Recently, we had a conversation about the radio industry of the media sector with Zacks senior media analyst
Ann Northrop, CFA, in which we try to get a handle on the dismal returns some companies have been generating as of late. Is there relief on the way?
Radio stocks are taking a beating. What is happening in the industry?
Yes, radio stocks continue to hit new lows. The sector has fallen roughly 26% this year and 60% from its highs in early 2004. The industry is in the midst of both a cyclical slowdown, pressured by a weak economy, and a secular downturn, which has slowed industry revenue growth to 1% annually over the last seven years.
Satellite radio, MP3s, video games and streaming music from the Internet have all grabbed listeners from traditional terrestrial radio. Simultaneously, advertisers have gravitated towards other mediums, which have better audience-measuring systems. As revenue stagnated and negative operating leverage eroded margins, stock multiples contracted and prices collapsed.
Do you see the trend changing?
I see possibilities for the industry to stem the secular trend of ad share erosion and revenue decline. The first is the industry's adoption of an electronic ratings system, which began last year and should be complete by 2010.
The industry is light years behind TV, Internet and print media in measuring its audience. It actually uses a diary method where listeners write logs of what stations they listen to and when. Understandably, advertisers want more reliable data to price their spots and we think this has accelerated the migration of ad dollars to other mediums.
Last year, the industry began adopting an electronic ratings system called the Portable People Meter [PPM]. With the PPM, sample listeners carry a pager-sized electronic device that reads signals from the radio stations they are listening to. This eliminate paper diaries, which rely on human memory and therefore makes radio more attractive for advertisers.
What other events do you see potentially boosting industry revenue and stock prices?
Clearly the industry needs to bring back listeners and also develop new synergistic revenue streams. Radio has unique positives. Its audience is more targeted than TV and cheaper on a CPM (cost per thousand) basis than cable.
It also has a wider audience than TV or cable. Ninety percent of people over 12 listen to radio but the hours spent listening to it have steadily declined. This is especially true among teens, who have moved to iPods. So the radio broadcasters need to adapt to the shift in the media landscape and recapture lost revenue share.
The Internet represents a huge opportunity for radio stations to build their brand, enhance their DJs' presence, drive traffic to their stations and generate revenue from downloads.
