EVERYBODY'S TALKIN' AT US
Daniel E. Cohen's good fortune began last year when football fans everywhere started asking why all the players seemed to be wearing Band-Aids on their noses. Eventually, word got out that the strips supposedly helped open nasal passages so athletes could get more oxygen. The curiosity spawned 450 articles about Breathe Right Nasal Strips and Cohen's CNS Inc., the Chanhassen (Minn.) outfit that makes them. Better yet, players sporting the strips notched 8 of the 10 touchdowns scored during this year's Super Bowl.
That's all fine. But Cohen's big bonanza came by way of Marta Limbaugh, a rabid football fan herself. Marta was wowed when she tried the strips to alleviate symptoms from her deviated septum. She told her illustrious husband, and Rush told the 20 million people who listen to his syndicated talk show each week. Overnight, Cohen says, sales went crazy. First-quarter revenues came in at $7.1 million, a 460% increase over the fourth quarter. CNS stock began a steep climb from 10 to its current 27. By April, Cohen happily wrote a fat check to sponsor the show twice weekly. "If Rush Limbaugh says to try something, there are a lot of people who will try it," Cohen says. "It's nice to pay for advertising that you can count on."
SCORCHERS. In the colorful history of radio, there has never been anything like Rush Limbaugh. His sway over the millions who tune him in is unprecedented. Not only has it helped turn the political tide sharply to the right but it also has breathed life into AM radio, which many had consigned to the dustheap. The more Limbaugh talks, the more money he and his many business associates rake in. Says David M. Kantor, executive vice-president of ABC Radio Networks: "Rush is in a league by himself."
The mad rush (sorry) to share in some Limbaugh-like success is a big reason America's airwaves are crackling with ever-more scorching dialogue. As right-wing talk radio comes under the microscope in the aftermath of the Oklahoma City bombing, it's easy to forget that the growth of talk radio began with a business proposition. "The agenda is first to get ratings and second to make money," says Michael Harrison, publisher of Talkers Magazine, the industry bible.
Indeed, since 1990, the number of stations that devote the bulk of their day to talk has almost tripled, to 1,130 from 405, according to M Street Journal, another industry publication. Nobody keeps count of talk-show hosts, but suffice it to say that a few years ago, G. Gordon Liddy and Oliver North were merely notorious, not notorious radio stars.
The number of people actually cleaning up in talk radio, however, is smaller than you'd think. Rush and Howard, of course, earn huge sums--for themselves, their syndicators, and the stations that air them. Limbaugh alone generates $30 million in revenue for his syndicator, EFM Media Inc. A second tier of long-established hosts such as Don Imus and Bob Grant also earns big bucks. But then the list drops off quickly. Although Westwood One Inc.--the biggest syndicator in talk with 15 shows--takes in $136 million in revenue, only a portion of that comes from talk. Says Steven Lehman, chief executive of Premier Radio Networks Inc.: "There are a few significant stars and a lot of planets."
The hard fact is, radio is an unusually competitive, fractured industry, with more losers than winners. True, the cost of doing business pales next to television in almost every respect. And a well-run station can easily earn margins above 40%, says Michael J. Wolf, partner at Booz, Allen & Hamilton Inc. The competition in radio, however, is much more acute--especially on the AM band, where almost all talk airs. There are nearly 10,000 stations in the U.S., and most cities have many more than 10 of them vying for an audience. In TV, there are usually just four or five stations to a market, so the pie can be divided into larger, more lucrative pieces.
James Duncan, who publishes statistical reports on the industry, figures only a third of all radio stations earn "substantial" profits, better than 20%. Another third, he says, lose substantial amounts. Stations on AM--which over the years have lost most of the music business to the higher-fidelity FM band--suffer most. According to Duncan, half of all stations are AM. But because FM dominates in music, it pulled in 75% of the industry's $10.6 billion in 1994 revenue. AM stations split the remaining 25%, but not evenly. Big, urban news/talk stations such as Chicago's WGN collect most of the revenue, while many smaller stations go begging.
It's easy to see why Rush has become AM's perceived messiah. His popularity not only means better ratings for almost all of the 660 stations that carry him but it has heated up interest in talk radio--good news for the many AM stations starving for listeners. Moreover, his nationwide success has shown that radio's traditional dependence on local programming was a costly anachronism. "Radio stations always considered themselves to be local, local, local," says EFM Media founder Ed McLaughlin, the ex-ABC radio executive who discovered Limbaugh in Sacramento, Calif., in 1988 and helped nurture him to fame. "What Rush was doing in Sacramento would be successful in any market. All I did was recognize that."
BARTER UP. Nowadays, with the right host or concept, news and talk radio can generate more revenue than any format on the dial. Because a host generally earns more than a disk jockey, talk is more expensive to produce than music. But since advertisers are convinced people actually listen to talk radio rather than just play it in the background, they'll pay more per rating point for talk. And since talk shows more easily segue into commercials--which are often read by the host--they can accommodate more spots per hour. The bottom line: For a highly rated host, revenues far outweigh costs.
Rush showed that syndication can produce a double benefit: It can provide a local station with a nationally known talk-show host for less cash than it would cost to produce a comparable show in-house. The alchemy that makes this possible is called barter (table). Under such deals, syndicators give stations ready-made programming in return for half of the advertising time on that show. The syndicator then sells that time to advertisers. Stern is the exception to this formula: Infinity Broadcasting Corp., his syndicator, collects cash exclusively. Rush and EFM collect both a fee and ad time. But the majority of talk syndication deals are straight barter.
Cheap satellite technology has helped syndication take off. Since the mid-1980s, the cost of transmission time has dropped by more than half as digital compression has boosted signal capacity. Receiver technology has also become cheaper, meaning more stations can afford to hook up. For a syndicator, this is crucial. The name of the game is to get your host's show on as many stations as possible. The more audience, the more you can charge advertisers.
Syndicators come in all shapes and sizes. The two most successful in talk are McLaughlin and Mel Karmazin--another former radio executive turned entrepreneur. He has scored big by linking Infinity, the nation's biggest radio station owner in terms of revenue, with Westwood One. Other big players, such as ABC and CBS, own lots of stations and syndicate all types of programming, but they aren't deeply committed to talk. Those that are--outfits such as Salem Radio Network, which syndicates Oliver North, or Major Broadcasting Co., which does Michael Reagan--remain relatively small.
Perhaps the smallest talk syndicator is Cullum Communications Inc. Its principal owner is also its star: Blanquita Cullum. A former Bush Administration aide and Texas TV personality, Cullum started a local show in Richmond, Va., and lured such big-name guests as Phil Gramm, Bob Dole, and Robert E. Rubin. Then she decided to syndicate. Backed by a wealthy Virginia car dealer and Holly Coors, of the beer family, Cullum bought satellite time and has launched on 35 stations. The cost runs about $200,000 a year, and she isn't close to making money. "It's been a lot of work," says Cullum, a single mother of two. "I think Mother Teresa has a better social life than me."
RICH AND POOR. One factor creating demand for smaller shows such as Cullum's is a recent change in Federal Communications Commission ownership rules. Since 1992, owners have been allowed two AM and two FM stations per market. In total, they can own 20 of each. This has created a situation in most cities where the richest stations own some of the poorest. Because talk is hot, they will reprogram the lesser station to that format and sell ads on both stations as a package. The second station doesn't make much money, but it is an incremental benefit.
That's the case in San Francisco, where the Capital Cities/ABC Inc. outlet KGO is financing weaker sister KSFO. Jack Swanson, the program director for both stations, has been using a 50-50 mix of local talent and syndicated hosts such as Liddy and Reagan to create an ultraconservative Hot Talk format at KSFO. In liberal San Francisco, it's plenty controversial, but it has boosted ratings from 0.7 to 1.4 since January.
The trade-off is that hot talk is sometimes too hot for advertisers. For all of the Breathe Right Nasal Strip stories, most blue-chip marketers are reluctant to be associated with Limbaugh or any of the more acerbic hosts. Media buyers say national advertisers such as IBM and Philip Morris Cos.' Maxwell House will advertise but only gingerly--either by going into the show sporadically or by purchasing time around the show, hoping to catch the overflow audience. Limbaugh, most agree, is largely responsible for the rocket-like growth of Snapple Beverage Corp., an early, dauntless sponsor of his show. "Rush made Snapple what it is. He gave it instant brand recognition," says Sam Michaelson, a radio buyer for Zenith Media. "But a controversial talk show host will make most advertisers very skittish."
They don't have to look far for reasons to be nervous. After Howard Stern offended most of the Hispanic community with his disparaging remarks about the murdered singer Selena, an ad for Quaker Oats Co.'s Gatorade was inadvertently slipped into his show for one day on KEGL-FM in Dallas. Gatorade landed on a boycott list and had its products pulled from some shelves. The anti-Stern forces recognized their error in short order, but much of the damage was done. Says a Quaker spokesman: "This reinforces the idea that [advertising on talk radio] can have a downside."
Oh, but the upside. That's all the industry can focus on. Take the situation in Fresno, Calif. Limbaugh hasn't shown his face at Fresno's annual Dittohead Barbecue & Politically Incorrect Picnic since 1990. But that didn't stop 9,500 fans from flocking to the event on Apr. 15. Never mind the torrential rain or the $4 ticket price charged by sponsor KMJ Talk Radio. What self-respecting Rush devotee could pass up the Al Gore Tree Hugging Contest or the Miss Dittohead Beauty Pageant?
KMJ Station Manager Al Smith certainly wouldn't miss it. Nobody in Fresno has a bigger case of Rush rapture. Since KMJ signed Limbaugh in 1990, its ratings in the 9 a.m.-noon time slot have shot from 10% to 22%, helping boost annual revenues. While Smith won't discuss profits, the 12-point ratings rise has likely produced a windfall. "Rush has had a huge, huge impact on our bottom line, and he knows it," says Smith. "That's why he keeps raising his rates."
In radio, such stories are the stuff dreams are made of. And as long as America keeps demanding talk, syndicators, station owners, and, reluctantly, advertisers will keep delivering. Most new players won't be getting rich, but that doesn't seem to deter them. "It's the greater fool theory," says ABC's Kantor. "There's always somebody willing to try to turn around a radio station." Rush Limbaugh is proof it can happen. But guys like Rush only come around once in a blue moon.
THE ECONOMICS OF TALK RADIO
Everybody from IBM to the maker of Breathe Right Nasal Strips. Advertisers buy time from syndicators/networks and radio stations. Companies spent $10.6 billion on all radio ads last year. Some 95% of that flowed directly to radio stations. Only 5% flowed to syndicators/networks.
RADIO STATIONS Almost all talk--except Howard Stern--is on the AM band. Many AM stations are losing money or are marginally profitable. The strongest are the biggest ones, often earning margins topping 40%. Tribune Co.'s WGN in Chicago is king, with estimated revenues of $37 million. Infinity Broadcasting, with 27 stations, has an estimated $322.5 million in 1994 revenue.
BARTER DEALS A station receives a show for no cash but gives the host's syndicator about half the ad time within the show. Both the radio station and syndicator sell ad time for a given program. Stations get popular national programming without spending cash. Syndicators get quick distribution. The risk: that a given host won't generate enough audience to attract advertisers.
SYNDICATORS/NETWORKS They provide all kinds of programming, not just talk shows, to as many radio stations as they can. Groups include ABC Radio Networks, which produces Paul Harvey and The Sports Babe, and EFM Media, with just two shows: Rush Limbaugh and Dr. Dean Edell. Westwood One, the biggest syndicator in talk, has Don Imus and G. Gordon Liddy.
EMPERORS OF BLAB
Rush and Howard rule. They both get income from radio, TV, books, and promotional activity. Rush is on 660 stations, Stern is on 20 in major markets. Both send ratings sky-high but also take a piece of their shows' action. Nobody else comes close.
DATA: BUSINESS WEEK, DUNCAN'S RADIO MARKET GUIDE
ILLUSTRATION BY ALBERTO MENA/BWBy Michael Oneal, with Linda Himelstein, in New York, Judy Temes in Boston, Eric Schine in Los Angeles, and bureau reports