Found: The Emperor's Clothes

The FCC "Future Of Media" Report ... or What's Really Going On In Radio

About a week ago, the FCC finally released its long-awaited report on the "Future of Media." Reviewing all forms of media, it devotes chapter 2 to radio. While I try to focus this column on straightforward legal issues and rule compliance matters, when dealing with administrative agency matters in an industry so crucial to the fabric of American society as is broadcasting, it is unavoidable that we must confront policy issues as well. Indeed, my background in government service was in Executive Branch telecommunications policy offices.

The Future of Media report provides a critical opportunity to take a good look in the mirror; to examine our course and see whether and what course corrections might be appropriate. So, I take leave of my usual role and offer the following observations.

Laden with an extensive history of radio broadcasting and commission regulation, the report traces the technical history of radio through to FM and HD technology, and the evolution of radio programming from shows to music, all-News, and finally News-Talk formats.

Focusing in on the last three decades, the staff observes that that the loosened ownership rules resulting from the 1996 Telecommunications Act, leveraged on the deregulation of the 1980s, led to rapid consolidation by large radio groups fueled by public financing, the ultimate consequence of which was to focus management more on efficiency and bottom-line performance than service focused on and originating from the local market. The staff is not telling us anything experienced broadcasters didn't already know. They're just putting it down in black type on white paper; sort of like showing the emperor where his clothes are, while the people of the realm, or at least the knights of the court, knew all along what sartorial splendor he was wearing in public.

The report refocuses the reader on the importance of local service in local programming. Quoting Mel Karmazin, "A lot of these larger companies abandoned what had made these radio stations enormously successful, which was local, local, local." Paul Jacobs of Jacobs Media agreed that the emphasis on bottom-line profitability and consolidation has hurt local programming because "the headcount at radio stations decreased dramatically. Local content, especially news, has disappeared. In a lot of cases, local programming and local focus have deteriorated and have been replaced by a lot of syndicated programming."

So far, nothing more than what many of my own clients have been saying. And, of course, neither radio, nor broadcasting in general, is alone! Its experience mirrors that of many others in American industry, not the least of which might be the auto industry, a key component of broadcasting's advertiser base and the U.S. economy.

In a recent (public) radio interview, former General Motors vice chairman Bob Lutz credited the U.S. car industry's downfall to putting numbers before design. "It's time to stop [t]he dominance of the number crunchers living in their perfect, predictable, financially-projected world who fail time and again. And give the reins to the product guys of either gender, those with vision and passion for the customers and their product or service." Lutz claims that giving the customer the absolute finest automobile that GM could possibly produce has proven to be correct for the automobile business because this finance-generated effort to skimp and see how much cost can we strip out before people actually protest -- that's taught in the business schools -- has been extremely damaging to American business.

Economists describe radio - and all over-the-air broadcasting - as a two-sided marketplace. It serves one market, the listener, with informational and entertainment programming that should be responsive to the local audience reached by the radio signal. The other market "side" is the advertiser, served by delivering the greatest audience possible to the advertising message. The report recognized that the greatest audience size, useful to the advertiser, and therefore the greatest revenue potential for the station, is not always delivered by the information most useful to that audience. Furthermore, because it spreads fixed costs, the report concludes, national programming often is more cost-effective for stations than local.

Perhaps as a result, it recognizes that whether driven by user interest or management preference, local radio news staffing has declined sharply and there are fewer stations doing news than there were 10 years ago. What is striking is that most news and information appears to be delivered by a few large market stations that have capitalized on the idea of all news and a myriad of smaller-market stations, with local ownership, where the local owner has set a goal of providing useful news and discussion to the local audience, serving, if you will, the listener side of the market.

Very important to broadcasters, there is explicit recognition for the critical role that radio has played during natural disasters. "In many cases, where millions of people were without electricity, radio proved to be their only source of information." This critical role for over-the-air broadcasting has been recognized time and again, with vivid examples of its unparalleled role in New Orleans following Hurricane Katrina, and most recently by the passionate keynote speech of Missouri Governor Nixon at the Missouri Broadcasters convention following the Joplin, MO tornado:

I salute your courage, your professionalism and your dedication to serving your community throughout this catastrophe.

Courage.
Professionalism.
Service to others.

These are the hallmarks of broadcast journalism at its finest. And in the last two weeks in Missouri, in the aftermath of one of the most destructive tornadoes in history, I have seen broadcast journalism in its finest hour.

While recognizing that Internet radio is on the rise, transforming both the user experience and business models for audio service delivery, the FCC study confirms broadcasting's important wireless, one-to-many model for service in emergencies. On the other hand, it acknowledges that among the principal capability of Internet audio is its ability to provide service well beyond the geographical boundaries of a radio transmitter. Clearly that capability is proving to be valuable ... and growing in popularity. While only 17% of Americans reported listening to online radio in 2010, over 55% of them listened to streaming online -- only radio rather than streams of an AM or FM radio station, and an increasing number are hoping to get Internet radio in their car.

Early critiques of the report have been mixed, with many saying it adds little to the discussion of the obvious and what we all know. It is true that there is little new here for experienced broadcasters. However, it does provide an authoritative, researched and sustainable confirmation of what is happening in broadcasting that can serve as the basis for policy conclusions. The trend is that News/Talk is the clear leading format of choice for tracking listeners and serving the radio listener market. In increasing numbers, listeners are turning to radio for news and information rather than entertainment.

In a later section on Internet and mobile, the authors clarify that local information, and especially hyper-local, is an area not served well by the Internet streamers. Meanwhile, even a cursory review of small-market, locally-owned radio will demonstrate that this is the real strength of radio. For the most part, small-market radio broadcasters recognize this and have included more local information in their daily broadcast schedule, even when mixed with music formats. From a regulatory point of view, the studies and conclusions of this chapter provide a useful record for further ownership deregulation of broadcast radio as well as continued respect for its ability to service public service objectives in a unique way.

In addition, the report's observations provide guidance to where future, continued success in radio lies. Internet streaming may be gathering the radio jukebox listeners, but the strong interest in and need for informational News/Talk programming and emergency preparedness appear to be the needs that will serve broadcast radio listeners best if the statistics are accurate.

Interestingly, radio has not suffered seriously by the shift in pure entertainment listing to Internet-only radio. Listeners seem to be more interested in the ability of radio to inform and challenge their thinking -- and that attraction appears to be sufficient for advertiser support. As the report noted from the Pew State of the News Media 2010 report, "News-and-Talk remains the most popular category in broadcast radio, and it [has grown] in both audience and number of stations." The number of News/Talk stations trended sharply upward, increasing from 2,634 in 2009 to 3,446 in 2010 -- to make up 24% of the country's more than 14,000 commercial radio stations.

But hyper-local news, with the exception of a few high-profile stations, has eluded the larger markets. An earlier 2007 FCC staff paper had concluded that radio companies earn higher gross profits but lower net profits than the average SNP 500 firm, often because they carry high debt loads and pay high levels of interest on that debt from the acquisitions following the ownership regulations change of the late 1990s and the 2000s. It would seem, therefore, that the price paid for the stations is more the contributing factor to lower net profit than the ability of stations to attract revenues. Indeed, station profits have remained over 20% in the last few years.

There is an important caveat that reflects this fact: the news shows tend to be national, rather than local in their focus. According to a survey done for the FCC's Localism Task Force in 2005, News/Talk radio stations aired 67 minutes of local news and public affairs and 428 minutes of non-local news and public affairs every day. Most broadcasters would attribute that to the high prices paid for stations in the roll-up years, leading to cost-cutting. Because it spreads fixed costs, the report concludes that national programming is often more cost-effective for stations than local.

But as Mel Karmazin reported to the study team: "The last thing I wanted to do was commoditize radio. Every station was different, had a different audience, a different fabric, and by putting all these things together you're going to homogenize and not make it successful standing alone."

For the most part, the Internet streamers, and even some of the new Internet journalists elsewhere reported on in the study, are taking on the provision of the commodity audio product. In the Internet age, radio can return to its local roots and still provide a unique and compelling product that eludes the Internet streamer. Adapting to the Internet age for radio means more information, new mixed media platforms which repurpose the station's local news product and a more intense focus on local events and reporting needs.

Edward Esposito, of Rubber City Radio Group in Akron, OH, reported that it's still very important for us to be a creator of content, and to make individual decisions that might lead to taking less of a profit margin and generate revenue in another item because they serve the local needs of Akron, including the local Akron City Council and the school board meetings.

The radio section concludes that News/Talk radio serves an important function in a democratic society by giving voice to millions who use the medium to express their support for or opposition to what the government is doing. That is a function that is not being fulfilled by Internet streaming, despite the blogging and citizen journalism that is ballooning over its streams.

So perhaps what Bob Lutz said about car-making is applicable here. Abandon the number-cruncher, financially-projected world, and to "give the reins to the 'product guys'" of either gender, with vision and passion for informational programming that audiences are not getting anywhere else.

As Governor Nixon put it to the Missouri broadcasters:

Unlike the national media, you are in it for the long haul.
Unlike the national media, you've got skin in the game because you live here.
When you get it right, your community gets the benefit.
When you get it wrong, your community suffers.
The point is that what you do matters.

Governor Nixon also recognized broadcasting's unique ability when he said, "After the cell phones went out, and the police radios went out, and the electricity went out, it was the local Joplin broadcasters who were there, on the air, helping the frantic woman, pregnant with twins, find her husband and providing information on where were the emergency rations and shelters."

His message was that broadcasters were there when no one else was, or could be. And local programming does that every day, with or without an emergency.

The signs are showing at the FCC that the public interest standard may be considered an anachronism. When that goes away, so does the broadcast spectrum and special role that broadcasting fulfills in our society. But it will stay and continue, and the FCC should support its place in society, if broadcasters continue to fulfill this one-to-many, community-based information-sharing function.

This column is provided for general information purposes only and should not be relied upon as legal advice pertaining to any specific factual situation. Legal decisions should be made only after proper consultation with a legal professional of your choosing.