News Analysis: Radio's Ad Market Slowdown

Just about every time Viacom President Mel Karmazin gets up in front of Wall Street analysts these days, he becomes one of radio's biggest boosters. While it's not unusual that Karmazin - a former radio guy - would be bullish on radio, a casual observer might wonder why Viacom would spend so much time on a relatively small part of its overall business, and one that has been languishing in recent quarters.

In third quarter data released last week, the radio unit's $551.7 million made it the second smallest at Viacom, well below the top-revenue-producing $1.8 billion for CBS/UPN and $1.4 billion for its cable networks. But Viacom and Wall Street have focused on radio for the reason that it's Viacom's highest-margin business.

Or, as Karmazin said in a recent Goldman Sachs investor conference: "Radio is a free cash-flow machine." But that doesn't mean that recently the cash has been flowing freely lately. Radio's recovery, which had a few quarters ago seemed assured, stalled in the spring and hasn't gotten much better through the rest of the year so far.

After posting gains beginning in early 2002 that continued in the mid-single-digits in January and February 2003, the war in Iraq turned off much of its growth. June and July were good but August's ad revenues were flat, according to the Radio Advertising Bureau, with national up 5 percent and local down 2 percent. Year-to-date, RAB's Radio Revenue Index of 150 markets is up 2 percent.

As the third-quarter revenues come in over the next few weeks, the industry will be looking at radio's performance to see whether the anticipated recovery in the third and fourth quarters will materialize. Analysts are increasingly deciding that 2003 won't end as well as hoped and are looking toward 2004 as the real recovery year for radio. Bear Stearns said recently that it was expecting radio to register either flat or slight growth (1.5 percent) in the fourth quarter. It said that national advertising, which had been the driving force in the gains in radio revenues, seems to be stalling. In early September, national advertising was up 5 percent to 7 percent compared to the same period a year ago but now Bear Stearns said it's flat.

A clearer picture on the third quarter will emerge with further statements from the RAB, along with earnings reports by the major players. Clear Channel Communications Inc., by the far the biggest radio station owner in the country, will announce earnings Nov. 4. A week ago, Wachovia Securities cut its ratings on Clear Channel and two other radio companies from outperform to market perform. Cox Radio will announce earnings Nov. 5 and Cumulus a day later.

Infinity, the second largest radio station group, is owned by Viacom. It's also the only one to announce earnings so far. Radio revenues at Viacom were up 2 percent in the third quarter to $551.7 million. But that's in sharp contrast to the third quarter 2002, which was up double digits. Karmazin, who has been critical of radio's pricing in the past, is confident that it would improve as TV's inventory tightens and radio becomes a surrogate for advertisers. He termed some of radio's woes as "speed bumps" but said that radio would be doing better in 2004. Karmazin predicted radio's advertising revenues would be up 6 percent in the new year.

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