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Fewer commercials on the horizon?
Radio firm Clear Channel hopes to boost ratings and revenue by cutting ads. Will it work?
August 15, 2005: 1:55 PM EDT
By Paul R. La Monica, CNN/Money senior writer
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NEW YORK (CNN/Money) - Consumers are increasingly frustrated by all the commercials they have to sit through when listening to the radio or watching TV and the ads they have to wade through when reading a magazine or newspaper.

And that's led many people to less-cluttered media -- mostly cable television, satellite radio and the Internet.

So what's an "old" media company to do? Clear Channel Communications (Research), the nation's largest radio company, is experimenting with a novel strategy. Recognizing that listeners are wary (and weary) of ads, it is trying what it calls "Less is More."

Clear Channel is reducing the number of commercial minutes per hour in an attempt to drive up ratings.

The rationale is simple. If you lower the amount of ad time, advertisers should be willing to pay more because supply is limited.

More important, if fewer ads wind up boosting ratings, advertisers should have an even higher incentive to pay premium prices for commercial time.

If this gambit succeeds, it could have bold ramifications for the radio industry and perhaps the rest of media as well.

"It could be a model for radio. I imagine that much of the industry is watching and waiting to see how it does," said Philip Remek, a media analyst with Guzman & Co., a Miami-based brokerage and investment bank.

Is less really more?

So far, Clear Channel's results have been mixed. The company introduced "Less is More" late last year. And in the company's second quarter, Clear Channel said that ratings were up in most markets. Nonetheless, radio revenues still fell 7 percent from a year ago because of the lower amount of available commercial minutes.

The change hasn't had much impact on Clear Channel's stock either. Shares have been flat since the company reduced ad time last December.

Remek said it will probably take at least another six to nine months to see if the strategy works.

But Dennis McAlpine, an independent media analyst, does not think that offering fewer commercials will be a long-term success.

"If you can increase ratings you can make more money," he said. "But the presumption is if the ratings go up -- I think there is a fallacy in that argument," he said.

McAlpine thinks the draw of pay-cable and satellite radio is the content -- not the relative lack of advertising. Ultimately, ratings for mainstream radio and network television are going to be determined by the quality of their programming, he said.

David Bank, a media analyst with RBC Capital Markets agreed that the radio industry's bigger problem is the cookie cutter formula regarding music. After all, some satellite radio stations do have ads (although mostly on news and talk stations) and that doesn't appear to be slowing subscriber growth at Sirius Satellite Radio (Research) and XM Satellite Radio (Research).

"It's not as if satellite radio is commercial free. While fewer commercials are an important driver, the bigger concern for radio is homogeneity, a lack of variety in play lists," Bank said.

Necessary evil...but not a savior

So while it may be too soon to tell if the strategy will change the radio landscape, Remek said that even if "Less is More" does work for Clear Channel, he doubts that other forms of media will adopt similar tactics, namely because commercial interruption is arguably a bigger turn-off to radio listeners (and potential ratings killer) than it is for readers or TV viewers.

"In a magazine you can just flip over the ads. And you can zap through TV ads now with TiVo and digital video recorders. With radio, if you are listening to commercials, you can't zap the ads. All you can do is flip to another channel," Remek said.

But Bank said that the rise of DVRs could lead to fewer commercials on television. However, he said that unlike with radio, it will be advertisers, not media companies, making the decision to buy fewer 30-second commercial spots.

"You may see a reduction in clutter not because of TV operators reducing inventory but because demand migrates more to in-product placement. Advertisers may buy fewer commercials because they're afraid people are skipping them," he said.

Either way, media companies, especially radio station owners, need to address their audience's growing disdain for advertising in order to stem the decline in ratings.

"Ad inventory cuts are a necessary evil," said Frederick Moran, an analyst with Stanford Group. "I don't think it will stimulate accelerated growth. It will just allow the radio industry to remain competitive and maintain market share longer in an increasingly fragmented media environment."

Is it time for investors to tune into Sirius?

For a look at more media and entertainment stocks, click here.

Analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking relationships with the companies.  Top of page

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