Is Radio’s Future Bright?
(By Editor-In-Chief Ed Ryan) With two of radio’s biggest companies righting their financial ships, are things about to turn the corner for radio, both in terms of revenue growth and investment? Big debt has been an albatross for Cumulus and iHeart for years, and many radio executives have been waiting for the day both companies fix their balance sheets, claiming that will make the entire industry stronger and bring more investors back to the medium.
Deregulation will also play a major role in radio in 2019 — that is, if it happens. The industry is not in agreement on how much more deregulation is needed, and that could turn a very radio-friendly FCC into a no-action FCC. For a closer look at what we can expect for radio heading into 2019, we turn to three highly respected analysts: Elliot Evers, managing partner at MVP Capital, Scott Flick, partner at Pillsbury Winthrop Shaw Pittman, and media ecologist Jack Myers.
Radio Ink: Where do you think 2018 will finish revenue-wise, and what is your general assessment of how radio performed?
Elliot Evers: I rely upon anecdotal information from what I read and hear from our clients. It seems like it will be a flat year at best. National is sorely challenged. I hear lots of anecdotal stories about local being strong, but with the erosion of national, if you put those two together, it will be a flat year — I don’t hear otherwise. Let’s hope political comes in bigger than it has, but we are not as close to that.
I rely on what I hear from our clients, and it seems to be situational. Some markets are up for local, but most are flat, and almost everybody seems to be suffering losses with national.
Jack Myers: I am holding on my original forecast of overall growth of 3.0, with significant
growth in the fourth quarter resulting from a meaningful political season in the off-year elections. In digital growth, 18-20 percent continued strength across the digital spectrum for both terrestrial and online audio sites. A lot of that strength is being driven by the surge in podcast advertising.
Scott Flick: Frankly, the gains from 2017-18 are mostly due to political, so it is the normal cyclical bounce. Hopefully radio can claim its share of those political dollars, which sound like they will be record-setting numbers for a midterm election. As a result there is a chance that radio will be a bit up, but more as a function of the year-to-year cycle.
Radio Ink: With the economy booming, why is revenue flat?
Elliot Evers: I think advertisers have a lot of alternatives, be it Google, Facebook, or whatever. Radio is definitely out of favor. We are hoping, with David Field overseeing the CBS assets and iHeart and Cumulus out of bankruptcy, that we see more investment in product and radio becomes sexy and exciting again, so listeners and advertisers are drawn back in. I think you are seeing a move away from our sector as one of the preferred advertising vehicles. There is that constant struggle for that piece of the pie.
Scott Flick: That is a fine question. Any statistic you pull will show you that digital mobile
is growing by leaps and bounds. It is sucking the oxygen out of the room. We could have substantial growth in terms of the advertising sold in the U.S., and we have had that, but almost every additional dollar of advertising that goes in gets swept up by digital. As a result, radio is having a tough time claiming a larger stake.
Radio listening is fairly stable, so radio advertising is not any less attractive than it has ever been, but we’re getting other types of advertising that are flashier and, depending on who you believe, better measured. That is the message we have heard from advertisers and agencies. Even if the information is not accurate, it is enticing when you place a digital ad and the medium delivers you all these metrics of exactly who saw the ad, who clicked on it, etc.
We know from experience that a lot of those may have been digital bots defrauding the advertisers, but even though that is becoming established, advertisers don’t seem to be scared off by that. Mainstream advertisers’ ads are being placed on fringe websites. If you ask the advertisers, “Are you OK with being associated with this particular political view?” they would say, “No, we are not into controversy,” but those things have not scared them away from digital.
They keep flinging more and more dollars at digital. Until that starts to stabilize and advertisers recognize the numbers are not all that reliable and perhaps traditional media is a safer way to reach their audiences, they are going to continue to go for digital.
The flip side is we are seeing a much better effort at working out metrics for radio advertising that will allow radio to capture that. Radio is in a position to say that you no longer just put your ad on the radio and hope the right people hear it — and wonder if any uptick in business is due to the radio ad or something else.
We will be able to track that, determine who heard it in their car, and if the next place they went in their car was the store being advertised. Those metrics will go a long way toward allowing radio to effectively be like a digital media and compete with those that have been taking dollars away from radio for the past 10 years.
That’s where we’ll start to see some growth in radio advertising dollars, getting the advertising agencies to come back to radio, because the metrics they’re seeing will be somewhat similar.
Jack Myers: Overall, media in advertising is not strong; marketing budgets are flat and have been for years. The growth is into Facebook, Google, and increasingly into Amazon. The legacy media models are increasingly being commoditized, and pricing is being pushed down. There is more pressure by the agencies to meet the objectives they have been required to meet in their new business pitches with their clients.
It is an increasingly commoditized and transactional business. Advertisers and agencies are shifting more of their dollars into programmatic, which is automated and not based on the traditional relationships. That is happening more and more in the local markets where Google and search engine advertising is increasingly dominant.
Radio Ink: Will the restructuring of Cumulus and iHeart mean anything for the industry?
Jack Myers: I think radio is in a resurgent mode, and the ability of Cumulus and iHeart to make significant investments again will be contributing to that growth. Three years ago, at a radio conference, I said, “Audio is the new black,” and I continue to believe that.
Advertisers are looking for extended reach and an emotional connection with audiences, and consumers are looking at radio. Growth of the podcast business is driving more attention to radio and audio as well as the smart speakers like Alexa and Google Home.
Elliot Evers: I think it will. We have had many clients go through bankruptcies over the years, and you cannot underestimate the distraction and drain on corporate sources when you are in bankruptcy or when you are over-leveraged. Instead of talking to lawyers all day and spending millions on fees, you are focused on a business, your people, and your product and have the maneuvering room with the balance sheet right-sized to an appropriate level of leverage for today’s industry. You have the tools to move forward and invest in product. I think we consider iHeart coming out of bankruptcy to be a significant event.
Scott Flick: It does have real meaning for the industry, just because investment in radio would be an all-around healthy thing. Now that those companies have or are about to remove from bankruptcy, it helps to remove a cloud that has been over the industry that’s been there for a good while in the eyes of Wall Street.
As well as that, those companies can go back to functioning in a normal manner, where they can focus on being strong competitors, as opposed to figuring out how they are going to pay off interest. That is a positive in the eyes of investors, and to the extent that you have strong radio companies promoting the benefits of radio, that is the rising tide that lifts all boats. When you have that many stations distracted, it is not a positive for the industry.
If you are a competitor of Cumulus or iHeart, you will be dealing with a stronger, more focused group — but to the extent that those businesses competing more strongly will likely take business away from the Googles or Facebooks of the world, that is promising. If somebody moves from a digital buy to buy radio and it does well, maybe today they are buying iHeart or Cumulus, but next time they may look more broadly at all broadcasters offering radio advertising.
Radio Ink: Transaction-wise, was 2018 a good or bad year?
Elliot Evers: For us it was a really good year because we handled the Entercom spins, but overall it was mediocre to poor, for reasons that are fully understandable. Generally speaking, the natural owners of broadcast assets are sitting tight. You have individuals with reasons to sell — for example, we represented Jim Ingstadt in the Pacific Northwest. He bought assets in the ’09 trough at a good price and sold at a reasonable price on the way out. He lives in Fargo, North Dakota and didn’t want to keep traveling back and forth. There are situations like that, with owners who want to trim up their portfolio, but those are few and far between.
There are not enough drivers out there to have people trading. People have settled in with the assets they want. We are not particularly surprised by the lack of activity in 2018.
As you look forward to ’19 you will see a relatively slow level of trading as people are waiting for deregulation. You will see some people making moves in anticipation of dereg, but we are advising clients in most settings to sit tight, especially if we see dereg close to what the NAB has outlined, and we hope we will.
Radio Ink: What could happen with the NAB-backed dereg proposal?
Elliot Evers: We spent a lot of time on that at the 2018 Radio Show in Orlando, talking to people who are on the NAB committee and attorneys close to the commission. I’m sorely disappointed we don’t have unanimity around the NAB’s initiative. I understand why iHeart is not supportive; frankly, they’re in a strong position in most of their markets, and allowing their competitors to get deeper and stronger is not in their business interest, but it’s clearly in the best interest of the industry overall. We were disappointed that didn’t happen.
It’s an open question as to whether or not Chairman Pai moves forward and takes up the NAB letter without unanimity in the industry. We are hopeful he does. I think he gets it and recognizes radio is competing with a whole lot of other advertiser options. It’s just myopic and naive to think that radio doesn’t need this deregulatory relief. We are optimistic about that.
I don’t know about markets 76 and lower owning anything they want; that may be a bridge too far, but hopefully it happens. Even if we saw owning up to eight FMs in markets 76 on down, that would be a major and needed change. I think the political winds blow favorably. Time will tell. We are having client meetings and doing strategic planning on the assumption there will be at least subcap relief.
Radio Ink: What are you hearing about deregulation, especially with the industry not in agreement?
Scott Flick: The FCC and a number of commissioners have stated specifically that they are interested in deregulating radio ownership to one degree or another. Commissioner O’Rielly has been particularly outspoken for eliminating the ownership restrictions. I think for that reason we will eventually see something.
There is some disagreement in the industry. We saw it at the broadcast finance panel [at the 2018 Radio Show], with Hubbard CEO Ginny Morris indicating she thought small-market deregulation was certainly appropriate, but in the larger markets she’s less certain about that. IHeart opposes more deregulation.
Obviously it would be easier for the FCC if the entire industry was in harmony and they could say, “OK, you all agree on the changes to be made, and they seem to make sense to us, let’s go ahead and adopt them.” When the FCC finds itself in a position where the industry does not seem to agree, there’s a strong tendency to say, “Call me back when you know what it is you want. It sounds like no matter what we do, part of the industry will say it’s great and part will say that it’s bad or unnecessary.”
There’s not a lot of reason for the FCC to stick out its neck to make changes that even those in the industry won’t agree on. That creates the risk they may hold back to see if a consensus develops. That creates a time delay factor or says, “Well, if some parts of the industry think we shouldn’t make changes and some think substantial changes are needed, maybe we come up with a middle ground.” Unfortunately, although it’s a compromise, it leaves everybody unhappy. It creates an incentive for the FCC to stand back and contemplate this some more.
Jack Myers: It’s a conflicted environment; with so much political reality being thrown in the face of the industry, it’s hard to predict. I can only pretend to have a sense of what is happening in Washington, but the trend would be toward decreased legislation, decreased regulatory control. Any time the industry can gain more control over its own decisionmaking and have less regulatory control, it is better for the industry.
Radio Ink: Do you think there is a possibility that nothing happens?
Elliot Evers: I think that’s unlikely. The need is more pressing than that. If the House goes Democratic, the FCC might not want to fall on their sword, especially when we can’t come together with a unified proposal.
Radio Ink: What is your gut feeling of what will happen?
Scott Flick: I think there is strong agreement among many in the radio industry that deregulation is going to be beneficial to the industry and if nothing else, will create some deal activity. Frankly, deal activity is something that is found in a healthy, robust industry that attracts investors. With the Cumulus and iHeart debt situations, a lot of investors have said it seems like an old school, stagnant industry. Suddenly having a lot of deal activity makes it look to investors like people are interested again. Stations changing hands presents opportunities for private equity to say, “Here’s a deal I would like to get into.”
Radio Ink: Do you anticipate Cumulus and or iHeart shedding some smaller markets once the bankruptcy dust settles?
Elliot Evers: If you see dereg, you will see lots of moving around and people realigning their assets. I don’t know about outright cash sales in smaller markets; I think most of the industry will want to swap assets and get deeper in the largest markets. Not everybody will be able to move up into larger markets.
The real question is, if the deregulatory door opens, will that attract new capital into the industry? We really hope it does. I had a conversation recently with someone who said this seems like a great time to get capital together for a broad $200 million acquisition initiative, and that would include some smaller markets. There may be a moving up on the food chain, with some existing players swapping and selling smaller markets and getting deeper in larger markets. Hopefully, new players come in.
Just because you have consolidation — which is what the deregulation would represent — does not mean you will have new capital come in. They are not necessarily linked. I would say if the NAB proposal for market 76 on down passes in some form, that smaller markets will be a lot more attractive than they are today. All those markets that have three players should reduce to one or two, and those markets will become much more attractive to own and operate radio stations.
Scott Flick: Assuming it comes slower than people are hoping, I don’t think we will see an uptick in deals. Normal deal flow will continue, and there will be a station sold here or there.
Maybe the exceptions are iHeart and Cumulus, who when they were working under heavy debt, it was a difficult situation. Obviously, it was tough for them to spend money on acquiring new stations, and frankly, it was difficult to sell stations because they found themselves selling at a lower cash flow multiple than they bought them for — which made their debt leverage look worse. That’s why they didn’t sell off stations to solve their debt problems; it just wasn’t realistic.
The fact that those two are freed up, it could stir up the deal market. If they are out there buying, they may find themselves in a position where they want to buy one station and not need a different one and sell it. Especially if they need to stay under a cap, they will do some swapping. That alone will liven things up. More people are looking to deregulation as the path toward an energized deal market in the next year or so.
Jack Myers: The whole industry is going through a period of consolidation/contraction, an increased control over its assets. So yes, I think there will be both acquisitions and shedding of traditional stations.
Radio Ink: Look into your crystal ball for 2019. What kind of year will it be for radio?
Scott Flick: I think it is a year we will see some form of deregulation on ownership and see radio wrap its arms around the analytical software and pitch to advertisers — exactly who hears the ads and what they do after they hear them. In terms of revenue, it will be a nonpolitical year, so there will be a drop in revenue just because of that.
It won’t be an easy task to convince advertisers that radio is suddenly the place to resume putting their money into. It will take a while, particularly for the younger folks who have been told digital is everything. That won’t be in a year — maybe two or three years — but it is a start.
In terms of long-term, at the 2018 Radio Show people were talking about new pathways to listeners, whether it’s getting in on the smart speaker platforms, streaming on phones, or trying to figure out ways to connect with listeners with podcasts. It’s good to hear people are looking at these methodologies to try to expand and better connect with audiences.
A few years ago, we were hearing that we don’t understand, radio is the most heavily listened-to medium in the country, and eventually advertisers will remember that and come back. We’ve spent many years waiting, and they have not. It will take these other pathways to bring back advertisers and listeners and give the industry something else to work at other than biding their time hoping advertisers wake up.
Radio Ink: Jack, you mentioned podcasting a few times. Do you think the industry has a strong strategy in that space?
Jack Myers: We are going to see iHeart, with their acquisitions and increasing focus on podcasts, moving aggressively forward to promote the medium and find integrated opportunities for marketers. It’s an amazing opportunity for branded content. I believe the industry has a good strategy for itself now. There continues to be a tremendous amount of dependence on legacy business models, which is inevitable in a commoditized transactional marketplace.
Overall, as you look across the spectrum of media, the radio/audio space and digital out-of-home space are the places where marketers are looking outside the normal track of increased commoditization.
Radio Ink: Aside from deregulation and the challenges of Facebook, Google, etc., what is radio’s biggest problem?
Elliot Evers: The quick answer is a lack of growth. Is that caused by the technologies that compete with radio? Is it the product? I don’t know. I think we have better leadership with David Field, Bob Pittman, and Mary Berner, who are focused on the right things now. One solution would be deregulation, to allow better pricing power. Another is getting the balance sheets right-sized so people can focus on product. Radio is going to be facing headwinds to attract younger listeners and to have the business become sexier. All these things are part of the solution for lack of growth.
Scott Flick: For much of radio, they are still selling advertising like it’s been sold for many years. There has been an effort at programmatic advertising sales, but realistically, we’re going to need to be training the next generation of sales reps much like digital sales reps — to be more focused on analytical software, and metrics they can deliver. I think ad reps in radio are still selling ads like they did 10 years ago.
The other radio stations in town are not your competitors. The competition is Google, Facebook, and a dozen other digital sites. You need to compete head-to-head with those reps who are working on the same clients and speak that language. The metrics will continue to improve with time. We spend a lot of time on sales training, but we need to spend time on technical training so they can preach the gospel of digital radio metrics more than has been the case up till now.
Jack Myers: It’s lack of video. Marketers are increasingly looking for video options. They are looking to use their video assets. You look at search and e-commerce as a huge growth area — which by the way, is a very strong area for radio. E-commerce, direct marketing, will really contribute to the growth of radio. The more video any medium has, the more it’s competing in the largest marketplace.
Consistent with that is the agencies’ failure to integrate across all media platforms; they continue to have radio in a separate bucket from video, and in some cases separate digital and linear. I think the agencies need to look across the platforms and recognize the reach opportunities of radio and use the medium for its strengths, not just for budgets that have been pre-designated to radio. What I mean by the need for more video is the need to be able to break down those barriers inside the agencies on how budgets are being defined and spent.
Radio Ink: What is your projection in 2019?
Jack Myers: For terrestrial radio, separated from the Spotifys and Pandoras, I am looking for declines overall of 3 percent. If you remove political from the model, radio is flat on its linear and +12 percent on its digital revenues.
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