The Margin of Success/Error Edition

Dear Santa,

This weekend I did a bit of Christmas, uh, Holiday shopping. I was never a big fan of shopping to begin with, but with a forced deadline (12/25) to spend as much money and time on friends and family as possible I thought it would be a good time to get started. I went to my wallet, grabbed a credit card or two, sat down at my laptop, popped on Napster's jazz holiday streamed radio station, and spent a few hundred, ok maybe a thousand dollars in a matter of a few hours. My car, with it's AM/FM radio tucked into the dash, remained safely in the garage.

Now don't get me wrong, I believe people will still shop in actual stores. Some people actually like the human interaction that only a full shopping mall can provide. In seasons past, my reason for going to the mall was research. Oh sure, I would shop. But It was fun to hear my radio station (At the time, WLTW-NY) being played in store after store. I would wander into Sears or Radio Shack, tune all the stations to 106.7 (Lite-Fm's frequency) and watch customers play with the new tuners, boom boxes, & clock radios. (admit it, you've done that, haven't you?) Sure, the radios are still there. Big tuners, little clock radios, car stereos, and boom boxes all adorn the shelves of stores. All can still receive AM&FM. But I'm afraid that's NOT why people are buying them. MP3 compatible, I-Pod adaptable, satellite ready, all compete for the ears we had to ourselves just five or six years ago. It's rare to even find a store playing a radio station anymore.

This is not another "radio is dead" missive. Perhaps like you, I'm getting tired of reading those "radio at the crossroads" stories. Even the one's I wrote! In the next two weeks we will see more Howard Stern/Sirius stories like the one on 60 Minutes last night. We will continue to read about the loss of younger listeners to the internet, cell phone technology, broadband and more. I guess it could be worse, they could stop making car radios with AM&FM in them.

So how do we become the next "big" "hip" thing? How do we swing the "cool" factor our way?

We are going to have to spend some money. Big money! Bigger than we're used to!

And that means smaller profit margins. That's the tough part. No one wants to lower their margins. But I'm afraid it's going to be a fact of radio life in the future. With a few exceptions, radio's cash flow margins are going down! And 2005/2006 is becoming the year it starts to drop. Why?

We have rung out all the savings we can from the cluster operations. Rare is the group that has not reduced it's overall operating expenses in the past few years. Head count is down, and the cost of operations per station is too! Margin preservation in the face of flat revenues is tough. But radio enjoys one of the highest margins in business today. Tell any retailer about radio profit margins. They gasp at the size of it!

Many radio clusters typically run high profit margins. 40% + is considered great! Many of the big companies run at this level. Especially in major markets. 30% is good, 20% is sub-par, and less than 20% is not good.

Many businesses in the US run single digit margins. Competition causes it. No one wants to spend money needlessly. But if you're fighting AOL, or Comcast, or Verizon, or Direct TV, or Apple, or Sirius/ XM, or Napster, you're spending on marketing, research, product development, technology, and management. We now compete with them, and many more. In addition to the station down the dial, we compete with radio across the country, and around the world. All of them "do" radio now. None of them did seven years ago. It's going to cost money to compete with them. The radio margin model of five years ago is outdated today. We are not used to big spending for additional distribution, (streaming) or programming (Howard, NFL) or even radios.

Notwithstanding this coming weeks announcement on HD radio, I can't find one HD radio for less than $499. Anywhere! (I went here, http://www.ibiquity.com/hdradio/hdradio_hdproducts.htm. (The $269 model has been delayed till Q1-06)

If you had $499, would you buy an HD radio? Or would you buy an I-Pod, Satellite Radio, Cell Phone, or even an inexpensive computer? And the expensive radio only (for the most part) simulcasts the current FM signal! There are few multicast stations with compelling programming.

http://www.ibiquity.com/cgi-bin/liststations?state=&go=Go%21

We have a very long way to go with HD. The cost of the box (radio) has to come down. The program options has to come up. Then we must tell people about it. It's going to cost money. It won't come from the existing clusters. There are NO extra people to devote to it. They are too busy doing AM&FM. At best you get a line extended version of the FM/AM signal or programming not worthy of the "big" signals. Not compelling enough to drive people to spend $499.

Someone in the cluster must spend all their time on this new HD band, podcasting, streaming, and "breakthrough" programming. It's now a full time job!

Perhaps an HD Division of the company could work. It will lower margins, but raise awareness of the new band. It won't be running twelve, fourteen, plus units of spots. Revenue will be generated differently. (think a home handyman "how to" channel brought to you by Home Depot for example.)

And here's the good news,

In the meantime, we can produce programming for;

The 200 million computers in the US. Most have audio capabilities. (http://www.c-i-a.com)

The 200+ million cell phones. New audio friendly models are coming on line every day.

The 36 million I-Pods projected to be sold through the holiday season. Podcasting anyone?

18 million MP3 players are out there. (http://www.newsfactor.com)

The competition is already there. We need to be there too! It's not a question anymore. Streaming, and podcasting are as necessary as your transmitter. Marketing locally to these distribution points is as important as a direct mail piece, billboard, or TV spot to your current AM/FM frequency.

Spending money bashing the competition (whether Satellite or each other) will only justify their existence in the first place. We need to spend money on different, compelling programming, new broadband distribution channels, talent, and the marketing of our local brands to these new distribution points.

It may lower the cash flow margin.

But,

It may raise the margin of success.

Because, at this point....... We have little margin for error.

Warm Regards,

Fig