distribution of format-switching costs play a key role in the analysis, as they might also be
following mergers or other types of market shocks. Even though performance rights fees
are not observed in the data, the size of switching costs are potentially identified from
how many and how quickly stations switch in response to changes in the demand for
different formats driven, for example, by changes in market demographics such as the
growth of Hispanic populations in many cities.
Sweeting’s results suggest that in the long run (e.g., after 20 years) the number of
music stations would fall by around 9.5% if fees equal to 10% of music station revenues
were introduced, with most of this adjustment happening within 2–3 years. One factor
limiting how many stations switch to non-music formats is that the types of listeners who
are most valued by advertisers (for example, whites aged 25–49) have relatively strong
preferences for music programming so that when some stations switch to non-music pro-
gramming the audience of the remaining music stations tends to increase, offsetting the
effects of fees, although in aggregate the post-fee revenues of the industry tend to fall. The
paper does not address the question of whether, in the long run, this fall in revenues
would tend to reduce the quality of broadcast radio, or the total number of stations.
While the Performance Rights Act was not passed, it remains quite possible that sim-
ilar legislation will be passed in the future, allowing for the predictions of the model to be
tested and an investigation of whether other margins adjust as well. At the same time, a
trend has begun to evolve where major radio companies, most notably Clear Channel,
have started to strike private deals with both major recording labels, such as Warner Bros,
and some smaller independent labels, where the radio companies do pay for performance
rights on broadcast stations but also receive lower rates for performance rights for their
online media services (for example, Clear Channel’s iHeartRadio), which is rapidly
growing.
107
While private deals potentially provide an alternative to federal legislation,
they may also come to favor larger companies, who can realize economies of scale in
negotiating contracts, on both sides of the market.
8.10. CONCLUSIONS
This chapter has summarized a wide range of research on the radio industry. Most of the
research in the mainstream economics literature has focused on understanding the effects
of the rapid consolidation in local radio markets that took place after the Telecommu-
nications Act of 1996. The main conclusions from this literature are that owners tried to
reduce the extent to which their stations cannibalize each other’s audiences and that they
107
http://www.nytimes.com/2013/09/13/business/media/clear-channel-warner-music-deal-rew rites-
the-rules-on-royalties.html (accessed December 31, 2013) and http://www.nytimes.com/2012/06/11/
business/media/radio-royalty-deal-offers-hope-for-industrywide-pact.html (accessed December 31,
2013).
391Radio
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