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Battle for the airwaves! Mega-broadcasters are squeezing independent black radio stations into extinction. How will they survive the war, and what does it mean for you? .

FOR WILLIAM SAUNDERS, DEREGULATION OF THE AIRWAVES HAS BEEN A DISASTER. The 68-year-old entrepreneur toiled in the radio business for more than 30 years. He had been part owner of Charleston, South Carolina-based WPAL-AM since 1971 and, by 1985, had taken control of the entire station. Earning a modest profit over the years, he bought an FM sister station in 1994 to add a younger demographic to his listener base. That's when his troubles began.

Saunders needed to upgrade his new acquisition in order to make the AM/FM combo work profitably, but he could only borrow $125,000 of the $200,000 needed to improve the transmitter and other equipment. To make matters worse, he got the money under horrendous terms. "If I paid them for the rest of my life, I would never have paid off the note with the way the interest rate was structured," he says, "but it was the only capital that I had access to."

As his debt service ate into his profits, the 1996 Telecommunications Act was passed and things got even worse. The legislation eliminated the 40-station nationwide ownership limit, and permitted broadcasters to purchase up to eight radio stations in large markets and five in small markets. Large radio broadcasting conglomerates began acquiring independent stations in dusters, setting off a wave of consolidation that is still going on today. As a result, the radio advertising market is controlled by a small cadre of mega-broadcasters, which offer advertisers packages that include millions of listeners across several radio stations at discounted rates. The effect on independent station operators is devastating. "[Before 1996] I would make up to $500,000 per year in revenue on the AM station alone," Saunders says. "After 1996, even though I had two radio stations, I could barely sell $400,000 [in advertising] per year. Every place where we had solid advertising commitments before was gone."

Unable to pay his loans, he was forced to sell his AM station in 1998 to Clear Channel Communications, the nation's largest broadcaster. In 2001, he met Judith Aidoo, a Harvard-trained investment banker who listened to WPAL as a child. She agreed to pay some of the debt on the remaining FM station in return for part ownership. But when the transmitter building burned a week after signing the agreement, she assumed flail control of the station because Saunders could no longer fulfill his financial obligations. Looking back, he concedes: "It was clear [when I initially got help] that I wasn't going to be able to come up with the money needed [to keep control of the station]."

GET BIG OR GET OUT

Since the passage of the 1996 Telecom Act, bigger has become better in the radio industry. In 1996, Clear Channel was the largest U.S. radio broadcaster but owned only 86 stations. Today, it's a 1,200-station behemoth with 6.3% of its stations (76 stations) targeting black and urban audiences. The next three largest conglomerates are Cumulus Broadcasting, with 280 stations; Citadel Communications Corp., with 206 stations; and Infinity Broadcasting, with 180 stations. Collectively, these companies reach a majority of black and urban listeners with their programming.

While large broadcast companies have benefited, deregulation has been a nightmare for black-owned broadcasters, creating an ultra-competitive environment that has forced many out of business. According to Kofi Ofori in his report, Badio LocalMarket Consolidation and Minority Ownership, in 1991 there were 173 minorityowned broadcasters. By 1997, however, that number dropped to 169, and by 2001 was down to 149. Simply put, the day of the single-station owner is over. Aidoo reinforces this sentiment by stating: "If black people continue to lose those properties [minority-owned stations], the likelihood of us ever regaining them is next to none."

What does all this mean for you? The trend impacts African Americans on a number of fronts. First, it has undercut black entrepreneurship in radio broadcasting--an area that gave rise to a segment of BE 100s companies over the past three decades. Today, the largest black-controlled radio broadcaster is Radio One, a former BE 100s company and 2000 Company of the Year. In order to grow and stay competitive, Radio One eventually reduced its ownership stake below 51% in a series of public stock offerings. It also expanded the reach of its 65 stations when it partnered with ABC Networks in 2001 to create the Urban Advantage Network,

Second, the dominance of broadcasting monoliths limits local programming, as the airwaves become saturated with national programs and syndicated fare. Clear Channel provides more than 100 syndicated programs to 7,800 stations nationwide, reaching 180 million listeners; however, the No. 1 urban radio show, The Tom Joyner Moming Show, syndicated by ABC Networks, reaches only 5 raftlion listeners nationwide. David Honig, executive director of the Minority Media and Telecommunications Council (MMTC)--a national, nonprofit organization that promotes and preserves equal opportunity and civil rights in mass media--wasserts that niche operators must be protected to ensure a diversity of voices and viewpoints on the airwaves. "Radio is one of the most important industries in the country because it shapes opinion," says Honig. "If you just have a few companies controUing all of the pipelines of opinion, then democracy starts to crumble." For instance, Saunders says the loss of his stations created a vacuum in vital political information and news for Charleston's African American community. "Last year, blacks in the Charleston area [virtually] stopped voting because WPAL-AM wasn't there," he says sadly. "Everyone at my station was interested in the community. Now we have people at urban [formatted] stations that don't know anyone in the community. [They] just play music and come up with new ways to make money."

The third impact is the employment of fewer blacks within the industry. The number of African Americans on and behind the mic will continue to shrink, with fewer black stations and less original and local programming.

So, will preserving black radio require a super-heroic effort? A number of entrepreneurs are marshalling their resources to fight for market share and a presence within the industry. Companies, such as Jacksonville, Florida-based Tama Broadcasting, are actively acquiring stations and creating their own networks. And, in some cases, they are developing formats and targeting listeners outside African American communities. "[In the current environment] you are not going to be competitive because you are competing for mainstream [advertising] buys with just urban programming," asserts Tama President and CEO Glenn Cherry. "You can't just depend on the black consumer market [alone] to make money. We are going to find the hole and fill it."

THE BROADCASTING BATTLEFIELD

Black broadcasters have only one choice: grow or die. Federal Communications Commission (FCC) Chairman Michael Powell is in the process of reviewing all rules limiting the ownership of radio outlets to make them applicable to the realities of the modern marketplace. "In 1996, radio was in trouble," he says in defense of deregulation. "There was a proliferation of too many outlets competing for the same demographic, [which] subdivided the advertising too thinly for any of them to stay functioning and profitable."

Deregulation proponents argue that radio broadcasters need the cost advantages associated with size to compete with TV, newspapers, and other larger media companies, and that the ability to provide a national platform for advertisers was imperative for the industry's survival. Deregulation supporters also assert that media diversity will still be satisfied through the Internet and the multitude of cable channels.

In fact, on January 30, Clear Channel Chairman and CEO Lowry Mays testified before the Senate Committee on Commerce, Science and Transportation that the conglomer ate was doing its bit for industry wide diversity. He said: "Clear Channel is committed to encouraging diverse media ownership.... [W]e sold more than $1.5 billion in radio properties to minority buyers. That represented one-third of all the stations we had to divest to obtain regulatory approval of the transaction.... We have done all of this not because of any direct benefit to Clear Channel, but because it is the right thing to do."

Deregulation opponents, however, don't buy the rhetoric. They fear that Powell's biennial review this year will recommend even further relaxation of ownership rules limiting the number of stations that can be owned by any one broadcaster. FCC Commissioner Michael Copps says enough damage has been done. "The purpose of the telecommunications law is to foster diversity, localism, and competition to protect the great American marketplace of ideas," he says. "We need to fully understand [the impact of radio deregulation] before further ownership caps and limitations are lifted. We don't want to have a great wave of consolidation and then find out, after the fact, that it has further cut off opportunities for minorities in the broadcasting industries. We know that discrimination still exists, and we don't want to make the situation worse, we want to make it better."

In fact, Aidoo says that because of the intense competition from three Citadel stations: WWWZ-FM, WMGL-FM, and WSUY-FM, WPALFM's Community station model was scrapped for one that focused solely on urban adult contemporary music. Indeed, as of this winter, the topranked station in Charleston was Citadel-owned WWWZ-FM, with a 10.0 rating. Combined with Clear Channel stations, these mega-broadcasters receive 60 cents of every adver tising dollar in this market, according to Aidoo. WPAL-FM's rating was 0.7, as measured in the same period.

To protect minority ownership and program diversity, the National Association of Black Owned Broadcasters (NABOB) filed comments against further deregulation with the FCC in January. Asserts NABOB Executive Director James Winston: "If the large companies have their way and all the [ownership] rules are eliminated, then it would definitely sweep out all small broadcasters."

Moreover, NABOB is working with Sen. John McCain (R-Ariz.), sponsor of the Telecommunications Ownership Diversification Act of 2002, which would bring back the tax certificate program that offers large broadcasters a break on capital gains taxes if they sell their stations to minorities. (Powell and Clear Channel's Mays are in favor of the bill.) NABOB also collaborated with Sen. Russ Feingold (D-Wis.) on the recently introduced Competition in Radio and Concert Industries Act, which is designed to regulate the radio and concert promotion industries. In reaction to the new bill, Mays says Sen. Feingold is "dead wrong. The legislation is built on the faulty premise that the concert business and radio business need to be fixed. They don't."

Explaining NABOB's alliances with McCain and Feingold, Winston says, "We are trying to help them shape legislation so that it helps to create additional minority ownership opportunities [and to] come up with the exact language for the legislation so that it achieves the desired result."

COMPETING AGAINST THE ODDS

With huge broadcasters controlling local markets, independent operators must expand to stay competitive. "These days you need to own a cluster of stations just to survive, let alone compete," says Archway Broadcasting Group's Al Vicente, who is in the process of buying 13 stations in the Southeast. "You have to have a cluster of stations so you have economies of scale ... have [multiple] stations run from one location so that you are not duplicating expenses and have employees that can work on more than just one station." Multiple-station operations, he says, also offer advertisers the ability to reach many different audiences with one buy.

But getting bigger requires capital to purchase stations--loads of it. According to MMTC, an AM radio station in a top 10 market, depending on the strength of the signal, could cost between $30 million and $80 million, and as much as $500 million for a similarly situated FM station--or 11 times cash flow. The asking price for an AM/FM station in a mid-sized market is between $1 million and $5 million.

Gaining access to capital has traditionally been a problem for black broadcasters. Aidoo, who must raise money for her low-rated station, says banks don't like to finance radio stations because they can't place a lien against the asset if the borrower defaults. Since the federal government regulates radio broadcast licenses, the FCC must approve any potential buyers of the station, which creates more problems for a lending institution. "Most banks won't finance a small radio station because they primarily finance against cash flow and not asset value," says Aidoo. "Though a station may be worth a few million dollars, it may not be generating enough cash flow [usually 5 times cash flow] to support a loan to purchase another one."

Minority owners have been forced to turn to private equity funds in which capital is much more expensive and requires giving up a substantial ownership stake in the property.

But even if they can afford to purchase multiple stations, owners must then be able to generate the necessary cash flow to compete. According to MMTC, depending on the station's format, operating expenses--costs that include salaries, upgrading transmitters, and purchasing state-of-theart equipment--can represent as much as 50% to 70% of annual revenues. "When it comes to general station management of overhead expenses, clearly, when you are running a cluster of stations, it's a lot more efficient and you have more cash flow," says A. Jerome Fowlkes, director of BIA Capital Corp. in Chantilly, Virginia, a private debt/equity capital firm that raises money for minority radio broadcasters. Mega-broadcasters can outspend smaller stations and raid the talent pool because, unlike small, minority-owned broadcasters, large broadcasters are usually publicly traded companies whose massive size helps generate free cash flow. They can also effectively market clusters of stations and easily secure nationally syndicated programming which is key to high ratings and marketing power.

CAN THESE BROADCASTERS SAVE THE DAY?

Some black-owned broadcasters have found winning strategies to do battle against the giants. Tama Broadcasting Inc. currently owns eight stations in Jacksonville and Tampa, Florida, and Greenville, South Carolina and, at press time, was closing a deal for three more stations. They have been able to create clusters by gaining $24 million from venture funds such as Halyard Capital Fund L.P., the private equity arm of the Bank of Montreal, and Black Enterprise/Greenwich Street Fund (No. 9 on the 2002 BE PRIVATE EQUITY list with $91 million under management), which is co-owned by Earl G. Graves Ltd., publisher of this magazine.

Glenn Cherry and his brother, Charles II, vice president and general counsel, have developed an acquisition strategy that focuses on purchasing three to four stations in southeastern markets and introducing a range of formats from urban contemporary and smooth jazz t.o country and gospel. And the Cherrys don't feel they have to limit formats to those targeted at African American audiences. Nonminority broadcasters are profiting from urban programming, Glenn maintains, so there's no reason why Tama can't produce other formats, as well. "We're broadcasters who will fill any niche. We just happen to be black," says Glenn. "You have to compete where the dollars are."

Since competition from other multiple station owners has dramatically reduced ad rates, Tama's operating strategy has involved austerity measures: cutting costs by 10% to 15% last year and increasing productivity by pushing a lean, multiskilled staff to work an extra five to 10 hours a week. "We've watched our expenses. We're not buying new equipment or laying out capital," he says. "Everyone in my company can multitask. We can't afford as many specialists."

The Cherry brothers are equally focused on ratings and revenues. And their tenacity shows. For instance, they launched WHJX-FM in Jacksonville in April 2002 and now it's the city's No. 3 urban-focused station. Producing total revenues of $2 million in 2002, they expect to grow Tama's sales by 6% over the next year with their eclectic offerings.

COMMITMENT TO COMMUNITY

Other black operators believe they can expand sales through their community appeal. Steve Hegwood, a former vice president at Radio One who now owns On Top Communications, operates five stations in Albany, Georgia; Jackson, Mississippi, (two stations); Norfolk, Virginia; and New Orleans, with that thinking in mind. "I impress upon our GMs [general managers], program directors, and promotion directors to be involved in community activities," he says. "Our goal is to create an emotional bond with our audience. We are [currently] launching an AIDS education effort. That's why we're here ... to serve our audience."

And that's why Hegwood shrugs at the notion that deregulation will force him to place his outlets on the auction block "Yes, the big companies have acquired most of the best assets in each major market, and it does make it difficult for an entrepreneur like myself to enter markets and acquire additional properties," he says. "But we have learned that there are people who will sell to independents. I can't take the position that I need a handout. I instill in my staff that you just have to put together your best effort on sales, operations, and programming."

The originator of the urban contemporary radio format 30 years ago, Inner City Broadcasting Corp. (No. 58 on the 2002 BE INDUSTRIAL/ SERVICE 100 list with gross sales of $59 million) has a comprehensive approach that includes the development of quality programming and being shark'sskin-close to their audience. "We believe we understand our audience better than some [mega] broadcasters," says President and Chief Operating Officer Charles Warfield. "They may have big budgets and marketing dollars, but at the end of the day, you have to target what is important to the community. We live in [and] circulate within the community, and we're talking to our audiences every day. We believe that this gives us an advantage." Inner City reaches urban communities nationwide, operating 17 stations in seven markets, including New York, Mississippi, and South Carolina. (Inner City received capital from the Black Enterprise/Greenwich Street Fund, which now has an ownership stake in the firm.)

Access One Communications is capitalizing on what its management views as the advantageous aspects of deregulation, as well as the grassroots appeal of community radio. The company owns and operates 10 radio stations in Shreveport, Louisiana, Marshall, Texas and New York City; the Super Radio Networks programming syndication company, which produces and distributes 35 radio programs; and 49% of the American Urban Radio Networks, a news and information programming network that serves over 400 radio affiliates nationally.

Deregulation paved the way for Access One to become the leader in the Shreveport market by allowing it to purchase a cluster of six stations, controlling 41% of the area's listening audience. The company also makes a substantial amount of its revenues from supplying its stations and affiliates with syndicated programming that targets African American audiences. Access One President and Chief Operating Officer Chesley MaddoxDorsey says that the overall strategy of creating clusters of stations while providing programming to enhance its ties with the black community allows the company to operate more efficiently. "Deregulation has opened up opportunities for us to improve our margins and to compete more effectively with newspapers and television outlets for advertising dollars in our markets," she says.

Maddox-Dorsey estimates that the share of advertising dollars that radio stations in the Shreveport market receive has increased from 12% to 15% in recent years. She believes that with deregulation in place, trends like this will continue, ultimately helping independent radio operators survive. (Access One's investors include the Black Enterprise/Greenwich Street Fund.)

Cherry, however, believes the community orientation will ultimately give black station operators the edge. "There are some issues a white broadcaster is not going to touch, but there are political, economic, and other really sensitive issues to the black community that we are willing to deal with. And it is that commitment to the community that separates us from the radio giants," he says.

--Additional reporting by Yvette Daniel & Siobhan Benet
COPYRIGHT 2003 Earl G. Graves Publishing Co., Inc.
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Author:Scott, Matthew S.
Publication:Black Enterprise
Article Type:Cover Story
Geographic Code:1U5SC
Date:May 1, 2003
Words:3290
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