Radio InSights

Gary Shapiro Wants TV Shut Down. Is Radio Next?

Remember Gary Shapiro, the FM-chip attack dog for the Consumer Electronics Association? It turns out that he hates free television just as much as he hates free radio.

During the debate over a proposal to require an FM-chip in cellphones, he famously declared:

Rather than adapt to the digital marketplace, NAB and RIAA act like buggy-whip industries that refuse to innovate and seek to impose penalties on those that do.

Calls for an FM chip mandate are not about public safety but are instead about propping up a business which consumers are abandoning as they avail themselves of new, more consumer-friendly options.

Now we know this attack was part of a broader agenda to ultimately shut down broadcast.

The reason Shapiro doesn’t like radio or television is that when someone listens to free radio, or watches free TV, his CES members don’t get a cut.

His ultimate goal is make sure his members make money anytime people listen to radio or watch TV.

In a recent interview, he said as much. If it were up to him, he would confiscate the spectrum and turn it over to CES members.

Here’s a taste of the interview:

For decades (broadcasters) haven't been creative, and they've been resistant to changes in technology. And they get a phenomenal amount of money from what they do. For years, they've basically controlled Congress.

Broadcasters have faced a declining viewership for years. They have been left behind. And they're sitting on way too much spectrum.

Whether it's 8 percent of the population, as our research indicates, that now relies on over-the air TV or 15 percent as others claim, it's still a low percentage of people relying on broadcast TV compared to the demand for more spectrum to fuel growth in wireless broadband services.

The question comes down to whether every market needs seven to 12 broadcasters. There will always be some broadcasters in every market. But is this the best use of spectrum? There has got to be better uses of the public airwaves than watching 40-year-old episodes of "I Love Lucy.”

And Shapiro couldn’t resist taking another shot at radio:

Radio broadcasters are the only medium that doesn't have to pay copyright fees. That's a fight that has been going on with the music industry for years. But it hasn't changed because they are so powerful politically.

So according to Shapiro, it is only political muscle that keeps broadcast radio and television on the air.

According to him, broadcast radio and television are wastes of spectrum space that mobile providers need so that more people can play Angry Birds and pay for subscription radio and television.

At the risk of sounding a little like Glenn Beck, it really sounds like Shapiro dreams of a future when AT&T and Verizon control both radio and television.

We speculated some time ago that the NAB was using their music royalty proposal as a Congressional bargaining chip in the fight over television spectrum.

Now you know why.

Great Time to Buy Pandora?

A frequent critic of Radio Insights responded to our brief post regarding Pandora’s precipitous decline by noting:

That looks exactly like the Amazon.com post-IPO performance. Did anyone here by (sic) Amazon at $26 a share? It's now worth $186 a share, by the way.

Certainly no one can predict what Pandora shares will be worth tomorrow let alone years from now. So it may ultimately become another Amazon.

Then again, it is just as likely to become another Pets.com, Netscape, or any one of the burst bubbles of the dotcom period.

What we can say for sure is that Pandora’s performance thus far has been nothing like Amazon’s in the months following its IPO in 1997.

As the graph at left clearly shows,  Amazon shares took off, and didn’t start tanking until the dotcom bubble burst in late 1999.

It took nearly four years and a recession for Amazon shares to return to near it’s IPO price, something Pandora accomplished in two day’s time.

Pandora's rise and fall  shows that a wildly popular service can still represent a bad investment. Investment professionals wonder whether Pandora can be profitable given onerous royalties the service is required to pay.

Questions about Pandora's profit potential also hang over the debate over broadcast streaming. If Pandora can't make any money streaming, how likely is it that broadcast groups can?

Bloomberg recently noted that at its peak Pandora’s value on paper reached over $2 billion, exceeding the valuation of the top ten radio groups combined.

Those ten groups generated combined revenues of over $8 billion last year compared to Pandora’s $167 million.

Yes, Pandora is growing rapidly, and radio is mature, but doesn’t it seem just a little optimistic to think that Pandora can deliver financial success anywhere close to what a $2 billion valuation implies?

But if you’re as optimistic as our critic, it might be a great time to mortgage the farm to buy Pandora at these bargain-basement prices.

Is Radio Embracing Digital Too Quickly?

 

Is radio embracing digital too slowly, or too quickly?

While the answer may seem obvious given the barrage of criticism directed at broadcast radio, the answer is not as obvious as you might think.

 We’ve all heard the criticism:

“Many terrestrial station owners resistant (streaming), in part because it is human nature to resist change.”

“The inability of today's leaders to see tomorrow is as old as industry leadership itself.” 

“The sooner broadcasters step into that space (streaming), the better.”

But like the calls of religious zealots, the self-assured beseechments of new-media types are based on faith rather than facts.

BIA/Kelsey thinks that digital will contribute half a billion dollars to radio this year. How much more would digital contribute to radio’s $15 billion revenue if radio moved faster?

Critics don’t have a clue. Like a scene out of Field of Dreams, they just believe if you build it, the dollars will come.

Jerry Lee, owner of Philadelphia’s WBEB, disagrees:

For me to go out and sell digital is playing with pennies against the dollars I could make by becoming sharper at selling my product.  The money comes from selling commercials.

As it turns out, radio just may be doing what Lee warns against, working too hard to bring in digital pennies instead of working to bring in more spot dollars.

Harker Research recently analyzed radio revenue patterns going back to 2009 and to no one’s surprise found that a growing proportion of revenue growth is coming from digital.

Radio critics point to this as proof that digital is the key to radio’s future growth. But is it?

 

Take a look at the graph at left (click to enlarge).

 

 

We have indexed quarterly revenue for spot radio, spot TV, and newspaper print against 2009 as media were coming out of the recession. To smooth out seasonal effects, each data point is the average of four quarters.

Television has rebounded from its post-election doldrums, and is now growing steadily. It now stands ahead of where it was in 2009. Newspaper continues its free-fall, now at 70% of 2008 print revenue.

Radio is better off than newspaper, but worse off than television. It appears stuck at about 92% of 2009 spot revenue.

The contrast between the three media’s recovery from the recession suggest that each is on a different trajectory.
      
Television spot growth is considerably stronger than radio’s, suggesting that radio might be inadvertantly following newspaper's path. Instead, perhaps radio ought to emulate television’s growth strategy.

The curious thing is that as the second chart illustrates, newspaper generates the highest proportion of revenue from digital, television generates the least, and radio is in between.

The medium that has focused primarily on its traditional product, television, is the most successful, while the medium that has essentially gutted its product, newspaper, is the least successful.

If digital is the key to growth, why is television, the medium that has done the least preparing for a digital future doing better than either radio or newspaper?

Newspaper was the first medium to decide that the future was digital. Newspapers put all their resources into re-inventing newspaper as an online product.

They fired reporters, writers, and editors, eliminated whole newspaper sections, and in most ways hollowed-out the product they delivered to readers.

During this time, print revenues dropped like a rock. $23 billion of annual print revenues have evaporated.

After eight years of gutting print to grow digital, newspaper has $3 billion of annual digital revenue to show for it, still leaving the medium $20 billion in the hole.

Radio has approached its digital future much like newspaper. It too has taken an axe to the product, firing air staff and program directors, cutting marketing and research dollars all the while it pours more money into digital.

If gutting newspapers backfired and left print in a deep hole, will it happen to radio too?

The third graph traces newspaper’s growth in digital revenue from 2003 when the Newspaper Association of America starting reporting digital separately.

 

As with the first graph, the data points are four-quarter averages of quarterly digital revenue as reported by the association, in this case indexed to 2003 revenue.

Revenue grew steadily until the recession, fell back, and then returned to pre-recession levels. Perhaps digital revenues will continue to grow, but so far this year digital growth has been anemic.

Newspaper may be facing a future of falling print revenue, combined with stalled digital growth.

The second trend in red on the graph is radio’s performance indexed to 2008 when the RAB started breaking out digital.

At this rate, digital revenues will reach about 8% of radio’s on-air spot revenue in about five years.

Newspaper’s failure to stop the bleeding with a digital focus, in contrast to television’s continued success improving its traditional product should be a warning to radio.

Digital has turned out to be a trap for newspaper. Gutting its print product to fund digital efforts has not solved newspaper’s problems. If anything, it has made the problems worse.

Television seems to be doing just fine with only 3% of its revenue coming from digital.

Television’s focus on creating a product that consumers want–even in a digital age, seems to be paying off.

Time spent sitting in front of a television set has inched upwards even as time with computer and mobile video consumption has grown.

Maybe if radio devoted more energy in creating compelling products like television has, radio might grow its revenue like television has.

Otherwise radio might find itself in the same deep hole in which newspaper finds itself.

Did You Buy Pandora at $26?

Jerry Lee: Blowing Smoke or Breath of Fresh Air?

 

    “Streaming is a bad business model.  If you take the combination of the cost of streaming and the royalties you are paying now, it is a stiff dollar, (and) the problem is going to get worse.”

 Are these the words of a mad man? Are these the words of a digital luddite, oblivious to radio’s inevitable future, unaware that the light ahead is actually a digital train hurtling radio’s way?

Or is Jerry Lee, owner of Philadelphia’s highly successful WBEB, simply saying out loud what every radio station owner has discovered, that streaming revenue doesn’t even cover its costs, and may not in the future?

Last year we pointed out that newspapers were well ahead of radio in developing a digital strategy, and yet only 12¢ of revenue came from digital. The vast majority of newspaper’s revenues were still from print.

Even if we use the most optimistic newspaper numbers to estimate radio's future digital revenue outlook, there's still a good chance that local radio, once a $20 billion industry, will become a $6 billion industry.

In another post we pointed out that BIA/Kelsey’s estimates put digital revenue at 5% three years from now, growing at something like 15% a year. We noted that:

The disparity between broadcast and digital revenue is so great that for digital to make up for a broadcast decline of just 1%, digital has to grow 33%.

Growing broadcast revenue by less than 4% generates more revenue than all the money radio makes on digital.

Is it any wonder that Lee declares:

“For me to go out and sell digital, my website, etc, is playing with pennies against the dollars I could make by becoming sharper at selling my product.  The money comes from selling commercials.”

While critics attack digital skeptics like Lee, even radio’s harshest critics turn silent when the conversation turns to revenue.

No traditional medium has found a digital strategy that pays its way. Not a one.

So broadcast profits are funding money-losing digital initiatives. Lee is echoing a point we made some time ago that needed money should not be diverted into digital, but rather put into growing the broadcast product:

Listeners have been very patient with radio as it has cut back on local programming. They have continued to listen while radio becomes homogenized and nationalized. There is a limit to their patience, however.

The industry should pay more attention to successful broadcasters like Jerry Lee, and less attention to self-serving new-media pundits and stakeholders.

Radio needs to adequately invest in the present before it can afford to invest in the future. That means putting more money into the product and less money into new platforms.

Want to Grow? You Need a Bigger Tent.

In a recent analysis of PPM ratings, we determined that cume has a bigger impact on share than either TSL or occasions. The natural follow-up question is the relationship between cume and TSL/occasions.

Is it true that cume and TSL are inversely related, that stations can't have a large cume and high TSL? More importantly, can a station grow both cume and TSL at the same time, or does one go down as the other goes up?

It’s a much more complex issue than you might think.

Returning to the rating data-set we used in the previous posts, we  plotted cume against TSL. (A graph of cume versus occasions would look very similar.)

 
There’s a clear inverse relationship between cume and TSL. Stations with the largest cumes tend to have the lowest TSL, while stations with lots of listening tend to have smaller cumes.

The key word, however, is tend. While the relationship tends to be inverse, it isn’t absolute. There are stations that have both above-average cume and above-average TSL.

And the chart doesn’t tell the entire story.

In long-term trend analyses, Harker Research has also found that growing stations tend to increase cume and TSL at the same time.

In fact, we have found that a good way to differentiate real growth from the more common month to month random fluctuations is to see whether both cume and TSL are growing.

If you see a spike in TSL without a spike in cume (or vice versa), it is probably a wobble. If you see both TSL and cume moving up, it is more likely to be real.

This is also true with downward trends, but more often with a lag between the two measures.

It stands to reason that TSL and cume would both grow for stations on the rise. The same elements that attract new listeners to a station also encourage existing listeners to tune in more often.

More occasions equal higher TSL. Consequently, cume and TSL grow concurrently.

One Radio Insights reader questioned whether external marketing was the only way to grow cume. It isn’t the only way, but it is an efficient way.

In diary markets, it is particularly difficult to grow an audience without external marketing.

A person typically listens to about five stations, but only writes down two or three stations in the diary. The missing stations make up a station’s phantom cume.

The goal of external marketing is to raise a station from phantom status to reported status by raising the station's top-of-mind awareness. You really haven’t gained a listener. You’ve gained a reported listener.

With PPM, listeners are replaced by exposed panelists. The meters pick up “drive-by” exposure, a few minutes at a time. That’s why cumes are higher with PPM.

External marketing is just as important in a PPM market, but it’s goals are different.

With PPM, every listener is essentially a phantom listener. You never know whether a panelist really listened to the station, or simply came in aural contact with it.

External marketing still works by raising top-of-mind awareness, but less directly.

While the goal in a diary market is to directly influence the diary keeper’s actions, with PPM you don’t care whether the external advertising works on the panelist or those around her.

The goal of external advertising in a PPM market is to grow the tent. The bigger the tent, the more people it can hold.

The more people in the tent, the more likely somebody in the tent will be listening to the station and the greater chance that a panelist will be exposed.

This difference between goals means that while external marketing is important in both diary and PPM markets, the messages need to be different.

That will be the subject of a future post.

So is PPM All About Occasions, TSL, Cume, or What?

Arbitron claims that highly successful radio stations share similar characteristics that distinguish them from average stations.

Analyzing top stations in 33 PPM markets, Arbitron concluded that TSL didn’t differ between top performers and average stations, but that top performers had greater numbers of sessions (occasions) than average stations.

The analysis and conclusions were widely reported, and the notion that the key to impacting PPM is increased occasions entered PPM folklore.

Unfortunately, the analysis suffered from several problems raising doubts about the conclusions. A closer look at the relationships between share and the other rating variables suggests that occasions are not as important as Arbitron claims.

We believe that several technical mistakes led to the misguided conclusions. For example, Arbitron simply averaged share, cume, TSL, and occasions. Averaging can be misleading because averages are distorted by outliers, the few stations at the extreme top and bottom of any ranker.

What is the average share for stations in this hypothetical four station market?

Station A     9.7
Station B     2.9
Station C     2.5
Station D     2.0

The arithmetic answer is 4.3, but does a four share average really capture the essence of the market?

The “average” station is in the twos. Yes, there’s a ten share station, but this one “top performer” station has pulled up the market average by nearly two shares.

Understanding how the two share station can beat the 2.9 station is far more valuable than understanding the ten share station.
 
Because many markets have the equivalent of our hypothetical ten share station, rating analyses across markets should use what’s called the median, the station in the middle, rather than the average. In our example, the median would be 2.7, a more realistic view of the “average” station.
 
A second problem with the analysis is the number of markets and stations involved. If one is going to aggregate ratings data for disparate sized markets, the data needs to be “pretreated” to equalize the impact of each market.

To better understand the role of occasions in impacting PPM, and illustrate the flaws in the Arbitron analysis, Harker Research examined a large Midwest market. We began by graphing the relationships between share and cume, TSL, and occasions for each of 30 stations with a 1+ share.

Share is the vertical axis, and the horizontal axis is one of the other three measures. Each station is shown as a marker.

 
 The first graph is cume. Note that there is a strong trend within the cloud of stations. As cume increases, so does share. It isn't a perfect relationship, but a very strong one.

 
The second graph is share charted against weekly TSL. Note that except for a couple of outlying stations, the station cloud is more or less round. This indicates a very weak relationshup between share and TSL.

The circular pattern indicates that TSL is far less predictive than cume of ratings success.There are stations with four shares that have the same TSL as stations with two shares.

 
The third graph is share charted against weekly occasions. Note that the pattern is very similar to the TSL graph. There is no directional pattern to the cloud. Stations with a wide range of share have the same number of occasions.

So neither TSL nor occasions is very predictive of PPM success.

These graphs show what’s called correlation, how share changes as the other measures change. Correlation can be expressed as a percentage, an estimation how much a change in cume, TSL, or occasions impacts share.

Cume explains about 68% of the change of share compared to 25% for TSL, and 21% for occasions.

In other words, occasion is the least predictive measure. It has an impact on share, of course, but increasing occasions has the smallest relative impact on share.

On top of that, there’s no practical difference between TSL and occasions when it comes to impacting share.

 
Take a look at the fourth graph. This shows the relationship between weekly TSL shown on the vertical axis and weekly occasions on the horizontal axis. It is almost a straight line.

What this says is that both total TSL and occasions move in the same direction at the same rate. With PPM they are inseparably intertwined.

Arbitron’s notion that TSL is not the key, but occasions is, is demonstrably false.

At the weekly level (which is what matters most in the ratings), there’s no distinction between TSL and occasions. Both impact ratings equally, and neither have nearly the impact of cume.

Arbitron used daily estimates to reach its conclusions and looked at a narrow demo. The graphs and conclusions presented here are based on weekly all person estimates. This is another reason we believe our analysis is more generally applicable than Arbitron's.

We believe that analyzing daily estimates of a narrow demo involves too few panelists to be conclusive. The difference between the average station and top performers was a one single occasion. 

The bottom line is that cume is by far the most predictive measure of ratings success. If you increase your cume, you have a very good chance of increasing your share. Not so much with TSL or occasions.

Isn’t it ironic that the single most important tool to grow an audience, external marketing to grow cume, was the first thing cut when radio got in financial trouble?

Robert De Niro, Deer Hunter, The Key to PPM Success.

George Orwell declared History is written by the winners. He might as well have been talking about radio.

When’s the last time somebody interviewed the program director of a station that just tanked in the ratings, asking about the keys to the station’s performance?

Radio isn’t interested in losers, only winners, so the stations that get all the press are the ones that are winning.

With over 2000 radio stations competing in PPM markets, each month hundreds of stations will have sizable gains and a handful will have spectacular gains.

And every month, the winners will get all the attention and speculation about why the stations did so well.

The problem is that nobody can really know why a station has a great month. Maybe it’s something the station did. Maybe it’s something the station didn’t do. Maybe it was something some other station did.

In reality, most of the gains from month to month are just by chance, but human nature and radio being what they are, the idea that most rating gains happen purely by chance is too unsettling.

Despite evidence that rating changes from month to month are purely random, radio pays close attention to the explanations of program directors, general managers and consultants in the belief that somebody must know the secret.

Let’s say a station does something like (say) commercial-free hours, has a good month and it makes the news. The following month other stations try commercial-free hours, and some of those stations also have a good month.

Seeing the number of stations doing commercial-free hours grow, the next month other stations try the same thing, and some of them have a good month.

Does that prove that commercial-free hours are the key to winning in PPM?

Not unless the number of commercial-free winners far out-number the commercial-free stations that were flat or went down.

It is called survivorship bias. We tend to only notice the winners. There may be just as many losers as there are winners doing the same thing, but we ignore the losers and pay attention to the winners.

Think about the Russian roulette scene in Deer Hunter. Robert De Niro’s character spins the gun cylinder, pulls the trigger, and lives. Does that mean De Niro has a special gift?

What if a hundred people decide to do the same thing?

One hundred people spin the cylinder, pull the trigger, and only ten people shoot themselves. That means 90 people are winners. They will be heralded and interviewed about the secret formula for winning.

The 90 survivors spin the cylinder again, 9 shoot themselves, but that still leaves 81 winners prepared to offer their key to staying alive.

You can see where this is going.

Most people win at Russian roulette, but who wins is determined purely by chance. There isn’t a secret formula for winning (except not playing).

Every month when the Arb numbers roll there will be plenty of winners. That means there will be plenty of stations that seem to have the winning formula, even if most won just by chance.

Last December even Arbitron got in on the act by presenting a piece called The Ratings Characteristics of PPM Top Performers (pdf).

The presentation was on pretty shaky methodological ground, but that didn’t dampen the excitement in learning PPM’s secrets.

One trade publication flatly declared:

Arbitron found hardly any difference in the length of listening durations among average stations and top performers, but top performers had significantly more daily listening occasions. It's all about the number of listening occasions.

This is how PPM myths are born.

Let’s look at what Arbitron did. They took the top 3 stations in 33 markets, averaged their share, cume, TSL, and occasions, and then compared them to the average station. You can read their conclusions above.

The table clearly shows that the top 3 stations had much higher cume audiences than the average station, slightly more TSL, but only one more occasion.

 

So the biggest difference between the top stations and the average station was cume. If you want to be a top three station you need nearly four times the audience as the average station.

Not an earth-shattering observation, but a useful reminder.

TSL differences were considerably smaller. Top three stations only have 22% more TSL. Not a huge difference, particularly when the cume difference is 247%!

Daily occasions differ by one single occasion. That’s it. One occasion.

On top of that, the top station in each market has no more occasions than the average of the top three. Despite Arbitron's conclusion, the evidence suggests a rather weak relationship between occasions and winning.

Yet we're told that it's all about occasions.

Arbitron released only 18-34 results for some reason. The presentation alluded to a 25-54 analysis, but those results were not shown.

In our next post we’ll continue discussing the issue of PPM winning secrets and show a Harker Research analysis that raises more questions about Arbitron’s Top Performer claims.

In the meantime, be very wary of people claiming to know the secrets of PPM....and stay away from guns.

Will Radio’s Destruction be at Its Own Hands?

Radio people who were in this business before consolidation remember a very different business.

Outside of a few corporate groups in large markets, most stations were part of small groups, maybe in several regional markets.

Many stations were literally mom and pop operations, with pop selling time and mom keeping the books.

Radio was then more of a shoot-from-the-hip business. If you had a new idea, there was a good chance you could find someone to give it a try.

There were 20% fewer stations before deregulation, yet there were far more formats and format variations. Formats would morph as they moved from market to market, so no two stations sounded alike.

Radio was a loose organic confederation, a giant network of people who’s natural urge was to keep changing things, searching for that next share point.

Consolidation, IPOs, and a focus on Quarterly Capitalism changed all that.

Radio began emulating successful public companies outside radio.

Look at successful companies like McDonald’s or Target. Major decisions are made at corporate headquarters.

Large corporations are all about centralized control, centralized decision making. And today’s corporations believe in standardization.

Adapting the approach of successful corporations outside of radio transformed radio stations into little more than McDonald’s franchises. Today formats are standardized just like the size, shape and weight of a McDonald’s beef patty.

We know that centralized decision making works in many other industries, but does it work in radio?

Not well enough to keep radio growing.

Radio has achieved its level of success through continuous, often chaotic, organic evolution and innovation.

Historically, radio programming innovation didn’t come from the cautious major market players. It came from the small market buccaneers who had little to risk, and who were willing to take fliers based on somebody’s crazy sounding idea.

A lot of the crazy sounding ideas turned out to be just crazy, but every once in a while something clicked, and soon others were emulating, and improving on that first person’s idea. The major players were the last to copy a good idea, to do something different.

As long as the buttoned-down suits ran just a handful of major market stations, innovation continued in the hinterlands beyond the reach of those who felt more comfortable doing the same thing over and over.

However, today’s vision of radio stations as McDonald franchises can be found in every market of every size.

Craziness has been systematically bred out of radio’s DNA. Tranformational programming innovation has essentially stopped.

Cisco's CEO John Chambers recently announced that he was reorganizing the company. The company had lost its edge, was losing ground to new competitors.

He concluded that Cisco had too many committees, too much bureaucracy, and as a result, initiative and innovation had suffered:

We have been slow to make decisions, we have had surprises where we should not.

He then laid out his vision of a mobilized Cisco:

• We will take bold steps and we will make meaningful decisions in a timely, targeted way.  
• We will accelerate our leadership. We understand that our competitors are fierce (but) we will not be defined by them. 
• We will simplify the way we work and how we focus our attention and resources.  We will empower our teams, and allow our people to focus on inspiring and important work.

Even Cisco, a $40 billion computer hardware company, can admit to becoming too bureaucratic, too predictable, and unresponsive to new challenges.

Radio, a business built on innovation, unpredictability, and change should do no less.This is the spirit radio needs today.

This is no time for radio to become cautious, afraid of change. We need the crazy buccaneers of the past. We need people willing to try something different, not afraid to fail.

New media is not radio’s greatest challenge. Radio’s greatest challenge is complacency and a growing buttoned-down attitude that stifles creativity.

Against an onslaught of new highly motivated challengers, it will not be new platforms, new delivery systems, or social networking that saves radio.

Radio will survive if those last strands of crazy DNA that still exist in the minds of a few programmers are reactivated and set free to innovate and reinvent radio.

If that happens, those new-media geeks don’t have a chance.