A few months ago I got a new head unit (think car stereo) that has no CD player, just AM/FM radio, and ability to control Android/iPhones with Pandora and streaming MP3s via Bluetooth or USB. While my phone usually connects automatically, sometimes I have Bluetooth off and I’m too lazy to spend 60 seconds playing with settings to get the unit and my phone to pair, so I listen to terrestrial (FM) radio, usually NYC “classic” rock station q104.3.
I hadn’t listened to terrestrial radio in probably a year or two until a few weeks ago, since I’ve been using my own music library, Pandora, and Spotify (free, ad-supported versions of both). After a few dozen hours of listening to FM radio, I can say unequivocally the frequency and sheer airtime dedicated to ads is probably 5-10x that of both Pandora & Spotify. Its absolutely ridiculous! 10x 30-second+ ads in a row on FM radio every 10-15 minutes v. what, 3 ads in a row on Pandora/Spotify every 20-ish minutes? Before I get off onto a rant, we should examine this phenomenon from a both the user and advertiser perspectives.
As a listener, this provides a strong incentive for me to use Pandora/Spotify/my own music instead of listening to FM radio, and, since using any of those alternatives is incredibly easy these days, that is what I usually do. This is to say nothing of the fact that terrestrial radio, much like most media (eg TV “News” networks) pander to the lowest common denominator by playing only hit songs over and over (and over…) instead of throwing some great but less popular ones into the mix like they used to do, but I digress…
From a business standpoint, though, the picture looks a bit different. Anyone who’s spent any time listening to Pandora and/or Spotify (again, the free versions) knows that a not-insignificant amount of ad time is dedicated to ads for the premium, paid versions of each service rather than ads from 3rd parties. Sure, terrestrial radio stations do their fair share of promotions, but their ad inventory (if we can still call it that) seems to be comprised of a far greater % of 3rd party ads, as compared to Pandora & Spotify’s ad inventory.
So, why is this the case when its fairly clear from any number of indicators that terrestrial radio is in decline while digital is broadly seen as “the future?”
The above chart compares the performance over the past decade of Cumulus Media (CMLS), XM Sirius (SIRI), the S&P500 (^GSPC), the Russell2000 (IWM), and Entercom Communications (ETM). The first and last are basically pure-play terrestrial radio broadcasting companies, while SIRI is, well, the satellite radio network that, technology aside, isn’t all too different from terrestrial radio, at least relative to the customization that makes Pandora & Spotify so attractive to users. Cumulus Media is down about 77% over the past decade, and Entercom is down even more, SIRI (here really just for kicks) is down a relatively mild ~50%, and the broader market indicies are both in double digit positive territory.
So, investors have largely abandoned the terrestrial radio stocks (at least these two), yet they still grab the majority of radio(-ish) ads, a few thoughts on the “why?” question:
Technology-wise I’m not sure how Spotify & Pandora use geo-targeting for ad delivery, but between not doing a very good job selling local/regional ads nor delivering them well, it seems the terrestrial (and to a lesser extent satellite) radio broadcasters are still getting the majority of such ads. Even if Pandora & Spotify had flawless targeting algos and rockstar ad sales teams – and aggressively pursued/made inroads into local/regional ads – I’m not so sure the transition would happen quickly, not nearly in fact.
If your in charge of advertising at a company, whether its a local car dealership or a national chain, you’re unlikely to be incentivized to mess with the status quo; if you’ve been using terrestrial radio advertising, you’re either going to continue to do so or simply terminate the relationship if performance gets bad enough (and it usually has to be pretty bad for that to happen). Your media buying and advertising co’s may try to get you to spend some money on digital (in various forms), but no executive is going to risk their job saying “Hey, none of our customers listen to FM radio any more, let’s take that money and spend it all on Spotify, Pandora, and SIRI!”
Just like with the evolution of web ads, some co’s will (and have) start(ed) to test the waters, and as the industry leaders grow their user base & fine-tune their ad delivery systems, I expect adoption to follow a similar adoption/transition curve as tv/outdoor/print -> web.
The advantages/value proposition are/is quite similar; better & more granular data on listener demographics, preferences, tastes, and networks enabling better ad targeting – at least in theory – and thus more bang for advertisers’ buck.
Recall, though, web ads have been around for the better part of 2 decades and its only in the past few years that they’ve really gone mainstream to the point where every company has or is working on an online advertising strategy. Digital, user-customized radio service advertising is still in its relative infancy, so while I doubt it’ll take 15+ years for co’s to transition, its not going to happen overnight.
How do you play this? Just like that, slowly, patiently, and with great discipline. Radio stocks are already pretty beaten down but as the transition happens – and it won’t be a complete one, that’s a key point – they may very well sink even further or even go bankrupt. They may also get bought by bigger conglomerate media companies and your “obvious” shorts/long puts may get crushed. Also, Pandora and Spotify aren’t necessarily the long-term winners yet even though it may seem that way today; just take a look at Pandora stock since the IPO, down about 35%! If/when ad $’s start flowing towards those co’s, you should also expect new entrants vying for a piece of the pie, increasing competition and putting pressure on margins and growth.
Patience, my friends, patience and discipline. And, as always: