Cumulus to acquire Citadel: Does this mean more M&A Activity?

The new year has been pretty sluggish in terms of major news about the media economy.  Last week all of that changed when Cumulus announced it was entering into an exclusive arrangement to acquire Citadel.  If consummated, the new company will be a radio powerhouse, second only to Clear Channel.  The company will be in just about all of the top 25 markets, with many stations holding strong positions.

Does this proposed merger mean that M&A activity is on its way back?  In January Hubbard Broadcasting announced it was buying 17 of Bonneville International's radio stations in several large markets for $505 million dollars.  In the first major radio deal in years, the multiple for trading (cash flow X multiple = price) was estimated around "8" which is at the low end of pre-recession multiples.

The Cumulus-Citadel deal is for slightly more than that, but still below double digits.  So has radio as an industry totally valued downward to single digit multiples? Is this reflective of the competition impacting radio from Pandora and other Internet radio stations, satellite radio, Mp3 players, etc.?  Is this an anomaly or part of a long-term secular trend?

Finally, are there other radio companies potentially in play?  Spanish Broadcasting Systems has had its share of economic woes like Citadel, but seems to be improving.  Could Univision finally be motivated to get our of radio by putting its group holdings up for sale? 

The Cumulus-Citadel announcement brings a renewed look at radio.  The industry finished 2010 strong, with a very good fourth quarter--one of the best in years.  The RAB has pegged total revenues at just over $17 billion for the year.  Perhaps these big players taking the lead will spur some other action.  Stay tuned.

Scattershooting on the Media Economy

It's been relatively slow in terms of news that deserves commentary the past couple of weeks.  Here are few random thoughts on what few things seem of interest to this blog and its readers.

The NAB Performance Royalty.  I wrote about this on October 26, and the only significant change is that most of the radio industry--make that the small and medium market station groups--are railing against the NAB for trying to reach a deal with the devil.  Radio Ink magazine and publisher Eric Rhoads called for an industry-wide vote on the issue, which seems like the reasonable thing to do. Since then, he has recanted and feels the "term sheet" negotiated is a good deal for radio.  I still don't understand how giving up a potential 1% of your revenue makes sense.  I'm also amazed the NAB jumped in to this prior to the elections, and with a Republican majority in the House the likelihood of legislation passing to enact the PRA seems unlikely.  Stay tuned for more rhetoric.

Moving way south--Nestor Kirchner's sudden death in Buenos Aires could usher in a new wave of media relationships with the government in Argentina.  While his wife Christina remains President, she is not perceived as being the hard-liner that her husband was, especially towards big media groups like Clarin.  Argentina is vital to the economy in South America, and letting the media operate on its own without government control will spur more economic growth.  The government doesn't need to be engaged in battles with the media--Argentina has plenty of other problems to solve.

Turning to the far East, former Fox executive Peter Chernin is working with a group of investors to develop a media company in Hong Kong that will be engaged in television, film, and digital entertainment.  The business-friendly Hong Kong market is the perfect place for a launch to cover the Asian region, and Chernin is a smart executive.  If successful, the new company could become a power in the region.

The Wall Street Journal on November 8 ran a very interesting infographic in the marketplace section called "When Screens Collide."  Very interesting, and illustrates how web and TV advertising are changing to resemble one another.  Pretty cool, check it out.

The Media Economy is always evolving.  Stay tuned.

The Performing Arts Battle between the Music Industry and Radio

For many months, the recording industry (music industry) has been lobbying Congress to enact legislation that would provide a performance royalty to artists (those who actually sing/play the music) from radio revenues.  The music industry has never had the votes yet to pass the legislation, but they keep trying.  There has been a lot of rhetoric on both sides about the issue, with radio claiming that the music industry benfits from free airplay and promotion, while the music industry points out that radio stations benefit from content and avoid paying a performance tax (whoops, I mean royalty) as in many other countries.

Surprisingly, the NAB Board has now brought forward a template for such a royalty, to be between .25 and 1% of radio revenues.  But there is a catch.  The royalty is tied to requiring that radio chips for FM and HD radio channels be required for mobile phones.  The radio industry has been after chips for mobile phones for some time, but the electronics industry and major phone makers are not interested.  And they probably won't be interested in this issue either.

Apparently, the NAB sees making concessions on the performance royalty critical to getting radio chips on mobile phones.  I probably don't get something, but to me these seem like mutually exclusive issues.  If I'm Apple, why do I care if there is an FM/HD chip on new versions of an iPhone?  Let the industry create an app for that (actually several already exist).  And if I am RIM or Nokia or another phone manufacturer, what do I get for putting this chip in the phone except for another cost?

And is anybody asking what consumers want?  Thousands of people are listening to Pandora and Internet radio on their phones every day instead of local radio.  They listen to these services because they have given up on radio and its repetitive, sounds the same in every market programming.  If consumers have a radio chip on their phone, how many are actually going to listen to local radio?  I get it if there is severe weather, or maybe a sporting event of a local nature I want to receive.  But just to listen to music?  That train has already left the station.

There are lots of issues here that are not resolved by this first step.  But this is a huge economic gamble for the NAB and the radio industry.  Giving away any revenue when you have been losing money for years in hopes of building more audiences online is a big risk.

Stay tuned.  This is far from over.

Former FCC Chairs Say "End the Ownership Rules"

This is an interesting item from another blog written following a C-SPAN program called "The Communicators" that brought together former Federal Communications Commission Chiefs Reed Hundt (Clinton administration), Michael Powell (G. W. Bush administration) and Kevin Martin, who took over the agency after Powell during the last years of the George W. Bush Presidency in a lively discussion on the FCC and the agency's ownership rules.

The central message from the three former Chiefs:  Throw the rules out.  But it won't happen for many reasons, with Powell citing politics as the primary reason.

It is an interesting program illustrating how policy decisions impact the media economy.

Televisa and Univision Extend Partnership

The media economy received a buzz this week with the announcement that Mexican media conglomerate Televisa is investing $1.2 billion for a 5% ownership stake in Univision, and at the same time extending the critical exclusive programming contract through 2020.  And these are the same two companies that have spent millions battling each other in court the past few years?

Clearly, this is a smart strategic move for both companies.  Univision gets an influx of cash, and perhaps more importantly they can continue to count on high-quality novellas from Televisa for their prime-time schedule.  Televisa CEO Emilio Azcarrage Jean has made a lot of noise about starting a Televisa channel in the US; this deal effectively mitigates that possibility.

But Televisa wins as well.  They will continue to have a key showcase for their programming in the US through the powerhouse Univision broadcast network.  Televisa will also receive higher royalty payments for this new deal, which also resolves the question of digital (Internet) rights to broadcast the programs. 

This deal also widens the gap among competitors in the Spanish language space in the U. S., especially for second place Telemundo and the struggling Azteca America.  We can expect Univision to continue to play the dominant role in the SL market going forward.

NBC Universal and Comcast: A New Look at Valuation

This article featuring an analysis by Wunderlich Securities analyst Matthew Harrigan gives us a first-hand look in to a complicated topic in the media economy--that of valution.  Harrigan has analyzed the pending NBC Universal acquisition by Comcast, and provides some amazing insight in to the valuation process--at least how this one analyst conducts such an undertaking.

Two things caught my attention.  First, the significant value placed on the NBCU cable channels, specifically ScyFy, CNBC, MSNBCm and Bravo.  The second thing that was very interesting was the negative valuation for the NBC broadcast network, which eliminated some $600 million off the total amount.  It is the first time I have seen one of the big four broadcast networks valued negatively.  The reason?  NBC's poor performance since 2007 in prime-time, finishing most seasons in either third or fourth place.

This is a very interesting article for a topic that we find too few stories about.  BTW, in case you don't want to read the article in the link, Harrigan values the merged Comcast-NBCU company at just a little over $38.6 billion, making it the world's largest media company.

Mobile Advertising and Future Projections

With the rapid adoption of smart phones and other mobile devices, the projections for mobile advertising is going through the roof.  According to the latest estimates by BIA/Kelsey, mobile advertising is expected to top $2 billion by 2014.  That may not sound like a lot, but for a category that didn't exist just a few years ago, these are impressive numbers.

With all of the apps being developed for smart phones and tablet devices, more and more consumers are moving to adopt these technologies as their budgets allow.  Advertisers recognize this trend and are following suit.

The $2 billion estimate for 2014 is only about 1.4% of the total projected ad pie for that year, according to RBR.  But that's still a lot of money.  We can expect double-digit growth in mobile advertising for the next decade at least.

Just illustrates the need for any media company operating in the 21st century to have a mobile strategy.  It is just too important to ignore mobile in the media economy.