The death of radio

Barron's (subscribers only): Losing the Signal. Radio may be in a long-term decline.

IT'S HARD TO SAY EXACTLY WHEN radio started to lose the love and the power and the magic celebrated in that 1975 rock anthem, but a good bet would be 1996. Landmark telecom legislation back then unleashed a powerful wave of consolidation that left the airwaves cluttered with commercials -- and investors set up for disappointment down the road.

Though many radio stocks soared seven- or eightfold during the merger frenzy, the excitement proved ephemeral. The stocks came back to earth with a thud, and the industry has since reverted to its former status as a generator of steady but unspectacular returns, with revenues growing little more than the economy as a whole. Worse, there's increasing concern that radio is entering a long-term decline, the result of new competition and technologies and changing consumer tastes.

Younger adults -- the key targets of radio advertising -- have clearly been losing their ardor for the medium. By one key measure, the number of listeners ages 18 to 34 has declined by about 8% in the past five years, as portable digital-music players, Internet radio programming and other innovations have started to take hold. And while the dollars spent on radio advertising have been essentially flat for the past few years, competing media like cable TV, the 'Net and outdoor advertising have been gaining steadily.

"It's over," Larry Haverty, a media specialist at State Street Research and Management in Boston, says of radio stocks' big run. "Something good happened in the 'Nineties; something less good has happened in the '00s. Every retailer is blowing its budget on advertising and radio is not getting any of it. If they don't get it now, they're not going to."

Clear Channel Communications, the big daddy of the industry, has seen its share price fall by nearly two-thirds since 2000 -- including 17% in just the past year. Citadel Broadcasting is off 33% this year and Cumulus Media is down 29%. But investors have by no means given up; the group is trading at multiples to cash flow that are higher than both their historic norms and the valuations of other media companies.

Investors, along with radio executives, may not be facing up to the full extent of the industry's challenges. While radio has always weathered past threats -- video did not kill radio's star, as a group called the Buggles prophesied in 1981 -- things could really be different this time.

Across the country, listeners are changing how they choose to receive music and news and talk radio. They are turning to portable music players like Apple Computer's iPod, streaming audio over the Internet and the emerging field of satellite radio to hear what they want, when they want to hear it.

Anne Kershaw, a 46-year-old lawyer who travels weekly between her home in Tarrytown, N.Y., and an office in Richmond, Va., bought an iPod in May, partly because "there is no decent radio station in Richmond. I was tired of being preached to." She still uses the radio -- but not in the old way. By attaching a transmitter to her iPod and setting it on a certain FM frequency, she can play the 983 tunes she has downloaded to the iPod through the radio, whether at home or in the car.

Music downloading is one of the "fastest-growing digital phenomena ever," says Forrester Research Group. It predicts download services will generate more than $200 million in revenue this year, $40 million higher than forecast and up from just $36 million in 2003. In all, some 35 million U.S. adults have downloaded music, according to the Pew Internet & American Life Project, a nonprofit initiative. ...