Gary Stevens

For almost 40 years, Gary Stevens has been involved in the radio business from a variety of integral perspectives. In the '60s, Stevens became a popular disc jockey for stations such as WIL/St. Louis, WKNR/Detroit and WMCA/New York. After a couple years on British radio, he moved up the command chain to become GM at KRIZ/Phoenix and KDWB/Minneapolis. He then rose even higher, becoming President of Doubleday Broadcasting in 1977. In the '80s he started his own radio brokerage, Gary Stevens & Company. Once deregulation hit, he became intimately involved in some of radio's biggest deals. Over $3 billion in station sales changed hands under his watch.

So if anyone can offer a comprehensive, inside perspective of what went down during radio's corporate heyday ... how and why it got out of control ... and the potential obstacles to a radio resurgence ... it's Gary Stevens.

During the heyday of the radio acquisition era, could you or anyone else see or notice that there was going to be some trouble around the bend when the debt bills come due?

Not really, because we were charting new waters at the time. The industry never had a paradigm like that. We suddenly had new economies of scale; there were fewer guys around to compete with, so you could reduce your promotion costs, have more inventory to sell ... and so on. It seemed to make a lot of sense. Plus, there was lots of money around for more acquisitions.

Then, however, things got what I call frothy. At the end, we saw a few stations actually sell for 1 times market revenue. That made no sense. They had already risen in value from 8 to 10 times cash flow to nearly 18. When deals that size were going through, it was an indicator things were getting, as Alan Greenspan had famously put it, "irrationally exuberant." Keep in mind that it wasn't just radio doing this. It was a worldwide problem for all asset classes, not just radio stations.

But there wasn't one deal that illustrates that turning point? More than a few pundits point to the Citadel/ABC sale.

Nothing really stands out to me. Frankly, I thought the Citadel deal looked pretty good. Larry (Wilson) had built a good company. They paid a lot, but eventually brought in Farid, who had good credentials, and he backed himself up with pretty decent people. He didn't just hire them off the street.

Why this came crashing down depends on what your view of the radio business is. To me, radio is not a high-tech industry ... and that's the genius of it. It's relatively low-tech, and the new media isn't that big a threat. At end of day, it's a very neat way to communicate with people in an inexpensive way ... plus they can use it while they do other things at the same time, such as drive a car. Radio has very good fundamentals, which has never changed.

What changed was the core of ownership, where longtime professionals were replaced by people who forgot (or didn't know) that radio is still entertainment. They saw the business differently. After a lot of the pros took the money and left, they were replaced by a core of operators for whom radio is not a learned experience. They didn't come up through the ranks. This is not to take anything away from them, other than the fact that perhaps they didn't see any limits to their growing by acquisition. As it turns out, there were some.

All those acquisitions and the money spent were based on a ready availability of relatively cheap money, where you could borrow low and sell high. When operating properly, there's nothing wrong with that paradigm. Unfortunately, some people had unrealistic expectations. You can use that to try to lay the blame on Citadel and others, but I don't. Everyone just moved forward on assumptions that turned out not to be right, and it's tough to back up when you are loaded with expensive debt.

I'm currently on Ed Christian's Board at Saga. He inherently understands the limits; as a result he never exceeded his reach in what he managed, nor did he try to be different than what he was. He had, and has, a clear understanding of what he's playing with ... but just as you can't teach someone to be good salesmen, they either are or they aren't, so it is with radio CEOs. Radio is like a restaurant; it's only as good as its chef.

I recall thinking, the first time I went to a radio convention and saw everyone in pinstripe suits, we were headed for trouble, because radio is not that kind of business.

Are you saying that if the radio pros sold their stations to other radio pros, radio wouldn't have experienced such a crash?

No, but they probably would've handled it better. You're also seeing some companies being run by financial types or family members. The latter may have grown up around radio stations, but they missed a few important intermediate steps before walking into the CEO's office. Then as the business got more and more publicly traded, it became guided by investment bankers, who we now see as not the best people to get advice from on how to run a radio group. They've been more interested in the capacity to grow by acquisition, than in building a good, solid business.

So the economic crash basically just added fuel to the fire...

It seemed to happen in two minutes; as soon as the economy took a dive, radio lost 25% of their business off the top, which was their profit margin. Secondly, the banks that allowed these guys to accrue all this debt essentially changed the rules in the middle of the deal. Loan limits were arbitrarily changed. It was as if you had a $10,000 credit card limit, had spent up to that limit, and the card company lowered your limit to $5,000, then charged you an over-limit fee.

Guys who once had access to a lot of easy credit, where banks were practically begging them to take money, suddenly found the widow shut. When things hit the wall, a different mindset descended on the financial community. They wanted their money back, or on different terms than were originally agreed to. Effectively, the radio guys got caught with their pants down.

So here we are -- 90% of the radio operators are now at the mercy of their lenders, who are squeezing the living daylights out of them, saying things like, "Okay, we'll let you continue to pay the loan, but we'll convert some to equity, wipe out yours, and by the way, we really don't want the place, so we'll pay you to run it until values come back, and then we'll sell it and keep the profit." Ouch.

We're in the end game now, where the old values turned out to be unsustainable. With revenue up from last year, the business looks like it will recover somewhat, but like housing, much of what was paid will not be recoverable.

The world banking system has been fractured. If nothing else, people have come to the realization that they have not been told the truth by anybody ... and there's no way to get around what is happening now. There's no back door out anymore. The government can pretend to make this debt go away or find some way around it by printing more money or not asking for the money back immediately, but the truth is that somebody has to take the losses ... and there's no easy answer here. You can't pretend there's a lot value when it isn't there. That's why Paul Allen, who had no stake in the industry but needed cash, bit the bullet and sold his Portland stations to Larry Wilson for pennies on the dollar.

More recently, you seem to have taken umbrage with Katz's monopoly in the rep game. Why?

I don't think it's right when companies exceed their defined parameters -- in this case, a rep firm trying to become an extension of the people they work for. They aren't there to sell the time, then allocate the money as they see fit. That's not only a bad idea, but it creates a real conflict, since they're owned by Clear Channel. Non-proprietary client stations can never be sure of the even-handedness of the placement. I'm not accusing them of doing it. This simply isn't an ideal situation.

Having said that, my real criticism is with their general lack of good judgment. They seem to project an air of superiority. Posturing with clients, when they don't like what they hear, could lead to the kind of pushback that can result in anti-trust scrutiny. It's unnecessary and unseemly. Why look for that kind of trouble when you don't have to?

The bottom line is radio, or any business, is never as good when there's no competition.

The macro story: The radio industry has been hurt; its model dented; and much of it its governance is in hands of people who are not natural broadcasters - we've already seen what their business sense is like. They're up a tree with their finances, yet they're allowing critical aspects of their businesses to be controlled by third parties (reps, Arbitron, etc.) You cannot be successful as an industry if you allow other people to determine your fate.

Are you saying that PPM is also doing that, because its "70=100" concept is being used by advertisers to get lower rates?

Of course it is. PPM represents Arbitron redefining how the radio business runs. It's generating different data than they got with the diary, so radio stations are changing their programming to accommodate the PPM data -- not necessarily their listeners.

I don't ever recall radio operators saying, "The diary is awful; we need electronic measurement." Since Arbitron had no legitimate competition, why come up with this "better" measuring system? Because in the long run, manufacturing all this new and different data gives them more things to sell and creates line extensions of their product. They had no client demand or competitive pressure to create this.

I thought the advertising community was demanding something better than the diary.

Radio clients just want cheapest rate - and look at what the PPM is providing: 70 equals 100 turns into paying 70% of what they used to pay. How does that work?

It boggles my mind. For years the radio business was so fragmented, you had dozens of owners in every market -- and you were only as good as the dumbest guy. If someone put his rates way down, everyone else had to follow. I thought we got past that with consolidation. Less competition usually means less pressure to cut rates. But now we have a situation where essentially one outside party tells radio what they can get for their national air time -- and how much they can have.

That creates a fundamental flaw in the business itself. I ascribe that environment to a) today's operators being so involved with their economic situation that they don't see the forest from the trees; and b) governance by folks who are not natural broadcasters. To crystallize it, the industry has gotten distracted.

Do you think things are changing for the better, with Nielsen giving Arbitron competition with its sticker diary ... and rumors of it launching its own form of electronic measurement?

Nielsen has never really been in the radio business, no matter what they tell you. There's no market for it; if there isn't a market for Interep, there's no market for a second ratings service. No major agency uses the other services now. National advertisers are almost exclusively concerned with the top 50 to 75 markets, so what anyone is doing in the smaller markets really doesn't concern them.

Lately, Katz and several major radio groups have been encouraged by growth in radio revenue in 2010. Are you?

Look, the growth comparison is against one of the worst years in radio's history. It will slowly come back, but the larger issue is that you cannot allow your vendors to control your destiny. I don't know any successful business model where a third party controls 20% of your revenue; that can be your profit margin. If you allow someone to determine the rates and distribution, you're not running your business ... you're taking what they give you. It's the difference between a soup kitchen and a gourmet restaurant.

At the same time, Arbitron wants radio to be even more dependent on them, and instead of fighting, radio has allowed them to get a stronger foothold in their business, too. Because PPM isn't giving radio the kind of results they expected or were promised, radio operators are changing their product not for the listeners, but to pander to PPM methodology.

What I've said isn't just criticism. Hell, that's easy. I'm talking about cause and effect when you lose control of your business. If the industry stood together, they could change it.