August 2007

Could technological development kill off broadcast media as we know them?

Could technological development kill off broadcast media as we know them?

In our February 2006 comment we asked whether commercial radio's business model could survive and ended up concluding that broadcast assets were over-valued and that the future might well be "more news/sport and talk, less genre music formats, more non-traditional revenue, and maybe fewer stations." although we also saw some benefits from the additional offerings made possible by digital technology.

So now some 18 months later, where are we? Rather gloomier, we fear, because of the combination of technological development, economic factors, and subsequent surveys on demographics and human behaviour,
If anything, we think the technology is now capable of much more - and the growth of broadband is making video as well as audio potentially available on demand: This however puts even more pressure rather than less on broadcasters. We don't think they will die but they are likely to decline somewhat.

We then thought that, although there would be a greater take-up of satellite radio subscription amongst the more affluent and a general switch from listening to radio for music to listening on portable devices, the scale of this would be fairly limited and the audience for radio would remain reasonably balanced in terms of the age of listeners and their incomes.

In fact surveys have indicated a greater than (we) anticipated move to portable devices by the younger demographic with an associated reduction in radio listening by them. Allied with this has been survey information that indicates- not surprisingly - a correlation between incomes and take up of both these devices and satellite subscriptions.

The concern therefore is that advertisers will see radio becoming a medium whose audience - currently tilted towards the richer demographics who have listened more - tilting towards poorer demographics. This together with a move of more advertising online could have change advertisers attitudes towards the medium.

Put this together with potential economic problems ahead and the rising cost of borrowing and concerns about the security backing a load as a result of problems in the US sub-prime mortgage market and there is the potential for some serious cutbacks in the income of radio companies together with a more costly and difficult to obtain market when it comes to them obtaining financing.

What has happened so far:

In print we have already seen cutbacks at - or closures of - many metropolitan newspapers round the world, more outsourcing of functions such as layout that used to be handled in house; the launching of online-only papers such as Fairfax Digital's Brisbane Times, Australia's first metropolitan online-only newspaper that was launched in March this year; the use of online clicks to determine printed content as is done by Chile's most widely read newspaper "Las Ultimas Noticias."

In broadcast media audio and video, which until broadband was widely available could not be supplied easily online, has not yet been hit as hard but there are ominous signs in the degree to which younger people already get things via downloads to computers or on mobile devices rather than via traditional means.

There is also the issue of the extent to which demographics desired by advertisers have made the move compared to the populace in general, in particular issues of income: The poor are much less likely to have the same access to newer digital devices than the comparatively well-off.

Add to this the perception by advertisers that online audiences can be more precisely targeted than those for broadcast media and adverts tailored to them with the result that more advertising is being moved online and the finances of traditional media are weakened.
Then there is also the potential whammy for terrestrial radio in the US of having to pay performance royalty fees as pretty well everywhere else in the world already does, yet again reducing profitability. At the moment terrestrial broadcasters get an advantage over satellite and Internet broadcasters who have to pay the fees but this could change depending upon who has the biggest lobbying clout.

Tipping points:

Many commentators point out that at the moment the size of terrestrial broadcasters' audiences remains substantial and draw the conclusion that the threat can be seen off, pointing to the way in which radio has survived past challenges and is making moves - in this context they list HD radio in the US and other digital radio formats elsewhere as well as moves such as reducing advertising clutter.

What we have not seen is any sound analysis of how market leaders can be overtaken by various linked developments: Consider, for example, how Microsoft Word was able to take over as the dominant provider of word processing software from Word Perfect; of spreadsheets from Lotus; and of databases from Borland's products.

In the case of radio advertising, online advertising is already set to - or already has - overtaken it in various countries and each move of money away from radio to online boosts the latter's ability to develop and weakens radio's ability to respond.
In the case of radio its profitability could be eroded much more rapidly than has previously been thought by a combination of movement of advertising - particularly local advertising that has so far been less affected than national advertising in many countries- and development of technological trends that allow people to get what they want when they want it for much of the time.

The former weakens radio and strengthens its competitors financially and the latter bites into audiences as does the availability of audio via satellite services and on mobile devices.

The question thus is not of whether there is an audience for radio but when the money that can be generated from that audience starts to dip towards and then below the cost of providing the service.

Why listen to radio?

So far what has happened through consolidation and technological development has in our view been a form of asset stripping with the prime concern for many companies being the bottom line and financial expertise rather than retaining listeners in the long term.

Through the use of technology that allows one person to do much more than they could have handled in the days of physically editing audio tapes and playing discs or records and consolidation that allows support services to be amortised amongst a cluster of stations, operators have been able to cut costs- largely through cutting staff.

They have also been able until recently to exploit the lack of alternative options for advertisers. This has boosted industry profitability but also eaten into the programming with the result that much of the demand for satellite radio has been fuelled by the absence of adverts.
So why would a prosperous individual who can easily afford a satellite subscription and take audio from the Internet listen to radio at all? Unfortunately the list of why not to listen seems more compelling than the why to listen list.

Not for music! They can get a much wider choice of this elsewhere and it can be accessed while on the move, be it in an automobile or - when stored in a mobile device - in places a radio signal is not accessible.

Maybe for news? Well not for the information as such most of the time for those in a location that can access the Internet but currently for those in an automobile radio is unsurpassed. For major national and international news, however, satellite can provide all that terrestrial does.

For sport? The same applies.

For local news and sport? Here radio still retains an advantage but many advertisers are switching local advertising to online, so the ability to make this pay as opposed to the demand for it could be under threat.

For quality reasons? Well no, whatever the hype about HD digital radio. For quality audio, a well produced CD has the edge over downloads but digital radio doesn't if the download or stream is of reasonable quality and in any case unless being listened to on quality equipment in a suitable environment. Listening in an automobile on the move, digital may have advantages in terms of not having the problems of analogue radio but its no benefit when compared to listening to music that is being played from a recording, be it from a download or CD.

So maybe for a sense of local community, the reason people may choose to listen to or watch local broadcasters and buy local newspapers rather than opt for national services that are now widely available through cable or satellite. The problem with this last scenario is not that the listeners for radio will change so much as that advertisers will move advertising online: The audience may remain but not the money!

The above list does not mean that there are not areas where radio still possesses tremendous advantages - can anyone, for example, suggest a better emergency medium than a battery-powered radio receiver? - but it does mean that when finance is no concern there are now other options that can better serve them for many of their needs and that switching to other options is likely to become easier rather than harder.

So where does that leave radio?

With a financial and programming problem we'd say. At the same time, if people can be persuaded of the real benefits of a medium that with comparatively cheap reception equipment that does not need mains power and enables someone almost anywhere to be in touch with the world and receive a wide range of services, the medium ought to have a healthy future.

The question is what that future might be and none of the answers currently being proffered leave us confident that the levels of income - and even more of profitability - seen in the past can be maintained. The audience, in other words, maybe there but its composition may be of declining interest to advertisers compared to their other options and its listening may decline yet further. That combination will almost certainly reduce the overall profitability of the industry and we suspect that it may well also lead to a concentration on talk and sport - with a little news thrown in - and trend away from music. It's also likely in our view to hit public broadcasting less than commercial counterparts and may even benefit community stations.

The worst long-term scenario in our view would be either another round of cost-cutting or attempts to push up the amount of advertising carried - reducing the quality of programming and pushing more people who can afford it to subscription and non-advertising supported stations and services.

The problem we have is that we cannot see a way round this in the long-term: We still can't understand why people would pay to watch on a tiny phone screen TV programming that they can view on a much larger one, often for free but mobile phone companies in various countries seem to think that there is a market here (although we do note that one such service in the UK failed to meet targets and was withdrawn: That service, however, wasn't available on all phones thus severely limiting its attraction whilst in other countries there has been a more universal system).
If the mobile companies are correct in their assumptions - and they, like satellite radio, certainly seem more skilled in marketing their services than does most terrestrial radio - then there is a process under way that will progress at different rates but will certainly bite into radio.

It can be slowed down if radio programming is compelling to an audience and the financial leakage can potentially be slowed by sufficient effort to provide advertisers with evidence of the efficacy of radio. On this last, work done in various countries has shown radio as a cost-effective medium in conjunction with campaigns in other media and there does seem to be hope that this work is yielding dividends.

That however will not be in our view enough to prevent advertising money moving online, a development that suggests to us that the future for radio will be strongest for those stations in which there is a strong community interest and involvement - some commercial stations may fit this mould and most public broadcasters in the US (where they are kept going in part through fund drives -the situation is rather different where there is a licence fee as in the UK) and community stations fit this model.

The logic of this is in our view to give more emphasis in policy planning to the non-commercial: Should local commercial broadcasters fail, we think the frequencies should then be made available to community radio bidders if no other commercial bidder comes forward, a policy that has already been applied in the UK.
In addition, in view of the value of radio in emergencies, we think this should be allied with suitable moves to require all community and non-commercial stations to have facilities to broadcast emergency messages - the US Emergency Alert System is a reasonable example of this.

We hope that our gloom is ill-judged but the surveys we have seen and our own experiences of asking teenagers about their listening habits are what led to it, even in the UK where radio -boosted by BBC stations, seems to be in better health than the US. The worry is that if the habit is lost - and in the UK commercial companies' lobbying to restrict the BBC is more likely to lead people to move away from the medium rather than switch to commercial as are NAB moves to restrict community radio in the US - the audience will never come back.

Radio companies therefore in our view would be well advised to support almost anything that keeps people listening on the basis that the more of them they are, the more likely they are to tune to a channel than if they've moved off to other listening sources.

What you think? Please E-mail your comments.

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