Credit Suisse: Radio's Rich, But Stuck In A Ditch

Despite the gnashing of teeth over radio ad revenues, the business is still remarkably profitable, according to Credit Suisse analyst John Klim. In fact, in a report released Monday, Klim wrote: "We view radio as a superb business, particularly as it relates to the business' strong free cash-flow characteristics." Klim even suggested that his company "would love to own radio stations." Klim said radio is a solid business because there isn't a lot of capital investment necessary to run a radio station--but it provides a steady stream of income.

Given that model, radio seems to resemble the newspaper business--an established medium with serious new competitors, including the Internet--that still delivers high profit margins. In 2005, radio profit margins hovered around 40 percent of revenues, while the overall operating profit margin for newspapers was 19.2 percent.

Of course, leaders in both industries know they need to adapt to protect their lucrative operations. Newspapers rush to bolster their Web presence. Radio executives tout the rollout of HD terrestrial digital radio as a future growth driver that responds to audience fragmentation and competition from new media.

Klim, however, worries that HD radio is a nonstarter.

"I don't think HD radio will be a substantial boost for the terrestrial industry as a whole," he says, adding that it's not a viable working business model. For one thing, Klim warns, the profusion of new formats and niche channels could easily divide the existing revenue pie into smaller pieces. "You run the risk of introducing a significant amount of supply into a market that's already soft and disrupting the pricing structure." In the end, Klim concludes that HD is more "a defense mechanism against satellite."

Indeed, together with figures from a recent survey of 1,009 American adults by American Media Services, Klim's analysis suggests that HD radio isn't currently revolutionizing the industry. Nine percent of AMS respondents said they had heard a lot about HD radio, 36 percent had heard "only a little," and 55 percent hadn't heard about it at all.

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