Radio broadcasters have long been the pipsqueaks of advertising because of the narrow niche audiences that individual stations offer to the McDonald'ses and Jiffy Lubes of the world. But flush with new powers to amass groups of stations, radio owners are now threatening to cut into newspapers' dominance in local advertising.
"With one station in a market, you can't get Pizza Hut's interest," said Norman Feuer, president and chief executive of Triathlon Broadcasting Co. in San Diego, which has agreed to buy 36 radio stations in seven small cities since forming in September. "But with six, seven, eight stations in a market, we can show advertisers that they can reach more of their audience, seven times in a day--cheaper than they could with newspapers."
Liberalization of federal radio ownership rules in February has set off a consolidation frenzy that is fast igniting new advertising wars. Although broadcasters were previously limited to two AM and two FM stations in a market and no more than a total of 40 stations nationwide, they now can expand to eight stations in the largest markets, for an unlimited total.
Newspapers have always had an edge in reaching a mass audience and in providing a lasting visual image that can be clipped and saved--and lately even reinforced through new electronic services.
With the clout of multiple stations, radio owners hope to lure new advertisers with more demographic options and a broader reach. They also hope to squeeze cost savings by combining back-office operations--perhaps passing on some of the savings as incentives to advertisers to buy from the group.
Such efficiencies are the keystone of the merger announced late last month by Westinghouse Electric Corp. and Infinity Broadcasting Corp. The merger, the largest in radio, would create an 83-station powerhouse that controls between 25% and 50% of all radio advertising revenues in each of the top 10 markets. The six stations they own in Los Angeles account for 26% of local radio ad spending.
"The L.A. Times classified section does more advertising than all the radio stations in L.A. combined," said Dan Mason, president of Westinghouse Electric's CBS Radio division. "It's not that we're on a hunt to take money away from newspapers, we just want to put radio on an even footing."
The imbalance between the mediums is indeed enormous. Radio accounts for a meager 8%, or $12.5 billion, of all advertising expenditures nationwide, according to the Radio Advertising Bureau. Newspapers have the dominant share, capturing about 23%, followed by television, with about 20%.
For radio, newspapers are the main competitor because of their reliance on local advertisers. By contrast, national advertisers are the biggest spenders on television.
Radio has already started to siphon dollars from newspapers in small cities where consolidation has accelerated. Since 1992, when federal laws were changed to allow multiple ownership of radio stations, newspapers' share of advertising spending in Denver, for instance, dropped from 42.2% to 37.1% in 1995, according to a study by Star Media Group, a radio brokerage house in Dallas.
In the same period, radio's share of the market increased to 19.6% from 16.8%. In Denver, only about 10% of the radio stations were individually owned in 1995, with most owners controlling two or more stations.
"In markets consolidating the quickest, the revenue share of radio increased almost exclusively at the expense of newspapers," said William Steding, managing director of Star Media, who said he has documented a similar trend in San Antonio and Cincinnati. "Radio is more efficient because you can produce it in a half-hour and put it on the air in the next hour. It got a lot of trial use in the recession of 1990 and '91, and that has carried through."
Indeed, although overall advertising expenditures are growing by only about 5% a year, radio spending spurted ahead by 8% last year and is expected to continue apace this year and next, according to Gary Fries, president and chief executive of the radio bureau.
In fact, many of the recent radio transactions depend on continued robust growth for their fat prices to pay off. Many radio groups are fetching prices of 15 times cash flow, and some, such as Infinity, are going for multiples of between 17 and 20. That is at least double the multiples of just five years ago, at the bottom of the market.
"These multiples don't make sense unless you believe the radio pie will get much bigger," said Herb McCord, the president of Granum Holdings, which was recently acquired by Infinity. "Seven percent growth can't justify 20 multiples. And if we go through a recession, these acquisitions could run into lots of problems."