October 2004

The future may be nearer than we thought.

Perhaps the future is nearer than we thought.

Until recently we were expecting alternatives to make fairly steady inroads into the audience for US terrestrial radio but this month's debut of Opie and Anthony on XM and Howard Stern's announcement that he is to move to Sirius when his Viacom contract expires combined with a faster take-up of broadband than we had anticipated has led us to rethink the time scale of those inroads.

None of this is to go into immediate gloom about the immediate future of terrestrial radio but we suspect the inroads will in the medium term be such as to significantly affect profitability and, bearing in mind the financial returns now expected, very significantly hit stock values.

The question consequent upon this is how this will affect the industry - will it be a question of Wall Street demanding returns to the degree that companies cut staff severely and end up in a negative spiral in which the service they give is increasingly less attractive, albeit cheaper to produce, with the results that audiences and income drop necessitating further cuts and further loss of audience and income.

The talent problem.

One of the main factors in our change of mind relates to the issue of talent.

Even when it's talent we personally don't particularly appreciate, we still recognise that it is an essential ingredient of successful programming and also that in many cases it isn't just financial rewards that attract it but a combination of those, the right environment and a degree of freedom to exercise that talent.

We also note that perceptions relating to these factors are often as important as reality in that a good reputation for developing talent or giving an idea proper backing will often be important in attracting the talent in the first place - or turning it off if the reputation is one of constrictions.

Thus the turnaround can be fairly sudden - one outlet or type of outlet gets a reputations as being worth trying, talent tries it, succeeds, and creates a virtuous circle that builds upon itself whilst at the same time creating a vicious circle elsewhere as a threatened organization frequently plays things safe and cuts back more, thus creating a vicious circle of failure.

Technological change and the economic model.

In the case of terrestrial radio, its whole economic model is founded on the programming simply being a way of getting ears that can then be tempted by advertisements but, as Clear Channel has belatedly recognised, overdoing the advertisements can get in the way of programming so much that it both creates resentment of the advert and a motive to switch away.

Enter technology and competition here. The competition from satellite - and, lest we forget it, subscription Internet audio - gives an option to pay directly for what you want rather than indirectly through the advert and the evidence seems to be that those who have tried the advert-free satellite radio services find the bargain well worthwhile.

Tag in future growth of wi-fi hotspots and there is the start of a market for the wi-fi equivalent of the trannie or walkman, a market that manufacturers will surely meet and probably combine with a cellphone cum radio and satellite radio thus providing in one handy portable package the choice, depending on location, of whatever of the above can satisfactorily be received.

Add in the further capability for replay - already being built into some DAB receivers - of programming that has been received (or missed on a channel for a period before you tune in) - and skipping adverts should you so desire, and there could be a real problem for the advertising-led radio industry.

At the very least it could skim enough income off the top to viciously cut into profitability and at worst lead to collapse of some major companies weighed down by debt - we would certainly be cautious about investments in terrestrial radio at the moment.

So what can existing terrestrial radio do to compete?

In any scenario like the one above, the only long-term approach it seems to us is for terrestrial radio companies to build on their strengths and reduce the advantages of their developing competitors.

Some of this they already seem to be doing with Clear Channel's move to reduce advertising clutter and the commitment by major groups to the introduction of digital radio among the promising signs.

There are also signs that the companies are recognising that the one area where they currently hold an ace is that of localism although we would note here that should lobbying to keep down the number of low-power FMs be unsuccessful there will be a degree of tapping into this audience by another competitor and also that should broadband and wifi become widely enough adopted there is scope for a new Internet-based breed of competitors.

US terrestrial radio also has an advantage that its big brother terrestrial TV does not in that much of its output is less likely to be time-shifted albeit we wouldn't necessarily call it that much of a strength at times in that most of it is either of a nature where time-shifting has little advantage - it's not much use for news for example - or simply isn't worth while for all but a small minority who have a specific interest.

Indeed for anyone with a broadband connection the on-demand programming of the world's public broadcasters leave the entire combined strength of US commercial radio in the shade, so yet again another segment of the audience may well be whittled away a little.

Nevertheless the combination of localism, specific live events and time-sensitive programming such as news, give a significant potential strength to terrestrial radio.

The problem is that to develop these and move to digital broadcasting will cost money as well may cutting down the advertising load and the result will be a bite out of the profits of existing groups.

We think the moves are essential but we're not convinced that many US radio stations or groups will have a long-enough perspective to bit the bullet and accept reduced returns now in return for potentially better ones in the longer-term.

And where it can't!

Of course there are also areas where under existing regulation Internet and satellite cum subscription programmes can tread but terrestrial broadcasters cannot - as we write Fox TV is facing a USD 1.2 million indecency fine that would not apply to subscription customers.

The response to this is essentially one of three approaches - an attempt to try and get the same restrictions applied to subscription, an acceptance that the world is as it is and the best approach is to leave brick walls alone and concentrate efforts in areas likely to be more productive, or a fight to get the restrictions lifted.

The first approach in our view foolish, counter-productive and likely to be thrown out by the courts but it is one we've seen gaining currency in comments from some broadcast sources. Our view here is that if you've shares in a company that comes up with this idea, look carefully to see if the comments are a smokescreen to cover up some other action - which may be sly but could be productive - but if it's a genuinely felt response either dump the stock speedily or muster resources to dump those with the approach.

The second approach seems the most likely to be adopted - after all that's what Clear Channel has done already, as have others in their settlements with the FCC. It's the safe way.

The third approach would be risky and maybe costly. We just can't see most groups going for the fight.

Terrestrial's future.

Irrespective of all the above, any decline of terrestrial radio will take time and is not the same as the death of the medium.

What we do think is likely to happen is a narrower range for commercial radio - broadcasters funded through a licence fee will have a different problem as the mean-minded amongst the commercial broadcasters opt to try and keep them out of commercially profitable areas and push them into minority-interest ghettos.

We can only hope that this pressure is resisted and defeated: As we have commented before we regard the cultural value of broadcasters like the Australian, British, and Canadian Broadcasting Corporations as exceeding that of all their commercial competitors combined and we just cannot see the same commitment to a range of informative and educational programming ever coming from organizations subject to market pressures to maximise returns on investment.

The question then is which areas of commercial radio will perform best in the new environment. We suspect that news, talk and sports stations in general will be comparatively little affected - unless, of course, satellite radio succeeds in the same way satellite TV in taking sports rights away from existing broadcasters with the consequent extra pressure on sports stations - but music stations may suffer significantly since the base material of their output will be available from many other sources.

We'd feel more concerned about this but for the fact that market-driven commercial stations have in many cases in our opinion put themselves at risks through their own actions in tightly-controlling playlists and thus limited their own appeal and contribution to introducing new artists to a mass audience.

So we come back to the need for commercial radio to develop the areas in which, as we've have noted above, we consider they have strengths that competitors cannot match: Look for the smart companies to do a lot more local programming from live events, to supporting local artists and getting more involved in community action and local news.

The dumb ones: They'll keep on trimming costs, pushing voice-tracking and market-researched playlists until many of their audience have moved to other sources from satellite radio to Internet downloads and so on using their by-then ubiquitous combination receivers that can receive terrestrial, satellite, Internet, and cell phone downloads.

And once they've started paying for any of the others, the terrestrial service has to be good enough to either see them off or compete despite advert loads. We think that in radio as in any other business retention may cost now but is likely to be cheaper in the long run than winning back lost listeners, even if that is possible.

What you think? Please E-mail your comments.

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