Jerry Lee Enjoys Philadelphia Freedom (1/17/05)
By Reed Bunzel, Editor-in-Chief
Take a look at the top 20 radio stations in Philadelphia* and you'll see that 19 are owned by five of the largest publicly traded companies. The other one - Adult Contemporary-formatted WBEB-FM - is the success story of one man who defied all odds (and logic) of consolidation to establish one of the most profitable radio stations in the country. That man is Jerry Lee. After nearly nine years of rapid-fire mergers, acquisitions, cost efficiencies and IPOs that have defined radio's consolidated playing field, his pioneering FM annually generates more than $30 million in revenues. And get this: He does it all with no debt.
“I was billing a little over $13 million in 1996, when the Telecom Act was passed,” says Lee, who claims he spends more money on research and television marketing than just about anyone else in radio. “I'm now billing $30 million. I couldn't have done that without deregulation. If I had debt, I couldn't do it, because I couldn't have taken the risks I've taken. I try a lot of things, and some of them don't work.”
Obviously, those “things” work well enough to qualify Lee as perhaps the most successful independent operator in the radio industry. A strong proponent of applying scientific research to virtually all aspects of business, he insists that randomized control trial research removes most of the guesswork in both day-to-day operations and long-range planning. Always wondering, “How do I get bigger?” Lee is willing to spend sizeable amounts of money on elements that can generate even more money. “My goal in 2005 is for 15-percent revenue growth,” he says, “and I believe we'll have so much momentum from things we did last year that we might be able to get it up to 20 percent the following year.”
But Lee isn't all about making money; he also enjoys spending it on noble causes. In 1982, he created the Broadcast Industry Council to Improve American Productivity, which spearheaded national campaigns for literacy, productivity and exports. In 1995, he initiated a program using customized interactive multimedia to help the Philadelphia School System reduce the number of 7th graders held back each year. He later funded a grant to research why the Union City school district improved from one of the worst to one of the best in New Jersey. The following year, as a member of the board of the Salvation Army, he initiated a series of programs to curtail child abuse, and another to collect toys for needy children.
In 2000, Lee established the Jerry Lee Center for Criminology at the University of Pennsylvania. “We're doing a randomized control study on restorative justice, which is probably one of the most important developments in criminology in the last 30 years,” he observes. “The British government is very excited about this. Our initial findings show reduced repeat violent crimes by 43 percent. The chief justice of the U.K. has reviewed these restorative justice findings, and he called all of the chief magistrates of Great Britain together and said, 'This is the future of criminal justice in the U.K.'”
Lee sits on the boards of numerous organizations, including the Philadelphia Police Foundation, the Greater Philadelphia Chamber of Commerce, the Radio Advertising Bureau and the National Association of Broadcasters, which last year honored WBEB with a Marconi Award for “Excellence in a Major Market.” He is a recent inductee to the Pennsylvania Association of Broadcasters Hall of Fame, and he is head of the research committee for the Radio Ad Effectiveness Lab (RAEL).
Radio Ink recently had the pleasure of sitting down with Lee (who won the Radio Wayne Award for Broadcaster of the Year in 1997) to discuss the things he holds most dear - particularly radio, research and technology - and how his success in Philadelphia broadcasting has given him the chance to promote a number of public-service activities.
*Mon.-Sun., 6am-midnight, 12+AQH
INK: There aren't many independent operators left in radio, especially in major markets. Describe what it's like to go up against the major players in Philadelphia.
LEE: ?I'm really in a unique position. If I had an independent station with debt, I couldn't survive, but I have the opposite problem, which is wonderful. When Congress passed deregulation in 1996, I was on the NAB board, and people were saying to me, “We know you're against deregulation, because you'll be killed by being an independent.” I answered, “No, I'm one of the most vocal advocates of deregulation.” I could read the future: I knew that the big groups, in order to gain Wall Street's favor, would cut back on promoting their stations. So when deregulation was passed, I increased my promotion budget by a million dollars the first year - and I've increased it every year since then.
Why did you stay in the game as an independent when so many others sold out or merged??
I could see the tremendous benefits. There is no way our station had the value then that it has today, but I could see its growing value. Also, I'm in a position to help in public service, because when you own a radio station, more people return your phone calls. That has been very helpful; even though we don't do anything on the air to promote my causes, it certainly has made me a lot of connections.
Radio had a difficult year in 2004, in terms of revenue growth and share price. How do you measure the value of an industry that's gone through three difficult years in a row? ?
It's very simple. Right now, radio is tremendously undervalued, and it probably will stay undervalued for the next 12 to 18 months. Five years out, radio is going to be phenomenally successful, for a number of reasons. First, television has become fragmented and overvalued. I know this because I spend a lot of money on television. I'm spending more money each year, and I'm getting less television. It's coming to a breaking point: We're hearing advertisers constantly talk about TV not being where it's at anymore. It's too mass of a media. Second, the future of the media is targeting, and radio is one of the best targeted media out there. Couple that with the information coming from the Radio Advertising Effectiveness Laboratory - it's phenomenal, especially against newspaper. There's gold out there.
New data says that mass media - including radio - should refocus on the consumer. How can the radio industry achieve this? ?
First, we need to learn how to write effective radio commercials. Radio is the one medium, as opposed to TV, that has a very wide swing between good commercials and bad commercials. Television has a very narrow band between good and bad commercials because people invest a lot of money in testing in television, but there's very little testing in radio. As a result, we have some really bad and some really good ads.
How much of a “paradigm shift” in the sales process is necessary to serve the needs of advertisers? ?
As an industry, we need to focus only on selling the heart of our demographic. Every radio station is big in a particular demographic, which is fantastic because radio is very targeted. But most radio stations go into an advertising agency and try to get all the business. Well, guess what? I typically get $1,000 for a midday commercial in demo, but if I go into that same agency to pitch a client that's only at the edge of my demographic, I may have to negotiate down to $650-700 a spot. When the next buy comes up for my demo, I'll get only $700 a spot. Target the core demographic, and everybody wins. Advertisers get more return for their investment, and the radio station makes more money. That is such a simple thing to do, and that's the way we're going to make the most money.
Will the research studies released by RAEL cause Madison Avenue heads to look at radio again? ?
There's no question about it. RAEL is conducting a study that will have a positive effect on the industry. The study looks at five advertisers that use varying amount of radio and television. We're going to areas where we can split the markets, so TV commercials go to only half the homes in the market. We can then measure which products are flying off the shelves in the supermarkets. If one area of the market has TV and the other doesn't, you can show the effectiveness of TV in the general market. When a radio campaign is being heard by both groups, you can see what happens with ROIs. The six-month study will be released next May or June.
We're planning in the next two to three years to study another five to 10 advertisers per year, until we study every category of advertiser. Proving we actually moved the needle and sold product will be powerful. Radio is now the only medium that is spending big dollars to find out how it works. This will give us a significant leg up.
Is the Portable People Meter ready for prime time? ?
It needs to be tweaked, but it's pretty close. In Houston they are working to get those response rates up. They're going to use the Nielsen recruiting method, which is getting a higher response rate than the Arbitron method did in Philadelphia. I just want the truth in radio. I'm willing to take a hit; I just want the truth. The truth will allow the advertiser to be successful with radio, so he'll keep coming back. Years ago John Wannamaker said, “Fifty percent of my advertising is wasted, but I don't know what half.” Actually, he was a wide-eyed optimist, because the best minds in the advertising field today say only 30 percent of ad dollars is working.
And those advertisers aren't going to waste that other 70 percent? ?
That's right. They're trying to find other ways to reach their customers. We're starting to see real evidence that radio is one of those ways, because the industry is putting big bucks behind quality research. On our research committee - and no one has ever done this before - is a researcher from every major agency. We don't make any decisions unless both the advertising people from the agencies and the advertisers tell us they want it. They also have to sign off on the methodology before we do it - which also has never happened before. We gain tremendous credibility because these researchers go back to their companies and say, “Hey, this is important stuff; you need to look at this.”
There's been criticism during the past year that the radio industry has lacked vision and leadership. Is this true? ?
I think it was an accurate statement a year ago. With consolidation, there's been a lot of scrambling that has probably affected leadership in the short term. Assimilating all these stations was close to impossible; and many people concentrated on that, rather than looking at the future of the industry. People are beginning to breathe a little bit. There are a number of people who will surface as effective leaders. I sense a change, which began when the big groups decided they were going to invest some big dollars and support the Radio Ad Effectiveness Lab. My sense is that we're a lot more cohesive as an industry, moving forward and tackling major problems.
Wall Street and the general marketplace seem obsessed with satellite radio, iPods and other new media. Is the radio industry getting a raw deal in all of this? ?
We certainly got a bad roll of the dice from Wall Street last year. Let's take a look at satellite radio: I predict that, no matter how big their penetration, they will probably never exceed 5 percent of Average Quarter Hour listening. American consumers are victims of habit, and they do not want to pay for something they can get for free. With that said, we can still screw ourselves up by running too many commercials. Clear Channel has taken a gutsy move by limiting commercials to 12 minutes an hour. I applaud them - that's the right thing to do. If all the music stations in the country adopt this 12-minutes-or-less philosophy, it will be acceptable to the American public.
Do you believe that an overload of commercials caused the audience erosion of the last 10 years? ?
It's not that hard to understand. It was like having a convenience store that's always running out of the things you need, but you had no where else to go. All of a sudden, this shiny, new, clean convenience store opens across the street, and it magically has most of the items you want when you want them. Overnight, the first store goes out of business.
That's what we were doing to ourselves. If we don't give people what they want, eventually they will go to the satellite and iPods to get their fill of music. But if we go back to 12 minutes an hour, we're in good shape.
Why have you been able to turn in such strong ratings and revenues, book after book? ?
I do more research than any radio station in the country, and when I get the results of that research, I act on it. I spend more money on television than any broadcaster. I even do daily research. For instance, an experiment over the past year has cost me a small fortune, but through it, I've been able to learn a lot about cause and effect. I have a microscope on the Philadelphia market, and I track everything that everybody does in the market. If they do direct mail, outdoor, television or anything else, I can see what affects the needle. This has given me an enormous amount of knowledge to work with.
What are you able to do differently from operators of major public - or privately held - companies? ?
Every decision I make is based on what I make this year and what I'll make five years from now. If the choice is between the two, I'll go with the five years. I always am thinking, “How do I get bigger?” Right now, we're spending a fortune on a project that looks at marketing to women, convincing agencies and advertisers that this is the future of marketing. It's costing money today, but in five years it's going to make me a ton of money. My goal in 2005 is for 15-percent revenue growth, and I believe we'll have so much momentum from things we did last year that we might be able to get it up to 20 percent the following year.
Do the pressures of being a public company force major group operators to watch every dollar they spend? ?
More than I do. I'm focused on driving the radio station, and I know from experience that money gets in the way of most decisions. When I sit down with my management team and brainstorm on new ideas, I will not allow anyone to ask, “What will this cost?” They're allowed to ask that question only after we decide as a group that this is something that would be good for the station in terms of ratings or revenue. Only then can they talk about cost and return on investment. Many people instinctively say, “We can't do that - it's too expensive.” Well, a dollar may be too expensive, but a hundred million dollars may be cheap.
How critical is it - or not - for radio to transform itself to a digital medium through HD Radio? ?
People have become so attuned to hearing digital music that we have to do it. After people saw TV in color, a TV station couldn't survive if they continued in black and white. Likewise, broadcasting in HD Radio is something we just have to do.
Can radio attract listeners in their 20s and 30s if they didn't gravitate toward radio during their “habit-forming” teen years? ?
This is a real problem. I've already written to [Clear Channel execs] Mark Mays and John Hogan to suggest that they convert a couple small-market stations that aren't serving them well and target teens. They should interview teens one-on-one to find out how we can merge their music needs with the Internet, instant messaging, and so forth. I received a note from Mark, saying they are going to do that. I also suggested that they think about partnering with other groups to experiment with younger listeners. We'll lose the edge if we have to get people into radio in their 20s and 30s. Why not make radio relevant to teenagers? Every day we don't do it, we're making a mistake.
What do you consider the greatest challenge facing radio in the coming years? ?
Radio's greatest challenge is to control its inventory. When you're never sold out, you have destroyed the engine of radio. Radio is a business that depends on the law of supply and demand for its continued success.
Likewise, what do you consider radio's greatest asset?
Radio's greatest asset is that it is the most emotional of all media. Television, newspapers and magazines cannot tap people at the emotional level of radio.
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