Radio's Empire Builders Are Scanning The Dial
Howard Stern and Don Imus may snarl and sneer on the radio each morning. But it's sweet music to their boss, Mel Karmazin. As president of Infinity Broadcasting Corp., Karmazin owns WXRK-FM and WFAN-AM, the New York stations that feature Stern and Imus. Between them, these acid-tongued disk jockeys attract 20% of New York's morning commuter audience. And that means big profits for Infinity, which recently went public and is the largest U.S. company devoted exclusively to radio stations.
Infinity is likely to become even more dominant. On Aug. 1, the Federal Communications Commission is expected to loosen restrictions on how many stations operators can own. That will allow Infinity and other companies to own a second FM and AM station in each of their markets. Infinity, which owns 18 stations, is already on the prowl for more in cities such as Los Angeles and Philadelphia. "We would like to expand in the biggest markets," says Karmazin.
COMEBACK. He's not alone. The FCC ruling has sent a lightning bolt through what had been a torpid industry. Radio executives are gearing up for a flurry of acquisitions once the new rules go into effect. Most think radio's power players will emerge even stronger, while weaker ones may fade out. "There isn't a single broadcaster in the country who isn't thinking about this ruling," says Doyle Rose, president of the radio division of Emmis Broadcasting Corp. Emmis sold station WFAN to Infinity last April to capitalize on the higher prices stations are already fetching because of the impending change.
Deregulation could also quicken the industry's recovery from the media recession. After falling 3% in 1991, radio ad revenue is on the rebound (chart). What's more, radio has clung to its share of ad dollars, while newspapers and broadcast TV have seen some of their revenue go to cable.
Even before the FCC ruling, the industry's rosier prospects were attracting new investors: Leveraged buyout firm Kohlberg Kravis Roberts & Co. began buying stations last year in a venture with radio entrepreneur Herbert McCord. But experts agree that consolidation is the key to restoring the industry's profits: "There are tremendous opportunities for economies of scale," says McCord.
Under existing rules, radio operators can own up to 12 AM and 12 FM stations, and no more than one AM and one FM station per market. Such caps have limited the growth of even the largest groups: CBS Inc. is the No.1 operator, with 1991 radio revenues of $205 million, while Westinghouse Electric Corp. and Capital Cities/ABC Inc. are second and third, with radio revenues of $200 million and $199 million respectively.
The FCC wants to raise the ownership limits to 30 FM and 30 AM stations and three of each in major markets. Some lawmakers say the FCC is going too far, and insiders expect the commission to compromise at 25 and 25, plus two FM and two AM stations per market.
For some radio operators, the new rules will provide a desperately needed escape hatch. In addition to the recession, many operators have labored under crushing debt. Following the last wave of FCC deregulation in 1985, radio operators went on an acquisition binge. Emmis and other companies bought up FM and AM stations around the country. When advertising revenue dried up, many of those stations got into trouble. An FCC report says 153 radio stations went off the air in 1991. And leading radio expert James H. Duncan Jr. says half of the nation's more than 9,300 stations are still losing money.
SPREE. Now, many of those troubled companies will be able to get out of radio by selling to strong players such as Infinity or Cap Cities. Emmis, for example, got $70 million for WFAN, or seven to eight times projected 1992 cash flow, according to analyst John S. Reidy of Smith Barney Harris Upham Inc. That's cheaper than what stations sold for at the peak of the buying spree, but more than Emmis would have gotten if Infinity had been unable to bid.
And it's a good deal for both companies: Infinity will be able to boost ad revenue by selling WXRK's Stern and WFAN's Imus to advertisers as a package. And debt-burdened Emmis got a good price. "It's a good thing for the entire industry," says Washington radio broker Jim Blackburn.
Not everybody agrees: Consumer advocates and opponents in Congress argue that the looser regulations will concentrate too many stations in the hands of a few robust operators. What's more, consolidation could squeeze out minority broadcasters, some of whom are saddled with onerous debt loads. "It's not clear that allowing this much concentration will benefit the public," says Gene Kimmelman, legislative director of the Consumer Federation of America.
Radio executives insist the industry is so diffuse that even lots of consolidation won't harm diversity Still, the industry is anxious not to offend. The National Association of Broadcasters recently asked FCC Chairman Alfred C. Sikes to tone down his proposal. And Commissioner James H. Quello says the FCC is likely to compromise, if only to mollify Representative John D. Dingell (D-Mich.), who blasted the current proposal.
SHREWD DEALS. Most execs don't have grandiose visions of radio empires in any event. They just want the chance to buy a second FM or AM station. By doubling up, they say, they can offer attractive advertising packages. Owning two stations would also allow operators to dominate certain demographic groups, says James P. Arcara, president of ABC's radio group. In San Francisco, for example, ABC owns an all-news station, KGO-AM. If ABC were able to buy CBS' talk-radio station, KCBS-AM, the company could dominate the 25-to-54-year-old age group and raise its ad rates.
But that's a big if: Major market stations are generally far more profitable than small ones. So few companies will rush to sell. More likely, ABC and others will swap stations so that each would end up with a pair of stations in individual markets.
In smaller markets, aggressive radio operators are also lining up deals. Evergreen Media Corp., which owns WAPE-FM in Jacksonville, Fla., recently bought the rights to program a rival Jacksonville FM station. Evergreen plans to buy it outright after the rules change. By owning two stations, Evergreen Chairman Scott Ginsburg says he will dominate the 18-to-49-year-old age group in that market.
The changes may hurt radio's newest investors the most. KKR has made some shrewd deals by buying distressed stations at low prices. But now it will be competing with every other top radio group. "We'd love to be in all of the top 10 markets," says McCord, "but that's not practical." KKR tried to buy Westinghouse's 18 stations for about $500 million last year. McCord concedes he would probably have to buy a large radio group outright to become a major player.
To succeed in this new era of Radio Days, it helps to have a loud voice. McCord and others must figure out how not to get lost in the din.