(By Ed Ryan) For several years we heard from radio executives, analysts, brokers and investors that once iHeartMedia and Cumulus addressed their massive debt, radio would become a media star once again. With both companies now in much better financial shape and the economy humming like a top, has that turned out to be an accurate prediction? In our special annual Forecast analyst report, we asked our expert panel that very question. We also pick their brains about the future of radio, how the 2019 court ruling will affect deregulation, the upcoming election, and much more.
We asked six analysts to look into their 2020 crystal ball:
Elliot Evers, Managing Partner at MVP Capital
Scott Flick, Partner at Pillsbury Winthrop Shaw Pittman
Mark Fratrik, Chief Economist/SVP, BIA Advisory Services
Davis Hebert, Senior Analyst, High Yield Research, Wells Fargo
Jack Myers, Media Ecologist
Justin Nielson, Senior Research Analyst, Kagan
Radio Ink: Do you believe we will see a recession in the next one to three
Davis Hebert: Let’s look at the facts. We are in a record 10th year of economic expansion, unemployment is at a 50-year low, and consumers continue to reflect healthy spending habits.
But there are concerns on the fringe that are giving us pause, and the chances of a recession in the next one to three years are high in our view. We are seeing industrial slowdown, trade volumes are showing signs of strain, and the rest of the world has been struggling. However, the Fed easing rates can perhaps help with a soft landing, and it doesn’t appear a major credit crisis is waiting in the wings.
Elliot Evers: Yes, we think that is likely. Today, the signals are very mixed: we flirt with an inverted yield curve, which has predicted every recession, while unemployment is at a 50-year low. But the Fed can only do so much to stimulate economic activity. The storm clouds are gathering, but it is far from clear what the catalyst might be — perhaps the burdensome tariffs imposed by Mr. Trump, which are already causing problems throughout the economy? Or maybe China’s economy slowing down?
Mark Fratrik: Certainly the odds are that we will see a downturn in the business cycle. With unemployment at only 3.5 percent, I think recession is a ways off. I believe it will depend upon whether the “trade war” is resolved with China and other countries. I think President Trump has a tremendous incentive to resolve those trade issues to help his reelection.
Scott Flick: I’m always hesitant to predict a recession is coming, given that nothing brings on a recession with more certainty than the expectation that it will happen. It becomes a self-fulfilling prophecy.
Having said that, recessions inevitably happen as part of the economic cycle, and we are sadly overdue. My hope is that it will be a mild one, and thankfully, no one is predicting a repeat of the Great Recession of 2007-2009 that devastated radio and pretty much every other business.
Jack Myers: Yes, there are clear indicators that the global and domestic economy have entered a downturn period that will accelerate over the next year, pushing us into a post-election recession. There are also secular headwinds across the media and marketing ecosystem that will have a negative impact on the overall media and advertising economy.
Justin Nielson: Yes, recent indications are that U.S. GDP growth is slowing, and there are global headwinds with U.S.-China trade conflicts and tariffs. However, it is anyone’s guess if it will happen next year or in 2021-22.
Radio Ink: If yes, how will that impact radio?
Scott Flick: As an industry that is largely reliant on a single revenue stream — advertising — radio is at greater risk in a recession than businesses with more diversified revenue streams and longer-term contracts that help them weather tough economic times.
Despite the number of times advertisers have been told that the last thing you should do when product sales decline is reduce your advertising spend, businesses seem unable to control themselves, as it is such an easy way to reduce short-term costs. The fact that reducing advertising is so damaging to both short- and long-term revenues is frequently lost on advertisers who panic in an economic downturn, and unfortunately, radio takes the hit when that happens.
Justin Nielson: Radio revenue will be impacted in a recession as it has been in the past, although more than TV stations, since radio revenue is still more highly correlated with advertising because it does not have monthly subscription revenue or retrans to fall back on.
Mark Fratrik: With a recession there will certainly be a cutback on advertising revenue, and given the strains on the local radio station industry, this can only exacerbate the problem. We could easily see decreases of advertising revenue in the 4-8 percent range instead of the expected 1-2 percent decrease we now expect.
Elliot Evers: As your readers are well aware, radio revenue is already facing significant headwinds in the current economy. It is safe to assume that, should a recession hit, the industry’s revenues will take a dip. Hopefully, this will be no worse than a low-single-digit drop.
Jack Myers: Radio should be a beneficiary of economic pressures on advertisers to maintain reach with improved cost efficiency. Radio and out-of-home will be among the few media sectors to experience growth, although low-single-digit growth is all that can be expected.
Davis Hebert: Radio is a cyclical industry, where 90 percent or more of revenue is derived from advertising. If we have a recession, especially one where consumers tighten their wallets on discretionary spending, radio will undoubtedly be affected. For this reason, we believe deleveraging should be the top corporate priority in the near to intermediate term.
Radio Ink: Will radio see more, less, or the same amount of political revenue in 2020 as it did in 2016?
Mark Fratrik: Could see somewhat more political revenue as President Trump will be spending more than in 2016, the Democratic nominee process will continue through several months next year, and there will be a number of close Senate races. Additionally, many of the new House members will be spending a lot to hold onto their seats.
Jack Myers: More, primarily because candidates will need to find homes for their money — they will find less TV inventory available.
Scott Flick: The data presented at the Pillsbury Broadcast Finance session at the Radio Show this year predicted about a 17 percent increase in overall political ad sales for 2020 over 2016. Given the political developments in October, however, I’m thinking it will be even higher, with the president now having to spend money just to try to keep his base energized without regard to who his eventual Democratic opponent will be. That is an entirely different dynamic than in 2016, when he was getting so much media coverage that he didn’t have to spend a lot of political ad dollars.
In addition, as members of Congress are increasingly forced to take a position on impeachment, there are going to be a lot of candidate and political action committee dollars spent trying to shore up or erode voter support for incumbent candidates. That’s all good news for radio, as long as it manages to get its share of that record political spend.
Davis Hebert: I believe radio should see more political dollars in 2020 versus 2016. Although we don’t see radio’s share increasing (should remain around 5 percent to 7 percent), we believe political dollars will be larger as a whole in this election cycle. Ad dollars follow fundraising, and with 90 percent GOP support, President Trump should have better financial clout in this election cycle.
Justin Nielson: I believe radio will see more political in 2020, since there will
be overflow from TV and campaigns are going hyper-local in very competitive districts and swing states.
Elliot Evers: The last presidential election cycle saw a move away from traditional media, and toward more targeted digital campaigns. Since then, many broadcasters, both in radio and TV, have significantly beefed up their digital capabilities. We would anticipate a steady increase in political dollars moving into digital campaigns, but, with more skills and more digital infrastructure in place, we would hope to see the radio industry capture more of those political dollars. Thus, we would hope the industry sees more political dollars in this cycle.
Radio Ink: If Trump loses the election in 2020 to a Democrat, what does that mean for the radio industry?
Elliot Evers: The Third Circuit decision in Prometheus IV certainly does not bode well for any further moves by the FCC to deregulate the radio industry before the election. But if Trump is reelected, there is a chance that Chairman Pai will take the steps necessary to bring radio regulation in sync with the realities of today’s audio marketplace (despite the opposition of iHeart and others). However, if Trump loses, we think it highly unlikely we will see any effort to loosen the rules governing radio for at least the next four years.
Mark Fratrik: Nothing good. There will be no chance of further deregulation that the industry desperately needs. If the new president imposes a considerable amount of regulation throughout the economy, there is even greater chance of a recession, which will also hurt the radio industry.
Scott Flick: The two Democratic commissioners at the FCC have made clear that they are not fans of the FCC’s current deregulatory bent, and in a number of cases, have actually called for increased regulation. Assuming a like-minded Democrat is appointed to the FCC by an incoming Democratic president to create a Democratic majority, I suspect we will see a repeat of the Wheeler-Pai transition in reverse, with the next FCC moving to undo
much of what the last FCC has done.
Regardless of your politics or views on deregulation, radio, like any business, needs a predictable business environment to prosper and meet its public service mission. It’s in no one’s interest to have the ground rules changed every four years, particularly with all of the other dramatic competitive and technological changes radio is already facing. Stations already have enough sources of disruption to confront; a staunchly partisan FCC is one they could live without.
Jack Myers: A shorter economic downturn.
Davis Hebert: I think there are a lot of “ifs” at play — who wins, what the platform is, etc. A less business-friendly administration would likely be more restrictive for M&A (especially relaxation of ownership limits), but this feels like a tough question to answer at this point in the game in terms of the direct impact on radio.
Justin Nielson: I don’t believe the regulatory environment changes significantly for radio since the majority of the focus of leading Democratic presidential candidates is on increasing regulations on big tech. However, radio ownership cap relaxation probably gets put on the back burner in a Democrat-led FCC.
Radio Ink: What is your prediction for radio revenue in 2019 and 2020?
Mark Fratrik: 2019: down 1.9 percent; 2020: down 0.2 percent.
Scott Flick: Again, the data at this year’s Pillsbury Broadcast Finance session indicates it will be slightly down overall, both in 2019 and 2020. The radio companies that can claim more than their share of the digital advertising pie will be the ones that beat the industry trend.
Justin Nielson: Radio spot revenue is forecast to be down 0.8 percent in 2019 and 0.1 percent in 2020. Including digital, network, and off-air, total radio revenue is expected to be up 0.5 percent in 2019 and 1.0 percent in 2020.
Elliot Evers: Based on current 2019 trends and without any major near-term catalysts, unfortunately, we see radio revenue flat to slightly down over the next five quarters.
Davis Hebert: We are predicting radio to be flat to up 1 percent in 2019 and in 2020. This assumes that the consumer spending environment remains healthy in the U.S. and radio has some success in growing its digital profile.
Radio Ink: There was a lot of discussion about having iHeartMedia and Cumulus go through bankruptcy and clean up their balance sheets. Now that they are both through bankruptcy, has that improved how investors look at radio in any way?
Davis Hebert: Not yet. I think it will take several quarters for investors to get to know the iHeart story again and for Cumulus to define its long-term strategy after its recent spate of asset sales.
Scott Flick: I’ve discussed variations of this question with every Radio Show panel I’ve moderated in the past several years, and it’s clear that the heavy debt load of those companies has weighed on all of radio in the eyes of investors. I was therefore pleased to hear this year that their emergence from bankruptcy has actually had a positive impact on investors. Speaking for myself, I work with a number of private equity clients, and I’ve seen more interest in radio investments this year than I’ve seen in a long time.
Elliot Evers: Unfortunately, we think it hasn’t had a significant impact on investors. Although it was critical for the industry’s major players to right-size their balance sheets in order to deal with the “new normal” of flat-to-down revenue, other than Apollo’s investment in Cox, we really have not seen any new capital coming into the sector.
The private equity firms have “left the building” due to the industry’s lack of
growth, and hedge and infrastructure funds have not replaced them. Nor have we seen family offices investing in radio as a way to enjoy the industry’s cash-on cash returns.
What we have seen, unfortunately, is Wall Street punishing members of the peer group by selling off equities in the space — the Street perceives certain names as having too much leverage for our “new normal” environment. At the same time, the Street loves the radio industry’s debt — Cumulus’ recent debt offering was oversubscribed.
Mark Fratrik: Certainly for those two companies, investors are more comfortable given they have a lot lower debt load. As for other radio companies, investors are still a bit apprehensive as the competition for audiences and advertising spending is still strong. Investors (whether equity or bank lending) look at the specific players and whether they have a successful track record before lending to these companies.
Radio Ink: What are your thoughts on station transactions looking ahead to
Mark Fratrik: Still going to be a bit slow with no expectation of ownership-rule deregulation. Low interest rates can be supportive of certain deals.
Scott Flick: Deal flow will continue to be slow until there is a change on the regulatory front, but I’m not as convinced as many that the Third Circuit’s decision overturning the FCC’s TV-oriented deregulation efforts means radio deregulation is stalled. I think it just means that we have a clearer roadmap of how it will have to be done in order to overcome the obstacles in its path. Stay tuned.
Elliot Evers: Unless the Pai Commission decides to adopt deregulatory measures as part of its Quadrennial Review (maybe because it did not like being told how to regulate the broadcast industry by an appellate court with little or no knowledge of how the industry is suffering), we think trading in 2020 will be very slow: most of today’s license holders have moderate leverage, long experience in the industry, and a commitment to continuing in the business.
This can be contrasted with the earlier part of this decade, when many of the industry’s assets were held by “unnatural” owners, i.e., distressed investors and lenders.
Davis Hebert: I’m skeptical we will see a major M&A theme in 2020. For starters, it is unclear if we will get the deregulation sought by the NAB. And second, public radio operators all lack financial flexibility at the moment. Once they get leverage to a more tolerable level (perhaps in the next two years), we could see more elevated activity. It is encouraging to see Apollo take on the Cox portfolio, but we believe their interests lie more in broadcast television.
Justin Nielson: Radio deal volume has been low in 2019, and we expect that to continue into 2020 without deregulation. Cumulus may continue to prune their portfolio to pay down debt, but iHeart looks to be holding on to its assets and Entercom is still trying to turn the tide on its CBS Radio acquisition.
Radio Ink: Do you believe we will see any additional radio bankruptcies?
Elliot Evers: Unfortunately, yes. But only a few, and smaller companies. Most of the industry’s players have trimmed their debt to acceptable levels.
Scott Flick: There are numerous radio companies that are more highly leveraged than they should be, and the good news is that most of them recognize that and are working to pay down their debt. How far they get in doing so before the next economic downturn arrives will determine which are the most likely candidates for a bankruptcy.
The good news for investors is that most broadcasters learned from the Great Recession and are not operating so close to the edge that a recession would take them under. However, unless you know how severe that next recession will be and how long, you can never say never.
Davis Hebert: Not in the near term. While we believe leverage in the radio sector is too high, most have ample FCF cushion and do not face near-term debt maturities that would create a solvency issue. Keep in mind that iHeart and Cumulus were both carrying leverage above 10x cash flow, which was a clearly unsustainable level. Leverage in the radio sector right now ranges from mid-4x to upwards of 6x cash flow.
Radio Ink: What are your thoughts on sports-gambling radio, and radio’s
shot at pulling in big dollars from that category?
Mark Fratrik: Could be a noticeable advertising category for radio, as casinos will want to target specific demographic groups such as young males, which some radio stations can deliver. We are seeing that in the Washington, D.C., area as the Sports stations are getting spots from West Virginia categories.
Davis Hebert: I think sports betting is an interesting area, and those broadcasters that have a Sports edge (e.g., Entercom) are smart to be tapping into this potential. If we are to look at Europe as an example, betting firms have become a staple for sponsorship and advertising dollars.
However, I think we are in the very early] stages in the U.S.; first, we need to see legalization on a more nationwide level, then see how betting impacts listenership, and then dollars perhaps follow. This could take a number of years.
Jack Myers: Big gambling dollars won’t materialize too soon, due to state-by-state regulatory issues. In states where regulations are well defined and advertising is viable, stations will see nice growth. I expect the ad market in this category will be slow to evolve.
Elliot Evers: Sports gambling appears to have a big future in the U.S., but we are cautious in our optimism on how significantly it will benefit the radio industry.
Scott Flick: While the feds and the states are still arguing over what gambling operations should be permitted and how they should be regulated, it is clearly going to be a growing segment of the ad market.
States want the added tax dollars, so they are incentivized to see this new industry grow. The question is whether Sports stations will walk away with the lion’s share, or if the category ultimately becomes so large that it benefits all radio stations significantly.
Radio Ink: How is radio performing in digital and podcasting, in your opinion?
Davis Hebert: Digital has been a nice growth story for radio, although it still represents a small contribution to revenue (7 percent to 10 percent) and the margin profile is a bit more challenging. I think podcasting is still evolving, but it presents an obvious opportunity for radio broadcasters.
For starters, podcasting is an easy extension of local brands and personalities. Second, statistics show that podcast listeners are inherently loyal to the medium and would not cannibalize its broadcast audience. And third, it is more profitable than other areas of digital.
Yes, it is a crowded field, but radio broadcasters have a big megaphone to promote podcasts and have the scale to aggregate audiences for larger advertising buys.
Mark Fratrik: Some companies are doing quite well in digital services, while others not so much. As for podcasting, of course it expands the potential listening audiences,b but there is incredible competition from hundreds of thousands of different podcasts, so I believe upside is limited.
Elliot Evers: In digital, we see many operators shooting for having digital be 10 percent of total revenues. Townsquare claims an impressive 35 percent. We applaud these efforts, but, oftentimes, the margin and profitability from these hard-won digital revenues are disappointing.
We’re seeing lots of activity and discussion around podcasting — broadcasters investing in podcasters, forming strategic relationships with podcasters, and developing their own podcasting content. But this is still the early days, and we’re not convinced much of this activity is really moving the needle yet.
Radio platforms are accountable to public shareholders and lenders, which is limiting their ability to be too creative or make mistakes. As podcasting matures, we expect to see a greater impact.
Jack Myers: Podcasting is generating great enthusiasm and interest, but audiences are still comparatively small and heavily fragmented. In both digital and podcasting, I expect most revenues will derive from automated/programmatic models.
Many podcasts have a short shelf life, like TV mini-series, along with some high-profile brands that are sustainable but rarely have large mass audiences. They tend toward specialized, highly targeted special interests. My concern about podcasting is that it shifts attention from the unique values of broadcast radio.
Scott Flick: Way better than it used to, not as well as it needs to.
Radio Ink: Give us your prediction on deregulation after the recent court
decision and the upcoming election.
Mark Fratrik: Nothing is going to happen before the election, and the way the election looks now, it does not seem promising for after the election.
Davis Hebert: I think deregulation is unlikely. Although the NAB has been front and center with its proposal, the industry has not spoken with a collective voice. We believe the FCC could move more cautiously with the recent court decision.
Radio Ink: If you had a room filled with the 40 Most Powerful People in Radio, what would tell them their biggest challenge is, and why?
Scott Flick: Whether you like it or not, you are no longer in the radio business, but the audio business. That’s not a bad thing; it’s a good thing. The obstacles to the traditional radio model are increasing (e.g., the connected car), as is competition for people’s time, but the time people spend with audio is growing, and no one has more experience crafting audio products that audiences want to hear than those that work in the radio industry. This is not their first rodeo.
However, they can no longer take home the prize just by being the best bronco rider; they need to apply their skills and become the best at riding a bull, an elephant, and animals that haven’t even been thought of yet.
Indeed, the ultimate prize will go to the rider that invents and then masters the next audio animal while others stand by waiting to see what it looks like.
Elliot Evers: Two words: revenue and growth. The industry needs to show that it can adapt and innovate in this digital age — whether that is investing in digital assets, podcasting, or whatever is needed to generate top-line growth. Allowing one licensee to get deeper in his or her market will be a step towards better rate control and, hopefully, increased revenue.
And we would suggest to the 40 Most Powerful that they put their heads together ASAP with the NAB and the FCC to come up with a plan to enhance diversity of ownership. As difficult as it might be to make a showing regarding the future impact of any such plan (perhaps a revised Minority Tax Certificate, or a fund to finance minority ownership, etc.), it is imperative that the FCC come back to the Third Circuit with a data-driven, thoughtful response so that, at the very least, the deregulatory moves initiated by the FCC in 2017 can be reinstated.
Mark Fratrik: Remaining relevant. They have to think of themselves as more than radio stations and as local media outlets reaching their audiences in many different ways (OTA, digital, podcasting, events, etc.) and selling that access to advertising clients. They have to be creative in different services that they provide and in how to monetize those services.
Jack Myers: Lack of knowledge about radio, lack of educational resources to inform brand executives who control ad budget allocation, increased programmatic buying, and inertia in attracting and retaining a young and diverse work force. Radio is the least engaged in industry diversity initiatives of any media category in modernizing its workforce.