The Current Market  *   The History of Consolidation

The Current Market

Newly established media consumption patterns have put Radio squarely in the throes of a healthy, yet decidedly painful metamorphosis. 

Over the last 20 years, 2001 and 1991 were the only years that the growth rate (CAGR) for radio revenue across all U.S. markets declined on a year-to-year basis.  In 1991, while Total Cash advertising declined 2.8%, total annual revenue in Markets 70-plus actually increased 5%, due to the overwhelming predominance of local, direct revenue (75%) to national advertising (25%) as a percentage of total revenue.  2001 was only the third “down” year for radio revenue since 1960, with a decline of 7.5%.  Again, the negative growth was generally attributed to the tech-wreck and 9-11 with greater downturns in national revenue predominantly impacting the major markets.  

With year end figures that appeared to signal a full  recovery from the previous year, industry revenues hit a record in 2004 at just over $20 billion.  However, this banner year also brought with it the dawn of a new era for traditional media.  A broad array of alternative content delivery options began to achieve wide-spread acceptance by consumers and advertisers alike.  2005 ended with radio revenue essentially flat on average across 150 markets monitored by the Radio Advertising Bureau (RAB). 

Figure 1

Revenue growth for publicly traded aggregators such as Clear Channel and CBS Radio (Infinity) has been disappointing primarily due to their dependence on high margin national advertising, which represents a significantly larger share of total revenue in larger markets.   These companies continue to market packaged impressions across several related media platforms, in effect positioning their branded outlets as “unwired” national advertising networks.   This approach creates a significant competitive vacuum, particularly outside the major markets, as local advertisers are not being served by the industry’s most prominent players.

Further, as larger advertisers begin to experiment, national and network revenue is being reallocated at least initially from traditional media to "new broadband-based media",   The near-term result is likely to bring a period of low to mid single-digit top-line CAGR for radio. 

Local versus National

Economic forecasts anticipate modest GDP growth in the U.S.  for 2006.  RAB figures for Q1 2006 seem to reflect this trend as an average across 150 reporting markets:

Figure 2

RAB Revenue Growth Figures - 150 Markets

Q1 2006


Q1 2005





Total Cash



Nonetheless, ECRP believes this situation represents an excellent opportunity to exceed average market revenue growth rates by focusing on acquisition opportunities in markets predominantly driven by local advertising, which historically have proven less sensitive to the type of macroeconomic conditions that currently restrain revenue growth in major media markets.

The Company’s management has established a successful track record of managing both under-performing and turnaround opportunities through implementation of an intensive, locally focused sales and marketing strategy focused on bringing an immediate value-added component into play for local advertisers.   ECRP typically delivers a fully-integrated, highly efficient platform of innovative, broadband-based marketing technologies that complements traditional broadcast to accelerate “growth” and increase operating profit margins for advertisers.  The Company aggressively recruits recent marketing degree graduates with the skills necessary to construct a unique, virtual bridge between consumers and the company's advertisers.

Free Radio's Future

Since its debut as the world's original broadcast medium, radio has enjoyed widespread market penetration despite competitive onslaughts over the years from a host of new, content delivery technologies from television to recordable portable media, such as cassettes and CD's.  Radio has demonstrated remarkable resilience to new competition due to its unique ability to rapidly assess and respond to local community needs and shifting market conditions.

However, since the dawn of the 21st Century a tidal wave of new digital content delivery device introductions threatens radio with further audience fragmentation.  XM, Sirius, the iPod, Internet Radio, RSS, text-messaging, blogs, and cell-phones that roll-up the functionality of the above clearly threaten broadcast's position as the preeminent news and entertainment content provider.

Despite this formidable competition, radio, arguably - has five powerful elements working to its advantage:

Embedded technology
Cost-free usage
Ease of access; and
Habit (media consumption behavior - although rapid changes are clearly afoot)

Moreover, radio's business model, its economic structure, is unique. The medium’s high ratio of fixed to variable costs (the investments required to attract additional advertisers) decrease exponentially as a station’s audience share (of market listening) increases.

"The real difficulty in changing the course of any enterprise lies not in developing new ideas, but in escaping the old ones" - John Maynard Keynes

The "new advertising economy" business model favors small, nimble, technologically savvy companies with a clear, sustainable plan to access like-minded consumers via the Internet.  The days of non-interactive media are clearly numbered.

“Free” radio already has a leg-up in this respect as its success was originally built upon its reputation as the first truly interactive mass medium (“Let’s go to the phone line!”), although we didn’t realize it at the time.

True, radio's own digital conversion initiative, HD-Radio, will offer listeners multiple program platforms, which may represent additional income streams for operators.  But improved technology is not likely to be the panacea that many in radio think it will be.

Increasingly the business must become all about the delivery of compelling audio content and not at all about radio.  The strategic issues of the near-term future (a planning horizon of 60 to 72 months) will include bandwidth, cohort replacement, marketing, and creativity.   All of these components will merge to allow “real” (free) radio to break out of its current malaise of low to mid single digit CAGR.

Free radio can and should prevail. Visionary thinking is all that is required.  ECRP has that vision.

The History of Consolidation

The Telecommunications Act of 1996 (the “Act”) touched off a frenzied round of consolidation, which  transmogrified the very essence of what was essentially an industry comprised largely of local entrepreneurs.   By virtue of the very nature of their centralized management and program distribution structure, it is nearly impossible for most of the larger operators to forge relationships with local audiences, business and community leaders. 

Ownership consolidation was driven primarily by an arbitrage opportunity for publicly traded companies.  For a period of time between late 1996 and mid-2000, public market multiples significantly exceeded those typical of the private markets.  Therefore, if a group could achieve adequate scale, it could go public and immediately enjoy significant multiple expansion, thereby insuring strong, realizable rates of return for investors. 

The benefit of effectuating further acquisitions on a grand scale has now reached the point of diminishing returns for the companies who pioneered consolidation.  Following the 9-11 tragedy, Radio PubCo stock prices traded briefly at an 11.4 multiple of earnings.  Early in 2002 industry stock trading multiples posted a record 18.3 times earnings.   The arbitrage advantage kicked in to drive a series "accretive" station acquisitions at high EBITDA multiples.

De-regulation seemed to have set the table for oligopoly.  However, as competitive pressures lessened, performance expectations accelerated.  The quest to achieve economies of scale resulted in drastic reductions in locally produced content.  The pricing power over advertisers that industry leaders envisioned never materialized.  Commercial clutter created significant audience disconnect issues.  Radio had created its own "Perfect Storm".   Investors began to take notice.

Figure 2

By the end of Q1 2006 the PubCo's stocks were trading at an average of 10 times EBITDA.  This precipitous fall has had a dramatic impact on station values.

The most recent statistics on station trading multiples (Figure 3) appear to indicate that exponential decreases followed patterns established by the PubCo's share trading multiples.  Political and Olympic revenue fueled demand for advertising in 2004 creating a bump in trading market multiples, the Company sees a limited window of opportunity to exploit these economic factors by moving quickly to make attractively priced acquisitions that will quickly accrue value for investors.

Figure 3


As Figure 4 illustrates, after peaking in 1999 both the number of transactions and the value associated with them declined precipitously after 2000. 

Figure 4

The statistics for 1999, 2000, 2001, and 2002 are somewhat misleading as they include several of the same large station groups being sold multiple times.  Specifically, Capstar and Evergreen were absorbed into AM/FM (which eventually was sold to Clear Channel), CBS purchased Infinity (which was then bought by Viacom), Forstmann Little purchased Citadel Communications Corp (2001) and Univision purchased SBS (2002).  Jefferson Pilot sold its radio group to Lincoln Financial in 2004.  2005 deal volume benefited by the Q4 announcement that Cumulus had purchased the Susquehanna Radio's 32 station for $1.2 billion. 

Early in 2006, Disney/ABC agreed to sell 22 major market stations and the ABC Radio Network to Citadel Communications for almost $2.5 billion.  In turn, Citadel is expected to divest at least $100m worth of non-core assets in mid and small sized markets.  Viacom/Infinity recently put stations in 10 markets on the market.  Univision put a "for Sale" sign on 33 stations, and others PubCo's are expected to follow suit as a wave of de-construction hits big media conglomerates.  Sale prices should further rationalize.

At the height of the ownership consolidation frenzy, the 10 largest radio companies controlled 20% of the total number of radio stations licensed to the United States.  Recent events imply that another round of roll-up and consolidation is imminent for the radio industry with more regional plays becoming the model.   ECRP  is poised to exploit market conditions to make attractively priced acquisitions that will quickly accrue value for investors. [top]