By any measure, the outlook for the terrestrial radio industry in 2007 lacks promise. For the second consecutive year, advertising revenue could be flat. There is also a good chance that radio revenue could end this year with negative growth, marking the first time the industry has posted back-to-back yearly profit declines. All told, the three-year period from 2005 to 2007 might be the slowest growth period in radio’s history.

However, when satellite and Internet radio are factored in, forecasts start to look a little brighter.
Like other broadcast media, terrestrial radio has been hit hard by a soft automotive category, about 15% of its business, and a volatile, ever-consolidating retail category, a big contributor to the local-dependent radio business. Conditions aren’t likely to change much next year. “Most advertisers’ budgets are down to flat, and I don’t expect it to get much better in 2007,” MediaEdge:cia senior partner/director of radio Kim Vasey says.

Anecdotally, radio buyers all year have observed new media, the Internet and out-of-home siphon off dollars. In the first half of 2006, radio’s share of advertising dropped from 7.6% to 7.2%, according to TNS Media Intelligence data.

“The Internet is forcing a redefinition of the scope of ad spending. It has taken half of the growth out of the normal expansion/recovery cycle,” says Lee Westerfield, managing director of BMO Capital Markets, which is forecasting radio to decrease 1.5% in 2007, coming off a 0.7% decrease this year. That’s a trend likely to continue with the planned launch of local searches by Yahoo and Google.

Radio is also coping with its changing definition, which often includes satellite and Internet. It will be blurred even further next year when Arbitron begins to include satellite and Internet radio in its regular ratings reports. With those new sectors helping constitute forecasts, radio is actually growing, up 5.3% in 2006, according to Veronis Suhler Stevenson.

Many broadcasters are exploring ways that new media can extend their brands, especially on the Internet. Hundreds of radio stations are making money on their Web sites, with some sites accounting for an estimated 3%-5% of station revenue. “We don’t view the Internet as the competition, we view it as a partner,” says Bob McCurdy, regional president of Clear Channel Radio Sales, a division of Katz Media.

Although it is small now, streaming holds potential for advertisers. “Local streaming, especially in large markets, is a good way to blend video messages with audio messages,” says Sue Johenning, Initiative Media executive VP of local broadcast. “You can find ways to creatively use streaming that you wouldn’t use on air.”

The industry has been rolling out sales strategies and creative commercial packages that encourage advertisers to use radio in new ways. Some ad approaches, such as Clear Channel’s two-second “blinks,” prompt advertisers to use the medium more frequently. Others, such as CBS Radio’s deal with General Motors to sponsor an exclusive extra half hour of “The Opie & Anthony Show,” link advertisers directly with content. CBS Radio has also offered advertisers naming rights to stations for a limited period. Its adult hits KJKK (Jack-FM)/Dallas became Jerry-FM for a day to promote the new time slot of “Seinfeld” for local MyNetworkTV station KDFI-TV.

While sales is working overtime, radio still has to find new programming to stem audience erosion of about 2% per year and stand out from the increasing number of choices that threaten to commoditize music. “There are too many variations on a theme and not enough differentiation, especially in markets where there is a large number of stations,” Johenning says. “Jack-FM did that for a while. But the basic adult contemporary/current hits format hasn’t changed forever.”

One anonymous radio exec says, “Radio will continue to have a tough time until the industry rebrands itself as a very viable medium in this digital world. We have a role. We’re consumed by 230 million weekly, and we should be able to find ourselves and find our way into media plans.”

Broadcasters are bracing for change. “We have to do the hard things—invest in our products and come up with new, compelling formats and new personalities advertisers want to be associated with,” says Rick Cummings, Emmis Communications president of radio. “If we do that, we’ll be able to grow our business.”

--Katy Bachman is a senior editor for Mediaweek.