Citadel – Harbinger or Fair Warning to the Radio Industry?

The radio business is off to an uncertain start in the new year, with the Citadel bankruptcy filing and other filings sure to follow soon.  With major radio operators in Chapter 11, will the prospects for the overall radio business improve in 2010?  Will the Citadel bankruptcy have an impact on the radio broadcasting industry? Is there a solution to the woes of the radio business?

My short answer to the first two questions is, “Probably not.” For the third question, “Yes, there is a solution but it remains to be seen whether or not the industry has the will to embrace it.”

The fundamental challenge to operators in 2009 – an excess of advertising time inventory – will remain firmly in place throughout 2010 and probably beyond, as operators struggle with deteriorating cash flow and increasingly burdensome interest expense and debt levels.

Sadly, it’s unlikely that the lessons to be learned from Citadel and other filings will spur operators to change harmful past behaviors and therefore, more will likely be forced to file for Chapter 11 or undertake a restructuring in 2010 or 2011.

Radio stations are still selling only 40 percent to 60 percent of total available advertising time

As shown in Table A, data reveals that advertising inventory sell-through ranges from 40 percent to 60 percent of total advertising time inventory. This means that roughly half of all radio station advertising time is a cash sale to radio advertisers. This also means that the reciprocal amount of advertising time, again roughly half, airs for no direct cash revenue benefit to station operators. This bucket of advertising time includes: sales incentive airtime for bundled pricing, internal promotions, public service announcements, barter, charitable contributions, etc.



Viewed in isolation, a stable rate of advertising inventory sell-through could be a positive for the industry; however, the data reveals a more nettlesome problem for radio station owners and lenders.

Excess inventory is fueling a disastrous price war in the industry
Pricing integrity has not existed in radio for several years. Since the advertising recession began, true revenue-per-minute deterioration has continued and is getting worse in some markets. This price deterioration, combined with increased competition for advertising dollars from television broadcasters, secondary digital channels and internet sites, now leaves radio broadcasting in a negative sum game.

As shown in Table B, data reveals that pricing for radio advertising has fallen by an average of 20 percent to 30 percent over the past two years, on a seasonally adjusted basis. The pattern is similar for the majority of evaluated stations’ traffic data with little standard deviation.



Interviews conducted by LM+Co over the past year with radio station owners, CEOs and GMs support our findings. These individuals describe the radio broadcasting industry as caught in a deeply destructive “Nash Equilibrium.”

What’s that?
It means that a radio operator will not set airtime pricing relying upon his or her sole, good business judgment. Instead, that operator will set airtime pricing based upon the actions of other competitive operators in the market.

In virtually every radio market evaluated by LM+Co, excess inventory is leading competitors to lower pricing, in an effort to maintain inventory sell-through rates that are already problematic.

This begs the question: “Why don’t radio broadcasters keep their pricing levels constant and accept lower sell-through rates temporarily while they wait for demand to come back?” This course of action should be revenue-neutral and would at least help the industry maintain price integrity.

Unfortunately, once one competitor in a market lowers pricing to increase their share of the market’s advertising dollars, the other competitors feel compelled to follow suit and lower their prices or risk losing significant revenue.

However, this response only worsens a bad situation.  In an environment of universal excess inventory, this kind of pricing “leadership” – in which all competitors in a market follow suit and drop pricing – only creates lower unit sales, an even lower advertising inventory sell-thru rate, even lower revenue and even more excess inventory, for everyone.

This is not only the heart of the problem currently vexing the radio broadcasting industry, but also, the key to a solution.  Efforts by operators to address the problem by lowering prices in an effort to stimulate demand have proven ineffective from a cash flow perspective.  Operators continue to chase one another down the pricing curve, until their interest expense exceeds cash flow.

What can be done?
The solution is available.  Operators must step up and drive a turnaround, instead of steering toward Chapter 11 filings.  To stem the long-term economic decline of radio, operators must bravely and confidently break the vicious cycle of self-defeating price-cutting. 

-- Kevin Shea, Managing Director, Loughlin Meghji + Company.
Loughlin Meghji + Company serves the needs of companies facing challenges. Whether advising in a restructuring case or negotiating and closing a merger transaction, they specialize in devising and implementing strategic solutions for companies to maximize enterprise value for all stakeholders.

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