• by Erik Sass  @eriksass1, November 3, 2006

In a generally mediocre third quarter, radio advertising spending continued to shift from local spot, traditionally the industry's mainstay, to local non-spot and national spending. While the shifts reflect the changing dynamic between advertisers and broadcasters, they're not doing much for the industry's overall health: grand total spending is slightly down again on a year-over-year basis.

National advertising rose 5% in the third quarter compared to the same period in 2005, while local non-spot climbed 11%, according to the latest figures from the Radio Advertising Bureau (RAB). These are in the same range as figures for these categories from previous quarters, suggesting a long-term trend. But while the growth in national and non-spot ad dollars might sound like good news at first, that trend is coming at the expense of local spot, radio's bread and butter.

Local spot declined yet again in the third quarter, posting a 2% drop. When combined with non-spot and national sales, the grand total for radio ad spending was down 1%.

In this context, the growth of national ad sales and non-spot may actually be a symptom of decline, not vitality. Delivering more overall airtime for fewer dollars than local spot, these categories are less lucrative for radio stations, allowing advertisers to pare down their radio advertising budgets.

Wall Street is not pleased with radio's monthly or quarterly performance, with analysts noting it missed their predictions of flat overall revenue. In light of this fact, a growing chorus of analysts is saying that radio needs to readjust to this long-term "secular downdraft" by squeezing profit margins and handing over more earnings to shareholders, in order to keep stock prices up.

In a September report, Credit Suisse analyst John Klim praised radio's basic fundamentals, writing: "we view radio as a superb business, particularly as it relates to the businesses' strong free cash flow characteristics." Klim went so far as to venture: "We would love to own radio stations." Klim said radio is a good business because "there's not a lot of capital investment you have to make to run a radio station," and it provides a steady stream of income.

While agreeing that paying out dividends to shareholders is probably the best way to maintain stock prices, analyst Jim Boyle of consultancy CL King also warned that slashing production costs and overhead is not the way to go: "The public radio groups are unlikely to bolster long-term stock prices in a sustainable, substantial way by cutting back investment."

In spite of long-term doubts about radio stocks, last week the Credit Suisse Terrestrial Radio Stock Index outperformed the market for the fourth week in a row, increasing 8.9%. Whether this trend has lasting significance is unclear, given the challenges radio faces, but it provided a glimmer of hope in an otherwise moribund radio scene.