RADIO INDUSTRY MARKET STRUCTURE

The contemporary radio industry in the United States has experienced massive structural change since the passage of the 1996 Telecommunica-

ALBARRAN

tions Act that removed national ownership restrictions (Albarran & Pitts, 2001). From 1996 to 1999, with the national economy soaring, interest rates near record lows, and financing capital readily available, a sellers market dominated the radio industry. By 2002, the radio industry was transformed into an industry dominated by two leading companies: Clear Channel Communications and Infinity Broadcasting, the latter being a division of the conglomerate Viacom. These two companies together own nearly 1,400 radio stations, slightly more than one tenth of all commercial stations in op- eration in the United States.

Radio consolidation abated somewhat since 2000, as the U.S. economy suffered a downturn fueled by the collapse of the dot-com industry and re- ductions in corporate earnings. Although there are still some mergers and acquisitions taking place, the level of activity has dwindled since the mad- dening rush of the late-1990s.

Prior to 1996, the radio industry resembled a monopolistic competitive market structure. This was due primarily to national ownership limits pre- 1 viously capped at 40 stations (20 AM and 20 FM). There were numerous companies that owned the maximum number of stations, and regulatory limits meant the companies could not grow any larger in terms of their radio holdings. Historically, radio ownership regulations developed around the concept of scarcity, the principle that more people would want to broad- cast than available frequencies allowed.

By the mid-1990s, many radio broadcasters and group owners had lob- bied Congress for years for relaxation of ownership limits, claiming that there was a multitude of information and entertainment sources available for consumers (especially via television and cable), and that scarcity was no longer an issue. Policymakers eventually agreed, as the 1996 Act allowed unlimited ownership at the national level, while maintaining limits in local markets using a tiered approach depending on the number of signals available to the audience.

In the largest markets (those with 45 or more signals) owners are limited to a maximum of 8 stations, with no more than 5 in one class (AM or FM). In markets with 30 to 44 stations, the limit is 7 stations with no more than 4 in one class. In markets with stations that total 15 to 29, the limit is 6 stations with no more than 4 in the same class, whereas in markets with 14 or fewer stations the limit is 5 stations with no more than 3 in the same class pro- vided the company does not exceed 50% of the stations in the market.

Allowing a single company to own as many as eight stations in a market meant managing and operating radio stations would be radically different. Theoretically, one General Manager could run eight different stations, along with a single set of departments providing the various support func- tions (e.g., engineering, accounting, human resources, etc.). Personnel, any companies’ greatest expense, could be drastically reduced resulting in

10. THE ECONOMICS OF RADIO

greater budgetary efficiencies. Likewise, greater economies of scale would

be realized in the marketing and selling of advertising, as account execu- tives would be enabled to sell for an entire group of stations. Combined with similar efforts going on in other markets, economies of scope were much more achievable for radio companies after the 1996 Act.

The growing realization that the business of radio would change led to a key dilemma for many radio group owners: Either get bigger, or sell out. Small companies owning only one to two stations in a market would have great difficulty competing against larger clusters for advertising revenues. Hence, many companies chose to collect profits by selling their holdings when stations were selling at inflated prices. In fact, today’s Clear Channel Communications and Infinity Broadcasting are the amalgamation of some

75 separate companies prior to 1996. According to one industry source, in 1995 the top 50 radio groups owned 8.6% of all radio stations; by 2000 they owned 27.5% of all stations (Fratrick, 2001).

The overall impact of radio industry consolidation means in many local markets the radio industry has moved away from a monopolistic competi- tion market structure toward more of an oligopoly. Further relaxation of local ownership caps could move the entire industry toward an oligopoly, although regulators (in the form of the Department of Justice’s Antitrust Division) have been concerned about allowing one to two companies to 2 dominate local advertising revenue in the market. In several instances, the DOJ halted merger approval until the impact on the local market could be carefully studied.

The restructuring of the radio industry also consolidated the financial earning power of the top companies. In 2001, the top 10 radio groups ac- counted for approximately 50% of all radio industry revenues, even though they owned only 17% of all stations (Fratrick, 2001). Of course, most of these revenues are generated in the top markets. The top 10 radio groups, as of July 2002, are listed in Table 10.1.

RADIO INDUSTRY MARKET STRUCTURE