Here’s a secret most insiders aren’t going to spill to you: radio is in trouble, real trouble.
Understand me, I adore radio. The babbling disc jockeys, the friendly and comforting music and even – as I get older – the informative talk radio of NPR and the BBC. Radio has stood by me, comforted me and often encouraged me to become a stronger person just by playing music and keeping me company on lonely drives around the country.
Glittering prizes and endless compromises
The traditional model of radio broadcasters is still going strong, but cracks are starting to show. Clear Channel Outdoor Holdings, Inc. (NYSE:CCO) was bought out by Bain Capital, LLC, and the way it’s emerging from private equity ownership is an unknown. That’s only one company that the casual investor will have heard of, but there are plenty of others.
Entercom Communications Corp. (NYSE:ETM) is representative of the industry. The chain has more than 100 stations in two dozen markets, both major and minor. The problem is that – like most advertising-driven properties these days – it’s not returning a lot for its investors.
The company took it in the neck during the market collapse. Now it’s recovered but somehow never reinstated that $0.10 per share dividend. Note, though, that recovered is a relative term. I’m not a fan of a company with a high P/E ratio (approximately 27.3) and a low return on avg equity (about 4.4%) combined. The share growth is good, but I think the challenge presented by new radio platforms will be a real hurdle. The same applies to others that follow the traditional broadcast model.
From a clear blue sky
The most obvious challenge to traditional radio is satellite radio, of course. Once pushed out by two companies, after a merger only Sirius XM Radio Inc (NASDAQ:SIRI) is still standing.
A long-term bet that’s starting to look shaky, Sirius XM Radio Inc (NASDAQ:SIRI) has a huge market share, lots of subscribers and a troubled future. Having once traded in the $7 range, Sirius XM Radio Inc (NASDAQ:SIRI) dropped as far down as $0.12 per share after the recession hit.
This year, it’s recovered to a hair under $3 – and has grown 31.7% over the last year. Still, even the recent takeover by Liberty Media Corp (NASDAQ:LMCA) might not be enough to make it viable over the long term in the face of a changing listener-base.
Liberty Media Corp (NASDAQ:LMCA) is a strong company with muscle to use to leverage a platform like Sirius XM Radio Inc (NASDAQ:SIRI). But, if Internet radio really takes off, Sirius XM Radio Inc (NASDAQ:SIRI) is in trouble.
A connected world
That’s what it comes down to, of course. Just like the rest of the media world, the Internet and the availability of cheap broadband are twisting radio into knots. Even the last vestige of a broadcast monopoly, the automobile, is about to begin seeing streaming broadband as a standard feature.
That’s where Pandora Media Inc (NYSE:P) comes in. Pandora Media Inc (NYSE:P) has generated a lot of buzz and excitement in bringing the dot-com world to radio. It uses software to determine the popularity of songs and user preferences and claims to provide an enjoyable listening experience.
Sadly, what it doesn’t do is provide a return for investors. Last year’s net margin was -8.9% and the first quarter of 2013 saw that drop a bit to -11.6%. Combine that with an EPS of -$0.23 and a growth in share value of approximately 58.7% in the last year and you’re looking at a classic tech start-up that’s being invested in for the future.
But, like most such cases, there’s no guarantee that the future is ever getting there. Pandora Media Inc (NYSE:P) suffers from a real risk that one of the big boys will get interested and launch its own service to compete with it. Honestly, the best thing that could happen to Pandora Media Inc (NYSE:P) over the next few years is a buyout from one of the monsters. Although, if that’s what Pandora Media Inc (NYSE:P) is aiming at they sure don’t make it easy to tell.
For an investor, radio is truly risky right now. Other forms of media are beginning to show some guidance and direction. Television is going streaming — movies, too. Even traditional information providers like newspapers and magazines are beginning to form up behind a plan. But not radio. Any money you invest in anything radio-related had better be money you’re confident you won’t need in the future, because it just might not be there.
The article The Future of Radio: All We Hear Is… originally appeared on Fool.com and is written by Nate Wooley.
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