"When $1 from listeners or underwriters
replaces $1 from tax support, it's not the same kind of dollar.
CPB grants or state allocations don't cost very much to acquire--
some paperwork and auditing.
Their net value is very high.
In contrast, listener contributions are expensive--
costing up to 40 percent of gross."What could make public radio alter its course?
Having to spend more to raise their money,
stations' gross revenues are going up faster than their net.This commentary was contributed by Mark Fuerst, a development consultant in public radio. At the time he wrote this article he was general manager at WXPN-FM at the University of Pennsylvania, Philadelphia. Originally published in Current, Feb. 14, 1994
By Mark Fuerst
Looking to describe the future of public radio, I think we can have confidence in at least one assumption: public radio stations, like most institutions, will tend to stay the same unless acted on by sufficient force. And predictions about how public radio will change should probably begin with reasons why it will change, or not change. What motivations and pressures will encourage or resist change in the ways we produce public radio programs or run stations?
Pressures to maintain the status quo are formidable, and the most powerful one is the momentum of success. Many stations deliver excellent programming. Listener and business support is rising. Especially among the most educated citizens, public radio is seen as a major public institution and a national asset. For the 5 million people who are our core listeners, the very suggestion that public radio should change would elicit only a question: "Why?''
A second reason public radio will resist change is the aging of its managerial work force. The people who built the field over the last two decades now have something to lose--or at least they fear they do--if it changes too much. Public radio executives, myself included, generally think of ourselves as fiercely independent. But we are, for better or worse, becoming fiercely comfortable--less ambitious, more financially secure and less entrepreneurial. Having achieved a measure of success, we're more attracted to the security of what we know than the excitement of what we can only imagine.
And a third force that will encourage public radio to "stay the course'' is our sense of mission and strategic public policy. In the mainstream of public radio (this article focuses on the stations affiliated with NPR and APR), the current mix of news, fine arts and jazz probably is the strongest programmatic foundation to justify continuing tax subsidies, even if the mix has to be fine-tuned to make it more effective. (I find it highly unlikely that audio, alone, will play a major role in formal education, thus some of the promising policy options being explored by public television are closed to radio.)
The impressive weight of these three factors helps to explain why over the last decade most changes in public radio were refinements rather than shifts in direction. Almost all of the institutions and policies that govern public radio were created at least 10 years ago. Successful new programs, like Car Talk, Fresh Air and Marketplace, fit the appeal (and the daily schedule) originally defined by All Things Considered. Even major technical developments, like satellite replacement, were objectives chosen a decade earlier.
If there ever was a "system development strategy''--build the drive-time news programs, expand the reach of signals, create a satellite system, emphasize classical music and jazz, while limiting investments in alternative-cultural programming--one can now say: it worked, and worked well. The returns were compounded by the fact that our competition, commercial radio, retreated from the fields of in-depth news, classical music and jazz. Exploiting these formats, many public stations experienced 10 years of growth.
For all its benefits, this strategy also had limitations. In particular, it did not substantially diversify our audience. Many diversification efforts were, in reality, format breaks that splintered rather than expanded listenership. Thus, a decade of effort produced only a handful of programs or stations that effectively reached beyond the market segments public radio served in 1985. This shortcoming can be traced directly to a continuing emphasis on discrete programs, when the key building blocks for diversity are formats or stations that serve listeners consistently, day after day. Belatedly, CPB recognized this and changed the Community Service Grant (CSG) formula to reward and reinforce stations that contribute to overall system diversity.
The new CSG formula, which went into effect this fiscal year, may encourage some audience diversification, especially for small stations or new networks, but it will have equally important and largely negative side-effects for most of public radio, because it reduces the net revenue available for operations at almost all of the larger stations. (By net revenue for operations, I mean the money that can be used for programming and broadcasting expenses after fundraising and overhead expenses have been subtracted.)
This single change in federal funding, taken in isolation, will only have limited impact on the future of public radio. But combined with other pressures, the new CSG formulas will reduce cashflow and operating flexibility at most of the "large'' stations in the field. And this bottom-line pressure will be a powerful force for change in the decade ahead.
Caught in the net
At most public stations, large and small, their net revenue margin (or operating margin) has been threatened since the early '80s, when the Reagan Administration cut CPB funding by 20 percent. Stations reacted to this loss of tax revenue by increasing "earned income'' from listeners and businesses.
The dimension of change was impressive: In 1980, public radio raised only $20 million in memberships and underwriting, 20 percent of total revenue. By 1992, that sum grew to $154 million, or 40 percent of the total. Largely because of this spectacular rise in earned income, public radio experienced uninterrupted growth in gross revenues, despite the large drop in federal support.
By focusing on the continued "top line'' growth, we have tended to overlook the more troubling numbers. For example, the average year-to-year growth in total system revenue is already going down. It has been dropping since the mid-'80s.
More importantly, with total CSGs declining for medium-size and large operations, net operating revenues--money that can be spent on programming and services after subtracting overhead and fundraising costs--is already going down at many stations, even though gross income is rising in many places.
This is a by-product of increased dependence on earned income. When $1 from listeners or underwriters replaces $1 from tax support, it's not the same kind of dollar. CPB grants or state allocations don't cost very much to acquire--some paperwork and auditing. Their net value is very high. In contrast, listener contributions, especially from new memberships, are expensive--costing up to 40 percent of gross, when you consider the price of acquiring and retaining the member. Raising $1 million in listener revenue provides only $500,000 or $600,000 in program production or purchasing power. The rest gets eaten up by overhead and development costs.
Even gross revenue growth has become increasingly difficult. In many markets, stations already have gotten support from the easy prospects, both members and underwriters. Gaining support from the next layer of prospects requires more sophisticated marketing and higher-level sales skills, both of which are expensive. The added "cost of sales''--for example, the cost of telemarketing in renewal efforts--takes more investment and reduces the net margin on most of our "new'' revenue, at least in the short run.
Changing the CSG formula this year, as mentioned above, added to this problem, because it accelerates the decline in net revenue margins, especially at large stations, by reducing the federal dollars available to match the local earnings. Since 1987, the matching rate for nonfederal financial support (NFFS) has declined continuously from about 20 percent to about 13 percent, and that trend is likely to continue. For a station with NFFS of $1 million, this is a net loss of $70,000.
Some of this should be expected in a "mature market,'' like radio. Barring extraordinary innovations, mature industries (as compared with growth industries) often face declining profit margins and competitive cost pressure. If this analogy is correct, pressure on public radio's net margin will only intensify in coming years, as competition increases and the mix of revenue continues to shift from "high net'' sources to "lower net'' components, from tax revenues to earned income. This transition has enormous implications.
Until it costs too much to bear
In a general sense, these pressures will make public radio more "business-like.'' Productivity will become more important at a national and local level. Managers will be forced to weigh the actual dollar return of their spending. By the end of the decade, efficiency criteria (such as listeners served per dollar, or money raised per hour) will be key measures of station performance.
We may never see another big-ticket program on the scale of Morning Edition--in part because the difficulty of accumulating the capital for this size project, but also because "talk'' and "disc-based'' programming will be so much more cost-efficient than expensive "tape-based'' shows. This will definitely be true for local programming, but it may also be true for national and regional productions.
As financial and competitive pressures increase, many stations will rethink and probably reduce their commitment to local production. Of course, this means they will increase their non-local programming. And not all of that will be "national,'' in the sense we use the term today. Aggressive stations may form "sub-networks'' along regional or niche-format lines to share costs.
A stronger bottom-line focus may even change the type of person commonly found running a public station, as future general managers rise through the development department, instead of programming. Career paths already have changed in related institutions, such as universities, which increasingly employ non-academic managers to make educational decisions by quantitative standards.
Of course, in crisis there is also opportunity: Under pressure, some operations and some people actually perform better. In terms of cume, average quarter-hour audience, audience support and underwriting, public radio probably was "underperforming'' 10 years ago. One might even argue that the cut in CPB funding encouraged stations to discover, develop and exploit vast pools of untapped financial support, which pre-'84 public subsidies allowed them to ignore. This year, stations are still underperforming in terms of marketing, audience, format development, service diversification and production efficiency. This time, the pressure to improve performance will not come from a single external blow, like the CPB funding cut. Instead, it will intensify gradually as net margins decline.
Public radio has room for improvement. Hundreds of stations have inconsistent-appeal schedules that break format repeatedly and devote hours to discrete programs for incompatible discrete audiences. Ten years from now, there will be more stations programming consistently to a single, clearly defined audience, especially in the large markets. Generally, this will mean more single-content formats (all news, all classical music, etc.), although some of our most creative stations are still trying to perfect multi-content, single-appeal formats. Inexpensive satellite and land-line technology could facilitate program and talent syndication through appeal-based networks, which would be a major boost to audience diversification efforts. But those steps have been and will be resisted as long as net revenue margins are large enough to support 350 or 400 semi-autonomous stations.
The most serious area of inefficiency is "overbuilding.'' All medium and large markets have two to five public radio stations. Yet a third of these stations struggle to find an audience and many duplicate existing services (even existing programs at the same time!). This will continue until the "carrying cost'' of inefficient service becomes too high for the public radio system to bear. Depending on the intensity of financial stress, we may see an industry shake-out, during which "strong'' stations--well positioned, well focused, reasonably well financed--take over "fragmented'' stations that have good signals but incoherent programming and marketing. Even without the pressure of bankruptcy, we could see operating mergers, much as in the newspaper business, where the efficiency of combined operations brought passionate rivals together to share printing, sales and distribution facilities.
Not all of the change will be consolidation. The need for new revenues will also encourage expansion in some areas of public radio. The search for higher net revenue will lead to continuous increases in dollar-per-donor ratios, through the implementation of major-donor programs. Increased program sharing may even pave the way for multi-station underwriting collaborations to tap advertisers' regional promotion budgets. The effort to improve membership recruitment will lead to expansion of "relationship marketing'' and the recognition of membership data as one of the most undervalued and underutilized assets in public radio.
"Station ego'' could hold the line
If this assessment is correct, it suggests that the stability of public radio could be seriously threatened by a period of stagnating membership, combined with a soft underwriting market. To the extent that we are dependent on these revenue sources, we are also vulnerable to their disruption, either from recession or emerging competition. Whatever the cause, most large and medium-size stations will experience flat or declining net revenue within the next decade.
But will these financial and competitive pressures be enough to substantially change public radio as we know it? The deciding factor may be the strength of "station ego''--that mix of personal and institutional factors that makes each station unique. Local control and program autonomy are central pillars of public radio, and there has been virtually no foundation developed to establish a case for individual stations cooperating in the pursuit of national policy objectives. In fact, what one station's staff regards as "cooperation'' looks like "coercion'' to another. And any plans to force efficiency on "the system'' will meet strong resistance at virtually every level. Acceptance will only come, if it does, with adequate time, ample discussion and demonstrations of successful adaptation.
Regardless of the degree of resistance, some level of change is coming to public radio, just as it did in commercial radio. Five years ago, many experienced commercial broadcasters were confident that "Howard Stern can't work in my market.'' Ditto for Rush Limbaugh. Now, daily network competition is a fact of life. Commercial radio is changing its accepted wisdom, including the concept of radio as an essentially local medium. Faced with a mature market and declining profit margins, commercial stations are consolidating operations, reducing overhead, sharing programs and increasing the impact of key personnel. Public radio, which led the re-emergence of network radio through NPR, now faces similar pressures. In all likelihood, it will respond in a similar way to improve efficiency.
These are not the best of times in broadcasting. The combination of financial pressure, changing technology and emerging competition often seems overwhelming. Only easily can be come pessimistic, imagining that the future of public radio will be shaped by forces and events over which we have no control. But most of us know this isn't true. While we cannot guarantee the future, we collectively will have a good deal of control over decisions that will determine whether public radio prospers or withers in the decade ahead, regardless of the level of CPB support or the pace of digital technology.
To exercise that control, we need to distinguish fact from fiction about the services we provide and how these services must be delivered, and about the parts of our system that are unsustainably ineffective.
"No one has much difficulty getting rid of the total failures. They liquidate themselves,'' as Peter Drucker notes in The Effective Executive. "Even more dangerous are the activities which should do well and which, for some reason or other, do not produce. These tend to become 'investments in managerial ego' and sacred. Yet unless they are pruned, and pruned ruthlessly, they drain the lifeblood from an organization.''
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