March 29, 2011
James Boyle has been one of the leading broadcasting industry analysts on Wall Street for 15 years -- this after having spent 15 years in various Media industries. He was a leading senior analyst at Wachovia Securities, Alex. Brown and C.L. King, before landing in his current post at Gilford Securities. Few people have witnessed and analyzed radio's roller-coaster ride on Wall Street than Boyle. Here he offers both a big picture view of radio's current situation ... and where it can go from here.
Radio has had a roller-coaster ride on Wall Street over the years, going from a bullish growth business with high-multiple sales to near-rock bottom ...and now it seems like it's starting to get back in gear again. How do you view radio's past, present and future?
If we go back in time ... in the 1990s when radio first showed up on the radar screen of Wall Street from the increased size of groups from the first round of deregulation and duopolies, even back then with Lowry Mays and Mel Karmazin acquiring more stations and groups, Wall Street considered radio in terms of still being small-market-size companies. However, it viewed consolidation as a business move with a track record of increasing economies of scale in a fixed-cost business that suggested radio could be viewed increasingly as a growth sector. By the middle of the 1990s decade, with full-fledged deregulation from the Telecom Act, all of a sudden within a few years' time, the smaller-sized radio stocks, in view of Wall Street, started to become mid-cap companies with prospects of becoming large cap-sized companies.
But once we got into next decade, the 2000s, and we got past the turn of century period where we had a recession, the dotcom crash and another Gulf War ... all that threw radio and other ad-supported media in a tailspin. It really shifted radio into more of a value stock, where investors were looking at multiples that had come way down from loftier levels where they used to be, but not sufficiently. Hence, in the second half of the decade, radio had become neither a growth sector nor a value stock in the eyes of investors, as eventually several radio stock prices fell below $1.
To give you a feel of how Wall Street apportions its resources ruthlessly but logically, in 2000 there were approximately 25 broadcast radio analysts. By latter portion of the decade, it had dropped to about 15 ... and right now less than five of us spend a lesser portion of our time on broadcast radio and TV stocks. There are no pure-play broadcast analysts left on the Street.
Now that radio revenue has come back better than newspapers from the depths of the harsh recession -- although radio groups are still getting tarred and feathered with the same brush that blackens newspapers' prospects - radio stocks have become more of an economically sensitive stock, where by pulling out of a near-death spiral, many companies that avoided bankruptcy filing and de-levered balance sheets rather impressively in the last two years, resulting in radio being viewed as a leveraged bet on the rebounding economy.
In your eyes, what are the prospects for radio in the near future? Will its growth rate mirror the economy ... do better ... worse?
Our near-term forecast for the radio industry is year-to-year growth of 3% in 2011E. There has recently been somewhat of a macro consensus to trim back economic growth in 2011, where GDP growth will be under 3% ... more along the lines of 2.5%. There are even large investment banks like Goldman Sachs that trimmed it back to 1.9% GDP growth. If radio can generate more in the 2%-3% growth range, then it will likely have a chance to do better than the economy as a whole. The real challenge will be even if you do that in 2011, what can you do for an encore in 2012? What is the sustainable top-line growth?
There's a website poll that said that upwards of 80% of the consumers will be interested in buying a new car this year. With radio dependent on auto dealer advertising, wouldn't this seem like a good sign for 2011?
It should be a good sign and it has so far in early 2011. If indeed that auto website survey is even half-true, it should bode very well for TV, radio and some other media that garners a high portion of revenue from auto advertisers. So far in quarterly conference calls over the last three to four weeks, both radio and TV executives noted that the rebounding auto advertising momentum of 2010 has continued into the early months of 2011. If that leading advertising category continues to be healthy, the conventional wisdom right now for the Radio industry for 2011 is for revenue to be flat to up 2%. However, if enough of your leading ad clients are spending robustly in 2011, there's going to be an upside that will surprise the conservative investor.
What's the conservative investor view of radio these days?
Investor sentiment can go in either direction; it's very pendulum-like, where it often overshoots reality or potential future trends if they don't see an immediate gain. Warren Buffet once said, "Mr. Market almost never gets it right." You either have too happy or too sad short-term investors due to emotions and very recent trends, which may or may not be sustainable. The conservative investor is likely on the sidelines, waiting to see if the economic revival will continue and similarly if the radio rebound will continue as the very easy comparisons have gone away, to be replaced by harder mathematical comps.
What do you see radio's revenue growth coming from - primarily the return of the auto industry? Or the move to digital platforms?
Since radio does not benefit from the newer dual revenue stream that its TV station brethren have from retransmission consent fees from cable systems, radio certainly needs to move towards more revenue from not only digital sources, but also more importantly from the listeners, which can be very beneficial in relying less on advertisers that keep compressing cost-per-points and asking for ever-more bonus spots. Radio stations have a chance to be a mature media that has positive, diversified revenue, and improving or stable margin prospects rather than the mature Newspaper industry, which continues to hemorrhage revenue, lose margins and readers. Of the three big mature media - Newspaper, TV and Radio -- Radio should want to look a lot more like TV than newspapers. It is long past time to diversify radio revenue from solely advertising.
There's talk of radio creating some version of Groupon to generate more NTR. Any thoughts?
You're seeing many people from different media looking at the hyper-growth of Groupon and thinking of how best to do their version of the "daily deal." I would imagine radio has already tried that in certain situations. They're likely to continue doing more of them. It's hard not to copy someone else's big success that has no barriers of entry, and given radio's ability and strengths, as they may have better and long-term relationship with local merchants, so that they can take advantage of radio's experience in simulating more sales traffic, than first-time sellers from a competing online coupon service.
It makes sense, but many media are trying it, too. It will be interesting to see how much of it is sustainable. I do recall that Sinclair Broadcasting TV station group did initiate quite a bit direct marketing efforts for some clients who felt TV was too expensive about five years back, and they had quite a bit of success and incremental revenue growth that came out of it.
What are the potential obstacles to radio's future success? Do you see Net radio and especially Pandora becoming a thorn in radio's side?
Pandora hasn't launched its IPO yet ... and there really is no sizable public equity play on Internet radio, yet. Certainly you and I can both look at Pandora's increase in audience and registered user numbers, but underneath those big boxcar numbers are some mixed trends, but that always comes with hyper-growth.
One thing's for sure: People are not going to stop listening to music and music from a lot of different directions, different distribution channels and different technologies -- especially as more smartphones and portable tablets flood the market. That "third screen," from tens of millions of mobile devices, is going to bring your listeners even more music, as well as other types of entertainment, social networking and information. Radio has recognized for years it is no longer just an over-the-air, ad-supported business. But even newspapers have diversified their core revenue stream faster, which hasn't staunched their significant losses in circulation and in revenue.
Speaking of potential rivals, there's been some debate among pundits as to the future of SiriusXM. What's your take?
I don't formally cover SiriusXM, but my personal opinion is that at 20 million subscribers, they are here to stay in the near to mid-term. Mel Karmazin and his company are going to see more competition from the introduction of wi-fi and wi-max into cars -- just as terrestrial radio will also see yet another increasingly easier-to-use music and news option, which in some cases provides a similar product to radio, but less locally-focused.
What's your opinion of the Cumulus/Citadel deal?
We do not have a formal published opinion on either company. In general, in the past, radio has always proclaimed itself to be a people-intensive and local-intensive business. Historically, the giant radio platforms have not always been able to keep pace with the audience and revenue share of their relatively smaller, more nimble peers. So, if radio is indeed still a business that attracts a local emotionally engaged audience, and is indeed "people-intensive" at the station level, it follows that if a consolidated group is more centralized than not -- and one reads a lot of different things about a lot of different companies on how they run their business -- that may not bode well for an industry that needs to be ever more nimble in adapting to shifting local tastes in a more fragmented media world, as well as more complicated, mobile world in general. That has often been the debate in radio; can you run hundreds of local stations as though they were fast-food franchises selling the same burger.
Nevertheless, do you see more consolidation in the future? If so, how much consolidation?
I do see the likelihood of more consolidation, now that the credit spigots have opened up from the banks beginning in the latter part of 2010. The Hubbard acquisition of several of the Bonneville markets and the proposed Cumulus/Citadel deal are not likely to be the only deals. Deals tend to beget more deals. The bigger question might be whether the future consolidation will stem from the larger groups, or also from the mid-sized and smaller groups.
In the previous few years, the two biggest groups -- Clear Channel and CBS -- actually streamlined and pared back significantly on their giant portfolios. Who is right? The big groups focusing on fewer stations, by rationalizing their too large portfolios, or those executives trying to build even bigger groups by combining large station portfolios and corporate cultures? Radio executives back in the 1990s told Wall Street roadshows that those radio groups adept at managing and investing in their people and programming at the local and national level, so as to super-serve their two constituencies, the listener and the ad client, would best thrive. One Radio executive emphatically told investors one could not constantly cost-cut their way to growth, that cost-cutting was a one-time boost to margins, that afterwards he would keep driving ad rates upward for sustainable growth. Radio consolidation can be beneficial and it can be harmful. We will all see which way it results in 2011 and beyond.