Radio's Crushing Quarter Is About to Trickle Down to Publishers and Songwriters

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Rights holders can expect lower performance royalties because radio revenues are down big in 2020 and possibly into 2021.

April through June was an unforgettable quarter for the U.S. radio business. As the economy slowed and unemployment skyrocketed, stations' advertising revenues were often half of 2019 levels.

By May 7, when iHeartMedia released its earnings for the first quarter of 2020, the second quarter was already a historic period in radio -- and not in a good way. After acknowledging that advertisers had reduced or eliminated their spending, the radio giant's CEO, Bob Pittman, laid out a persuasive case for optimism: combined with cost cuts and improved liquidity, iHeartMedia would rebound "under conservative recovery scenarios," he said. As the recession continues, "advertisers will reevaluate things and take more chances" on new formats such as podcasts, he explained. But by early April, after revenue cratered in April, any radio executive knew they would face the most challenging months in their histories -- the lasting effects of which haven't yet been felt.

Key Takeaways:

1) The largest U.S. radio companies suffered revenue drops as much as 53% in the second quarter compared to the same period last year. 

2) Royalties paid by radio stations pay performance rights organizations (PROs) will fall sharply because radio ad sales plummeted in April (and are still in negative territory through July). 

3) Some radio licensees are attempting to pay PROs late or not pay at all.

The quarterly earnings releases of eight publicly traded radio companies show that revenues fell anywhere from roughly a third to 50% from the same quarter a year earlier. Revenues of iHeartMedia, Cumulus and Entercom, the three largest U.S. radio companies, were down 46.6%, 47.8% and 53.8%, respectively. Two smaller competitors had similar declines of 53.7% at Beasley Media Group and 47.6% at Saga Communications. Urban One and Townsquare Media performed well relatively speaking -- they were just down 37.5% and 34.5% (35% excluding political advertising), respectively. Salem Radio Network dropped a mere 17.3%.

The music industry should be ready for its own revenue declines, as  radio's woes will flow downstream to songwriters and publishers. Because stations pay performance royalties based on revenues, not fixed amounts, they have paid PROs royalties commensurate with first-quarter declines. And if PROs collect less money, they will pay fewer royalties.

The group of eight publicly-traded radio companies will pay PROs roughly $37 million less than the second quarter of 2019, according to Billboard's estimate. "Radio revenue is subject to economic disruption," says attorney David Oxenford, who specializes in broadcast radio law. "There certainly was a significant downturn in 2008 and 2009 with the great recession, and significant downturns in previous recessions, though probably not to the extent of this year's." As a whole, U.S. radio stations will take in $12.8 billion this year, down from $14.1 billion in 2019, according to a BIA Advisory Services forecast on June 25.

The timing of royalties from the troubled second quarter varies by PRO:

ASCAP pays royalties in the quarter they are collected; its large licensees typically pay 30-45 after a quarter closes, meaning ASCAP might not have collected second-quarter royalties from some radio companies. BMI will distribute second quarter royalties on Jan. 15, 2021. SESAC will pay terrestrial radio royalties for April on July 31, May on Aug. 31 and June on Sept. 30. Global Music Rights will pay in late October.

To help mitigate the loss, some PROs have tried to soften the blow to songwriters who are not touring by collecting royalties "trapped in the system" to help songwriters, says Anthem Entertainment Group CEO Hellen Murphy. "We've seen a lot of the societies... shoring up whatever shortfall by clearing whatever monies might have been in the pipeline for a while."

Through the end of the year, the eight publicly traded radio companies could distribute as much as $70 to $75 million fewer royalties than the prior year, Billboard estimates. To make matters worse, other royalty sources, from bars to television, will also falter in 2020 and 2021. Indeed, ASCAP president Paul Williams said in an April 3 letter to members the pandemic "will have a material and negative impact financially on almost every category of licensing" and warned of declines in revenues and distributions.

The good news -- for all stakeholders --  is revenues are on the upswing after bottoming in April. In May, June and July, iHeartMedia grew revenues 49%, 41% and 27%, respectively, and third quarter results will be "materially better" than the second quarter, said president, CFO and COO Rich Bressler, during the earnings call. At Cumulus, July revenue was down only 32% year over year, although entertainment "is still significantly depressed," said president and CEO Mary Berner during the Aug. 10 earnings call. Other companies have narrowed their deficits to 20% to 30% in the third quarter.

Faced with radio companies moved quickly to save cash through furloughs and layoffs, and selling assets. iHeartMedia says it has reduced 2020 expenses by $250 million. Cumulus will reduce fixed costs by $85 million this year and is raising $210 million by selling 250 radio towers locations (about $140 million comes from a sale-leaseback in which Cumulus will sell the property and lease it from the buyer).

Liquidity isn't a problem -- yet. At iHeartMedia had about $868 million available liquidity on June 30 and no "material" debt covenants that would normally put a company in default. Cumulus improved its cash balance to $197 million, allowing for operations "even through a protracted downturn," said Berner during the Aug. 10 earnings call. Entercom improved its cash to $208 million and loosened some loan terms through 2021 to avoid defaulting. Townsquare believes it has enough liquidity for three years "even if business remains at the same levels" experienced today, said CFO and executive vp Stuart Rosenstein during the Aug. 10 earnings call.

Counterintuitively, iHeartMedia and Cumulus, the two largest radio companies in the US, are inadvertently engineered to withstand the pandemic. Had the coronavirus risen in, say, 2016, iHeartMedia would have been crippled by $20 billion in debt and annual interest payments of $1.9 billion. In 2018, given the options of default and Chapter 11 bankruptcy restructuring, lenders worked with iHeartMedia in a bankruptcy restructuring that eliminated roughly three-fourths of its debt.

Moreover, iHeartMedia's debt lacks the covenants typically (a certain ratio of debt to earnings is common) that would prove impossible with unprecedented losses. Likewise, Cumulus entered Chapter 11 in 2017 and reduced its long-term debt by 44.3%, from $2.3 billion to $1.3 billion -- and its lenders also waived maintenance covenants. Entercom, which didn't file for bankruptcy, convinced lenders in July to loosen debt covenants starting with the quarter ending Sept. 30, 2020.

Over the long haul, the pandemic could leave lasting improvements on how radio reaches listeners. At iHeartMedia, listening is up 19% on the web; 25% on gaming consoles and 13% on smart TVs, said Pittman during the Aug. 6 earnings call. Time will tell if listening habits from the lockdown days will continue, but iHeartMedia expects user adoption of home devices during the lockdown months will provide incremental gains, said Pittman.

But although radio reaches about 98% of U.S. adults each month, subscriptions, not ad-based business models, were the steadier of the two in the second quarter. Spotify's subscriptions grew 8 million to 138 million globally; SiriusXM's 264,000 new subscribers brought its total to 30.3 self-pay customers. Not surprisingly, their ad-based services stumbled in the second quarter: Spotify's and Pandora's advertising sales fell 21% and 31%, respectively.

"It's still too early to predict the slope of the recovery with any certainty," iHeartMedia's Pittman said during the earnings call. One guarantee is people will listen to music through homeschooling, evictions and unemployment.

The value of that listening is another issue.

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