Converging forces are causing the radio industry to rethink its revenue model.
Since Clear Channel’s announcement that it would retool its approach to radio advertising, there has been much talk and speculation on just what effect these changes would have on the actual sound of U.S. radio, and how audiences might react. The end result remains unknown, but it appears that Clear Channel intends to reduce the overall number of ads, redistribute them into more frequent but shorter sets, and adjust prices so the change is essentially revenue neutral.
This is a monumental departure from past practice, and therefore warrants thorough examination. Of particular interest is the process that led to the decision, as well as consideration of its possible effects.
Like the weather, the problem of ad clutter is something that everyone talks about, but no one has done anything to change. Since the deregulation of the industry in the 1990s, radio broadcasters seem to have concluded that audiences possessed nearly infinite elasticity in their tolerance of advertising, with some major-market stations even exceeding 30 minutes per hour of commercials during drive time as a result.
The lack of effective competition allowed this practice to flourish, and the ratchet effect – which allows one station to push the envelope, and the others to follow suit shortly thereafter after observing no ill effects – only served to broaden the problem.
As this practice became institutionalized, broadcasters were locked in to such behavior by golden handcuffs, and no station was likely to retreat from the practice in isolation. (A ratchet only goes in one direction.) By virtue of sheer mass, however, Clear Channel was able to step forward unilaterally, and hope that the industry would follow.
It’s well known that one of the benefits of consolidated enterprise is the ability to enable coordinated systemic change more rapidly than a diversified industry can accomplish. So Clear Channel can make this move with some confidence that it will be not left out on a limb for long.
The spin on this move is that it’s an attempt to create a more listenable product, which it no doubt will do. Another stated goal is to provide greater satisfaction to advertisers, which is also likely to be achieved. (How would you like to be Spot #15 in a 17-spot block?)
Yet some of real motivations behind the change – and its timing – may have little to do with these objectives.
Handwriting on the wall
First, consider the obvious: No rocket science is required to spot the salient trends in recent listener behavior: Satellite radio listenership, while still relatively small in absolute terms, is growing fast. (Satellite radio’s appeal also may have been increased recently by its apparent immunity to the indecency purge.) Meanwhile, among terrestrial broadcasting, the only sector showing significant audience growth is public radio.
To the commercial radio analyst, the primary common factor between these two growing services – and the most salient differentiator between them and commercial radio – is their minimal advertising content. This bolsters the belief that has now been put forward by Clear Channel, citing excessive advertising for the current audience erosion. However, the converse may not be true: Reducing advertising on commercial radio may not inherently stem this trend. The assumption that commercials are the only element driving away audiences belies the possibility that there are other reasons for this migration. Excessive advertising may only be masking the real problem, or just making it worse.
Perhaps in acknowledgement of this possibility, there are a very few commercial radio stations experimenting with new programming formats that feature broader music selections, along with plenty of back-announcing and other discussion of the music played, in addition to reduced commercial loads. Audience reaction to these formats will be carefully gauged, and if successful, could result in a more widespread trending to this more comprehensive, retro approach.
Another clear and direct response to satellite radio competition is Clear Channel’s and other broadcasters’ move to add automated title and artist info to the PS and RT fields of their stations’ RBDS signals, as discussed here in our Jan. 14 column.
All of the above reactions make sense, but there may be other, more fundamental business reasons behind the proposed changes.
First, consider that the recent depression in Clear Channel’s stock valuation is something that always garners management’s rapt attention. (Prior to the announcement, CC’s stock had lost 27 percent of its value at the start of 2004.) Often the incentive to increase or recover shareholder value (or a direct request from the corporate board of directors to do so) motivates management to take unusually strong and decisive action.
Next, the timing of this move could be an acknowledgement that doing so now while satellite radio still has a relatively small share of the entire U.S. radio market is greatly preferred over doing it later. This is because the raising of advertising rates now is less likely to drive advertisers to the competition for better value, simply because these emerging competitors cannot yet deliver an equivalent advertising service. Once satellite radio’s penetration more closely rivals terrestrial radio’s, precipitous ad-rate hikes by either camp will not be possible with such impunity.
Further, commercial radio broadcasters may be anticipating the market fragmentation (and thereby reduced audience numbers per service) that HD Radio multicasting may bring about. Raising rates before this happens will make any subsequent adjustments that may need to be made a bit easier to take in the long run.
Finally, Clear Channel may be anticipating the arrival of the Personal People Meter and its possible negative effects on spot valuations in the radio advertising business, and thereby electing to take a proactive strike at raising rates while they still can. Again, this will put them in a better starting position if rates need to be adjusted downward in the future, once PPM metrics are considered adequately credible and are fully digested.
Thus the argument that reducing ad clutter is now necessary may be, at least in part, a convenient smokescreen allowing flexibility and rate adjustments that otherwise would not be competitively feasible. Attributing the change in this manner also makes it hard for other radio broadcasters to not follow suit. The window of availability for making this argument without suspicion of ulterior motives is also likely to soon close, so it behooves broadcasters to do so quickly.
Of course, just how much difference these proposed changes will have in the product is uncertain. Whether this movement will overtly change the sound of U.S. commercial radio cannot be known until implementation happens. Often the lofty goals of an initial position statement fail to be fully realized as they work their way down to actual execution – a concept we are reminded of frequently in any election year.
Whether the process effectively stems the tide of audience migration from commercial radio services also remains to be seen. Most important, of course, will be the effect of these changes on terrestrial broadcasters’ bottom lines. Will it maintain the viability of these services in the face of emerging competition?
All of these questions will keep things interesting in this space for the next several years. Meanwhile, the value of competition in forging a better deal for consumers is being illustrated yet again.