I have been getting a bunch of calls lately from reporters on my take on radio royalty issues, so figured I would put them out here for all to see. For those that are not familiar with the issue, there are 2 main debates raging right now. The first refers to the performance royalty for digital audio - i.e. streaming, playlists, internet radio, etc. Terrestrial radio does not pay a performance royalty because of a long standing "agreement" that radio offers promotion for the artists, so therefore should get a break on this royalty. However, with the record industry suffering from illegal file sharing, they decided several years ago not to extend this break to digital transmission of music. The thought being that it is this digital medium that got them into this problem, so it should be what gets them out of it. Ironically, these days, internet radio is probably a better vehicle for music discovery than traditional radio, yet it's viability is being put in jeopardy by this royalty. And streaming audio is not the problem for the record industry. It's peer to peer file sharing - which is very different than internet radio. Have you ever heard of anyone stealing music off of an internet radio station? There are a million other places you can do it more easily...
The second debate is related, but potentially has a much bigger impact. I am referring to the recent discussions about lifting the performance royalty exemption on terrestrial radio. There has been some debate as to why this is happening - especially when the radio business is apparently under so much financial pressure. Some people think it is to blunt the digital broadcaster argument that applying a performance royalty on digital is unfair because there isn't one on terrestrial radio. Other's believe that terrestrial radio was the target of the record industry all along - and that digital was just the first step in taking back this exemption.
Ultimately, it doesn't matter. Performance royalties make sense. I find it hard to believe that someone in good conscience can argue that the performer isn't entitled to a royalty for the airing of their performance. However, it of course, isn't that simple. Because this is regulated by congress, and because the record industry is a wounded dog backed into a corner, there are all kinds of political and economic games happening.
In most situations like these, I would support the market working this out. If the record industry doesn't want radio - terrestrial or digital - to play their songs without paying a big "tax", then the radio industry can negotiate directly with artists, cut deals on a label by label basis, or enact a pay to play scheme where they only pay music from artists that pay them to play their music. However, since these two industries are mature and have hundreds of thousands of jobs and billions of investor's capital in them (pensions, IRAs, mutual funds), there is a political interest in keeping them stable. If I had my way, I would broker a compromise that put a small ($.0003 per song) royalty on performance. Something that recognizes radio's impact on record and concert ticket sales, but also pays for the right to use the content. Unfortunately, (or fortunately, depending on your pov), I don't decide what happens here.
But here are my predictions on what I think does happen:
1. Internet radio suffers through a painful royalty rate. It may improve a bit from where it is now, but this will happen.
2. Internet radio will start to look a bit more like terrestrial radio. By this, I mean that Internet radio will have more ads and more royalty free content. The good news is the personalized and niche programmed radio everyone loves will still be available. The bad news is you will probably be hearing about 4-5 minutes of audio ads per hour of programming to pay the bills. This is still less than half the ads heard on terrestrial stations, but a far cry from the commercial free experience found on Pandora and imeem.
3. Internet radio will get serious about ad targeting. In order to generate the most $ from the ads they run, internet radio will tap into all the targeting tools of internet advertising and ultimately create an ad that is much more valuable than a terrestrial radio ad. If they have less than half the # of ads running, they will need to create 2x the value to make the same $. I think this is possible. (I know this is self serving because I run TargetSpot, but I REALLY believe it!)
4. Terrestrial radio will win the current royalty battle with the record labels. This will happen because of politics. Quite simply, big radio is more powerful than the big labels. Not only does the radio industry employ more people than the music industry, but radio execs are much more politically savvy. Their business has always been in partnership with government - the FCC, local zoning laws, political advertising, issue oriented talk, etc., so they know the players and are in a better position to influence the decision makers. And government, correctly in my opinion, won't let the record industry drag down the radio industry - especially in an economy that is teetering on the brink of collapse. The record industry has already imploded, but the radio industry, despite the much publicized decline in ad spend, over leveraging, etc. is actually a healthy, profitable business.
But, if I am a radio group, I would continue to fight this royalty tooth and nail while at the same time begin to prepare for the demise of the royalty exemption. Eventually the labels will win this war. If not through legislation, through streaming radio becoming a larger and larger part of radio's distribution.
Wednesday, February 25, 2009
Wednesday, February 11, 2009
If I Owned a Radio Station
I just got back from Radio Ink's Convergence conference in San Jose and spent a good chunk of my flight reflecting on the Radio Industry, where it is going, and where it should go. For those that don't know, the Convergence conference is all about the convergence of Radio and the Web, with lots of panels on utilization of the web - i.e. streaming, loyalty programs, etc. - to make your radio station more profitable and more appealing to listeners.
The conference was great. I go to a lot of radio and web conferences throughout the year, and this one is by far the most informative and while most other radio events are painful for me (especially because I focus on the interactive side of the business), this one is less about preaching to the choir, and more about sharing ideas and inspiring a traditional business to act.
However, the perspective of these events are always from that of the traditional radio broadcaster. Sure, this makes sense since that is who attends these conferences, but I am not sure the traditional operator is going to be the driver of this convergence. I actually think it will meet in the middle. The web operators, with all the information they have about their listeners, will be in as good a position to dominate "radio" as the terrestrial operators, and maybe more. Here's what I would do if I ran a terrestrial music radio station:
1. Get rid of my programmers
I hate to even say this, because the programmers are probably the people at terrestrial radio stations that I admire the most and enjoy spending the most time with. However, after using algorithmically personalized web radio like Pandora and Slacker recently, and using community driven services like Last.fm and Hype Machine, it seems that we should be able to program stations more efficiently. I am not saying that there shouldn't be a human element in programming - Pandora has 20 musicologists analyzing songs - but I am advocating utilizing technology to program in a different way. I would use the online community of music listeners and music lovers to program my station.
2. Take it easy on the ads
Every serious music lover I know barely listens to terrestrial radio. And if you are under 30, forget terrestrial radio altogether. But these people love internet radio. A big part of this is the personalization - and a lot of this can't translate to terrestrial radio. However, another big reason is commercials. Plain and simple, commercial breaks on terrestrial radio are too long. An ad shouldn't be longer than 30 seconds and there shouldn't be more than 2 in a row. That's the way internet radio stations operate. Throw out the 5 minute stop break and keep the music going as long as possible, and when you need to make some money, keep it short.
3. Throw formats into the garbage
Every terrestrial radio station has a format. Even when they tried to mix things up they called it Jack, and there was a specific format associated with Jack. I think it may have even been patented. However, I believe a music station should avoid formats. Let the community decide what they want to listen to. This way the station can evolve to the tastes of it's listeners. Just like one person can fine tune a personalized Pandora station, the "wisdom of crowds" can ultimately create the best mass market terrestrial station. And rather than firing all the DJ's, switching the call letters and having a commercial free summer to launch the new format, the flavor of a station can simply evolve into what the audience wants it to be.
4. Be platform agnostic, but web centric
These words get thrown around quite a bit these days, but it is important to offer the best programming to your audience whether they are listening on an FM signal, the web, HD or on a cell phone. Of course there are limitations to all of these formats, but a good operator provides the best experience each format is capable of. But in each case the web will provide the interaction and information necessary to enable the station to serve their listeners.
Of course, as someone who never actually ran a radio station, it is easy for me to say what I would do. I don't have an existing revenue stream to worry about, and I am not leveraged beyond my cash flow. I mentioned I was going to write this to an 80 year old, former station owner over lunch today and he looked at me incredulously and said, "what do you know about running a radio station?" Well, not much, but it is clear that the current model needs some work, and mixing it up a bit could be just what the industry needs right now.
The conference was great. I go to a lot of radio and web conferences throughout the year, and this one is by far the most informative and while most other radio events are painful for me (especially because I focus on the interactive side of the business), this one is less about preaching to the choir, and more about sharing ideas and inspiring a traditional business to act.
However, the perspective of these events are always from that of the traditional radio broadcaster. Sure, this makes sense since that is who attends these conferences, but I am not sure the traditional operator is going to be the driver of this convergence. I actually think it will meet in the middle. The web operators, with all the information they have about their listeners, will be in as good a position to dominate "radio" as the terrestrial operators, and maybe more. Here's what I would do if I ran a terrestrial music radio station:
1. Get rid of my programmers
I hate to even say this, because the programmers are probably the people at terrestrial radio stations that I admire the most and enjoy spending the most time with. However, after using algorithmically personalized web radio like Pandora and Slacker recently, and using community driven services like Last.fm and Hype Machine, it seems that we should be able to program stations more efficiently. I am not saying that there shouldn't be a human element in programming - Pandora has 20 musicologists analyzing songs - but I am advocating utilizing technology to program in a different way. I would use the online community of music listeners and music lovers to program my station.
2. Take it easy on the ads
Every serious music lover I know barely listens to terrestrial radio. And if you are under 30, forget terrestrial radio altogether. But these people love internet radio. A big part of this is the personalization - and a lot of this can't translate to terrestrial radio. However, another big reason is commercials. Plain and simple, commercial breaks on terrestrial radio are too long. An ad shouldn't be longer than 30 seconds and there shouldn't be more than 2 in a row. That's the way internet radio stations operate. Throw out the 5 minute stop break and keep the music going as long as possible, and when you need to make some money, keep it short.
3. Throw formats into the garbage
Every terrestrial radio station has a format. Even when they tried to mix things up they called it Jack, and there was a specific format associated with Jack. I think it may have even been patented. However, I believe a music station should avoid formats. Let the community decide what they want to listen to. This way the station can evolve to the tastes of it's listeners. Just like one person can fine tune a personalized Pandora station, the "wisdom of crowds" can ultimately create the best mass market terrestrial station. And rather than firing all the DJ's, switching the call letters and having a commercial free summer to launch the new format, the flavor of a station can simply evolve into what the audience wants it to be.
4. Be platform agnostic, but web centric
These words get thrown around quite a bit these days, but it is important to offer the best programming to your audience whether they are listening on an FM signal, the web, HD or on a cell phone. Of course there are limitations to all of these formats, but a good operator provides the best experience each format is capable of. But in each case the web will provide the interaction and information necessary to enable the station to serve their listeners.
Of course, as someone who never actually ran a radio station, it is easy for me to say what I would do. I don't have an existing revenue stream to worry about, and I am not leveraged beyond my cash flow. I mentioned I was going to write this to an 80 year old, former station owner over lunch today and he looked at me incredulously and said, "what do you know about running a radio station?" Well, not much, but it is clear that the current model needs some work, and mixing it up a bit could be just what the industry needs right now.
Wednesday, February 4, 2009
Start-Up M&A
I was recently interviewed for a small business publication about mergers and acquisitions for start-ups, and whether the tough economy makes it a good time to make an acquisition.
While I think there are advantages to doing M&A in a weak economy, the lack of capital available probably offsets the advantage. And while it motivates some businesses to sell - it is often the businesses you didnt want to buy in the first place. Of course, there will occasionally be some opportunistic moves a business can make to scoop up a competitor that would not exist but for the pressure of a smaller pie to divide. I think this is what the reporter was hoping I would say when he asked me about our recent acquisition of Ronning Lipset Radio. In fact, this was not the case in this situation, and I would argue that the deal we did with RLR is probably the only kind of M&A activitity a start-up should engage in.
Here's why. The reality is that completing an acquisition is a ton of work and the amount of work involved often has little to do with the size of the transaction. Smaller companies often have founders that are emotionally attached to the business that is often absent with professional managers at larger companies. Also, diligence is harder to complete with smaller businesses who often do not report finances in as great detail as larger companies who use professional auditors and have financial controls and policies in effect. Public companies (in theory, at least) are transparent and have disclosed not just their financials, but all known risks of their business, as well as thier outlook for the future. And there are criminal penalties if these were intentionally misleading or not disclosed. Smaller businesses are not regulated, so the overly optimistic forecast probably has a greater shot of rearing its ugly head, so the diligence process must be even more rigorous in these transactions.
Furthermore, start-ups and small businesses rarely have dedicated corporate development teams, so the bulk of the work to close these deals either falls on the CEO/Founders and/or their legal and accounting firms. Both aren't ideal since the time and effort to close the deal means people are doing that instead of growing the core business. And legal expenses add up very quickly, adding to the price of the deal. And since the time and effort to close these small deals are often similar to larger deals (we joked that our last deal took longer to close than Wachovia/Wells Fargo), the expenses of these transactions relative to the cost of the overall deal can be very high.
So when does it make sense to do a deal like this? Rarely. But there are times when the deal makes so much sense, you need to do it. Here are my criteria:
1. Must bolt on: When I was 17 year old car enthusiast, I was always looking for things that would make my 280Z faster. But I didnt have the expertise to weld or do anything electronically. I needed something that would work out of the box and merely bolt onto the existing hardware. Start-ups rarely have time for a lengthy integration before synergies are realized. And while it may make sense for management to spend a good chunk of time closing the deal, the distraction of putting pieces together that do not easily fit is probably a time suck that smaller organizations can't afford.
2. Good Chemistry: When you have a large organizations coming together, everyone talks about the "culture" of the orgs, and how they will mesh. In smaller companies, it is not the culture of the company, but chemistry of the people on the team that will be working together that matters. The bottom line is that if you don't like the people on the new team, the business will not combine well. There needs to be trust and respect between the teams and the individuals that will be working together so they will be able to work through the inevitable hiccups that occur when putting two businesses together. A sales culture and a tech culture can come together nicely if there is good chemistry between the individuals. A law school professor I had years ago always said people don't sue people they like. They also don't quit their jobs when they work with people they like. Two good reasons to make sure there is good chemestry.
3. Buy>Build: Quite simply, the cost of the acquisition should be cheaper than building the business yourself. This, of course, is not an easy calculation. We can all figure out the cost of hiring a team and/or developing a technology and then add in the opportunity cost of not having this team/technology in the market during the development period. But you also need to factor in the talent of the team you are hiring and whether it is possible to replicate things like expertise, relationships and credibility, and how much this is worth. And finally, you need to factor in the execution risk of being able to replicate the business. If the business you are acquiring is the undisputed leader in their space and few others have been able to replicate their success despite attempts to do so, there is clearly a lot of value to assign to this.
4. Necessity: Is this a business your company needs to succeed. This can't be a "wouldn't it be cool if we bought x" moment that drives the decision. You need to decide that your business must either build or buy, and doing neither is not an option. If being in this business is not the first item in your strategic plan, don't bother.
5. The Reese's effect: With a peanut butter cup, we all know that the chocolate and peanut butter on their own are tasty, but together it is greater than the sum of its parts. This applies to M&A as well. Merely bolting on a business is often appealing to add revenue, but if it doesn't have significant synergies, you will not get any additional value from it. It makes sense to get the perspective of professional investors when considering these types of transactions. Ideally, the cost of the deal should be paid for by the synergies of the business. By this I mean you should be able to raise $ for the combined business at a valuation that is equal to the pre-merger valuation of the acquirer plus 2X the value of the acquired company. If you can achieve this, or something close to it, it's a good deal.
If you can hit on all 5 of these points, go for it. If not, you should reconsider whether it is worth the effort. And this applies in good and bad economies.
While I think there are advantages to doing M&A in a weak economy, the lack of capital available probably offsets the advantage. And while it motivates some businesses to sell - it is often the businesses you didnt want to buy in the first place. Of course, there will occasionally be some opportunistic moves a business can make to scoop up a competitor that would not exist but for the pressure of a smaller pie to divide. I think this is what the reporter was hoping I would say when he asked me about our recent acquisition of Ronning Lipset Radio. In fact, this was not the case in this situation, and I would argue that the deal we did with RLR is probably the only kind of M&A activitity a start-up should engage in.
Here's why. The reality is that completing an acquisition is a ton of work and the amount of work involved often has little to do with the size of the transaction. Smaller companies often have founders that are emotionally attached to the business that is often absent with professional managers at larger companies. Also, diligence is harder to complete with smaller businesses who often do not report finances in as great detail as larger companies who use professional auditors and have financial controls and policies in effect. Public companies (in theory, at least) are transparent and have disclosed not just their financials, but all known risks of their business, as well as thier outlook for the future. And there are criminal penalties if these were intentionally misleading or not disclosed. Smaller businesses are not regulated, so the overly optimistic forecast probably has a greater shot of rearing its ugly head, so the diligence process must be even more rigorous in these transactions.
Furthermore, start-ups and small businesses rarely have dedicated corporate development teams, so the bulk of the work to close these deals either falls on the CEO/Founders and/or their legal and accounting firms. Both aren't ideal since the time and effort to close the deal means people are doing that instead of growing the core business. And legal expenses add up very quickly, adding to the price of the deal. And since the time and effort to close these small deals are often similar to larger deals (we joked that our last deal took longer to close than Wachovia/Wells Fargo), the expenses of these transactions relative to the cost of the overall deal can be very high.
So when does it make sense to do a deal like this? Rarely. But there are times when the deal makes so much sense, you need to do it. Here are my criteria:
1. Must bolt on: When I was 17 year old car enthusiast, I was always looking for things that would make my 280Z faster. But I didnt have the expertise to weld or do anything electronically. I needed something that would work out of the box and merely bolt onto the existing hardware. Start-ups rarely have time for a lengthy integration before synergies are realized. And while it may make sense for management to spend a good chunk of time closing the deal, the distraction of putting pieces together that do not easily fit is probably a time suck that smaller organizations can't afford.
2. Good Chemistry: When you have a large organizations coming together, everyone talks about the "culture" of the orgs, and how they will mesh. In smaller companies, it is not the culture of the company, but chemistry of the people on the team that will be working together that matters. The bottom line is that if you don't like the people on the new team, the business will not combine well. There needs to be trust and respect between the teams and the individuals that will be working together so they will be able to work through the inevitable hiccups that occur when putting two businesses together. A sales culture and a tech culture can come together nicely if there is good chemistry between the individuals. A law school professor I had years ago always said people don't sue people they like. They also don't quit their jobs when they work with people they like. Two good reasons to make sure there is good chemestry.
3. Buy>Build: Quite simply, the cost of the acquisition should be cheaper than building the business yourself. This, of course, is not an easy calculation. We can all figure out the cost of hiring a team and/or developing a technology and then add in the opportunity cost of not having this team/technology in the market during the development period. But you also need to factor in the talent of the team you are hiring and whether it is possible to replicate things like expertise, relationships and credibility, and how much this is worth. And finally, you need to factor in the execution risk of being able to replicate the business. If the business you are acquiring is the undisputed leader in their space and few others have been able to replicate their success despite attempts to do so, there is clearly a lot of value to assign to this.
4. Necessity: Is this a business your company needs to succeed. This can't be a "wouldn't it be cool if we bought x" moment that drives the decision. You need to decide that your business must either build or buy, and doing neither is not an option. If being in this business is not the first item in your strategic plan, don't bother.
5. The Reese's effect: With a peanut butter cup, we all know that the chocolate and peanut butter on their own are tasty, but together it is greater than the sum of its parts. This applies to M&A as well. Merely bolting on a business is often appealing to add revenue, but if it doesn't have significant synergies, you will not get any additional value from it. It makes sense to get the perspective of professional investors when considering these types of transactions. Ideally, the cost of the deal should be paid for by the synergies of the business. By this I mean you should be able to raise $ for the combined business at a valuation that is equal to the pre-merger valuation of the acquirer plus 2X the value of the acquired company. If you can achieve this, or something close to it, it's a good deal.
If you can hit on all 5 of these points, go for it. If not, you should reconsider whether it is worth the effort. And this applies in good and bad economies.
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