Thoughts on Radio's Digital Future
NAB Radio Show 2009: Resolution in Philly
Radio broadcasters come together and focus on the new reality, and digital – online and over the air – is a fundamental element of future success.
I've been reflecting a bit on the recent NAB Radio Show in Philadelphia. I detected some fundamental shifts in the mood and focus of radio broadcasters, and wanted to share my impressions. I saw a clear change in attitude from recent NAB Shows.
Last year at the Radio Show in Austin, the great financial meltdown had just hit, and I think the overall feeling was one of denial. Radio had already been seeing the effects of both new digital competition and a slowing economy, but nothing like what the financial crisis would bring. I don't think anyone was ready to face what it would mean for AM/FM.
By April at NAB in Vegas, it was clear how badly radio was being hit, and the mood was widespread panic. Revenue had fallen off a cliff, the industry was dangerously overleveraged, and there was no relief or obvious solutions in sight. Collectively, it felt like the industry had fallen and couldn't get up.
So I was pleased to get a much different vibe in the halls in Philly. I would characterize it as resolve: OK, it is what it is, let's stop feeling sorry for ourselves and get on with the business of fixing it.
I've read some of the industry pundits asserting that radio industry leaders were still not facing the challenges with realism and candor. I disagree. I saw and participated in many discussions on all the key issues. Whether it was the state of the general economy or ad spending, the still dangerous company balance sheets, the fragile state of station personnel, the continued need for compelling programming, the threats and opportunities of the internet and new media, or the necessity of attracting great young people to the business, the key issues were on the table. And the passion to find and work through solutions was as strong as I have seen in several years.
The most interesting debates I had with radio leaders centered on the fundamental issue of recovery. As I have written before, I think the issues that have both taken radio from a $20 to $14 billion business and decreased AM/FM tuner sales from 100 million to 60 million in a few short years are driven by more than just a cyclical downturn. No doubt the general economic malaise and the drying up of ad spending which it spurred play a fundamental role. But there is more going on.
AM/FM has also seen a secular decline, driven by both the explosion of new infotainment choices consumers have, especially in a mobile setting, and the increasing choices advertisers have for their dollars. The internet, mobile phones, iPods and other personal media players, mobile broadband, online streaming and satellite radio all represent new competition that barely existed a decade ago, and they have also played a role in radio's slide. And this digital competition will only intensify with mobile video being deployed, in your pocket and in your car.
I had several spirited debates about how these two fundamental issues - radio's cyclical and secular challenges - will shape AM/FM's recovery.
Several industry insiders argued convincingly for strong radio revenue growth as part of a classic cyclical recovery. Radio, which has been hurt more on the downside, will see more than its fair share as ad budgets perk up, a pattern seen in prior recessions. And as newspapers continue to decline, more local ad dollars will be available. This storyline has partly driven the recent major increases in radio stock prices (admittedly from very low levels). I follow all this logic and hope it plays out that way, but I am not convinced it will.
I think we may be in for some tougher sledding as the secular decline will dampen the cyclical upturn. Radio's new digital competition will continue to fight for listener's attention and advertisers' dollars. According to longtime industry analyst Drew Marcus, radio's share of the ad pie has shrunk from 8% to 5% as a result of new competition. The industry will have to reverse that secular trend, or at least stop the decline, to achieve solid growth.
The good news is that regardless of the viewpoint on the shape of the recovery, there was widespread agreement on the operational actions the industry needs to take to position for future growth. These actions were addressed in panel discussions and were being talked about in the halls. This is why I say the Show had a feeling of resolve: attendees were past the shock of the downturn and were coming together planning solutions.
A fundamental piece of the solution is cleaning up the industry's balance sheets. There is recognition that existing debt structures are not sustainable at near term revenue levels and have to come in line with new realities. This effort is well underway, with bankers and owners engaged in the important negotiations. There has been lots of progress already, but all at the Show understood it will be a long process.
A second set of actions centers around operational excellence. I heard time and again that radio must focus now more than ever on the fundamentals. To recover, stations must execute on the time tested keys to success: producing compelling programming, effectively promoting their offerings, super serving their clients, cultivating the next generation of talent and leaders, and of course, selling like crazy. The playbook has changed somewhat – using social media to engage and promote, for instance – but the necessity of these fundamentals endures. And the industry knows and is working on them.
Finally, I was excited to see that there seems to be clear consensus that digital – both online and over the air – is a critical piece of the recovery. There were of course some great panel discussions on streaming and web presence as well as HD RadioTM technology. But I was more struck by how digital seems now to be a part of the industry's DNA. The hall talk showed this: are you streaming that station?... how are you selling your online content?... the new Zune HD is pretty slick… how are you programming your HD2s? I felt digital had graduated from being more or less a science project to becoming a day-to-day business tool for stations. Digital revenue is small but growing, and understood to be part of the way out of the woods.
People were buzzing about a great pairing of online and over-the-air digital, with CBS bringing user generated content from its Last.fm internet service to HD2s in several markets. This is a perfect example of the logical compliment between internet and HD Radio technology. Repeat after me, complimentary not competitive.
Not surprisingly, I spent a bunch of time reviewing the HD Radio rollout progress: 2000 stations on air, more than 1000 HD2s and HD3s, 13 automakers with 70 vehicle lines offering the technology, new portable devices from Best Buy and Microsoft with more soon from RadioShack, and another doubling of HD Radio receiver sales in 2009. The progress in cars and portables, sectors on which broadcast leaders have encouraged us to focus, was particularly exciting to most I spoke with. And the receiver sales growth got a lot of attention; 100% annual growth in this market is hard to ignore.
And with that installed base of HD Radio receivers growing, my discussions increasingly turned to the business opportunities: how do broadcasters generate a return on their HD Radio investments? We at iBiquity realize that the effort has to be more than a strategic science project. It has to help grow the business and generate a return on investment. Happily, there were significant success stories to talk about here as well.
To use the popular cliché, we see green shoots on HD Radio ROI in a lot of places:
- HD2s and HD3s are being sold – both spots and sponsorships, local and national.
- HD2 and HD3 spectrum lease deals are being struck. The best example here is WorldBand Media, which has pulled together a South Asian language programming network in major cities by leasing HD2/HD3 bandwidth.
- Music purchase is generating finder's fees for stations. When a consumer uses iTunes Tagging to tag a song they like on an HD Radio station and goes to iTunes to purchase it, the station gets a cut of the purchase.
- Innovative new sports content is leading to HD2/HD3 revenue. Maybe the most exciting are the Dallas Cowboys and Pittsburgh Penguins launching 24/7 multicast channels with local broadcasters in their respective markets. ESPN Radio HD is also getting clearance around the country, providing access to a massive amount of exclusive sports content.
- Revenue from real time traffic information is coming. Two national networks, one built by Clear Channel, the other by Navteq in partnership with a consortium of broadcasters, have been deployed. And consumer devices are on the way. These traffic information services also include other data like gas prices and movie times, and will generate revenue for the stations transmitting this info on their HD Radio stations.
Let me be clear: I am in no way claiming that the emerging revenue generated from HD Radio technology is a silver bullet that will solve the industry's issues. We know we have to get a bigger base of receivers out there for stations to maximize the revenue opportunities, and we work on that every day. But I am saying that digital, in both its forms, is part of the solution. I was thrilled to see widespread recognition of that, and real work to make it happen, at the Radio Show.
So I think the Philadelphia Radio Show marked a turning point for AM/FM, where the industry collectively resolved to get on with the hard work of rebuilding. Folks were clear eyed about the issues and challenges, and focused in on the actions necessary to grow once again. We are proud that HD Radio technology will play a role here, and are eager to help.
Oh, and the cheesesteaks at Reading Terminal were fantastic.
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