Radio InSights

Group Size & Ratings: What about 25-54?

But what about 25-54?

We knew before posting Does Group Size Help or Hurt Ratings? that we’d hear complaints about using 6+ numbers.

Maybe the largest radio groups don’t dominate 6+ because they are too smart to worry about the 6+ beauty contest.

Maybe the big guys know that the real money is in 25-54, so that’s the demo they focus on. Maybe 25-54 is the metric by which they should be measured.

The problem is that publishing a 25-54 analysis similar to the 6+ shown below runs afoul of  Arbitron restrictions on the use of their numbers. Were we or any other organization to release the results, an Arbitron Cease and Desist order would quickly follow.

But we have seen the data.

If you want to know what 25-54 looks like, just take another look at the 6+ chart and visualize the largest groups slightly weaker than they look now.

Yes, the biggest groups perform no better when looking at the money demo.

So there’s no hiding behind the “6+ doesn’t matter” argument.

The edge that smaller groups hold is there even with 25-54.

Then there’s the argument that revenue and profit are better metrics to compare competing radio companies. Admittedly, profit is the ultimate goal of every company, so perhaps it is a better metric.

The problem is the availability of the data. It does not exist in any form that enable us to compare all radio groups.

Using share and rank to compare radio groups may not be ideal, but it uses the most complete set of comparable data available, so it serves as a useful proxy for the more telling data we can’t get at.

Besides, no company regardless of size ignores potential revenue, margins, or power ratios when choosing a format. Formats are chosen expressly because their advocates believe they can become successful and generate above-average profits.

And taking into account demo differences, there is a very strong correlation between a station’s rank and the revenue it brings in–particularly in PPM markets.

But all this is beside the point.

The contrast in performance between the large national groups and the smaller groups suggests that companies are responding to radio’s new challenges in different ways. And those different ways are producing different results.

Jerry Del Colliano in Inside Music Media (paywall) suggests that radio is evolving into two industries, monopolies and local operators.

We can debate the nature of the division, but the divergence is clear.

Radio groups are reaching starkly different conclusions about radio’s future, and in many ways those contrasting visions are reshaping radio today.

And one vision seems to be producing better results today than the other. The subject of our next post.

 

Anything You Can Do, I(HeartRadio) Can do Better.

Clear Channel recently started streaming the 24/7 comedy service, continuing to expand iHeartRadio channels.

It just may be coincidental, but Pandora rolled out it’s comedy channel last Spring, hoping to expand its personalized service beyond music.

Two years ago in a post titled Thanks Pandora, We’ll Take it From Here we pointed out that the barriers to entry onto Pandora’s turf were small:

Pandora may have a tremendous lead over its competition, but it remains to be seen whether the service can sustain its lead. As countless Internet companies have discovered, there is no "first-mover" advantage when it comes to new-media.

Nothing that Pandora does is proprietary. Every aspect of Pandora can be replicated, and ultimately improved upon.

Pandora’s lead may seem unassailable, but think about Netscape, MySpace, or AOL. Weren’t they just as dominant?

On the Internet, being first doesn’t prevent someone else from ultimately eating your lunch.

After Pandora’s lovely honeymoon with Wall Street, the investment community is beginning to recognize Pandora’s vulnerability. As we noted recently, Pandora’s stock price is well off its highs.

Writing of iHeartRadio’s growing popularity, Motley Fool recently declared: This is Pandora’s Biggest Nightmare.

Sometimes even fools get it right.

Streaming's Winners or Losers? MOG, Spotify, & Pandora

So much for the predictions that pure-play digital alternatives will come to dominate radio’s future.

After several years of hot money pouring into streaming and Internet radio, the reality is finally sinking in.

First, MOG is in play. Rumor has it that Beats Audio, a division of smartphone maker HTC, has either bought MOG or is in the late stages of buying the service.

Venture capitalists have already invested more than $33 million into the service. MOG claims a half million users, of which perhaps no more than 100,000 actually pay to use the service. (That compares to Spotify’s 3 million paying customers.)

The fact that MOG’s investors are looking to get out isn’t a positive sign.

VC companies invest in a start-up hoping to hit pay-dirt when the company goes public. They only unload a company after they’ve made a tidy profit, or when they realize that there will be no profit.

Ironically, MOG still has a lot of fans. Forbes recently declared: MOG blows Spotify away, but obviously its investors have a different view of the company.

HTC may see value in MOG as the handset’s “in-house” music service, the same way Microsoft packages Zune with its smartphones.

And while Spotify, streaming’s 2011 glamour-boy, is well ahead of MOG in subscriptions and revenue, there are growing questions of even its financial viability.

Michael Robertson, the man behind DAR.fm recently made this point:

I think Spotify is a tremendous service. Their technology is outstanding, their speed to stream is terrific, and users love it. It's just a math problem. Under the math (royalty payments to labels) they're forced to agree to, they will never generate a profit.

Remember this isn't the first wave. Go look at the archive from 3 years ago, 6 years ago, 9 years ago, you will find the iLikes, MySpace Music, Napster. They all paid up front and did the same deals, and they've all gone to heaven.

Pandora is another tremendous service that people love and yet may never make a profit.

The company’s stock got hammered after Pandora announced another losing year and predicted future losses.

The service’s loss widened to $16.1 million from a previous loss of $1.8 million despite nearly doubling revenue.

You’d think that doubling revenue would be good news, but Wall Street was expecting even higher revenue.

More troubling was the similar trajectory of expenses. Expenses increased at an even faster rate than revenues. On top of that, Pandora admitted to a 23% drop in active user growth.

Now analysts are questioning whether Pandora can even get its stock back up to its IPO price, let alone beyond.

Despite rosy predictions for the future of Internet radio and streaming services, the inevitability of pure-play success over local radio seems less certain than ever.

It is becoming even more obvious that broadcast radio is far from dead. Quite the opposite.

Radio groups continue to attract the majority of listeners and consequently the majority of radio dollars.

It is this continuing flow of advertising dollars that will enable broadcast to prevail over pure-plays on the Internet. Broadcast radio simply has much deeper pockets.

And all the hot money chasing radio dreams can't beat that.

Pandora’s Home-Grown Ratings: Methods & Motives

Pandora claims it has more young listeners than any local broadcast radio station. If 11 million Google hits are any indication, the world seems to believe it.

But is the claim a valid comparison, and is it a trustworthy claim?

The answer is no on both questions. The comparison is meaningless, and worse, the numbers supporting the claim are shaky.

And despite Pandora’s assertion that their efforts are to provide a useful comparison for media buyers, the exercise seems designed to do just the opposite.

Explaining why Pandora created their own ratings, Pandora CRO John Trimble claimed:

Accurately reflecting our audience listenership is critical to our clients....AQH, is the industry standard for buying radio advertising providing buyers with an apples-to-apples metric....AQH comparisons enable advertisers to fully understand the scope and scale of Pandora’s audience. (See here and here.)

But it seems the effort is more for Wall Street than Madison Avenue.

When Pandora first released its AQH numbers inviting comparisons to local broadcast ratings, we pointed out that comparing millions of streams to a single local broadcast signal is meaningless.

An honest apples-to-apples comparison is comparing one corporate audio service to other corporate audio services in the same area.

According to Pandora’s own home-grown ratings, the service has just a fraction of the local audiences of broadcast companies like Clear Channel, Cumulus, Univision, or CBS in any market.

And that is assuming the Pandora numbers are accurate.

The more troubling question is the reliability and comparability of Pandora’s local numbers.

Pandora invites comparisons to Arbitron numbers by using the same terminology, but how comparable are its numbers?

Arbitron weighed in with a carefully worded critique of “recent releases of audience estimates” raising numerous doubts about Pandora’s methods of calculating audience.

Rather than use Triton Digital, Pandora's own ratings provider, and the Media Rating Council (MRC) accredited leader in measuring audio streaming, the service hired a company without ratings experience.

Why didn’t Pandora use the leader in streaming measurement, especially after Triton announced that it would be offering its own local ratings?

On top of that, the company that produced the ratings used a method that is undocumented, and to our knowledge never tested against traditional measurement.

It is not used by Triton nor comScore, the two MRC accredited Internet measurement providers.

The data used to create the ratings came from music logs used by SoundExchange to determine Pandora’s royalty payments.

Perhaps this approach will ultimately prove to be an acceptable method of generating ratings, but what testing has been done? How has it been validated?

Rating providers go through a lengthy and laborious process to gain MRC accreditation. Just ask Arbitron.

The MRC checkmarks tell media buyers that they can trust the numbers media companies provide them.

Cavalierly releasing unaccredited ratings may have created great headlines for Pandora, but with so little known about the reliability and comparability of these ratings, the company has done a disservice to media buyers.

If Pandora is going to get into the home-grown ratings business, it needs to offer greater transparency about the reliability and validity of the numbers it releases.

Otherwise, it ought to leave the ratings business to Triton Digital, comScore, and the other experts.

Streaming Economics: Grow & Lose More Money

Once again Pandora was bragging about its growth during the recent Investors meeting.

While user numbers and top line revenue figures paint a rather upbeat picture of the service’s future, the made-up metrics couldn't conceal the real story, the upside-down economics of streaming.

Business Insider recently looked beyond the hype and came to this conclusion about Pandora:

The more users it has, the more advertising it can sell against those pairs of ears. But at the same time, the more ears that listen and the longer they listen, the more songs they hear and the more Pandora must pay out in music license royalty fees.

The analysis includes a number of graphs that illustrate the point. Take a look at one example shown at left. Revenues and expenses are moving in lock-step.

Broadcast radio has efficiencies of scale. It costs the same to reach one listener or a million listeners. Compare that to streaming radio where costs rise with each additional listener.

Pandora’s revenues have doubled over the past year, yet royalties still consume 50% of Pandora’s revenue. On top of that, royalties are scheduled to increase another 37% by 2015.

Making matters worse, Pandora’s user growth seems to be slowing. According to Seeking Alpha, this quarter’s growth rate was the lowest in three years.

Add to that a reluctance for users to upgrade to the $36 Pandora One, and the service has even fewer options for breaking out of the vicious cycle of revenue and costs tracking each other.

Pandora has to raise its advertising rates, or it has to run more ads.

Pandora users are already noticing the increased ads. One of the attractions of Pandora was the clean limited spot-load of the service. That image is already suffering with the increased load.

Loading up on spots will diminish it’s advantage over broadcast.

The only alternative is to raise rates.

The problem is that Pandora’s CPMs are already considerably higher than broadcast radio’s. The service’s ability to directly target users may be worth a premium, but there is a limit to what an advertiser is willing to pay.

While broadcasters can take some pleasure watching Pandora struggle, streaming’s perverse economics apply to broadcast streams as well.

Broadcast radio groups are essentially using broadcast profits to keep unprofitable streaming afloat.

If new-media pundits are right and ultimately most radio listening is done via streams, broadcast will see revenues decline and expenses increase.

Radio’s cost of doing business will look a lot more like Pandora’s.

That’s why it is important to continue to invest in broadcast. A dollar of revenue on the broadcast side is worth a whole lot more than a dollar on the streaming side.

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.

Did You Buy Pandora at $26?

John Hogan Shares his Vision of Radio's Future

Neal Bocian recently vented here regarding John Hogan's performance at the recent Radio Day 2009. (Hat tip to Jerry Del Colliano's Inside Music Media.) The follow-up debate is well worth reading.

Starbucks Stumbles: Another Victim of Wall Street's Short Attention Span

Starbucks is losing market share, closing stores, and laying-off employees. According to Harvard Business Oneline, the reason is Wall Street and the pressures of going public. Founder Hoard Schultz in an internal memo notes that, "Stores no longer have the soul of the past and reflect a chain of stores vs. the warm feeling of a neighborhood store." Attributing the problem to Wall Street, author John Quelch notes:

Schultz sought, admirably, to bring good coffee and the Italian coffee house experience to the American mass market. Wall Street bought into the vision of Starbucks as the "third place" after home and work. New store openings and new product launches fueled the stock price. But sooner or later chasing quarterly earnings growth targets undermined the Starbucks brand.

The article goes on to note that in an interest to protect the company's status in the investment community, Starbucks stopped paying attention to the qualities that launched the company in the first place. It began focusing on things that would goose quarterly earnings rather than things that would enhance the Starbucks experience.

Starbucks missteps sound a lot like radio's missteps. Is it any wonder that their stock price is in the tank too?

What Wall Street Thinks of Radio

After years of kowtowing to Wall Street analysts and working to enhance "shareholder value" (by gutting stations) this is how Wall Street rewards radio's efforts. Was it worth it?

CBS

Citadel

Emmis

Entercom

Don't Shed a Tear for Wall Street

Inside Radio today lamented radio’s loss of Bear Stearns radio analyst Victor Miller. Inside Radio notes:

Miller’s departure comes as Wall Street firms have been shedding analysts assigned to covering radio. As Inside Radio reported in January, 24 analysts were assigned to radio a year ago compared to about half as many today as stock prices have plummeted and some of radio’s biggest companies are going private.

Radio & Records went even further writing:

Miller’s observations were respected and revered and played a pivotal role in the way institutional buyers looked at a broadcast property when making an investment. He also thanked broadcast executives and industry leaders who shared their knowledge and findings with him, let him grill them about their business and took his tough questions during seemingly endless quarterly teleconference calls that companies host for investors and analysts.

These stories bring to mind an old (and admittedly tasteless) joke that goes, "What do you call 10 dead lawyers at the bottom of the ocean? A good start." Yes, it is in poor taste, but the joke’s survival (and the web sites that perpetuate them) speaks to a universal mistrust of lawyers. And in some respects, what Wall Street analysts have done to radio is not unlike what some lawyers have done to the justice system.

While both Inside Radio and R&R lament the passing of radio's moment in Wall Street's limelight, The fact that Wall Street is abandoning radio says as much about Wall Street as it does radio. Wall Street introduced the notion of "shareholder value" into our lexicon. Suddenly listeners and advertisers didn’t matter as much. Shareholder value is a code word for the price of the company’s stock. To Wall Street what mattered most was that the stock price remained high, and since more than two dozen analysts wrote about radio groups every few months, the business became fixated on quarterly results.

If a group spent money in an effort to increase share and that led to a decline in quarterly profits (which it generally does over the short term), the analysts would write critical reports accusing the company of not showing enough concern about shareholder value.

Ultimately, radio became a hostage of Wall Street thinking. Radio abandoned any thought of investing in the product. The focus was on reducing costs, pricing for share,...and keeping the stock price up. Wall Street rewarded all this by then criticizing the business for not investing in the product. The very people who forced us to plan in three month increments accused the business of thinking too short term.

Noting that small market radio revenues were holding up better than revenues in larger markets, Jim Boyle, one of the few analysts that actually worked in radio, observed:

What we believe this strongly implies is that the unwieldy 'giant platforms' and near-sighted public groups that dominate the big markets are generally not a positive for the management-intensive, locally-centric industry.

Yet it was Wall Street that rewarded the mega-deals. Smaller groups like Cox were criticized and larger groups like Clear Channel and (then) Viacom were praised for their vision.

So pardon us if we don’t shed a tear for Wall Street’s abandonment of radio. Record low stock prices might be painful for the executives and shareholders of public radio groups, but perhaps radio needs a little invisibility on Wall Street so we can start paying attention to our listeners again.

Wall Street Doesn't Understand Radio

R&R reports that Radio One's sale of KRBV has Wall Street's approval. They write:

"Radio One is making positive changes" was the headline on Wachovia analyst Marci Ryvicker investment note to clients yesterday, a day after Radio One agreed to sell KRBV/Los Angeles for $137.5 million and its board authorized a stock repurchase program. She said she sees "two key positives" from Monday's announcements, saying they "not only improve the company's financial position, but more importantly, they provide management with much needed credibility." Over at JP Morgan, analyst John Blackledge told clients, "The sale of the troubled L.A. station makes sense for Radio One at this point, as reformatting and focused efforts could not turn around the station's fortunes over the past few years."

So as far as Wall Street is concerned, a radio company selling a radio station that it couldn't turn around and announcing a stock buy-back is proof of management's wisdom, credibility and warrants praise.

Following this logic, public radio companies should announce that they are selling off all under-performing stations and returning the money to stockholders.

Most of us already understood that kowtowing to Wall Street has been corrosive and a major contributor to the sad state of the radio industry, but if you weren't sure reflect on the implications of these assessments.