Wall Street's Delusion

Banc of America securities analyst Jonathan Jacoby has just returned from CES in Las Vegas with some good news and some "bad news" for terrestrial radio. He also returned exposing his ignorance of true listener behavior.

Mr. Jacoby says that he "found many new devices/systems that are making it easier to use cell phones and MP3 players in the car." He continues, "several products on display integrate the iPod and cell phone into the car. Our negative outlook for terrestrial radio is based largely on our view that radio's in-car listening base will be eroded by compelling alternatives.

"On the plus side," he adds, "the supply of HD radio units seems to be building. There were more HD radios on display than at last year's CES," and many major audio manufactures have gotten into the game."

Let's address these comments:

1. Mr. Jacoby, as substantiated by Arbitron's People Meter technology and more granular research by Bridge Ratings, terrestrial radio has evolved into more of a reach medium. Radio stations have larger weekly audiences than previously thought. From a radio sales perspective, sales managers will have to finesse a new approach to selling air time with reach as the emphasis over "average quarter hour", but that's not a major river to cross.

The point here is that in spite of the in-car alternatives Mr. Jacoby mentions, Americans still listen to the radio and attrition overall is slight. Terrestrial radio is still a key viable in-car option and only the very young early adopters and innovators in the 16-22 year old age group are significantly more likely to turn off the radio for longer periods of time. But they still listen.

Terrestrial radio competes quite well in-car with other alternatives. The amount of time spent in-car with terrestrial radio depends on quality of content.

2. HD Radio units available seem to be building. Not pertinent. Bridge Ratings estimates that by this time next year, there will be 1.9 million HD radio units in the hands of consumers in the U.S. an increase of some significance over the approximate 1.1 million we estimate were sold by the end of 2006. But it's not enough. The growth is disappointing. We project less than 9 million HD radio consumers by 2010. Hardly something to be excited about when satellite radio will have 30 million and Internet radio will have 147 million.

Let's look at consumer interest in HD radio. In a soon-to-be-released update to its 2006 study, Bridge Ratings reveals that mainstream America, a life group we call "mainstreamies", has little understanding of what HD is or what its benefits are. A disappointing 26% of this group are even familiar with the term and less than 1% know that you have to purchase additional hardware in order to use it. 63% of the entire mainstreamie life group think they already have it!!

No, Mr. Jacoby, your visit to Vegas doesn't seem to have clarified anything for you. It would appear that if Mr. Jacoby represents common attitudes on Wall Street, terrestrial radio has a different problem: those who lead investors by the nose don't have a clear, informed understanding of consumer interest or behavior. That may be the biggest hurdle terrestrial radio has to face going forward.