How many ads are too many?
How many ads are too many, too many, too many...
Radio stations are playing more advertisements than ever. Now some industry executives wonder whether the sector's two largest and increasingly dominant companies are overloading listeners with promotions -- at the risk of the medium's long-term health.
The concern hasn't reached Wall Street yet. After a rough patch last fall, radio has reclaimed its place as the medium shareholders love to love, with its operating margins close to 50% and a monopoly on the ears of commuters stuck on ever-busier highways. Just last month, investors snapped up close to $3 billion in shares in
subsidiary that, by most measures, is the largest U.S. radio company. Infinity shares are up 30% since.
But while analysts and investors hear nothing but easy listening ahead for radio, some of the companies that compete with Infinity and
, the industry's other giant, aren't so sure. They worry that to satisfy the Street's love of ever-higher cash flow, the two behemoths are squeezing their stations to run more advertisements. While profitable in the short run, that move could eventually turn listeners off radio for good, they say.
"At the end of the day, we have two customer bases. We produce a product for free and give it to the listeners, and then we sell it to advertisers," says
Chief Operating Officer Dick Ferguson. "Those can be at odds at times,
but the radio business has been extraordinarily good at finding the right mix. People like me hope that the pressure of Wall Street doesn't cause radio companies to mess with the mix."
Historically, AM stations, which are usually mostly news or talk, run 18 to 20 minutes of ads per hour. Music-oriented FM stations typically have 10 to 11 minutes of ads each hour. Typically, AM stations sprinkle their ads throughout the hour, while FM stations run them in two or three long "pods" every 15 to 30 minutes.
Getting hard statistics on whether ad loads have increased is difficult. But the perception inside the industry is that they have, sometimes substantially. In November,
noted that "according to the general manager of one CBS-owned station, CEO Mel Karmazin has encouraged loads
on FM stations as high as 15 minutes per hour, telling stations there is no such thing as 'sold out.'"
Mark Chernoff, program director of
, Infinity's flagship sports talk station in New York, calls his station's ad schedule "heavy and full," although he won't discuss specific figures.
Ad clutter "is getting worse -- without a doubt," says Marilyn Richter, who supervises radio buys for
, a New York ad agency.
Both Infinity and Chancellor are reluctant to talk about loads. Chancellor didn't respond to repeated requests for comment. A CBS spokesman wouldn't answer specific questions, saying only that "you don't judge the quality of a radio station, or a newspaper or a Web site for that matter based on the number of commercials they run. Infinity has some of the most successful radio stations in America, many of which place first in their markets. If our listeners objected to us, they'd let us know."
It's easy to see why stations want to up ad "loads" -- the number of advertisements played each hour. Assuming a station can hold the line on ad pricing, running 12 minutes of ads each hour instead of 10 gives it an instant 20% top-line gain, with little increase in costs. And the demand is there: Advertisers have increased spending on radio from $9.5 billion in 1993 to almost $15 billion in 1998, according to
Veronis Suhler & Associates
, a New York investment bank that specializes in the media industry.
Even so, stations were once extremely reluctant to boost loads. A decade ago, radio was one of the most competitive businesses around, thanks to
Federal Communications Commission
rules that limited the number of stations a single company could control. Any station that ran too many ads faced the prospect of losing listeners to the competition.
But the FCC has steadily loosened its rules on station ownership. Today, companies are allowed to own eight stations in major markets. The result has been a huge acquisition spree, led by Infinity, Chancellor and San Antonio, Texas-based
Clear Channel Communications
. Infinity now has more than 150 stations, including six in New York, eight in Los Angeles and eight in Dallas. Chancellor has similar strongholds in New York, Washington and Houston, among others.
In those markets, listeners who tire of the ads on one Infinity-owned station may find themselves switching to another station that also reports to Karmazin. George Sosson, Clear Channel's senior vice president, sums up radio's new rules: Before the FCC loosened its regulations, stations were afraid to increase loads too much for fear of driving listeners to "the other guy," he says. "Now we all are the other guy."
But Cox Radio's Ferguson says the truth is more complex. Cox has been careful to keep its loads at traditional levels, hoping to win audience from other stations. But Ferguson worries that companies that overload their stations with ads may end up driving listeners away from radio entirely. "If you have a couple of big operators doing it in the market, it paints all of us with the same brush," he says.
Is radio losing listeners? The evidence is sketchy but suggestive. According to
, which monitors radio use, the average American listened to 21 hours and 45 minutes of radio last spring, a 3.3% decline from three years earlier. Data for summer 1998 showed a 2.2% decline from the same period in 1995.
The slight dip in listeners is "something you have to monitor," says Jeff Smulyan, chairman of the nation's eighth-largest radio company, Indianapolis-based
Other broadcasters are more sanguine. "There's a school of thought that if radio as a medium adds too much
ad inventory, it will reduce time spent listening," Sosson says. But he doesn't believe that. Rather, he says, "I just don't like to constantly add inventory because it gives salespeople an excuse to cut rates."
Cox Radio's Ferguson warns that view is short-sighted. Within two years, the industry will face its first real competition from ad-free satellite radio, he says. For now, broadcasters have shrugged off the satellite threat, claiming that listeners won't pay to hear songs they can get for free. Two decades ago, television networks had the same attitude about cable.
So this may turn out to be precisely the wrong time to up loads. Mark Greenberg, the manager of the $250 million
Invesco Strategic Leisure fund and a longtime radio bull, remains a big fan of the sector. Even so, he warns that "adding ads is like a nonrecurring gain -- you just can't keep going to the same well."