station ... and the medium ... in the marketplace. It's important for broadcasters to create something new to expand their business.
It sounds as if you're calling for more of those classic water-cooler promotions and stunts....
I used to teach a graduate course in Economics of Media at a college, and for my introductory lecture every semester, I'd bring in a copy of the "turkey promotion episode" of WKRP In Cincinnati. I'd run just the 10 minutes of it when they dropped the turkeys out of the helicopter. Now I did it just to have fun and loosen up the class, but I also told the class that I knew five people who became very successful in the advertising industry from doing something crazy like that. Sometimes you've got to have open mind and do crazy things. Should everything you do go over the top? Of course not, but you do have to think about new and different ways promoting to break through in a hotly competitive marketplace.
How much is radio's revenue situation impacted by those who cut spot prices to get business?
It hurts because in terms of generating maximum revenue, but that's what competition is all about, be it radio sales or competing tire dealers. Sales reps all don't get together at a local golf club and set prices so everyone gets the same share of the pie. Radio stations have always been active in offering spot discounts. Has it been more prevalent in the last few years? Certainly when you have an economy downturn, you're more likely to sell at a lower price just to get more inventory; it's a byproduct of the general economy. When it improves somewhat, there won't be as much need to do it.
With auto sales on the rebound, do you forecast more radio revenue from their advertising?
It's a very important part of radio sales - the #1 or #2 advertising category. Thankfully, so far this year auto sales - and advertising - is coming back a noticeable amount. Radio should always be looking for ways to do special promotions with local dealers and trying to make it more attractive for auto dealers to adverse on their stations.
Radio groups are using more voice tracking and syndication as a way to cut staff costs. Are you concerned that the money saved by doing this undermines your advice to bring more excitement and local promotions to the station?
I can't say syndication and voicetracking are automatically bad things in the sense that you're often bringing in better talent to the station. Do you lose bit of local flavor? Yes, but if it's necessary to keep costs down to make stations viable, you do it. And in a lot of small markets where stations don't generate high revenue levels, that may be necessary. And again, bringing in better talent - people who are already successful -- to a small market can actually be a good thing.
How has the continued consolidation of radio groups, as evidenced by Cumulus' acquisition of Citadel, impacted radio's ability to generate more revenue?
It certainly does have an impact, but while many people will say that the business is not way it used to be, as they look back to the "glory days" in radio before consolidation, I believe the level of competition is much more different today. You're not the only local media selling spots. There's so much more competition for audio consumption, so while consolidation can have a negative impact on creating a greater demand for revenue under heavy debt loads, consolidation generally was necessary ... and continues to be necessary ... because there's so much more competition.
There are efficiency savings when there are fewer, but larger groups. There's the potential to create better programming because larger groups have more resources to do research. Those kinds of positives for larger groups are rarely brought up, even though they potentially can benefit consumers and ultimately advertisers.
How often do you examine data and revise your projections?
Excellent question. I know it sounds mind-boggling, but in the world today, European activity can impact not just the world economy, but the local ones. Obviously last month's unemployment numbers were underwhelming; things like that causes advertisers to get worried about the economy.
I'm always reading about the general optimism of the consumer. When people start to get more concerned about the economy, then advertises react - and they can react quickly. They're investing dollars into advertising that should lead to greater sales, but if they don't think consumers are interested in buying what they're selling, they're going to be a lot more tentative with their money.
On the flip side, if we do get stronger economic growth, stronger employment, things settling down in Europe, and the price of oil continues to decrease a little, there may be more of a positive view. I recently started to think that we do have to make revisions to radio in the next few weeks. I'm concerned about increased pessimism, which would likely lead to a downward revision.
Is there anything radio can do to turn around advertisers' pessimistic perceptions?
Any salesperson with training has to go in with optimism to impart to their customers, but you can't hide the fact that Nevada still has a lot of foreclosed homes, that there's double-digit unemployment in many markets, or that many people who are employed are only working part-time. You can't get by economic facts; you can't have rose-colored glasses when you talk to potential advertisers who can see how many people come through their doors, I don't think they could get around those basic economic facts.
I do agree with your general thesis in that it helps in radio and many other businesses to go into a potential client with an optimistic view, which can help you increase their business. It's very important to have that sort of attitude, where you're acting more as a consultant to their business than just someone selling them a radio spot.
How sizable a part of this business is dependent upon perceptions? For instance, when it comes to stock prices, Apple almost always low-balls their forecasts, then when they exceed their own (as well as analysts') expectations, their stock goes through the roof. Should radio groups start low-balling their forecasts as a way to ultimately exceed perceptions?
It'd be nice if radio was as innovative as Apple is. They sold 45 million new iPhones because they moved into China. Does radio have that kind of innovation and a huge new market that could lead to such a dramatic change? I don't foresee that happening. I don't see radio selling a lot more advertising to a new segment of clients; it's a much more mature and developed business. I'm not sure there's any new secret sauce radio could lead to really sizable increases in over the air revenues.
Recently, Cumulus' Lew Dickey estimated that the Rush Limbaugh boycott was responsible for at least $2 million in lost advertising to the Cumulus stations that air his show. Are you concerned that advertisers can be so easily intimidated by a well-coordinated online campaign?
Advertisers are much more cognizant of that pressure than they were two to three years ago because of the ability of various interest groups to get their message out to exert pressure. In one some sense, it's a wonderful testament to democracy; when people coalesce and have an immediate impact. Does that kind of clout negativity impact radio? It certainly does when that happens. But let's not overestimate the impact on the industry. Few, if any, people have the size of an audience that can even be impacted by such a reaction. What's more, radio is a $14 billion industry. If Lew was correct, what's $2 million in that context? More important, where did that $2 million go? Probably to other radio stations.
So you're not concerned that radio will tell their air personalities to play it safer, this making radio more milquetoast...
I do think there was a lesson learned and I am sure most good radio operators talk to their personalities and say something like, "Okay, we weren't hurt by this, but we learned something here. Let's just be careful." I'm sure there were some discussions like that; as a result, you'll have more careful thinking of how controversial topics are approached.
Finally, as over-the-air radio revenue barely grows, while online ad revenue increases substantially, do you foresee a time when radio's online platforms become the chief moneymaker for radio operators?
I could see it happening, but not for many, many years. What's more, the smart operators will continue to be relevant. We haven't talked too much about the rise of News/Talk stations. Those that provide a lot of useful information are still relevant. It's true that more work needs to be done to secure 18-25-year-olds to over-the-air programming, If so, their presence will be around for a considerable amount of time -- and once they adapt to all the new competition, radio operators will remain vibrant, important players.
It comes down to convincing advertisers not to get too carried away with one media or the other. To generate a successful ad campaign today, you can't just rely on one medium. Advertisers who do TV also do a mixture of print and audio. Radio is still part of most advertisers' media mix. It may not be as big a part of that mix, but it still can be an important part of an advertising campaign that wants to reach out to an audience on the local level.