by Fred Deane
Dom Theodore is one of those “wake-up call” voices we turn to every now and then when we get the urge to take the pulse of the industry from a seasoned radio executive’s perspective.
There’s been some ongoing turbulence in our industry over the past year, which doesn’t seem so peculiar as the industry continues to try and find its way given the challenging circumstances of ownership demands, acquisitions & mergers, and the never fading competitive digital issues.
A couple of weeks ago Entercom CEO David Field provided a much-needed burst of positive energy serving as an industry reality-check. Field expressed an accounting of the value and importance of radio in the grand scheme of all things relative to the competitive aspects of our business.
We called on Domino to incite some further discussion about the Field memo, and about the general state of affairs in our business today.
Obviously, bankruptcy has been a hot topic of discussion lately. What are your thoughts on the recent memo Entercom CEO David Field expressed to his company?
David raises many good points. The fact is that the radio industry still produces a good amount of cash flow, and the real reason behind many of these bankruptcies is simply too much debt. It doesn’t matter how healthy a company is. If you load it with debt that sucks most of your cash flow, and you have no money left to operate, the end result will be bankruptcy. And the type of financing structures that private equity employs only contributes to the problem.
Remember how PE works. They purchase a business by making a small down payment and financing the rest, similar to how you would buy a house. But in the case of PE, the debt isn’t owed by the buyer. It ends up on the acquired company’s balance sheet. The PE firm then charges exorbitant “management” fees to pay themselves back for their original down payment, and after that it’s all profit no matter what happens to the company. Even if the company goes under, the PE firm still makes money. It’s a great business model for the private equity firm, but because the profit incentives are not really aligned with the best interest of the company, you typically see PE firms simply cut expenses to temporarily jolt cash flow, and then flip the leftover scraps to another buyer.
In his book “The Buyout of America,” author Josh Kosman outlines how this has happened in industry after industry…not just radio. Look at Toys R Us. Same thing.
Getting back to the Field piece…
Bankruptcy and PE ownership are only half of the problem. These financial issues are compounded with the fact that radio has many, many self-inflicted wounds. David is right when he says “we are highly undervalued and receive far less than our fair share of total ad spending.” But this didn’t happen overnight, it has taken years to arrive here.
The early signs go way back to the early 90’s when we started compromising the product to give “added value” to ad agencies in exchange for a commercial buy. For a while it seemed like we were giving away a carnival with every spot buy. Once that precedent was set, we were essentially ‘training’ ad agencies to believe that our commercial units themselves had no value, and therefore we needed to “add value” to make it worth their while to buy us. After years and years of devaluing our own product, we then started adding even more units every hour to hit budgets, because we lost pricing power. Imagine that?
The effect was growing audience dissatisfaction spurred by too many commercials. Then you had a couple of companies start to swallow each other and accumulate mounds and mounds of debt that could never be repaid. So instead of having free cash flow that could be used to invest in research, talent development, innovation, creativity, marketing and contesting, the money went to service debt.
Then the iPod emerges, the first of many new disruptive digital delivery systems that dispense commercial free music on-demand. What did the big companies do? Cut even more on the product side and add even more commercial units. So instead of being well positioned to combat this, we actually made ourselves more vulnerable, and that’s how we arrived here.
How do foresee the radio ownership landscape shaking out during (and after) these current Chapter 11 proceedings?
One thing is for sure, these companies will emerge with far less debt, and that’s a good thing. But if the same operating tactics are still in place at the end of this, we will be no better off than we are right now. We need more operators that come from broadcasting and understand the art of radio performance. It’s no coincidence that most of the best performing companies right now have deep roots in radio and broadcasting.
Is the industry better served by more ownership spread among less properties, or will the sum of the whole still be the most competitive tactic in staving off digital disrupters?
It’s really not about the number of owners, it’s about the quality of management. If we had more owners that actually come from and care about radio, we will surely be more successful as an industry.
There is a theory that an industry must go through a disruptive phase in order for it to get to that next level or be left in the dust. Outside disruption leads to the latter, inside disruption leads to positive growth. How does our medium accomplish this?
In order for “inside disruption” to happen, we have to put the disrupters in charge and let them make operating decisions. Until owners are willing to take that intelligent risk, we will never get to the next level. Let’s face it, radio has been very effective in driving out the creative “characters” that used to be the innovators in this business. Those were the eclectic types that viewed radio as a form of performance art, and many of them were high maintenance and liked to color outside of the lines. With the top-down management style so prevalent in the last few years, these people were pushed out. The creative performers no longer view radio as a ‘destination career.’
We need owners who will recapture those people and unleash them to create and innovate. Then you will have meaningful disruption that can reinvent the industry.
What fundamental component is radio lacking that used to be a prominent part of its operation?
In many cases right now, we don’t even have the basics right. How can we disrupt when we can’t even meet basic customer service standards? For example, isn’t it interesting that the volume of calls and texts that come into radio stations is way down from what it used to be? I remember back in the day, you’d have six lines ringing, even at 2 a.m. Now? Not even close, unless you are doing a contest.
At least part of this is due to the fact that you have no reasonable expectation to actually reach a human when you call or text a radio station anymore. Most stations don’t respond. They don’t answer calls, text back, or even respond to a Facebook post. In many cases they can’t because there is no person there to do any of this. At a time when human beings are more connected and interactive than ever before, many radio stations, even in big markets, are less interactive.
Is aggregating cume (per company) across multiple platforms still such a critical strategy, or does the value to ownership lay in maximizing its existing portfolio of outlets and optimize every one of them on a case to case basis?
I believe there are too many “throw away” frequencies that have lowered the overall quality of our medium, so I’m a fan of maximizing each and every station. It’s not a good thing to have a cluster of seven stations, and have three really healthy stations, and four that get sacrificed because they aren’t a big priority, or the owner doesn’t want to expend the resources to make it viable. Lots of healthy brands are good for the industry overall and will help us actually grow the revenue pie.
Radio execs for the past few years have been preaching about our industry not standing on high ground for itself and selling ourselves better to the advertising community. Do you see this as a current ongoing issue?
Yes, as I outlined above, this perception of radio having no value was self-inflicted, and that happened long before we had the digital advertising platforms we have today. Now the issue is compounded by the fact that agencies want to know exactly how many impressions they made, and real time response rate data for their campaigns. Broadcast radio still doesn’t have an easy way to do this.
Then you have the problem of stop-sets that are too long, which renders the 6th, 7th and 8th unit of a stop-set as virtually worthless. I believe the opportunity for revenue growth in radio is going to come from local/direct advertisers who still value the most important metric – results. Products sold. People in seats. Customers through the door. And radio still does a great job driving these results.
How do you rate the general overall forecast for the industry going forward?
We are at the crossroads, and if we finally learn from the mistakes of the past 20+ years, and actually invest, innovate and disrupt ourselves, radio will emerge stronger, smarter and healthier than it has been in a long time. But if we continue down the same road of cutting the product, over-leveraging, failing to invest in innovation, and driving our most passionate content creators away, we might not make the next curve in the road.