Radio Industry Split on Affordability of Streaming, Terrestrial Royalty Deal

Deal foes and backers in radio seem to think the NAB has done a better job communicating with them about the potential accord, including by holding a meeting Monday where President Gordon Smith and other executives of the broadcasting group discussed it, industry executives and lawyers said. But some broadcasters oppose in principle paying labels for giving their artists free airtime, while others can’t afford it without making cutbacks in other areas such as firing staffers, lawyers representing stations said. “We're seeking an open and honest dialog from our radio membership and are actively seeking input from radio stations across the country,” said an NAB spokesman. “Any legislation supported by NAB would have to be ultimately in the long-term best interest” of members and listeners, he added.

The consumer electronics and wireless industries have opposed a potential deal on grounds they'd be required by Congress to put analog FM chips in all cellphones if the accord were enacted, as broadcaster and music labels would seek (CD Aug 24 p1). Motorola -- along with industry associations like CTIA and CEA and other device manufacturers -- opposes any such mandate, a company spokeswoman said. Motorola will actively support efforts to defeat legislation including any such mandate, she said.

Carriers and CE companies eventually will support a deal, or at least be less vocal in their opposition, some radio executives predicted. “At the end of the day, they're going to see it will help them in their own business,” said CEO Peter Smyth of Greater Media, owner of 23 stations and an NAB radio director. “Let’s all stop calling each other names. Let’s sit down at the table and at the end of the day I think the manufacturers want this. It will be beneficial to all parties, the cell companies and the radio industry."

"You are not going to create a free market as long as the carriers control the system,” unlike in other countries where handsets are sold independently, said CEO Jeff Smulyan of Emmis Communications, which owns 25 stations and is represented by other company executives on NAB boards. He said carriers have indicated they won’t put chips in phones because “we make money selling the music.” Smulyan, Smyth and other radio industry officials said it’s crucial that any deal include a requirement that wireless devices have analog FM chips. On the potential settlement not requiring that HD Radio chips be included in cellphones -- which would let them get digital broadcasts -- Smyth said, “Let’s get out of the box here” with the deal on the table.

The top U.S. radio broadcaster has some qualms about the potential accord. “The ‘proposal’ that has been widely discussed does not yet best serve local radio,” Clear Channel said in response to questions from us. The company is “certainly supportive of the good-faith negotiations between NAB and RIAA. But Clear Channel will only be supportive of a settlement if it best serves local radio,” it said. “A public performance tax that takes money out of local communities all across the country does not help our industry or the communities we serve.” Clear Channel said it isn’t “aware of any radio company that does not support including radio functionality (analog and digital) in as many platforms as possible -- and that includes cellphones -- so that we can reach our listeners wherever they are."

For Cox Radio, a deal “would eliminate uncertainty about this issue,” said President Bob Neil. “But a bad deal would definitely hurt an industry that is trying to recover from the worst ad recession in 80 years” and reaching any accord is “going to take a lot of work.” Some parts of the possible accord, like FM chips in cellphones, “haven’t really fallen into place,” said Neil, whose company is represented on NAB board. “We're supportive of the dialogue, but the details are always tough to hammer out.” Agreement on the chips is an important piece of the potential settlement to Cox Radio, which owns or runs 86 stations, he said. “With more cellphone providers eliminating unlimited data plans, this is entertainment for consumers that won’t eat into their data usage or put pressure on the carriers’ data networks.”

"I am seeing more of a groundswell of support” among radio stations for a possible deal, said Smyth. “I'm going to vote for it. I think it makes a lot of sense.” He added, “I think that most people are going to be relieved to know that the Copyright Royalty Board is out of it.” Some broadcasters said they think the board, which sets royalty rates, is biased toward rights holders. The potential NAB-RIAA deal will cost Greater Media several million dollars annually, but that’s offset by “deal certainty” that a higher royalty won’t be imposed, Smyth said. “It gets the copyright board out. It gets clarification on streaming, which is becoming a major, major thing we need to look at, because the distribution platform is changing quickly."

It’s uncertain how much radio stations would save under the proposal to cut streaming music royalties 10 percent, brokers and appraisers said. “Streaming, to the extent that their royalty payments may be declining, does not appear to be the future of radio broadcasters on the Internet,” which is moving toward podcasting, said Hoffman Schutz Media Capital President David Schutz. Director Robert Heymann of Media Services Group called it the “great unknown.” The industry “has had a very difficult period over the last two years,” so “it’s unfortunate that now we're looking at this across-the-board increase in expenses for stations,” he said. “If the station owner is giving a fixed percentage of its revenue” to performers, “that’s going to negatively impact on radio stations’ cash flows, which are then multiplied in the neighborhood of six to nine times” to derive a sale price, he said. “This can have a dramatic impact on ultimate station values,” though “the upside to that is they're hoping to get carriage for FM on cellphones.”

Radio M&A activity this year may be the lowest in recent history, perhaps $300 million to $400 million if stagnant bank lending (CD Aug 24 p3) picks up, said BIA/Kelsey Vice President Mark Fratrik. That compares with $353 million last year and would be a 99 percent drop from the zenith in 1999 of $28.5 billion, he said. A royalty deal could lead acquirers to pay a higher cash-flow multiple, though cash flow itself would be cut, by giving buyers more certainty about expenses, Fratrik said. “You may pay a little bit higher in terms of the cash flow multiple just because you see what the future will be,” he said, and an accord “opens up possibilities of maybe doing more efforts in streaming."

That wouldn’t help stations struggling to pay bills, including FCC annual regulatory fees due Tuesday that some radio broadcasters have said they may need to make late or they can’t pay until the last minute, according to industry lawyers. “That’s how close to the margins some of these people operate, and I don’t know that even some folks at the highest levels of the NAB are aware of that,” said Kevin Goldberg of Fletcher Heald, though he said they may be aware. “I wasn’t aware until I was working through this last regulatory fee period.” The NAB’s forum Monday “was a really big step forward” in answering radio station questions about “why are we doing this” possible settlement, he said.

"There’s a definite split” in the industry on royalties, with some stations “still absolutely cash strapped” and unable to pay and others that “want nothing other than Washington to stay out of their business,” said Scott Flick of Pillsbury Winthrop. “The Washington-conscious tend to be the bigger groups” that see a deal, while costly, as the best practical outcome, he said. “If the FM chip can’t be had, I don’t see this getting off the ground, because that in my mind is the most valuable part of the deal,” Flick said. “With the FM chip, I think it’s quite sellable, but it will still run into the issue of, if you don’t have the money, you don’t have the money.”