We think here that the analysts may well be
correct when it comes to genre music services in that, although
there will be an audience for these services for a long while,
the competition for ears from newer services including subscription
radio services, Internet audio - including podcasts and downloads,
and serviced to mobile devices such as cell-phones continues
to bite into this audience and could eventually do so to the
extent that stations go into loss.
Terrestrial broadcasters can react to this trend a number
of ways but in essence unless they can find a way to retain
a sufficiently large audience through delivering programming
people want to hear and that is not available conveniently
from other sources the options are cost-cutting or adding
extra revenues through changing to multiple delivery platforms
that can tap different forms of revenue.
In sufficiently large markets we can see the current model
surviving albeit with lower returns on investment for some
musical formats and for news, sport and talk we cannot see
how competitors, apart from paid services such as the satellite
radio companies in the US and maybe mobile services, are likely
to be able to match a broadcaster when it comes to content
that by its nature demands a live rather then recorded broadcast:
The term "live" is central here since if the content
can be recorded then podcasts and downloads can easily match
radio for some of the audience.
There will also continue to be a demand from advertisers for
a way of reaching a general audience, particularly in local
markets, but the ability of targeting more precisely is likely
to mean that online will continue to take some revenues from
What other income
can be added?
At the moment broadcasters have a platform
that gives them significant advantages when it comes to driving
business to other platforms such as their web sites but that
benefit will diminish so it seems to us that the window of
opportunity to build non-traditional revenues that exists
now may well start closing in the near future.
This does seem to have finally percolated to major companies
such as Clear Channel and CBS and in addition the extra channels
that HD provides (or other forms of digital service provide
elsewhere) offer advantages for economies of scale in using
existing facilities to reach additional audiences at fairly
low cost and attract additional income such as sponsorship
rather than advertising within programming, online advertising
tied to web sites, different online advertising to that of
broadcasts, and deals for sales of audio tied to a broadcast.
The scale of additional income and costs.
What we are not clear about is the scale
of these new sources of income when balanced about the loss
of advertising income to newer media or of audiences to other
sources of audio but the costs of transmitting extra HD channels
should not be too onerous and the costs of Internet add-ons
for a station are also likely to remain at a reasonable level.
Of more concern we suspect that, as with the dot-com boom,
the US economy may yet be in for a bust as the country continues
to spend more than it earns yet reacts badly to foreigners
using the dollars they possess to buy US assets as illustrated
by the row over the Dubai purchase of Peninsular and
Any such bust would of course affect commercial radio round
the world because of a general economic downturn that would
almost inevitably follow a weakening of the US economy. It
might also affect other audio providers disproportionately
- if income is reduced then the decision to spend a couple
of dollars buying a download of a song or the Ricky Gervais
show has proportionately greater effect and people might well
opt to listen to a broadcast for which there is no charge
instead: They might also decide spending money on an HD or
other digital receiver is not worthwhile, yet another reason
in our view that prices for digital receivers need to come
Fortunately we see that as very likely to happen for DAB -
and the soon-to-be-produced DAB/DRM receivers because of the
massive potential audience and thus economies of scale for
manufacturers if countries like China and India decide, as
seems most likely, to go this route.
We're less sure about digital in the US since HD is a proprietary
system and the overall market will thus bear the costs both
of licensing payments and a smaller production. In this regard
we see time as being of the essence - if there is a significant
economic downturn before mass production of receivers, HD
will struggle but if there is a mass market before any downturn
then receiver prices could just about be at a reasonable-enough
level to maintain sales when old sets are being replaced.
Considering all the above, we think
that terrestrial radio companies will have to look for additional
sources of income such as those they can gain from extra digital
channels and Internet and downloading operations.
We also think that they will have to accept that advertising
revenues will decline somewhat, both because audiences will
tune-out if too many adverts are crammed into broadcasts -
we think Clear Channel has it right for the longer-term with
its "Less is More" decision - and also because online
advertising will continue to take away some business and other
sources some of the audience.
In line with this it seems to us that broadcasters should
accept that keeping the audience for the longer term is more
important than short-term return on investment but fear that
shareholders and accountants will demand the short-term, even
if it kills the longer-term one.
Whichever way things go we think there is no way but down
for the valuation of broadcast assets since far too many were
in our view, bought at inflated prices (Those of CBS
are now valued at much less than Viacom paid
for them) but once a little more reality sinks into investors
minds we have no doubt that there's still a viable future
for broadcasters. That future, however, may well be more news/sport
and talk, less genre music formats, more non-traditional revenue,
and maybe fewer stations.
On the more positive side digital is offering additional options
and should offer better audio - at least getting rid of some
of the hiss and interference even if its peak quality is,
despite the marketing, not necessarily as good as, never mind
better than, that of a top-class FM transmission-reception
chain. In business terms, the better audio is probably essential
since it's what competitors are already providing, and the
extra channels and data facilities should offer extra revenues
but largely use existing facilities.