Keywords
Radio, Two-sided markets, Advertising, Mergers, Variety, Product differentiation, Synergies, Localism,
Payola, Copyright
JEL Codes
L13, L41, L51, L82, M37
8.1. INTROD UCTION
Even though the inventor Thomas Edison argued in 1922 that radio was a “craze [that]
will soon fade,”
1
radio has proved to be a medium of enduring popularity. In the United
States, where almost everyone now has access to more modern media alternatives, 92% of
the population still listens to the radio every week and the average listener tunes in for
2.5 h each day (
Arbitron Company, 2013). US radio advertising revenues in 2013 were
almost $15 billion, or roughly 75% of local TV advertising revenues.
2
In developing
countries, broadcast radio remains the primary means of accessing news and information
for millions of people because radios are cheap and require little infrastructure or literacy
to operate. For example, in Kenya 87% of households own a radio, while only 47% own
televisions (
Bowen and Goldstein, 2010). Radio programming is also often argued to
have significant effects on a country’s culture: in the US, the development of
personality-driven talk radio has been cited as a primary cause of political polarization
(
Hillard and Keith (2005), p. 80) and a perceived narrowing of playlists on music stations
has often been blamed for the problems faced by the music industry (
Future of Music
Coalition, 2008
). The importance of radio has led governments in many countries to
tightly regulate or directly provide programming.
This chapter aims to introduce the reader to the economics of the radio industry and
to describe empirical research that has tried both to understand these economics and to
use radio as a setting to examine broader questions to do with two-sided markets, the
effects of competition on product variety and deregulation. It will emphasize that our
understanding is far from complete in many areas, and that recent changes to local media
markets provide new questions to study and mean that answers to existing questions based
on historical data may no longer be appropriate. The focus will be on the broadcast (free-
to-air) radio industry in the United States in the last 25 years, but I will explain the history
of the industry from its inception so that contemporary issues can be placed in their his-
torical context. Indeed, understanding the history is necessary to understand why many
1
http://rockradioscrapbook.ca/quotes (accessed February 27, 2014).
2
http://www.biakelsey.com/Company/Press-Releases/140326-WTOP-Leads-Radio-Station-
Revenues-for-Fourth-Consecutive-Year.asp and http://www.biakelsey.com/Company/Press-Releases/
140424-Local-Television-Revenue-Expected-to-Reach-Over-$20-Billion-in-2014.asp (accessed February
14, 2015).
342 Handbook of Media Economics
reforms that might seem natural to economists have aroused controversy. At certain
points I will also mention how the radio industry in the US differs from the radio indus-
tries in other countries, for example in the role of publicly funded radio. I will also
describe some of the challenges faced by the contemporary broadcast radio industry given
the growing importance of satellite and online radio platforms, and non-radio digital
media that have successfully captured a large share of both local and national advertising
dollars.
Like broadcast television, important features of the broadcast radio industry are that
(a) stations operate as two-sided platforms, attracting listeners with free programming and
selling these audiences to advertisers who reach listeners with commercials or sponsored
programming; (b) some types of programming—typically news and educational
programming—might be considered merit or partially public goods; (c) the marginal cost
of reaching additional listeners within a given coverage area is essentially zero; and
(d) entry is limited by constraints on the broadcast spectrum available for radio stations
to use, and stations must coordinate their frequencies and coverage areas in order for their
broadcasts to be audible for listeners. This last point naturally creates a role for licensing
and regulating stations. The fact that spectrum is seen as public, not private, property has
also been used to argue that radio stations should operate, in the words of the 1927 Radio
Act, for the “public convenience, interest or necessity,” leading to a degree of content
regulation that has never been applied to the US newspaper industry (at least outside of
wartime).
Chapter 9 in this volume discusses the newspaper industry in more detail.
While broadcast radio and television share these important economic characteristics,
there are at least two significant differences between the media. First, radio is a much
more portable medium with the majority of listening taking place outside of the home,
a pattern that has become even more pronounced in recent years and for younger lis-
teners.
3
The peak hours of radio listening are during the day, and especially during
the morning and evening drivetime periods, whereas, since the late 1950s, television
has dominated in the evening primetime period.
4
Portability also explains why most
radio listening is still accounted for by traditional over-the-air broadcasts, whereas most
television viewed in the US is delivered via cable or satellite even though broadcast sta-
tions remain popular. Second, the fixed costs of operating a radio station are low and the
spectrum constraints are weak enough that local markets can be served by quite a large
3
In Spring 2007, Arbitron identified 40% of listening as taking place at home. The remainder was split
roughly equally between in car and at work (figures from Arbitron’s Radio Listening Trends reports,
http://wargod.arbitron.com/scripts/ndb/ndbradio2.asp, accessed February 18, 2014). By 2011, the share
taking place at home had fallen to 36% (Arbitron Company, 2011), and for listeners aged 18–34 it was
estimated to be 28% in 2014 (Nielsen Company, 2014).
4
The data comes from Arbitron’s Radio Listening Trends reports, http://wargod.arbitron.com/scripts/
ndb/ndbradio2.asp (accessed February 18, 2014).
343Radio
number of stations.
5
For example, Duncan (2002) estimated that there were 23 viable
radio stations in the Washington, DC market (with another seven marginal stations),
compared to 13 local television stations.
6
In Billings, Montana there were 12 viable radio
stations, compared to only four TV stations, with one viable radio station for every 8736
residents aged 12 and above. In this sense, one might hope for quite competitive eco-
nomic outcomes without regulation.
The costs of providing programming also differ across the media. Television produc-
tion is typically expensive so that smaller stations must rely on large amounts of program-
ming provided by the networks or syndication. In radio, producing local programming is
potentially quite cheap, especially as stations are currently only charged a small propor-
tion of their revenues for the rights to perform music (see
Section 8.9.2 for a discussion of
licensing arrangements). I will return to the question of whether local programming is
necessarily desirable below. One consequence is that stations are able to vary their pro-
gramming in response to the local competitive landscape, and in the last two decades this
has resulted in the emergence of quite narrow programming formats, which may, for
example, offer only a particular kind of rock music or serve listeners with a particular
religious adherence. However, in spite of this cost structure and these patterns, there
is an active debate about whether the types of programming that stations provide is opti-
mal, both in the sense of whether it is of the optimal quality or whether stations offer too
much of the same types of music (
Future of Music Coalition, 2003).
The structure of this chapter is as follows.
Section 8.2 provides a brief history of the
broadcast radio industry in the US, from its inception to the present.
Section 8.3 discusses
the data that has been used in empirical research.
Section 8.4 outlines some of the eco-
nomic theory that can be used to understand the possible effects of mergers in the radio
industry.
Section 8.5, divided into four parts, describes empirical research examining the
effects of ownership deregulation and the subsequent consolidation that took place in the
1990s and early 2000s.
Section 8.6 looks at the question of whether there are too many
stations in most radio markets.
Sections 8.7–8.9 examine strategies that stations use to
make sure listeners hear their commercials, the effects of public radio, and the effects
of radio on political outcomes and its interactions with the music industry.
Section 8.10 concludes.
5
Many interesting questions in television arise from the vertical relationships between content providers and
platform operators (such as cable companies). See
Chapter 7 in this volume for an in-depth discussion.
Vertical issues also exist in radio—with syndicated programming being broadcast on stations owned by
many different companies, and major station owners also producing some of this programming—but it
has not been the focus of attention in the economics literature.
6
Duncan identified “viable” stations as those with signals that reached a large proportion of the market and
had at least a 1% share of listening. Most markets have a number of smaller stations listed in their Arbitron
market reports that can be considered marginal. Additional low-power stations would typically have too
few listeners to be listed by Arbitron at all.
344
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