Late Night - Early AM on WBZ-AM is now Mr. Computer

Bob Bittner
Mon Jan 20 08:37:31 EST 2020

In a message dated 1/20/2020 12:30:36 AM Eastern Standard Time, writes:

<<On Thu, 16 Jan 2020 23:48:33 -0500, A Joseph Ross <> said:

> I think that shareholder value was always part of the obligation of 
> corporate officers and directors.  It's something I remember hearing 
> about in law school, in the course on corporate law, back in the late 
> 1960s.

Company management and boards of directors have broad discretion in
how they pursue shareholder value, and it's almost never possible to
win a suit in Delaware Chancery Court claiming that a public company's
management has decided on an inappropriate *strategy* -- you pretty
much have to assert malfeasance, some sort of self-dealing, or
objectively unreasonable waste.  So that's not really the direction to
be looking.

The proximate cause, of course, is the Telecommunications Act of 1996,
the brainchild of Massachusetts' own Ed Markey.  But the changes in
the Telecom Act would not have made such a difference without other
changes in the business landscape.

Starting in the early 1960s, in an environment of low interest rates,
leveraged buyouts became popular as a way for ambitious business
executives to create and grow conglomerates.  In a leveraged buyout,
one company borrows money, secured by the assets of a second company,
with the intent of purchasing the second company and using the future
revenues of the target to repay the debt.  In order for this to be
profitable, the acquiring company has to be able to squeeze more
revenue out of the target, and various economists thought that this
was a good thing because it would make companies more "efficient" and
"discipline management".  Conglomerates were considered good credit
risks under the theory that one company with a diverse set of
businesses would be more resilient to cyclical declines in any one of
its businesses and thus better able to support debt repayment.

Continental Electronics, one of the major transmitter manufacturers of
the 1960s, was acquired by just such a company, Ling-Temco-Vought; LTV
also owned other electronics firms as well as defense and commercial
aviation businesses and Jones & Laughlin Steel.  (You may have heard
of a company called "LTV Steel", which went backrupt 19 years ago --
same outfit, after stripping all of the other businesses for reasons
I'll get into.)

In the 1980s, conglomerates began to be seen as very *inefficient*
investment vehicles.  In part, this was because the rise of mutual
fund marketing to consumers meant that there was little value in
intra-company diversification; most investors would get
diversification through ownership in a fund, not individual stocks.
But this period also saw a significant divergence in the market
valuations of different industries with different expectations of
future growth potential -- and a company which owned both slow-growing
businesses and fast-growing businesses would receive unfavorable
treatment from institutional investors who couldn't apply their simple
formulas to set their price targets.

This was also the time of the big "corporate raiders", who -- once
interest rates came down after the inflation of the 1970s -- would use
the LBO structure to perform hostile takeovers of companies
specifically to dismember them and sell off the good parts (often
while leaving lenders and employees holding the bag), often the same
conglomerates that have been assembled by LBO in the 1960 and early
1970s.  Other times, "activist investors" like Kirk Kerkorian would
invest enough money in shares to buy their way onto corporate boards
and force the management to adopt a similar strategy without ever
owning the company.

These strategies were aided by the change in stock ownership from a
small (mainly upper-middle-class and wealthy) population of investors
who owned individual stocks, to a large population of investors who
owned stocks through mutual funds, held in the newly authorized
401(k), Keogh, and IRA plans.  There are far fewer mutual-fund
investment managers than there are companies, and most funds have
income maximization or capital appreciation as a fundamental
investment policy.  The managers vote the shares held by their funds
in accordance with this policy, and almost all fund managers will vote
the same way (often after taking advice of an even smaller number of
institutional-investor advisory services).

So you had a situation in the early 1990s where the few remaining
industrial conglomerates that owned broadcast stations were eager to
find a way to sell them, and the few "pure play" broadcasting
companies that could raise money on the stock market to buy those
stations were at the national or market ownership caps and so could
only acquire new stations if they had less-valuable stations they
could spin off to someone else -- this significantly depressed station
prices relative to their expected earnings.  So too were a lot of
family-owned broadcasting companies looking to liquidate, if only
someone could buy their whole station group.  (Likely many were
spooked by the ten-year-long wind-up of RKO General.)

Nobody in Wall Street had any idea that the Internet would be a thing,
much less be a meaningful competitor to broadcasting.  However, the
new FM stations allowed under Docket 80-90 were starting to apply
competitive pressure to incumbent market leaders, and a lot of markets
ended up "over-radioed" in an environment where every FM station had
to defend itself from two or three close format compatitors.  The
relaxation of the duopoly rule and the national ownership limits gave
some headroom to station prices, and allowed owners to achieve some
efficiencies by consolidating more stations' traffic, master control,
sales, and engineering, giving some indication of how much additional
cost savings might be had from greater consolidation.

Then along comes the Telecom Act of 1996, which took most limits off
(and out of the hands of the FCC), completely eliminating the barriers
to consolidation -- and therefore to skyrocketing station prices.  At
this time, a broadcasting license still appeared to investors like "a
license to print money" as the old saying went.  Most people had
dial-up Internet service if they were online at all, almost nobody had
wireless data service of any kind, and it was thought to be totally
impractical to deliver sufficient bandwidth at low loss and low
latency that you could have even "toll-quality" audio over consumer
Internet, never mind listenable stereo music.

So these new "pure" broadcasting companies loaded up on debt in order
to acquire more and more stations, now that they were allowed to, on
the theory that economies of scale would allow them to wring
ever-increasing profits out of a business that still seemed to have a
sizeable technological moat around it.  We had some discussions about
this on this very list back in the late '90s!  But 20 years of
advancement in networking technology -- and especially the rise of
smartphones with ever-increasing works-everywhere mobile data
bandwidth -- bridged those moats much sooner than anyone in the
business anticipated, and the bottom dropped out of station prices
ca. 2013.  This left the companies that had borrowed the most to
expand the fastest -- Clear Channel/iHeart and Cumulus in particular
-- extremely vulnerable to pressure from creditors to sell off
assets, on pain of a possible involuntary bankruptcy filing by
creditors whose collateral was now worth much less than the loans'

That brings us to where we are now.  Station prices have dropped back
below their early-90s levels in many cases, and broadcasters' primary
competition is now not from expensive satellite radio but from "free",
advertising-supported, global, music-streaming services and podcast
providers, many of them backed by deep-pocketed venture capital
investors, with minimal talent or engineering expenses and cheaper
music royalty payments than those that apply to radio.  Religious
broadcasters like EMF have already demonstrated that a national
programming model can be extremely successful, and the rest of the
non-commercial sector has settled on a model that for most listeners,
most of the day, might as well be a single national service.  With
continued pressure to extract more profits from assets that are
declining in value, it's only natural that a company like iHeart would
see the rise of national and global programming services as a reason to
eliminate as many inescapably local expenses as possible, including
air talent.  If the audience isn't demanding a local product, it
hardly makes sense for a financially insecure company with a national
footprint to be providing one.

Meanwhile, smaller operators, especially those who didn't sell out
into the boom and have no debt service, have an opportunity to prove
that they can still make money providing a product that's tailored to
whatever segment of their local audience actually wants that.

(Note that I haven't even gotten into the nationalization of
retailing, the decline of local advertising more generally, and the
other revenue-side challenges that face any station looking to "go it
alone" in today's media landscape, but at 1500 words already, this is
getting a bit long and I have other things to write this weekend.)


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