Doing the Consolidation Dance

Is consolidation really the best thing for consumers? Companies are getting bigger. Right now, just in the radio business, the biggest company, iHeart Radio, is in bankruptcy with debts of over $20 billion. The third biggest company, Cumulus, just emerged from their bankruptcy reorganization. And the second biggest company, Entercom, just absorbed a bunch of debt with their purchase of CBS Radio.

This is all happening at a time when revenues at radio stations are going down. The big radio companies have reacted to lower advertising rates by increasing the number of commercial messages they run. Now, on some stations you will hear over a dozen commercials in a row. This can’t be good for the businesses wanting to get their message out, and it certainly isn’t a good listener experience.

When radio was healthy, there was a limit that no company could be in more than seven cities, and they couldn’t own more than one AM and one FM station in each market. There was healthy competition between stations. Radio ownership was wide and varied – stations were owned by local businessmen, media companies, insurance companies, manufacturers, and just people who loved serving their communities.

It all changed when the Telecommunications Act of 1996 was signed into law, with the pitch from the National Association of Broadcasters that it would benefit the public by allowing companies to grow and offer more programming choices. However, just the opposite was the result.  There was a land grab of radio stations. Companies no longer were restricted to only seven markets; they could be in as many markets as they wanted. They could own up to eight radio stations in each market, with no more than five of them being from one band (AM or FM). 

Because it was a seller's market, radio station owners could demand top dollar for their radio stations. Small companies like San Antonio’s Clear Channel (now iHeart Radio) grew quickly by paying top dollar for radio stations. They paid as much as 15-times cash flow for radio stations that had big profits because they were debt-free with plenty of cash flow. Owners of these successful radio stations quickly calculated that if they accepted these ridiculous offers, they could take the proceeds of the sale, invest their money, and make more than they did actually operating their radio station. This saw the exodus of radio station owners that operated their stations in the public interest, and the new owners whose main goal was to grow their business.

Then came the 21^st Century and new technology: streaming audio-on-demand. Advertising dollars shifted from traditional radio to streaming services. Big city stations that used to run 8-10 commercials an hour found that their ads that used to sell for over $300 each were worth less than $100. So, they increased the number of commercials they run every hour and made major staff cuts to lower the cost of operation. Radio stations that used to have 40-50 employees for one station were now part of a big radio cluster, where up to eight radio stations were being run by a small core staff.

This week, the National Association of Broadcasters has come up with a new solution to the problem of decreasing revenues at radio stations. Considering Sinclair Broadcasting’s pending purchase of Tribune Media for $3.9 billion (which will increase Sinclair's reach to 72% of all American households) and the proposed $70+ billion sale of 21^st Century Fox to either Disney or Comcast, the NAB has a new idea for radio: let companies get even bigger! Their new proposal – let one company own up to eight or ten FM stations in each of the top 75 radio markets, while at the same time, allowing them to own as many AM stations as they like. Oh, and in markets smaller than #75, one company can own every single radio station in that city.

The idea that Disney, which owns ABC, will be able to own Fox is just strange. Even stranger, if Comcast, who owns NBCUniversal, ups their offer, then we could see NBC and Fox owned by the same company. Imagine MSNBC and Fox News in the same building! But getting back to radio, think what it would be like to have every radio station in El Paso, Texas (market #76) all owned by the same company and all in the same building.

It didn’t necessarily help radio in 1996 when the Telecom Act was passed. It took what was a healthy industry and straddled it with tremendous debt. Radio stations that were throwing off good cash flow, were now spending most of their profits to pay off their debt. I mentioned that radio stations were selling for as much as 15-times cash flow then. Today, when a radio station calculates its value, it uses cash flow multiples closer to 6-times as a starting point. So a station that might have been valued at $65 million dollars in 1996, today might only have a value of $12 million (lower cash flow and lower multiples).

I believe that if radio stations had been healthy with lots of smart people in the building when the new digital radio age hit, today’s outcome might be a lot different. Instead of focusing on gobbling up other radio stations and dealing with a debilitating debt, a healthy station might have created compelling digital content to stay up with changing trends. We can only imagine what might have happened.