(9-4-2017) 2 Years Later, Lew’s All Smiles

Lew Dickey created Cumulus Media 20 years ago, in 1997. In 2015 he was pushed out of the company by its board of directors. The change in command took place as the 2015 Radio Show was launching — in Atlanta, Dickey’s home turf. Board chairman Jeff Marcus was the driving force behind replacing Lew Dickey.

In a November 2015 Radio Ink cover story, Marcus, a good friend of Dickey’s at the time, went on a national tour of the company’s stations. Cumulus had been

underperforming since the Citadel merger in 2011. Marcus said back then, “We found the ratings in the various radio stations continuing down, not up. We also saw our market share deteriorate, as well as our broadcast cash flow deteriorating. It took a few years of disappointing results until the board decided that the company’s direction wasn’t changing and that a change in management was necessary.” Lew Dickey, while still a board member and large shareholder, was out, and Mary Berner was named the new CEO.

As the radio industry gets set to meet up at the Radio Show in Austin, two years after Atlanta, Cumulus is still in the middle of a turnaround and still approximately $2 billion in debt. Ratings are showing signs of improvement, especially in PPM markets. In Cumulus’ May 2016 earnings call, Berner updated investors on the turnaround effort: “While we’re certainly gratified to share tangible evidence that our turnaround strategy is working, we’re also acutely aware that to maintain our momentum, we can’t relax our execution against our foundational initiatives.”

Taking a look at some of the numbers from 2016: Cumulus’ revenue was down 2.3 percent, to $1.14 billion. Radio station revenue was up nearly 1 percent, to $802 million, while Westwood One revenue was down 8.8 percent, to $336.6 million. The company lost $510.7 million in 2016 compared to $546.5 million in 2015.

In the first quarter of 2017, Cumulus generated $264 million in revenue, compared to $268.5 million in Q1 2016. Revenue from Cumulus’ radio stations was $173.6 million, down from $176.4 a year earlier. But a note: 2016 was a big political year; excluding political, revenue at Cumulus’ radio stations would have been flat. At Westwood One, revenue was $89.9 million in Q1, down from $91.6 million a year before.

In Q2 of 2017, Cumulus reported total revenue of $290.5 million, compared to $287.2 million in Q2 2016. Westwood One had a very strong quarter, with revenue up over 6 percent, to $81.2 million. Radio station revenue was down .7 percent, to $208.6 million. When you combine the two divisions, Cumulus was up 1.2 percent in Q2 of 2017, and Mary Berner said the company’s Q2 performance “is further evidence we’ve turned the corner. We achieved these results despite both a weak industry environment and political headwinds.”

Prognosticators argue the earlier revenue declines were set in motion by the previous leadership (and being behind the curve on Voltair) and wonder if Berner and company have enough time to turn the company around. Others argue there is only one way to fix Cumulus, and that’s with some sort of restructure. The current leadership has never sugarcoated the fact that its balance sheet is a major problem and needs to be fixed. Cumulus’ heavy debt load continues to constrain its ability to do business in the short term and achieve its full potential in the long term.

But perhaps it’s all just water under the bridge. Since he was pushed out of the company he created, Dickey didn’t just take his walkaway money and hit the beach with his new family; he’s causing just as much buzz now as he did two years ago in Atlanta. He wrote a book (his second) about the media landscape and launched a new company called Modern Media Acquisition (the name of Dickey’s new book is The New Modern Media). The company has more than $200 million, with a goal of purchasing one or more media companies, and speculation began immediately that Dickey would attempt to reclaim his old company.

So what is Lew Dickey up to, and what is he really interested in purchasing? What are his views of radio from the outside — outside for the first time in 32 years — and what are his thoughts on the company he launched in 1997? Let’s find out.

Radio Ink: It’s been almost two years since you left Cumulus. A lot has changed in your life, beginning with starting a family.

Dickey: Yes, we had our daughter, Vale, last August, a year after we were married. It’s truly been a wonderful experience for us. I must say that having a child is one of the very few things in life where the realization truly exceeds the anticipation.

Radio Ink: Aside from starting a family, what were you doing to stay busy the last two years?

Dickey: It’s been an active and productive period for me. I spent the first nine months researching and writing a 70,000-word book on the future of media. I then partnered again with Macquarie and spent the next 10 months out raising a couple of hundred million dollars of capital to build a new company informed by the findings in my manuscript. With the capital now in hand, I’ve spent the last couple of months on the road meeting with investors, entrepreneurs, CEOs, and bankers evaluating potential companies to acquire or merge with. The time has gone quickly, and I really enjoy what I’m doing.

Radio Ink: How hard is it to write a book and get it published?

Dickey: The New Modern Media is actually my second book. I wrote my first book, The Franchise, for the NAB over 20 years ago, and, frankly, I forgot how much work it was! The New Modern Media was basically a full-time job for the better part of nine months. I found it to be an enormously beneficial investment of time to help me understand the rapidly evolving digital and mobile landscape and how it will impact media and advertising in the years ahead.

Radio Ink: The subtitle of your book is “Remaking Media for a Mobile Culture.” Explain.

Dickey: Today, the average person spends almost five hours a day on their mobile phone, with the vast majority of that time spent consuming content. It’s hard to overstate just how profound this behavioral shift has been in such a short period of time. Remember, as of this interview, Apple has not yet released the 10th-anniversary iPhone.

In other words, in just a few short years, hundreds of millions of people around the world have radically changed the way they communicate, shop, bank, travel, and, most importantly for us, consume media and entertainment. There are virtually no legacy business models that have not been disrupted by the shift to a mobile culture, and this trend is only accelerating.

Radio Ink: Has radio missed the mobile revolution?

Dickey: No, I don’t believe radio has missed the mobile revolution, but I believe it can do a much better job of embracing mobile to expand its product offering for both consumers and marketers. For consumers, video is the fastest-growing use case for mobile devices, and radio is well behind the curve with respect to video content offerings. Ironically, newspapers have done a much better job in this important area than radio.

For marketers and content producers, mobile technology is evolving quickly. I’m seeing a number of very interesting technology companies who could be excellent partners for radio in the modern media ecosystem with their production tools, workflow management, data capture, and analytics. For broadcasters, it will require a focused and sustained R&D effort to develop the products and partnerships, as well as a cultural imperative to train both content creators and sales organizations to execute new product sets. Video is going to capture the vast majority of online ad spend, and radio needs to play aggressively in this space.

Radio Ink: What is the future of traditional media in the new digital world?

Dickey: Over time, these descriptors will disappear as traditional and digital media as well as marketing services continue to merge in the new modern media ecosystem. It’s important to separate content from distribution. Google, Facebook, YouTube, Instagram, Twitter have each amassed enormous audiences that far exceed most traditional media companies without producing any original content, but rather by simply functioning as scaled, digital distributors.

As the shift to a mobile culture has accelerated, they have become increasingly valuable to advertisers because they have the ability to serve individually addressable or “smart” interactive ads to large audiences at scale and, as a result, are capturing nearly 85 percent of every incremental online ad dollar. Their data, analytics, and massive audiences have become enormously valuable to marketers.

As audiences continue to fragment and people consume increasingly more media, content will become more important than ever, but it will be largely consumed over mobile broadband, causing margin compression for traditional media companies, where distribution was a meaningful source of profits.

Whether you’re shopping, securing a mortgage, booking a flight, or consuming media, the Internet has expanded choice, lowered costs, increased convenience, and made the experience interactive through connectivity. We’re in a highly disruptive phase in business, where barriers to entry are coming down and competition is intensifying as distribution becomes democratized by mobile devices.

Radio Ink: In your book, you analyze the strengths and weaknesses of each medium. Give us your perspective on radio.

Dickey: Radio is unique among traditional media because it has more of a competitive moat around its proprietary distribution, particularly in-car. In other words, people will continue to listen to broadcast radio in the car for at least another decade or more because it’s free, convenient, and ubiquitous. In addition, broadcast radio is local, whereas Internet radio (Spotify and Pandora) and satellite radio are not. So radio’s primary advantages for consumers are reach, localism, live content, trusted brands and talent. Just as important, radio’s primary advantages for marketers are local sales and promotion staffs to create and execute brand activation campaigns.

Radio Ink: That sounds like good news for radio. What are its challenges?

Dickey: Radio’s challenges are simple and straightforward. It is an ad-supported model with fixed inventory, and the cost of an ad impression is inexorably declining. Virtually every media company reported declining ad rates in the latest quarter, and this trend will continue into the future due to the basic economic principle of supply and demand. As I say in the book, advertising is getting cheaper and better due to rapidly increasing supply and better targeting through technology.

This is a real challenge for fixed-inventory businesses like radio and television broadcasting as well as linear cable networks. Over the last several years, television has been somewhat inoculated, as retrans now makes up as much as 30 percent of revenue and is growing, whereas radio doesn’t have an alternate revenue stream that is material at this point.

Secondly, radio has high fixed costs that continue to escalate — particularly in the major markets — including real estate, salaries, health care, insurance, ratings services, sports rights, and even royalties with new entrants like GMR. These, along with declining ad rates, are the primary drivers of the margin compression he industry has experienced over the last five years as EBITDA margins of the publicly traded radio companies have declined from 34 to 29 percent.

Radio Ink: Why is radio so under-monetized?

Dickey: With its present product set, it’s probably not under-monetized. I remember my friend Ralph Guild arguing for a greater share of ad revenue when I first got started in the business some 30 years ago, and it’s been a recurring theme ever since. Ad markets speak and tend to be efficient over time, so the relative share that radio captures in a highly competitive marketplace is arguably efficient and rightfully deserved.

Simply put, in order to capture more share, radio’s product set has to evolve to better match the needs of the evolving marketplace.

Marketers’ demands are shifting toward highly targeted, individually addressable impressions that are bid for and served in real time. Moreover, marketers are also looking for real-time feedback on levels of engagement to help them optimize both creative and messaging through constant testing and iteration, which are best enabled through interactive platforms. These trends present challenges to radio’s relative value proposition in the marketplace.

Radio Ink: Does this mean you’re bearish on radio?

Dickey: I would say more cautious than bearish as I look to invest capital. I still like the radio business and believe it can be an important part of the modern media ecosystem. Radio’s model, however, has to evolve — just as most other legacy media models need to evolve. Interestingly, for tech companies, the need to evolve is assumed, and culturally it is a way of life. For example, Facebook went public five years ago without a mobile strategy, but it now has four of the top five mobile apps in the world, a market cap of $480 billion, and will book about $35 billion of mobile ad revenue this year.

Even the big automakers are rushing to reinvent themselves as providers of “mobility services” as they focus on autonomous driving, fractional ownership, and ride-sharing, and the list goes on.

For radio, this means leveraging reach and localism along with a robust local sales and promotions effort in order to develop incremental revenue streams from both marketers and consumers. It will take a great deal of trial and error, but the payoff will be enormous. I also believe broadcasters will ultimately be the beneficiary of regulatory relief that could pave the way for more consolidation, as we’re seeing in local television and cable networks.

Radio Ink: What are radio stations worth today? How should they be valued?

Dickey: That’s an interesting question that I’m spending time on. To put it in perspective, I’m seeing a number of sectors and companies within media, entertainment, and marketing services that are all growing, yet not trading at multiples much higher than radio. When acquiring an asset, you have to forecast both the growth rate of EBITDA as well as the expected multiple of EBITDA the asset will trade for in the future.

If radio continues to suffer margin compression from declining ad rates and higher fixed costs, it’s a sure bet that trading multiples will contract over time. Therefore, if you buy a radio company today at eight-times EBITDA, there is a reasonable chance that over the next three or more years, both the EBITDA and the trading multiple could both be lower, and that’s a difficult investment case to underwrite.

Radio Ink: What do you think about what David Field is putting together at Entercom?

Dickey: I don’t think it’s appropriate to comment on other people’s deals, but I certainly wish them well.

Radio Ink: What do you believe will happen with iHeartMedia?

Dickey: I like Bob [Pittman] and Rich [Bressler]. They are smart guys and good competitors. They are also doing a good job of leveraging the scale of their platform, including Katz, to keep the industry relevant with major advertisers. On the balance sheet side, they have a tough hand to play, but I believe they will successfully restructure their debt over time and the company will continue on.

Radio Ink: What was the biggest mistake you made running Cumulus?

Dickey: Probably a couple. Earlier in the decade, I misjudged the growth prospects for the radio industry, causing us to overpay for some assets. And secondly, I badly misjudged a couple of people, and I’ll leave it at that. As my father always told me, “We’re the sum total of our experiences.” And I consider myself wiser on both fronts.

Radio Ink: What do you consider your biggest professional success?

Dickey: Building the second-largest radio company from scratch over a 20-year period, from an idea hatched on a flight in 1996.

Radio Ink: Do you wish you were still running Cumulus?

Dickey: Life is today and tomorrow — you can’t look back. My plan is to build a very interesting company that is advantaged by the secular trends in media, entertainment, and marketing.

Radio Ink: When you launch your new company, will you run it any differently than you ran Cumulus?

Dickey: I’d run it differently because it will be a different company with different needs. Also, you learn from trial and error where some things work and others don’t. When you’re building and running a large enterprise through 150 separate acquisitions, it’s a complex web of people, processes, cultures, and systems. Decisions are made daily that affect business outcomes both near- and long-term. I’ve had the opportunity to reflect on a host of things that will undoubtedly benefit my decision-making going forward. Experience and domain knowledge are truly invaluable.

Radio Ink: Does radio need more consolidation?

Dickey: Yes and no. Due to the charter of the FCC license, consolidation in broadcasting doesn’t eliminate capacity, and you could make the argument that there is a surfeit of radio inventory in the local and national marketplace.

Consolidation, however, can lead to efficiencies by increasing leverage over vendors and suppliers and, to a lesser extent, with pricing. Also, with the rapidly evolving ad technology and inevitable adoption of programmatic, I believe local concentration — such as the ability to own half or more of the stations in a market — is now perhaps even more beneficial to value creation than having a national footprint. This dynamic is somewhat different for broadcast television because they tangibly benefit from scale in negotiations with both programmers and distributors, two constituents that radio does not depend upon.

Radio Ink: Is NextRadio going to work?

Dickey: I’m not current on the prospects of NextRadio, but I applaud Jeff [Smulyan] for investing in R&D to give radio a greater presence on mobile devices. I can tell you, however, that it’s in the best interests of the carriers to keep their customers on the network and in their ecosystem at all times.

Radio Ink: How will radio get revenue growing at 3 to 5 percent consistently again every quarter?

Dickey: If radio is to begin growing at that rate again, it must evolve and expand its product set. The average radio station has about 50,000 units a year to sell, and the spot rates are not growing. In fact, in most cases, spot rates have been declining, particularly in the transactional marketplace.

Therefore, local stations must create new products to sell in digital media, live events, and local commerce to compensate for the declining spot revenue in order to create incremental growth. It’s a pretty simple concept to whiteboard, but really difficult to consistently execute. I believe this is the industry’s biggest challenge but also its greatest opportunity.

Radio Ink: That’s a good segue to your new fund. What do you plan to buy with your Modern Media Acquisition war chest?

Dickey: We are looking at a wide array of companies in media and entertainment as well as marketing and information services both in the U.S. and internationally. We’re seeing enough good ideas to put more than our current pool of capital to work, so we may employ additional acquisition vehicles over time. The primary objective is to identify companies and sectors that benefit from the accelerating shift to a mobile culture. The goal is to build a company (or companies) that are well-positioned to take advantage of the trends I discuss in the book.

So in media, it will be multi-platform rather than a singularly focused play like radio. This “modern media” approach is a very different strategy from the one I used to build Cumulus over two decades. Today, consumers and marketers no longer view either media or advertising as siloed, but rather as a seamless experience across connected devices.

In fact, the very definition of radio and television is changing for both consumers and advertisers as linear content is replaced by on-demand offerings. However, I believe that radio will remain somewhat of an exception due to radio’s incumbency in autos and its “live” DNA, which means that its proprietary distribution channel will be more durable than, say, television or, certainly, local newspapers. While it’s not a hall pass, it does give the radio industry more time to develop incremental revenue streams in digital media, marketing services, and local commerce.

Radio Ink: So will you be buying your old company back?

Dickey: As I said earlier, we’re looking at a number of interesting companies right now.

Radio Ink: What was going through your mind when you were told you were out at Cumulus? It was the buzz at the Radio Show in your backyard in Atlanta.

Dickey: I was actually on my honeymoon when the machinations took place. The timing, setting, and personalization of events speak volumes, and I’ll leave it at that.

Radio Ink: What do you think about the performance of the company since you left?

Dickey: Frankly, as a large shareholder, the results are shocking. Since the fall of ’15, it has been the worst-performing public radio company, with a precipitous decline in both EBITDA and share price. It’s been difficult to watch for all shareholders.

Radio Ink: What will happen to the company?

Dickey: As a shareholder, I believe the company must now engage in a full-scale turnaround and make the necessary decisions to change course and protect value. Ironically, the company celebrated its 20th anniversary this May, and I would like to see it be a force in the industry for another 20 years.

Radio Ink: What about the turnaround Mary Berner is constantly talking about?

Dickey: Next question.

Radio Ink: You’ve also expanded your publishing business. How will that play into your plans?

Dickey: This spring, we bought our largest competitor in the regional luxury magazine space to create a luxury publishing and brand-activation platform with over $100 million in revenue. As I discuss in the book, modern media companies will eventually be structured against audiences rather than around mediums.

Our vision for Modern Luxury is to become a true multi-platform luxury brand serving a highly desirable audience segment. We enjoy a unique relationship with 2 million of the most affluent and influential consumers in the top 25 markets, reaching them where they live and play. In addition to publishing 85 magazines, we produce 2,400 events per year, creating bespoke solutions for luxury marketers. Modern Luxury targets a very different audience than radio, but the types of custom brand-activation campaigns we conceive and produce are increasingly in demand by marketers.

Radio Ink: Why print? Isn’t that a dying business?

Dickey: We play in a very specialized segment of print, which is regional luxury publishing. Similar to radio, we have trusted relationships with our readers based upon relevant, local content. Brand marketing also remains critically important to luxury marketers. As a result, they dramatically over-index in print advertising due to the large visual formats and the ability to control the context of their message. Lastly, we have built highly effective brand activation teams in the top 25 luxury markets, which is an important differentiator from our national competitors at Condé Nast and Hearst.

Radio Ink: Do you stay in touch with people in the radio business?

Dickey: Sure. I speak with group heads and people I’ve either worked with or have known over the last 30 years in the business.

Radio Ink: Why raise money and come back? You probably have enough money to buy your own island. Why not relax the rest of your life with your family?

Dickey: I just turned 56 last month, and God willing, I hope to be active in business and making a contribution for the next 20 years or more. In a sense, I view this period as “halftime” in my career and look forward to what’s next.

Radio Ink: It’s been two years. Do you miss the radio business?

Dickey: I miss the daily interaction with the team, and I really miss the competition. However, stepping aside after 18 years of nonstop work to build Cumulus has given me a deeper appreciation of balance and perspective, particularly with the birth of our daughter. It’s been a healthy break, and I’m now looking forward to putting capital to work to build a substantial modern media company over the next five to 10 years.

Radio Ink: How and where can people get your book?

Dickey: It’s available on Amazon, and if readers have questions or would like to discuss a finding or framework, please send me an e-mail. If you work or invest in media and advertising, I think you will find it helpful and informative. I know I learned a great deal while researching and writing it.

Radio Ink: Are you going to the Radio Show in Austin this year?

Dickey: Not sure yet with my travel schedule, but it would be great to catch up with old friends if I can swing it.