Written: 2/9/99
Steven Dodge, chairman and chief executive of American Radio, says, “It’s part of our business plan to increase demand for radio, which is what drives prices,” he says carefully. He adds, “There is a limited amount of radio inventory. If we are able to increase demand for it, its value will go up.” [1]That is but one business model in radio. It is the business model of choice for larger, investor driven companies, but that is, I am sorry to say, not the trend in some of today’s business models for broadcast properties. The industry has undergone massive changes in direction and theme as business practices are split between broadcast revenue and nontraditional revenue sources (NTR).
Radio, as a business is no different than any other. Its purpose is to create a product, offer it for sale and collect the revenue from its sale. What makes broadcasting slightly different is the two step accountability levels built in to its structure. That two step structure should be a guide post to investors to determine if a property’s management is doing the right thing. But most often these days one is ignored in order to justify the other. The result is a lack of focus on the main business plan.
Radio stations are manufacturing companies, who make a product they deliver by radio frequency. They are unable to charge for that delivery to the people who listen to their frequency, so they rather, charge for the placement of commercial messages to provide the delivery. The first step of the structure of a radio station is the end user’s response to the product delivered to them. It is a misnomer to believe that radio’s product is free to the consumer. The cost is the commercials. It costs a listener to do without the reason they listen to the station (music, personality, news, talk, sports, weather, etc.), and put up with the ‘interruption’ of a commercial segment. ‘Interruptions’ of any kind will cause the normal radio listener to turn to another station seeking less ‘interruptions’. Smart broadcasters know this and spend appropriate efforts to make commercials entertaining as well as informative, to help reduce the ‘interruption factor’ associated with hawking a product to an unwilling audience.
Therein lies the first level of structure. A create/deliver/collect issue has been established with the listener. The feedback from that process determines its success. The greater the listener’s attention is retained the more value each properly produced commercial will have and the higher the rates can be the station will charge its advertiser clients
The second level of structure is the create/deliver/collect issue of the advertisements. The product is still the first level of structure, with its ramifications of performance. The deliver issue is response to advertisements from that first level’s customers, the listeners. And the collect level is the actual collection of debt owed to the station for the sale of its commercial inventory.
As is true with any business process, the indication of whether a management team is on the right track, is adherence to the original business plan, or deflection of it in leu of another, less responsible method of revenue. This means the management has retained focus on the product or has deflected the issue to another product as they are unable to perform to the original business plan’s purpose.
The American model of business is based on performance. Those who perform well succeed. Those who perform badly, suffer and go out of business. And they should well do so. To tolerate inadequacy is to endorse it. Radio has begun to fall into this trap and has been digging its own grave in doing so. Such activity raises red flags all potential and current investors should well take note of and heed.
A radio station that does not perform well in the first level of structure is left with attempting to recoup revenue by concentrating on the second level of structure by changing its focus from the product of radio to the creation of ‘nontraditional revenue’ (NTR). Or, better stated, Alternative Sales Sources, (ASS).
The structure of a radio station is one where product is the 1st step. Without step one, any further step has no foundation. Red Flags should be popping up all around a station where step one is not the point. A station unable to succeed based on step one , (audience loyalty=ratings) should simply go out of business or sell to someone who knows how to run one.
The structure of a radio station requires concentration on its product to keep focus. Without that focus desperate managers, unable to succeed in step one, will concentrate on step two and justify it as an enhancement to the ‘bottom line’.
Such ‘bottom line’ mentality has resulted in the desperate drive to acquire Alternative Sales Sources (ASS). ASS is when station efforts are directed away from product and placed upon revenue that has nothing to do with the product. Many smaller advertisers are gullible enough to allow this to happen, but most larger advertisers, and especially agencies, are not so gullible. They still want response. They still want proof that their advertising revenue is well spent.
Stations are getting around this issue by staying away from anything connected to ‘advertising’. “We don’t talk to anyone who has ‘advertising’ in their title. We’re not after advertising dollars. We’re after local and regional sales and marketing dollars.”, [2] says an unnamed ASS salesperson of a major market radio station. Red Flag: If your station is not succeeding at what radio has it changed to something else?
In admission by this unnamed ASS salesperson, he or she has been on the job for three months without closing a sale.[2] That should be the end of that. Economies of scale are not something radio’s current management deems important when the issue is covering their rear.
Our entire economic structure is based on performance. If your business is radio, your performance is judged by how much money you make doing it. Should it make a difference how you make that money? Absolutely!
What if a major automobile manufacturer was producing cars that were junk? They were made just to get them out of the factory. Using their place in the industry they succeeded in delivering cars to unsuspecting consumers only to find the response was negative. People stopped buying their cars because they were junk. Another automobile manufacturer came along and produced quality product and sold it to happy consumers. The first manufacturer would go out of business. Remember Chrysler? Chrysler did the right thing. It refocused on its product. It build quality automobiles and with the help of a government bailout, it was sold to a German company years later, but its investors prevailed.
In radio that is not what is happening. If Chrysler was radio, it would have continued to make worse and worse cars. It would have eliminated most of the assembly crew because it still had its delivery fleet intact. It would have changed it sources of revenue from selling automobiles to consumers to selling packages of automobiles to unsuspecting corporations who would pay for the right to be associated with junk products, and would receive no response for their involvement from the consumers the automobile manufacturer had stopped caring about. Chrysler would have become a sales force selling nothing to nobody as it takes more salespersons to sell nothing than it does to sell value. Its investors would have closed it down. As well they should have.
Radio is just now reaching the point where Red Flags should be popping up all over the country for the same reason. Concentration on product to result in ratings to result in rates to result in revenues has been replaced by concentration on using the delivery fleet (the frequency) to entice unsuspecting marketing budgets to cover the incompetence of bad management.
It all comes down to one major issue: Is profit to be earned or created? Profit, by its very definition is “Positive gain from a business operation”[3]. Does it matter how that positive gain is acquired? Net profit is, “Gross revenues less all costs of doing business and income taxes. Also called net margin or net revenue” [4]
The reader will notice that ‘all costs of doing business’ does not include things that do not cost. Reducing the cost of doing business is a major goal of profit enhancement. It is accomplished by increasing the economies of scale to acquire more output from less expenditure. It is not acquired by reducing expenditure to acquire the same output. That is a prescription for bankruptcy.
Current management strategies in radio tend to reduce expenditures in order to leave a balance of more ‘bottom line’ by acquiring the same output (a signal is filled with something for people to listen to) while concentration is placed on acquiring revenue enhancement through ASS. This makes radio’s definition changed, from a product delivered over a frequency of radio waves, to a sales force delivering sales generated schemes over a frequency of radio waves, which means there is no product. That is a prescription for bankruptcy.
Is the management of the station you have invested in concentrating on its ASS and not on yours? If the station you have invested in is concentrating on its ASS it can not focus on its product and it is continuing to dig its own hole. I am sure you would not want to invest in an ASS hole. Why would you permit something you already own a part of to dig one?
References:
[1]: Wall Street Journal Copyright © 1997 Dow Jones & Co. “A wave of Buyouts Has Radio Industry Beaming With Success” By Eben Shapiro. Published: Thu, 18 Sep 1997 .
[2]: Radio And Records, Copyright © 1999 Radio And Records, “In Search Of NTR”, By Lon Helton. Published Fri, 5, Feb 1999 .
[3]: http://www.moneywords.com/glossary/detail.CFM?ID=3295&SearchTerm=Profit
[4]: http://www.moneywords.com/glossary/detail.CFM?ID=2706&SearchTerm=Profit