Radio Braces Itself For Tough Year

As the nation's unemployment rate reaches its highest level in more than two years and businesses make their deepest payroll cuts since the 1991 recession, radio is bracing itself for a tougher-than-expected 2001.

Merrill Lynch analyst Jessica Reif Cohen says that radio industry advertising could decline for the year overall. "Our survey of radio broadcasters regarding May and June pacing suggests that the industry is pacing down at a rate modestly worse than the first quarter's estimated decline of 7%," she wrote in a quarterly advisory to investors. The timing is critical, she added, because May is traditionally the biggest advertising month for radio. She reported, "Major-market radio is truly struggling."

By the firm's estimates, New York is down 20%, Los Angeles is down 15%, and Miami is down 20%. The declines are led largely by a sharp decrease in national spot advertising, which is more common in large markets. Those companies with the biggest percentage of major-market stations will be the most affected, Cohen says. They include Clear Channel, Infinity, Emmis, Entercom, and Radio One.

The slowdown in radio advertising is worrying commercial lenders, who may slow the flow of credit available to broadcasters, Cohen adds. That could result in necessary "reductions in operating costs and capital expenditures, as well as stipulating asset sales." If groups are forced to sell off stations, she says, such conglomerates as Clear Channel, Viacom/Infinity, and Disney/ ABC could be poised to take advantage of fire sale prices.

According to the Radio Advertising Bureau (RAB), on a combined basis, March's local and national dollars were off 10% from last March, when dotcoms were still strong customers. But this decline is uneven; local revenue numbers dipped 6% in March, but national revenue dropped 23% from the same month a year ago.

The same trend is true for quarterly figures: According to the RAB, through the first quarter of 2001, combined local and national revenue was running 7% behind the first three months of 2000. But, taken individually, local dollars were off just 3%, while national sales were down 20%.

"Local radio continues to be more stable, relative to other media sectors," contends RAB president/CEO Gary Fries. He predicts that because the radio business is so embedded in the local marketplace, the medium can endure the slowdown in the economy. "Once we get into the latter half of 2001, past the high comparisons from the first six months of 2000, radio will be well-positioned to pick up momentum."

Like most radio groups, Cumulus Media has been hurt by soft demand for advertising in the first quarter. "We are in a pretty tough revenue environment right now, and nobody can say when it will end," warns CEO Lew Dickey. In the first quarter, Cumulus posted a 70% increase in broadcast cash flow compared with 2000, while revenues dropped 7% to $45 million—but the company has sold off a number of stations in the 12 months since those figures were released.

Westwood One CEO Joel Hollander says that his radio network has concentrated on gaining additional business from traditional advertisers. It has also won a bigger chunk from Verizon, Southwest Airlines, and Auto Zone, which helped fuel Westwood's growth in the first quarter, with cash flow up 6% to a record $29.3 million.

"We're continuing to see weakness on the national front, but local business is strong, and it is up double digits in some cases," Cox Radio president/CEO Bob Neil says. While banks, financial services, telecom, and dotcom advertising have been soft, he says, automotive, health care, and restaurants have improved.

Although Cox's broadcast cash flow and net revenue both had double-digit gains, the company reported a net loss of $2.1 million in the first quarter, down from a net profit of $33 million in 2000. Neil says he is experiencing "buyers' revenge," as spot buyers try to get bargain-basement ad time because of weak demand. "We've seen competitors adding inventory to try to make up for the lack of revenue in a number of markets. The problem hasn't been selling your inventory; it's been the price at which you sell it."

Radio One president Alfred Liggins concedes that it has been difficult to keep selling spot time for the same price as when Internet companies were beating down the door. "Any time you see revenue growth fall off, the rates have to come down. It's just not possible to hold them."

He says his company is trying to work with advertisers by giving them cut-rate deals and free bonus spots to avoid lowering rates.

In the first quarter, Radio One's net loss was $15.2 million—compared with a net profit of $2.1 million a year ago—while its after-tax cash flow fell from $7.5 million to $1.7 million. Liggins says this downturn is largely due to Radio One's purchase of a number of stations from Clear Channel.

Facing tough financial times, radio operators are cutting costs. The Ackerley Group, which owns radio and TV stations in Seattle and Portland, Ore.—two dotcom-heavy markets—says it will reduce its workforce by 5%. Combined with other cost-cutting measures, Ackerley executives say the cuts will save the company as much as $15 million this year.

Cumulus Media has undertaken a cost-cutting initiative, cutting the "bloated" structure of the company. Promotional spending will be reduced as Cumulus focuses instead on cross-promoting between stations and signing more trade deals with local TV stations and newspapers. The company has even slashed some nontraditional revenue programs, says Dickey, since several were costing more money to run than they brought in. CFO Marty Gausvik says the company is "no longer in the business of renting a corporate jet."

Because of the soft advertising market, Radio One is cutting the amount of revenue it expects this year. For 2001, it is projecting a net revenue of $248 million, compared with the $258 million that it predicted in February. Instead of cutting projections, a number of other radio groups have stopped making predictions altogether in order to avoid looking bad on Wall Street if they're forced to lower the numbers.

"National [advertising] is definitely the weakest link," says Radio One COO Mary Catherine Sneed. While she says fast food, soda, and entertainment categories remain strong, she does not foresee an upturn. "Right now, there's no light at the end of the tunnel."