July 18, 2007

Radio's $3 Billion Missing Piece

In 1995, before the Internet became a household word, advertising a product or service was a relatively simple procedure. Advertisers or their agents would put together a budget and determine how to apply that budget to the few key and historically effect media available: TV, radio, print. Over the last ten years, however, the pressure on U.S. advertisers has increased by virtue of the 'scattering' of consumers as use of television, radio and print has been subplanted by the Internet, email, text messaging, etc. Simply put, it has become much more complicated to apply advertising budgets that in many cases have not increased in size.

The following chart shows the growth of ad revenue over the first 11 years of the Internet:

More specifically, the Internet has gained considerable advertising market share and will surpass radio ad spending by the first quarter of 2008.

A closer look at advertising spending for 2007 shows the true effect of "scatter", the dispersion of dollars to multiple media. The landscape for advertising agencies and clients alike has become confusing. Budgets run out before effective advertising campaigns are completely planned. There simply isn't enough money to cover it all in order to be effective.

So agencies and buyers alike find focal points, a combination of media which will allow ad campaigns to attack the problem in pieces.

What is radio to do?

As radio advertising revenue as grown in recent years it has moved into a consistent or stable mode. Up until 2000 ad revenue growth for the radio industry expanded at double-digit rates. Since that time, a number of factors have inhibited similar growth.

One of the factors has been the evolution of the choices of advertising. The big 'rock in the pond' has been the Internet and all things associated with it such as email, websites and streaming.

A tipping point was reached around 2000 as momentum among advertising options improved and ad agencies and clients alike began adopting web banner advertising in significant numbers.

Expansive use of the Internet aided by growing broadband adoption by the consumer, instigated the open-minded early-adopters in the ad buying community to try new things. Close to 100 million Americans now have broadband high-speed internet access at home this year. 70% of American households have Internet access. Of that total, 47% have broadband. Targeted Internet advertising is reaching a more receptive consumer because of the improved ease-of-use of the Internet that broadband provides.

Google and Yahoo search advertising began to prove the power of the Internet and its ability to target one-to-one the consumer target.

This chart displays the growth in real dollars of traditional radio advertising revenue along with percentage growth during this term.

Each of the following options available to advertisers generated substantial revenues in 2006. This chart shows each and the ad 'scatter' of each. For example, based on interviews conducted by Bridge Ratings during January and February 2007, a national sample of local and national advertisers and ad agencies provided estimates of the dollar/percentage amount each medium lost to other media in 2006 through reassignment of ad budget dollars.

For example, approximately 9% of the potential advertising dollars that had been budgeted for Outdoor advertising (billboards, buses, cabs), was reconfigured to some other medium. From a percentage basis, radio suffered the most "scatter" with 15% of its budgeted dollars targeted elsewhere.

This amounts to over $3 billion in overall spending that if retained by radio could have boosted radio's 2006 ad revenues lost primarily to the internet.

Recommendations

I. The radio industry is not adapting quickly enough to the new media competition. Much of radio industry management seems to understand what it's up against and what needs to be done. In interviews conducted with 250 station or market management personnel during the second quarter of 2007, nearly 64% mentioned "resources" as the primary reason their station(s) weren't being more proactive with expansion of their advertising options for clients. Most of these managers had "wish lists" of concepts they would like to initiate to attract more advertising streams to their businesses. Among those concepts:

1. Internet only & streaming sales teams and training
2. Email database marketing systems
3. Internet Radio development and marketing
4. Podcast creation and sales
5. Non-traditional marketing partnerships

Traditional radio has substantial brand power to help leverage additional revenue streams. According to most managers we spoke with, there just isn't enough time, money and personnel to support development of these concepts. Perhaps it is time traditional radio properties reinvest some profit margin in order to accomplish these very important components.

II. Advertising agencies and clients are finding it more challenging to manage the many advertising vehicles available to them. Many small and medium local businesses don't have the budgets they need to impact traditional radio effectively. Return on investment (ROI) for many of these local clients is out of reach so they are forced to seek marketing help in other media. Many are returning to 'analog' advertising options such as direct mail because it provides a more focused advertising approach. Those who can afford search advertising use it because it targets only those consumers interested in their product or service.

Ad agencies have no commitment to traditional radio, but they should at least be asking the questions of their station sales representatives. They should seek out non-traditional advertising channels that radio stations are developing. Traditional radio brands that extend beyond the radio dial into new media retain their brand strength and carry with it thousands of loyal listeners visiting websites, Internet radio streams or downloading podcasts. When clients ask their agencies "What now?" or "How do I distribute my ad budget?', agencies must understand the inherent power of traditional radio brands no matter what the medium, and provide that option.

The following chart displays the top ad-revenue generating sites by genre - excellent new revenue stream development opportunities for radio.

Sources: Price Waterhouse Coopers, Nielsen/NetRatings, Bridge Ratings

For more information or questions, call Dave Van Dyke at Bridge Ratings at 818.291.6420.