Lew Dickey on the future of Cumulus, and radio
In 2013, Cumulus created $1.2 billion of shareholder value. The company is on fire and Lew is considered the biggest leader in the radio industry today. They recently completed a major refinancing; the buy of Westwood One/Dial Global; a major investment in Rdio; they’ve purchased WLUP and WIQI Chicago from Merlin Media; signed Michael Savage; set up the NASH Country lifestyle brand and transitioned many country stations over….the list goes on and on. We want to know what makes Lew so driven—his passion for radio, business success and how he’ll be putting all of the pieces of the puzzle together. What’s next for Cumulus and what does he see for the future of radio?
You have steadily and methodically grown Cumulus to what it is today—a strong, vertically integrated multimedia machine—all in a very challenging economic environment that both our industry and country are facing. What is the formula, philosophy and mindset that guides your major business decisions?
We are building a very interesting media company on a solid foundation of radio broadcasting assets. We believe content is king across all media today, and it is content that drives our decisions. The heart of our strategy is the desire to produce unique and compelling content that we will distribute first and foremost through our broadcast affiliates, and secondary through our digital platform. And then, as a corollary to our operating philosophy, we are creating content verticals around key audience segments designed to engage people with unique and compelling content through multiple platforms as we’re doing with Nash.
The WestwoodOne/DG purchase: You haven’t made a lot of changes there yet, other than deciding to remove a layer of management in Paul Caine. What have you found to be the division’s strengths and weaknesses at this point?
We are integrating Westwood One with our existing network to create an efficient engine for content creation, distribution and monetization. We have the good fortune of having a number of talented folks join us through the acquisition to complement the people we had in our existing network business. We feel confident that over time, as the integration process is completed, we will have a very strong and talented staff of people to run this business.
The network business is very competitive. If you think about the primary verticals in it, you have information, entertainment, news, sports, and services, and you have several good competitors out there, of which Premiere is the largest. There are some areas in which we are stronger than others, but overall, it is a very competitive space. Network business offers little barriers to entry, and it’s a business where you truly have to earn your keep every day. So, we are very focused on being the go-to place for producers and for talented people in programming and sales, and to provide a great experience for our affiliates and a value for our advertisers. If we do that, we can continue to grow our business. It is an important cornerstone asset for our company, but we have to earn our keep every day, and we’re very focused on that.
WestwoodOne, merged with Cumulus Media Networks, has a lot news and sports product. Do you see all of these brands as being viable down the road, or might one of them have to be folded in? What does it depend on in your eyes?
You wouldn’t want to go into your favorite sports bar and there’s only one kind of beer to drink. You want choice. The same is true in network radio for sports, information, talk, entertainment and services. We’re doing business with 10,000 local radio stations. In many markets today, there are multiple stations in virtually every format. They all need unique and compelling content. We are in essence a premium marketplace for broadcasters to provide high-quality content at an excellent value.
We are definitely focused on maintaining diversity in our product line, and we allow the products to compete with one another. We think that’s healthy and makes them better. Our network is all about diversity, competition, and choice. That’s the key focus of our product strategy and is driven by the feedback we receive from our affiliate partners. Even if we could save money by consolidating lines of businesses, I think it would be short-sighted in the end. We want to have a broad customer base, and we want to sell them unique and premium content and services and that requires a significant investment. Quite frankly, it’s very difficult for smaller businesses to do it at that scale. Scale affords us the ability to invest in a broad variety of premium content, so we can better serve our customers. We know firsthand the challenges of operating local radio stations today and we design our network product offering to meet the wide range of needs of radio broadcasters.
Many think radio has too many commercials. Do you think that our industry could take a lesson from Pandora or iTunes Radio and, say, play only one or two spots between songs, rather than a heavy spot load during regular spot sets?
Radio has a moderate commercial load compared to broadcast and network television. Commercials are valuable content for listeners because they communicate useful information about commerce. In addition, radio is over 85% local which is where consumers spend the vast majority of their disposable income. That said, I believe our medium can do a better job when it comes to creative – particularly on the local level. We are currently working on several different offerings to help our local affiliate-partners have access to national-quality talent, writing and production skills to produce spec creative on-demand. I’ve been doing this a long time and have yet to see anything that beats great spec creative when pitching a client to shift their dollars into radio.
Moreover, I do think, though, that it’s the age-old question, how much is too much? And we have to be mindful of that, and commercial loads tend to ebb and flow with overall demand and the economy. It’s very self-governing at the end of the day, because there’s plenty of empirical data to show (an almost perfect correlation) if you’re over-spotting, you’re running too many commercials, too many interruptions, it will impact time spent listening and ultimately cume—and your ratings will be adversely impacted. It’s self-governing, and if you pare back and you run a lighter load, you will likely increase time spent listening and even increase cume thereby driving your ratings up. There’s a fine line in order to compete. If you cut your commercial load in half, you’ll get increased ratings, but you certainly won’t double your ratings, and that’s a bad economic trade-off.
What if you just put one commercial between each song, kind of like Pandora does?
So there’s been a lot of experimentation, and back in my old research days we did a lot of this in focus groups and auditorium-type settings applying sophisticated statistical analysis techniques like conjoint analysis to weigh trade-offs There’s a perceived difference between the length of the commercial break and the frequency of commercial breaks. A 15 or 30 second commercial break between every song is perceived as a greater overall interruption than if you did two 4-5 minute breaks an hour at :40 and :55. The reason that commercials are clustered in pods is because programmers have lots of data and there are a lot of smart people in our industry that have a lot of experience with this, and over time it has been proven that the tolerance for the interruptions, to actually listen to the commercials and actually stay with the radio station, is better set in 2-3 breaks an hour of 4-5 spots for a total spot load of 12 minutes per hour.
A break with 4-5 spots is ideal, and you serve both purposes. You keep people tuned-in because they look at the commercial breaks as a point of punctuation. Radio is a linear medium. People listen through the breaks. Unlike television, when people are time-shifting their consumption and fast-forwarding through breaks or using devices like Hopper and not watching them at all, radio is consumed linearly, and as a result people listen to the commercials.
Pandora is currently playing fewer spots per hour, but increasing their loads because their business model is upside-down and they’re burning cash. The amount of inventory they have to run at the rates they’re able to charge would have to increase arithmetically in order to create operating profits and therefore a sustainable business model. It’s important to note that there is a big difference between a radio station and a playlist punctuated by commercials. A curated radio station with talent, with production values, with features and imaging, is a very different audio experience for a listener than a static playlist punctuated by commercial announcements. One is a hell of a lot more compelling than the other. That’s the difference between Pandora and between local broadcast radio stations. Radio sales people would be well-served to go on the offensive with advertisers to sell our medium’s value and not allow us to be re-defined by a digital playlist service that has never let the facts get in the way of telling their story.
Tell us more about your vision with Rdio, which Cumulus has invested heavily in.
We’re very excited about our partnership and investment in Rdio. Rdio enables us to play in the ever-widening audio space, and what I mean by widening space is that traditionally, radio listening has accounted for about 3/4 of audio consumption, and that is still true today. The other roughly 1/4 of audio consumption was music that you bought and playlists that you made, and that speaks for itself. Back to the days when there were physical copies of music–records, tapes, 8-tracks and CD’s—they were sold through retail and people bought music.
People listened to the music they bought and they also produced their own playlists to serve as soundtracks for parties, workouts, car trips, etc. Today, radio is still the primary source of audio consumption with 93% of all Americans 6+ tuning into broadcast radio weekly.
iTunes changed the way we buy music and today, Apple is the largest music retailer, having disrupted the brick & mortar stores which sold physical copies of music. Today, the model is changing once again as consumers prefer to rent or “access” their media in the cloud, verses buying and owning individual songs, movies or television shows. It’s a far superior value proposition to the consumer to pay $99/year and have access to over 20 million songs plus virtually every song that is recorded in the future. With Rdio & Spotify, consumers have unlimited access to all of this music on any device with the ability to cache music.
So, these services have in essence rendered your iTunes library and that ownership model obsolete. It’s a superior value proposition to pay $99 a year and have it all. Through our ownership in Rdio, it enables us to also play, if you will, in music e-tailing. We as radio broadcasters could never play in the space of music sales, because we weren’t music retailers. We played their content for free and promoted it, and that’s what drove sales. Now all the promotion we give music through its on-air play, we can capture a portion of that value through the increased value in Rdio as people use that as their service to consume on-demand music. That’s the first part.
The second part is the playlists that you make–and that was changed with Pandora–that created in essence a much easier way to create a playlist than having to sit there and make a tape or a CD or rip songs to create a digital playlist. It was a much easier way to do it, and a more thoughtful approach. A custom playlist from Pandora, by the way, draws from about a million songs. In contrast, Rdio, which also offers a custom playlist feature which draws from over twenty million songs. So it’s definitely a more robust offering. One of the big negatives we consistently hear from our research on Pandora is extreme fatigue.
What are your plans in Chicago, with the recent purchases of WLUP-FM and WKQX-FM from Merlin Media? What opportunities do you see?
I think in the first month it jumped to a top 5 radio station in Chicago. We’re very excited about the early progress we’re making on that station and The Loop’s ratings are up as well. It gives us, strategically, a really important toe-hold in the market place and the assets all complement one another now with the three class-B FMs and a big 50 kilowatt clear AM radio station. We’ve got a great presence in Chicago and look for the market to be a growth driver for our company.
You’ve recently completed a major refinancing, freeing up a lot of cash flow. Tell us a bit of how that was done and what that extra cash might be used for.
I think we’ve managed our balance sheet very adroitly. We have the lowest cost of capital in the industry, and we are de-leveraging nicely. That affords us a high conversion rate of EBITDA to free cash. In our company today the conversion EBITDA to free cash is about 60%. That’s a big number. That gives us the flexibility to continue to add high quality assets to our portfolio, like for instance what we recently announced in Chicago. Moreover, our balance sheet gives us the firepower to buy both content and distribution assets as we continue to grow our company while also continuing to pay down debt. We’ve paid down $420 million in debt since we bought Citadel.
Do you think the shrinking value of radio stations, coupled with the huge debt that post-1996 consolidation brought on is a major factor in hindering radio’s product at some companies? How can that be resolved?
What I’d say is that radio station values, like all assets, ebb and flow over time. I don’t view the value of radio assets as being in secular decline. The value of radio assets today is closer to the level they had pre-consolidation than post-consolidation. However, it goes in cycles. So you’re seeing broadcast television spiked last year. Generally these are event-driven, things like retrans really helped multiples in broadcast television–and increased consolidation. It’s empirical, however, that radio station values are improving. I think the promise of continued consolidation and the industrial logic behind scale is buoying asset values in radio, in combination with historically low cost of debt capital.
I do think that, to your point on debt loads, it’s no different than in any other business. If you capitalized a business when asset values were at the top of the cycle, and asset values decline, it can be very difficult to meet your obligations. There were a number of media companies that restructured in the last cycle and there are still more to come because ultimately, a balance sheet restructuring is unfortunately the only way out if you’re hopelessly burdened by debt.
How is Michael Savage doing so far in his new time slot? What are affiliates saying?
It’s early, but we’re hearing good things out of the gate. He’s getting good results for advertisers and handily winning his time period in the first monthlies. He just started in January, so he’s been on the air now for a little over seven weeks he’s been on the air. We’re just starting to get some returns. So PPM won’t see anything in the diary markets for a few months. But we’re getting great feedback from listeners and from sponsors who are on his show are seeing good results. We’re optimistic about what we see thus far with Michael, and in head to head battles he’s establishing himself very nicely. We expect Michael to create a superior alternative for our affiliate-partners in the 3-6pm timeslot.
What is the latest update on the NASH brand?
The Nash brand is progressing very nicely. As you know, it’s being incubated in our owned platform of stations first. We will continue to roll Nash out over the next several quarters as we continue to build out the various platforms and elements of the brand. We have a lot of exciting things in store for this brand. It’s off to a very good start, and we now have it in two dozen markets across the country for America’s Morning Show including the stations that have been re-branded Nash. We will continue to roll those out across our platform in the months ahead
We haven’t really been actively syndicating outside of our owned and operated platform yet, and we expect that to come towards the end of second quarter. We’ll really be in a position to more aggressively take the entire package out to our affiliate-partners in the back-half of this year. We’re just really focused on getting it right internally first, and so far we’re very pleased with what we see. The magazine is out on the stands now, and it is Country Weekly with the Nash insert, and over a period of time that will reverse itself, and it will be Nash magazine with a Country Weekly insert.
There will also be a significant video component to the Nash brand. Look for some announcements on that over the next couple of quarters.
What do you see as the future for radio? Do you see two possible paths the industry could go?
Radio is the heart and soul of our company, and we are eternal optimists about radio’s future, and believe very strongly in it. We are also realists, and we see that all media today is experiencing some form of digital disruption. One of the things that radio enjoyed in the past was high barriers to entry, as did television and newspaper and quite frankly, and all of that is being challenged today by digital media.
Consequently, scale is becoming increasing important in media today. We believe that the scale we’re creating on the content side can be enormously helpful to the industry because local radio broadcasters are now competing with a lot more than other local broadcasters. Westwood One is making multi-million dollar investments in content and services to serve our affiliate-partners across the country with premium content and services to help them run a more profitable enterprise. It’s important to us that this industry not only survive, but thrive. As in all businesses today, I think we’ve got a real opportunity to play a key role in that by offering high-quality content and services at a very affordable price to our affiliate-partners.
From your perspective, where would you like to see Cumulus in three to five years from today?
I think we’ll continue to transform our company. I think it will be much larger, and it will continue to be focused on creating great content and investing in strategic distribution channels including local broadcast radio in the top 50 markets with a focus in the top 25. We’re going to continue to build out our Nash brand, and there are a couple of others behind it that we will be launching. Cumulus will be a multiplatform, Media Company that is really going to be built on a foundation of broadcast radio assets, primarily in the major markets. Westwood One will be a key strategic cornerstone in our growth as we work closely with our 10,000 affiliate-partners to help them leverage the investments we’re making in premium content and services.
What can we as an industry do together to help strengthen our place in the dash and the smartphone?
I think it’s the same challenge that we’ve always had as a business and as an industry—which has been, to date, our relative inability to speak with one voice. We have been up against competitors both satellite and digital who have been somewhat monolithic and speak with a unified voice. Consequently, they have been successful in communicating their message designed to redefine our industry in the minds of business press and the investment community. I think if we have suffered, it has been because of our inability to communicate with a unified voice and to tell our powerful story and market our strengths with a unified voice. That is, I believe, the biggest challenge our industry has to overcome.