Coping with the Meltdown

by Guy Wire, 12.12.2008

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It's now grown into a 1,000-pound gorilla staring at everybody in the room. Nobody can ignore it anymore.

What is it, you ask? To quote the politicians, "It's the economy, stupid." More precisely, it's the very bad economy. And it's affecting everyone.

While I'd prefer to be writing about the HD digital power increase or about online radio streaming making giant strides, those topics pale when compared to the drastic economic downturn and how it's affecting our business and our people. There is an unrelenting downsizing going on that's becoming downright scary.

Less than a year ago, few in our industry saw this coming.

For instance, since January, we've locally lost about a quarter of our entire major-market staff through attrition and layoffs. I just worked up enough courage to walk into the GM's office and ask if my job was "safe."

He looked at me and said, "I'd like to assure you we couldn't run this cluster without you, but truthfully, nobody's job here is ultimately safe, especially mine." He advised me to keep working hard and go the extra mile, but that I should probably figure out a good "Plan B" … just in case.

Plan B means going out and looking for another job. That's not going to be easy for anyone in the present environment. You may have to seriously consider pursuing another career. If you've been in the business for a considerable length of time, that's going to be anything but easy.

THE PARTY'S OVER

We're witnessing the worst business recession since the Great Depression. Few who were working in radio back then are still around.

Those who remember those days have told me radio actually fared pretty well through the 1930s. FDR spoke to the nation regularly throughout his presidency with the famous fireside chats. Entire families everywhere stayed glued to their radios. There were lots of trade-outs going on since cash was scarce. For some stations, that practice is still alive and well.

But make no mistake; the long party of rising revenue growth year after year for radio is over. It ended in 2006 and will not likely return anytime soon, if ever.

Our business is being transformed into a smaller and potentially less effective medium that will have to be satisfied with reduced earnings, profit and growth. We'll have to be very smart in figuring out ways to successfully compete with alternative media in the years to come.

I FEEL YOUR PAIN

How did we get here and why do the waves of layoffs at many public companies keep happening every few months?

When I wrote about the deteriorating market conditions and layoffs in April, we were hoping most of the pain had already been absorbed. Instead, it's only getting worse. The worldwide financial meltdown in October made sure of that.

Most stations have been operating very lean and mean already. The fat is gone and much of the muscle has withered. We're now literally removing bones from the beast … the very structure upon which successful stations have depended for many years.

The companies most acutely affected are publicly held. If you work for a privately owned station or group with little debt, or an NCE public radio station, you probably haven't seen or felt these layoffs. But as the economic tide goes out, boats of all stripes will be tougher to navigate and will carry fewer passengers.

THE WALL STREET BLUES

Stock prices of most all media companies have fallen to ridiculously low levels. The trend-lines had been dropping steadily since early 2007. Few financial experts were predicting that they would continue to slide downward and then fall precipitously in late September. A lot of this is symptomatic of the entire market sell-off of course.

As of this writing and from the peaks, Entercom has nosedived from $66.56 to 78 cents a share; Citadel from $22.08 to 25 cents; Emmis from $58.09 to 50 cents; Cumulus from $53 to $1.28; Spanish Broadcasting from $40.25 to 19 cents; Salem from $33.08 to 88 cents; Cox from $35.31 to $6.19; CBS from $35 to $7.79; Saga from $29 to $4.18.

Sirius Satellite has almost disintegrated from a high of $65.06 to 25 cents. Mel got his Christmas present from the FCC early this year with the approved XM/Sirius merger. But now he gets to play the role of executioner as I suspect perhaps a third of the inherited staff will likely be terminated. Mel may have to watch a lot of Harry Houdini movies to figure out a saving strategy for his new company during this financial debacle.

Clear Channel execs no doubt feel very lucky they were able to finalize taking the company private just a few months before the meltdown. At least the Mays family and their banker friends don't have Wall Street to answer to anymore. But even many of the privately held outfits are struggling with large debt-to-asset ratios as market values continue to drop. When the balance sheet turns completely upside down and balloon payments come due, there are few escape routes.

Stock prices are only part of the story dogging the beleaguered broadcast industry. They merely tell us that the market has heavily devalued radio company stocks as a function of how they are expected to perform in the future in terms of debt service, revenue growth and profitability.

Most of the devaluation is based on the notion that radio became entirely too over-leveraged in debt from equity market-fed financing over the past 15 years. The cumulative debt of many companies that grew quickly and paid too much will be very difficult if not impossible to pay off. Radio is no longer perceived as a growth industry, and will have a hard time holding onto its share of advertising market revenues competing against new media and the Internet.

When the overall market falls significantly, there is often a disconnect between the stock price and the real value of any company. With prices dropping so far, profit opportunities emerge for buy-outs to break up and resell their component pieces. We will likely see such activity in the very near future. The buyers this time around may not only be corporate raiders or healthier broadcast companies. They very well might be new media competitors who have managed their assets and debt much better.

NUMBER CRUNCH

Radio has been losing its share of ad revenue as the Internet has grown its share. All media companies appear to be under the same gun during this meltdown and will generally suffer the same pain. Layoffs and budget cuts are hitting other media. Most financial trade journals are predicting that media and entertainment, along with automobiles, food retailers, restaurants and the leisure industry, are the most vulnerable as the recession deepens. The high tech and software industries could follow.

This is an equal opportunity recession.

Advertising revenues are down significantly for most all stations in many markets for the second half of this year. There are exceptions, of course, mostly in the smaller markets. Christmas is shaping up to deliver many lumps of coal into radio's revenue stockings. Ad bookings for the first quarter of 2009 are way down to historic lows. The business that is out there is mostly coming in at the last minute as sales managers struggle to hold rates and fill avails. Talk to any GSM and they will tell you they have never seen it this bad.

When group stations aren't making their budgets and revenues are falling, corporate managers look at the projected shortfalls against expected performance benchmarks. They then have to determine how much cost savings must be extracted to maintain acceptable profit margins for the CEO and the board of directors, who ultimately have to answer to their major stockholders.

Each market manager is given two numbers when crafting next year's budget. The first is the annual total revenue increase (or decrease) the market is expected to deliver. The second is the overall percentage of cost reductions that must be made for the upcoming fiscal year. Every market manager must decide where and how the cuts will be made. That mostly involves determining who will stay and who will go.

Employees who have shown the readiness and willingness to take on more work will be the lucky ones still employed, as less-essential workers are laid off and positions are eliminated. Those who have learned how to work smarter rather than merely harder will be among the survivors.

YET MORE PAIN

Beyond staff cuts and beating out all other possible operating cost savings, owners and managers are invoking other painful take-aways that especially affect vested employees — those who have shown a measure of loyalty and have been around the longest.

Many have built up at least something of value in their 401(k) plans, before they became 201(k) or even 101(k) plans. Entercom, for example, announced in October they are no longer doing any stock matching for their 401(k) program.

Others are sure to follow that lead. Media companies tend to do the monkey-see, monkey-do routine when these kinds of crises unfold.

Another maneuver some of the bolder and more desperate companies may implement is an across-the-board pay cut for all employees, or perhaps a modified version that applies the cuts to only the higher-salaried employees. Emmis did that a few years ago and is doing it again.

Such a scorched earth move is considered by many as potentially lethal as it sends the message that a complete financial breakdown or fire sale may not be far behind. The more valuable and talented employees will formulate their own Plan B employment options and look elsewhere.

Unfortunately most of the best-paid engineering positions in our business have been with the high-flying public companies over the past 15 years. With many of those now under the cost-cutting knife, engineering budgets and staffs are being carved up and the salary levels of those who remain could be moving backwards. Sadly this will hollow out the engineering community a great deal.

WINNERS AND LOSERS

With so much bad news swirling around, it's hard to even think about what positives might come out of all of this. There will be more losers than winners, but the winners stand to profit very nicely if they play their cards right.

We talked here in June about outsourcing and the impact that it's having on engineering and IT support for radio. Many general managers and CEOs view these areas as necessary, but only as support functions that have less impact on profitability and that can be outsourced easily.

Station sales, consolidation and buy-outs can quickly erase what you may have thought was a secure position with a supportive manager. We all know ex-chief engineers who decided that being tethered to one owner for a paycheck had become entirely too limiting and too vulnerable. They started their own contracting businesses and became able to diversify their employment activities and income sources.

Doing this successfully entails lots of caveats and risks. If you are well-organized and efficient, have a good business head and are willing to work lots of overtime, you may be able to do very well as an independent contractor during the present downturn. Existing broadcast contracting companies that offer wide-ranging services including studio construction, RF construction and IT support stand to do well as outsourcing gains more traction.

The other winners will be the privately held companies like Greater Media and Bonneville that have little debt and are looking to expand their holdings. And then there are those new media giants that have been playing on the periphery of broadcasting for a while. Microsoft or Google could decide now is the time to take an active ownership stake in our business.

Station multiples are still falling. During the heyday of the mid '90s to about 2006, sale prices commanded price multiples of up to 15 times earnings. That number is now about 9 and continues to fall. Until credit frees up and dependable valuations return to the market, there should be very attractive fire sale deals breaking soon. Many stations will be sold to independent and privately owned companies as the excesses of Wall Street unwind. Cash will be king.

DEAR MR. PRESIDENT

Our new president, Barack Obama, obviously has enormous challenges to get this derailed economic train back on the tracks. Here's hoping he can do this fairly quickly and that we may all survive whatever bad news continues to threaten our own job security and well-being.

I do have one request of Mr. Obama: While you've been quoted as being opposed to reinstating the Fairness Doctrine, many on your Democratic congressional leadership team want very badly to bring it back. Don't let them change your mind like others who got you to refuse public campaign financing. A return to the Fairness Doctrine would deliver a crippling blow to talk radio, one of the few bright spots and growth formats this business has left.