February 2006

Can commercial radio's current business model survive?

Can commercial radio's current business model survive?

Within the past month iTunes has reached its billionth download and The Ricky Gervais Show podcast, offered at first for free, is now to be available only on a paid basis, developments that seem to us yet another warning notice for radio as traditionally perceived.

Already some analysts think that the model of radio simply broadcasting narrow genre music formats is effectively dying and some broadcasters judging by a report being pushed by the UK Commercial Radio Companies Association (See RNW Feb 27) are reacting in what we perceive as petty and negative ways in an attempt to hold onto what they can by attacking competitors such as public radio services rather than trying to build a new business model.

The question that arises therefore is two-fold: Can radio's current business model survive? - And if not, what viable commercial models are available for those in the radio business?

Under the latter heading come various potential models including charging for audio, financing through sponsorship rather than advertisements, building a combination of businesses that include current advertising-funded broadcasts but add on extras and other options.

The current advertising funded model for radio.

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 existing broadcasters.

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 Orient (P&O).

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 right down.

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.

What you think? Please E-mail your comments.

Comment index ........ E-Mail us with your comments
Front Page About this site Freelance bulletin
Site audio files Radio Stations Other links Archives Index Comment Pages Your feedback Browsers
players, 38 Creswick Road, Acton, London W3 9HF, UK: