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May 18, 2006

Guardrail to Guardrail - Time For Radio to Check For Scrapes?

At a certain fast-growing direct marketing company I used to work for, we used the phrase "guardrail to guardrail" as a way of cautioning against the possibility of over-reacting to a business issue, having our reaction create another problem bigger than the one we're trying to resolve. To understand this metaphor, you first have to picture hitting the guardrail on one side of the highway, then over steering in the opposite direction to crash into the guardrail on the other side of the highway with even more force.

The radio industry might be doing the same thing with the new "Adult Hits" (AH) formats - like Jack, Jill, Bob and Hank. The business issue in this case is the feared loss of listeners to ipods and satellite radio, which would create a slide in advertising revenue since ad prices are based on listenership.

It's certainly understandable to be concerned. The question is whether the reaction is the right one.

From what I've read through Arbitron reports, the majority of stations that have switched to the new format have seen an increase in various listenership numbers. From the radio station's perspective, they see the total audience numbers grow, thereby boosting the stations "ranking" in its market.

Now let's look at this from the advertiser's perspective. Here's the problem: The Adult Hits formats, with their huge playlists and wide variety of songs from over three or more decades, attract a more generic listener demographic. Changing to a format that draws a more generic listener demographic, in theory, will reduce the efficiency of advertising placed on that format. If that's the case, advertisers who hold their advertising dollars accountable for profitability (like those we work with) are likely to cease advertising on these stations as a result.

That means one of three things: a) stations will have to count on advertisers not knowing that their ad dollars aren't working as well on the AH formats, b) stations will have to reduce their rates to offset the reduced efficiency, or c) station ad revenues will fall and they won't know why.

We track every lead, order, and dollar in revenue back to the media that generated it. As a result, we have a certain vantagepoint on this topic. The results so far have been mixed. What we've seen in our analyses is that AH formats perform less consistently than the traditional formats like AC or Classic Rock. For example, a campaign that works profitably on AC will work well on about 80% of AC stations, where a campaign that tests well on Jack might work profitably on 50-60% of Jack stations.

Are some of these Jack stations profitable because they've reduced their rates to compensate for the reduced efficiency of advertising on their stations? Does that rate reduction, or the possibility of losing the advertising altogether, offset the gains that come from (a) above? Is this format change sustainable? Is it the answer to the iPod and satellite radio threat? It will be interesting to see how this story unfolds.

Posted by Brett Astor at 05:00 PM | Permalink