Strategic Planning Paper Cumulus Media Feb 15 2015
1. Cumulus Media, Inc.
Strategic Analysis
Submitted in Partial Fulfillment
of the Requirements for the MBA Degree
MGT 6800
Dr. Paul Boyd
Barry Y. Zoll
February 18, 2015
2. Cumulus Media 1
Contents
Executive Summary ........................................................................................................ 4
Background Information on Cumulus .............................................................................. 5
Brief History .................................................................................................................5
External Analysis.............................................................................................................9
Brief History of the Industry.......................................................................................... 9
Industry Analysis........................................................................................................ 10
PESTEL Analysis....................................................................................................... 10
Political Factors.......................................................................................................... 11
Economic Factors ...................................................................................................... 11
Sociocultural Forces .................................................................................................. 13
Technological Factors................................................................................................ 14
Environmental Forces ................................................................................................ 15
Five Forces Analysis ..................................................................................................... 17
Barriers to Entry - Strong ........................................................................................... 18
Bargaining Power of Suppliers –Strong ..................................................................... 19
Bargaining Power of Buyers - Moderate .................................................................... 19
Threats of Substitutes - Moderate.............................................................................. 20
Collective Strength of the Five Forces ....................................................................... 21
Factors Driving Industry Change................................................................................ 22
Industry Competitive Analysis ....................................................................................... 24
Industry Competitors.................................................................................................. 24
Position of Rivals in the Market.................................................................................. 28
Value Proposition .......................................................................................................... 29
Strategic Moves Rivals Will Likely Make ....................................................................... 30
Industry’s Key Success Factors .................................................................................... 31
Industry Outlook ............................................................................................................ 32
Summary of External Analysis ...................................................................................... 33
Internal Analysis............................................................................................................33
Organizational Analysis................................................................................................. 33
Corporate Vision and Mission .................................................................................... 34
3. Cumulus Media 2
Leadership ................................................................................................................. 34
Culture, Social Responsibility, and Structure ............................................................. 35
Summary of Organizational Analysis ......................................................................... 36
Analysis of the Company’s Resources.......................................................................... 36
Physical - Strong........................................................................................................ 37
Financial - Moderate .................................................................................................. 37
Technological Assets – Strong................................................................................... 38
Organizational Resources - Strong............................................................................ 38
Intangible Resources - Strong.................................................................................... 38
Human Assets and Intellectual Capital - Strong......................................................... 39
Brands, Company Image, and Reputation - Strong ................................................... 39
Relationships - Strong................................................................................................ 40
Company Culture and Incentive System - Weak........................................................ 41
Capabilities - Strong................................................................................................... 41
Core Competencies and Sustainable Advantages - Strong ....................................... 42
Distinctive Competence - Strong................................................................................ 43
Summary of Resources.............................................................................................. 43
Analysis of Objectives ................................................................................................... 44
Evaluation of Financial Performance............................................................................. 45
Financial Condition Analysis and Summary............................................................... 45
Crafting a Strategy ........................................................................................................ 47
Criteria Test................................................................................................................... 48
Focus on unique brands............................................................................................. 49
Further Leverage Operating Efficiencies.................................................................... 49
Use experience to provide consistent operations....................................................... 50
Refine their large-scale operations to achieve efficiencies. ....................................... 50
Operate in a fiscally responsible manner. .................................................................. 50
Making acquisitions that are sensible ........................................................................ 50
Value Chain Analysis .................................................................................................... 51
SWOT Analysis ............................................................................................................. 54
SWOT Analysis ............................................................................................................. 55
4. Cumulus Media 3
Strengths (Internal) .................................................................................................... 56
Weaknesses (Internal) ............................................................................................... 57
Opportunities (External) ............................................................................................. 58
Threats (External) ...................................................................................................... 59
Strategic Fit Analysis..................................................................................................... 60
TOWS Analysis ............................................................................................................. 64
Alternatives ................................................................................................................... 64
Alternative 1 (SO) ...................................................................................................... 64
Alternative 2 (SO) ...................................................................................................... 64
Alternative 3 (WO) ..................................................................................................... 64
Alternative 4 (ST)....................................................................................................... 65
Alternative 4 (WO) and (WT) - ................................................................................... 65
Alternative 5 (ST) and (WT) ....................................................................................... 65
Recommendations ........................................................................................................ 65
Recommendation number 1....................................................................................... 65
Recommendation number 2....................................................................................... 66
References....................................................................................................................69
5. Cumulus Media 4
Executive Summary
The purpose of this paper is to conduct a strategic analysis of the broadcast
radio industry with a focus on Cumulus Media, Inc. This analysis will outline a brief
history of Cumulus and a timeline of major events in its history, along with an
explanation of the company’s purpose. Then, the external environment will be analyzed
and the potential effects on Cumulus. Using Dr. Michael Porter’s Five Forces Analysis,
an assessment will be made of the threat of entrants, the factors affecting the power of
buyers and sellers, the threat of substitutes of broadcast radio, and trends in the
industry. The paper will then look at competitiveness within the industry including
anticipation of what Cumuls’ competitors might do from a strategic perspective, a brief
summary of industry competition and a look at industry key success factors. Once the
external analysis is complete, the paper will look inward and take a close look at of
Cumulus Medias’ resources, objectives and financial performance. The strategies
employed by a company are vital to their future and must be flexible enough to change
thus the paper will analyze the company’s strengths, weaknesses, opportunities, and
threats. Cumulus operates in an industry that continues to move rapidly towards
consolidation and the results of the research will show what constitutes a good strategic
fit as well as a list of alternatives for positioning Cumulus for the future and a list of
recommendations.
6. Cumulus Media 5
Background Information on Cumulus
Brief History
Cumulus Media (NYSE:CMLS) is a radio broadcasting company with the second
largest portfolio of radio stations in the United States. From their headquarters in
Atlanta, Georgia, they operate two distinct media groups. One, is Cumulus Radio,
which operates over 500 broadcast radio stations located in 110 US cities. Their other
business called Cumulus Media, which provides content to over 4,500 radio stations
and facilitates and syndication of well-known talk show programming hosted by such
notables as Mike Huckabeee, former Governor of Arkansas and Mark Levin (Cumulus
Media Networks, 2015). In addition to their presence in terrestrial broadcasting and in
another step towards fulfilling their goal of increasing their number of listeners and being
accessible via streaming, Cumulus created an alliance with iHEART radio to carry their
programming on iHEART’s digital platform so that anyone with a computer, smartphone,
or other device capable of accessing the internet, could listen to Cumulus stations
(iHEART Media Inc. 2011).
Cumulus Media was created as a result of the changes in the 1996
Telecommunications act which removed the limit of the number of radio stations owned
by one entity (FCC. 2015). The company’s founders were Lewis W. Dickey, Jr. a
consultant and author for the radio and television broadcast industries and CEO of
Midwestern Broadcasting, Inc., and Richard Weening, who was the CEO of Quaestus,
which was an equity investment and advisory firm located in Milwaukee, WI. Using his
experience in the areas of publishing, radio broadcasting, and other eCommerce
businesses, Weening was able to secure investors from the banking and life insurance
7. Cumulus Media 6
industry as well as one institutional investor, the State of Wisconsin Investment Board.
On May 27, 1997, operations began with Weening as CEO and Dickey as Vice
Chairman (Cumulus Company History, 2015).
As part of their offensive growth strategy, Cumulus went public in June of 1998,
and during their IPO, they raised over $390 million of which approximately 70 percent
was used to conclude the purchase of several acquisitions as well as reducing company
debt. Their initial purchases included 167 broadcast stations that were in a series of
broadcasting groups located in every area of the country except for the West Coast.
During subsequent years, they strategically acquired stations in markets where they
lacked presence or saw an opportunity to have one. By the beginning of 1999, they
owned 232 stations in 44 distinct markets which positioned them as the number three
owner of broadcast radio stations in the country. However, their unabated growth
resulted in financial problems during 2000.
During the first quarter of 2000, Cumulus’ stock price tumbled resulting from the
results of a recent audit. Earnings for the previous year had to be restated and
shareholders filed lawsuits contending that the loss of stock value was not strictly from
poor business conditions as was previously thought. As a strategy to bring confidence
back to their stockholders and Wall Street, Vice Chairman Dickey was appointed
President of Cumulus and the company’s CFO was dismissed. In addition, they fired
their accounting firm Price Waterhouse and replaced them with KPMG. The also hired
Martin Gausvik, whose experience with finance in the communications industry was
badly needed. By the middle of that year, the company had restructured some pending
purchases and named President Dickey as CEO and his brother John as Executive
8. Cumulus Media 7
Vice President. The three years of rapid growth had leveled off and despite the loss of
stockholder value, the company’s mounting debt, and the consolidation of operations
that resulted in hundreds of layoffs, their portfolio of radio stations were regarded as
highly valuable and the company was ready to move forward (Cumulus Company
History, 2015.).
10. Cumulus Media 9
External Analysis
Brief History of the Industry
This paper analyzes the external environment of the radio broadcast industry and
begins with a brief historical overview of the industry’s development.
Commercial radio broadcasting traces its roots back to the late 1800s when Mr.
Guglielmo Marconi successfully made the first trans-Atlantic radio transmission between
England and North America. In 1906, a Canadian inventor named of Reginald
Fessenden developed holiday programming for ships sailing off of the Atlantic Coast
which ushered in the era of public radio broadcasting. This experimentation lead to the
official licensing of radio stations in 1922. In these early days of broadcast radio, many
people were concerned that the electromagnetic waves generated by radio transmitters
would cause children to become ill or livestock to produce less, concerns that could be
dispelled by current scientific knowledge (Ruben, 2010). Yet, despite these concerns,
the number of radio stations began to grow.
These early commercial radio stations were owned by various entities such as
private businesses, schools, churches, and radio clubs, but many struggled to achieve
profitability. Stations owned by radio manufacturers used their on-air time to attract a
customer base who would buy their equipment, while others derived their revenue from
advertising sales. For many stations, widespread profitability didn’t occur until the end
of World War II. Corporations such as NBC, CBS, and ABC began to dominate the
broadcast radio industry and produced programming and sold advertising on a national
basis which gave them an economy of scale. This in turn, supported the growth of local
radio stations. Two emerging strategies influenced the proliferation of AM radio: 1) the
11. Cumulus Media 10
automobile industry began equipping cars with AM radios, and 2) the invention of the
transistor that brought the price of radios within the reach of most Americans
(Stromberg, 2011). Radio quickly became the main source of news and entertainment
(Scott, N.D).
Commercial broadcast radio has evolved through many economic cycles and
external influences. This paper will use PESTEL, Five Forces Analysis, and other tools
to provide a summary of the external analysis of the broadcast radio industry.
Industry Analysis
Today’s broadcast radio industry is comprised of 15,358 terrestrial AM & FM
stations (“FCC News”, January, 2014), as well as Sirius / XM which is a satellite
provider. According to research conducted by Houston-Santhanam, Mitchell, &
Rosenstiel (2012), broadcast radio has maintained a level listenership during the past
10 years. Using advertising revenue as metric, terrestrial stations continue to dominate
the radio listening market, with satellite remaining flat, and streaming growing slowly.
Nielsen company’s research shows that over 90 percent of every age group listens to
broadcast radio at least 2.5 hours per day. For advertisers, it offers a differentiation from
other media because many consumers are listening to broadcast radio just prior to
arriving at a shopping destination (“State of media: audio today,” 2014).
PESTEL Analysis
This section of the industry analysis will address macro environmental factors
such as political, economic, sociocultural forces, technological, environmental, and
Legal/regulatory.
12. Cumulus Media 11
Political Factors
The Federal Communications Commission (FCC) is an agency of the US
government that oversees all types of communication including broadcast radio. The
FCC’s stated purpose is to act as a regulatory body for ensuring the orderly use of
different media, licensure, and frequency and transmitter power assignments. The FCC
is also responsible for integrating and acting as a steward of new technologies and
other innovations and to educate its citizenry. The FCC is comprised of five
commissioners, all of whom are appointed by the President and one is selected as
chairperson (FCC, 2014).
With the passing of the Telecommunications Act of 1996, the license renewal
process was significantly altered. It allowed stations to devote less time to public
service broadcasts that traditionally drew fewer listeners and in its place, the station
could put alternate programming that would generate more advertising revenue. In the
interest of fairness, the Act also provided for a lottery system for new frequencies vs.
the prior system that had the potential for subjective favoring of one applicant over
another (Marc, 2000). Another provision of the act allowed for the formation of
conglomerates such as Cumulus Media, by removing the limit of the total number of
radio stations that one entity could own. However, there was no removal of the limit
placed on the number of stations that could be owned in a particular market. (“FCC
What We Do,” 2014).
Economic Factors
There are several stakeholder groups in broadcast radio affected by factors in
the economy: radio listeners, station owners, advertisers, and station personnel as well
13. Cumulus Media 12
as the companies who provide the facilities and equipment necessary to produce shows
and transmit signals.
Other media such as newspapers, television, podcasts, and internet streaming,
broadcast radio equipment is the most affordable of all. For as little as $12, a consumer
can purchase a Sony ICF-S10MK2 portable radio (“Sony ICF-S10MK2,” 2014) and the
only additional cost is the occasional replacement of batteries vs. the monthly cost to
subscribe to the Arizona Republic for $6.12 per week (“The Arizona Republic
Subscriptions,” 2014). And although News and Talk Radio podcasts are available from
iTunes, free of charge, the minimum cost of purchasing an Apple device capable of
downloading podcasts, without the need of a computer, is approximately $199 (“IPod
Touch,” 2014). The user must also have access to the internet which is a service can
either be purchased for a monthly fee of over $60 (Dang, 2013). If television is the
consumer’s media device of choice, the cost of a basic television is approximately $90
(“Polaroid 19GSR3000,” 2014) and if the consumer elects to subscribe to a cable or
satellite service, the cost of a monthly subscription starts at approximately $20 per
month (“Digital Cable & TV plans,” 2015).
In an address given by FCC Commissioner Gloria Tristani , which was shortly
after the passing of the 1996 Telecommunications act, she explained there were many
benefits of consolidation to local communities. Some of these benefits include the
continued existence of local stations now owned by large broadcast groups, by taking
advantage of their economies of scale and reducing their cost of operations.
Considering the format diversity of these larger organizations, they could experiment
with bringing programming to local communities that would otherwise be cost
14. Cumulus Media 13
prohibitive. Consolidation also gave advertisers a more efficient process for buying time
from one entity vs. negotiating with individual stations (Tristani, 1998). The downside of
consolidation, in addition to the effects of having local news stories for one market
produced in another, is the estimated loss of thousands of jobs at local radio stations
(Boyle & Wexler, 2005).
Sociocultural Forces
Broadcast radio is frequently listened to in an automobile however there are
several lifestyle changes in the US that have impacted the amount of time people are
spending in a car.
According to the 2013 US Department of Transportation report on the status of
the nation's highways, bridges, and transit, between 2001 and 2009, the average
number of miles driven per day declined by 10 percent and the number of daily trips
declined by 7 percent. The report also stated that Baby Boomers, those who were born
between 1946 – 1964, are now approaching their retirement years and will be driving
less frequently while Millennials, those who were born between 1982 – 2000, drive less
frequently for reasons such as their migration from suburbia to urban settings. This
results in more use of public transportation and the declining need to own a car.
Millennials also face the challenge of finding good paying jobs which also reduces their
need to drive (“2013 Status of the Nation's Highways,” 2013).
The United States continues to welcome new citizens from around the world and
there are cultural and language issues that can affect radio programming. According to
the 2010 US Census report, the Hispanic population has increased by 46.3 percent
since 1990 and is the youngest ethnic group. With the majority of them being US born,
15. Cumulus Media 14
they are bilingual so this presents a challenge for broadcasters because the Hispanic
audience is comprised of those who are older and only speak Spanish and the younger
generation who speak both Spanish and English but may prefer English (Guskin &
Mitchell, 2011). There are currently 816 US radio stations whose format is Spanish
(“Spanish Speaking Radio Stations,” 2014). This impacts station owners to have a
diverse workforce so that programming and advertising are properly representing the
local demographic.
During the 1970s, a migration took place with music stations moving from AM to
FM to take advantage of the superior sound quality and reach of FM signals. The AM
band continued with formats that were primarily news, talk, and sports. Now, AM
stations are simulcasting their AM programming on an FM frequency. Among the
reasons for doing this is an attempt to capture more of the younger generation who
grew up listening to music on FM and rarely listened to an AM station (Diaz, 2013).
Technological Factors
The proliferation of electronic technology has been a boon to the broadcast radio
industry. Many radio stations carry sporting events and conduct remote broadcasts in
their communities. When a remote broadcast is held within a short distance to the radio
station, a microwave transmitter will send the broadcast back to the radio station for re-
transmission (Younger, 2012). Sound quality was greatly improved unlike the era
where these broadcasts were sent via telephone lines. When long distance signal
transmission is necessary, the internet has enabled radio broadcasters to use
technology such as Skype to send audio back to the studio (“More about Skype TX,”
2014). Social Media sites such as Facebook allow correspondents to post videos and
16. Cumulus Media 15
reports to their Facebook page and these items can be extracted for use on the air. For
stations with a music format, the invention of the iPod and other MP3 devices has
replaced file cabinets filled with records and studios crammed with turntables. Increased
reliability, improved sound quality, as well as access to millions of titles have enabled
stations to provide more diverse content. This technology has also enabled the use of
podcasts and ushered in an era where programs can be produced from a remote site
and sent via the internet for rebroadcast at a later date (“Making a Podcast,” 2014). The
internet and satellite transmissions also facilitated the growth of syndicated
programming such as talk radio, business and weather reports creating an economy of
scale that reduced individual station payrolls and simultaneously removed some of the
local content. This topic will be discussed further in a later section.
Environmental Forces
Commercial radio broadcasting began in Pittsburgh, PA through experimentation
by an amateur radio operator who began playing music for his listeners. This caught
the attention of a Pittsburgh company by the name of Westinghouse, a manufacturer of
radio receivers. On October 27, 1920, the US government granted the first commercial
broadcasting call sign KDKA to the Westinghouse corporation (“KDKA the first
commercial radio station,” 2013). Since then, broadcast radio has played a pivotal role
in all facets of American life including the support of our communities during times of
environmental events such as earthquakes, hurricanes, snow storms, and other natural
disasters. When a catastrophic event takes place, stations will often suspend normal
programming and eliminate advertising commitments to provide continuous coverage of
the environmental event. During the aftermath of Hurricane Katrina in 2005, FEMA
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distributed food, water, and battery powered AM radios to residents of Hancock County,
MS. Days prior to the arrival of the hurricane, station personnel set up a remote
broadcast site on higher ground and received a waiver from the FCC to broadcast their
signal at a higher power. Once the storm passed, WQRZ provided 24 hour coverage
including information about relief efforts, shelters, locations of food drop sites, and other
information to assist the victims of this storm (Pappentick, n.d.).
Broadcast radio stations require very tall radio towers to enable them to transmit
their signals over long distances. These antennas emit what is called radio frequency
energy or RF and there have been concerns about the environmental and health
impacts that result from RF exposure. In 1969, the US government enacted legislation
that required the FCC to establish a process to evaluate the effects of RF emissions
from transmitters that belonged to licensed operators. In 2013, this issue was reviewed
and the FCC was asked to revise their RF exposure limits based on changes in
technology and more awareness since the 1969 legislation was put in place. They
determined that their guidelines provided adequate public safety and welcomed further
comments from professionals in this field (“Radio Frequency Safety,” 2013).
When a broadcaster applies for a permit to erect a tower, there is a comment
period during which anyone who objects to the permit request has an opportunity to
provide feedback. In some cases, the Federal Aviation Administration (“Potential Flight
Hazards,” 2014) may object due to the flight path that the tower may interfere with.
However, the majority of the objections come from citizens who are concerned about
the appearance of the tower or RF emissions. One recent example occurred in
February, 2014 with an objection filed by a resident of Point Roberts, Washington.
18. Cumulus Media 17
Radio station KRPI, applied for a permit to erect a tower at a height between 145 and
150 feet. The FCC license for the station included an approval to erect the tower
despite the town ordinance that required a variance for the height necessary to reach
the assigned listening area. Ultimately, the Town prevailed and the request from KRPI
was denied (“Whatcom County,” 2014). As of December 24, 2014, KRPI is appealing
the ruling and the residents of Point Roberts, Washington are raising money for a
defense fund (“No Radio Towers,” 2014).
Five Forces Analysis
The Five Forces Analysis was developed by Dr. Michael Porter and measures
industry factors of rivalry, barriers to entry, bargaining powers of suppliers and buyers,
as well as threats of substitutes.
Rivals within the industry – Strong / Moderate
In the terrestrial broadcast radio industry, Clear Channel Communications, which
is a division of iHEART Media is the largest owner with 835 terrestrial stations (iHEART
Media Inc., 2014) followed by Cumulus Media which according to Businesswire.com,
(2011) has 570 terrestrial stations. Clear Channel represents a strong rival due to the
control it has over the Cumulus digital platform and through the influence it has resulting
from the larger number of stations. Other smaller competitors include Salem
Communications, CBS, Cox Radio, and numerous stations owned individually and by
smaller groups. From a macro perspective, these competitors have a moderate
influence because they don’t have the financial and content capabilities that their larger
competitors do. Looking at the industry from a micro view, the influence of smaller
rivals is greater because their relatively smaller size and lack of large corporate control
19. Cumulus Media 18
could allow them to operate with more local content. Later in this analysis, research will
be shown that radio station WTMA, located in Charleston, South Carolina only devotes
4 hours per day to local programming and they are a Cumulus station (WTMA Weekly
program schedule, 2014). Compare this to WSB, a Cox station located in Atlanta,
Georgia that dedicates at least 13.5 hours per day with local programming (WSB
program schedule, 2015).
Barriers to Entry - Strong
The terrestrial broadcast radio industry has many barriers to entry. The first
barrier is obtaining a license to broadcast from the FCC. The demand for new radio
station licenses has significantly increased and the supply of station positions or
frequencies is static, as of December 26, 2014, the FCC is not accepting any new
license applications so a potential entrant would have to purchase a currently operating
station (“How to apply for a Radio,” 2014). There is also a permit required to erect a
tower that is the appropriate height based on the frequency assigned by the FCC,
gaining public support can cause a lengthy and costly delays (“Whatcom County,”
2014). Whether a new entrant is purchasing an existing station or starting a new one,
they must have sufficient financial backing either through loans or other sources, both of
which erected significant barrier of entry. The FCC does not keep a database showing
purchase and sale transactions (FCC, 2014) however in 2014, Emmis Communications
announced the acquisition of WBLS-FM & WLIB-AM in New York City for $131 million
(Emmis, 2014) vs. the sale of a small Vermont station with a current asking price of
$250,000 dollars (“Vermont AM Value Priced,” 2015).
20. Cumulus Media 19
Bargaining Power of Suppliers –Strong
Suppliers, depending on what they are selling, have a varied amount of
bargaining power with radio station owners. The supplier may have a strong advantage
with smaller stations and face fierce competition when selling to larger organizations
such as Cumulus. As an example, if Cumulus chooses one supplier for their national
news, then the competition to win this business would likely result in a lower price per
station than a single station operator would be able to negotiate. Conversely, the sole
supplier of music from a particular artist or an agent for a popular talk show host would
hold an advantage because the stations have no alternative to obtain the rights to use
the particular music or carry the highly desired talk show from any other source.
Sean Hannity is a popular talk show host whose show is carried by Cumulus
stations. Estimates have been made that his listening audience is approximately 13
million per week ranking him second in the nation. If Hannity decided not to renew his
contract, this would force Cumulus to offer more money, possibly a more desirable time
slot for the show, or replace him which would be a large financial expense and would
take time to recover the lost listenership that would likely follow Hannity’s show (Daily
News, 2013).
Bargaining Power of Buyers - Moderate
Broadcast radio stations have one commodity to sell which is time. This could be
in the form of advertising or paid programming such as a show to promote the sale of a
consumer product. The bargaining power of the buyer varies based on the time of day
or frequency of airing. The size of the listening market which in the case of Cumulus,
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which could be nationwide, would also put the buyer in a weak negotiating position.
Small local radio stations, such as WWPR-AM in Bradenton, Florida offers different
rates for advertising spots aired between 6 AM and 6 PM and another rate schedule for
other hours. They also offer new customer discounts as well as the opportunity to
purchase time for paid live programming at a rate of $150 per hour (“Radio Advertising
Rates,” 2014). The size of the audience, the number of spots, and the time of day they
are aired will vary the buyers bargaining power.
Threats of Substitutes - Moderate
Consumers listen to broadcast radio for different reasons so the threat of
substitution varies based on the type of usage and in some cases, with the cost of
subscription and switching. According to research conducted by Arbitron, Inc., Edison
Research, & Scarborough Research (2011), respondents stated that 64% of their
driving time is spent listening to AM/FM radio and 42% reported that they left their
radios tuned to the same station. In addition to listening to music, many drivers depend
on local radio for traffic and weather reports. The cost of the radio is included in the
price of the automobile and there aren’t any additional fees so substitution isn’t likely if
broadcast radio meets their needs. If the listener is stationary, the cost of an AM/FM
radio is as little as $12 (“Sony ICF-S10MK2,” 2014) and potential substitutes are
television, newspaper, or internet streaming. Sirius/XM radio offers a wide variety of
news, sports, and music content; however the cost of switching is relatively high so the
threat is moderate and dependent on affordability. Streaming audio through a smart
phone is also a relatively expensive substitute because it requires a monthly fee,
equipment purchase, and in most cases, a long term contract so the threat of this
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substitute is low. Another option is to use an MP3 player or iPod device. Once the
music is loaded into this device, it offers portability however unless it’s equipped with
wireless internet capability, it cannot provide the local content of an AM/FM radio. For
listeners seeking local content, AM/FM radio provides the greatest value and the least
amount of threat from substitutes.
Collective Strength of the Five Forces
The level of competition for listeners to broadcast radio is very high and it’s
based primarily on program content and accessibility. The lack of new station licenses
and industry consolidation has created large entities who enjoy economies of scale.
This evolution has created barriers of entry that are difficult to overcome which pits well-
funded and diverse organizations against each other to gain more listeners which
increases their ability to generate higher advertising revenue. Depending on their
product, suppliers to the industry sometimes have strong bargaining power and in other
cases, they are in a relatively weak negotiating position. Businesses who advertise with
a radio station have alternatives in the each market. However, as consolidation
continues, the cost to advertise may rise which could lead to defection to other media
and a decline in the industry’s revenue stream. The threat of substitution is relatively
low for listeners who depend on broadcast radio for local news, sports, weather, and
traffic and are on a limited budget. However, as costs decline with other technology
such as smart phones and streaming audio, consumers will have access to a broader
range of content which may undermine the success of broadcast radio stations that
have chosen to remain with a terrestrial strategy only.
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Factors Driving Industry Change
The broadcast radio industry has several drivers that are affecting change. Until
the 1970s, AM radio was the primary carrier of programming including news, talk,
sports, and music. FM had been underutilized and with lackluster programming, the
listening audience was far below its potential. By the late 1960s, the FCC encouraged
station owners who were broadcasting the same shows on their AM and FM
frequencies, to use a different format on each. As more FM radios were manufactured
for home use and FM radios for automobiles became more common, FM band usage
began to grow. The sound quality was more appealing than AM and did not have some
of the characteristic reception and static problems that AM suffered from (West, 2011).
As a new generation began listening to FM in greater numbers, AM listenership
declined and by the late 1970s, FM listenership exceed that of AM for the first time. In
an effort to reposition the AM band from decline back to growth, a ruling from the FCC
in the late 1980s removed the regulation requiring that the broadcast of opposing views
of political issues receive equal time on the air. This ushered in the rebirth of the AM
band (McCoy & Sciullo, 2013). Listenership to AM and FM broadcast radio has
remained relatively flat since 2001 and statistics show that the driver that will help keep
this industry alive will be online streaming of their programming (Mitchell et al., 2012).
The internet and smart phones have driven a revolution of change in
broadcast radio. One of the most significant drivers within this technology has been the
addition to streaming a station’s broadcast through the internet. Listeners can enjoy
virtually seamless reception without the limitations of the station’s coverage area. When
a listener is traveling and wants to stay informed about local events, internet streaming
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provides this service. While a listener is working, staying tuned to a terrestrial station
presents reception challenges. Radio signals do not travel well through steel and
cement buildings and are adversely affected by electrical noise caused by computers
and fluorescent lighting so having the availability of the station via the internet
eliminates terrestrial reception problems (“Improving Your Reception,” 2014) and allows
the listener continuous station access. Similar to the impact of the internet on
newspapers, as more consumers switched to the internet for news gathering, broadcast
radio is facing a similar problem except there’s room for both technologies. Advertising
costs are measured by CPM or costs per impression. Broadcast radio advertising
revenue for spots, which is the term used for a broadcast radio advertisement, declined
by 4% in 2013 vs. a 15% increase in digital advertising revenue during the same period.
From an advertiser’s perspective, digital advertising is not limited to the broadcast range
of a terrestrial transmitter so their CPM is much lower due to a wider audience base.
The radio station knows the approximate location of each digital listener so they can
substitute local advertising for listeners in specific markets. The blend of both terrestrial
and streamed broadcasting should allow for growth in revenue and listenership over the
long term (Kinsella, 2014). With greater availability of radio stations through streaming,
the competition for listeners is rapidly increasing because not only are local stations
available, now the listener is able to choose from content around the world which will
force the industry to become more efficient in their operations as well as working harder
to offer the best possible content.
25. Cumulus Media 24
Industry Competitive Analysis
The broadcast radio industry is going through an evolutionary period with the
internet and smart phone devices playing a larger role in how listeners are accessing
content. To analyze this industry without the inclusion of broadcasters who have a large
presence on the internet and Sirius/XM, the sole provider of content via Satellite, would
not portray an adequate analysis of this industry. I will examine iHEART media,
Cumulus Media, CBS, and Cox Media as well as Sirius/ XM, Pandora, and Spotify.
Industry Competitors
The industry leader is iHEART Media, Inc. who owns 835 radio stations located
in 85 of the top 100 markets in the US. They also produce 95 syndicated radio
programs with 5000 affiliates carrying some or all of the content and they claim to reach
a weekly audience of almost 190 million listeners. They have a large digital presence
that includes their own programming as well as carrying content from other
broadcasters (iHEART Media Inc., 2014).
Cumulus Media is the second largest with a portfolio of 450 terrestrial stations
located in 93 media markets and distributes network programming to over 10,000
affiliates. They distribute their broadcasts through terrestrial and digital formats and in
addition to distributing digital content through their own network, they joined forces with
iHEART Media to carry a selection of Cumulus owned station programming. Cumulus
stated in the March, 2014 10k report that they have a presence in 8 of the top 10
markets and estimate that their content is heard by 65 million listeners per week
(Cumulus Media Inc., 2014)
26. Cumulus Media 25
CBS, owns 126 radio stations in 26 US markets and provides news, sports, and
other content to affiliated stations with an audience of 72 million. Their market
capitalization of $29.6 billion (CBS, 2014) is significantly larger than that of Cumulus
with $974 million (Cumulus Media Inc., 2014) and iHEART Media with a market cap of
$605 million (iHEART Media Inc., 2014) however they’re involved in several other
businesses such as television broadcasting, outdoor media, and publishing (CBS,
2014).
Cox Media Group owns 57 radio stations and is a division of Cox Enterprises.
Cox Media’s 2013 revenue of $1.7 billion (“Cox Media Group – About,” 2014) puts it
ahead of Cumulus Media however its significantly less than the revenue generated by
both CBS and iHEART Media. Many of their radio stations also stream on the internet
and they’re the only company discussed thus far that is privately held (“Cox Media
Group – About,” 2014). There are several smaller broadcaster groups such as Greater
Media and Emmis. Salem Communications owns almost 100 stations however their
emphasis is on family values and Christian broadcasting rather than the mainstream
market that these other companies serve (“Salem Communications History,” 2014).
For those broadcast listeners who prefer primarily music, there are several
options. We will now look at Spotify, Pandora, and Apple.
Spotify is an online music provider that offers their services free of charge with
commercials or with their premium pay service for $9.99 per month, the user can
download songs and create playlists and will not be subjected to listening to
commercials. The system also allows the user to identify artists and/or songs that they
like and Spotify will remember this information and make future recommendations
27. Cumulus Media 26
(“Music for everyone,” 2014). As of May of 2014, the company has approximately 3
million users in the US (Adegoke, 2014). Spotify offers the user the opportunity to select
their preferred tastes in music vs. services from iHEART Radio, Cumulus, and CBS who
all offer features that allow the user to select certain songs and then recommend ones
that are similar but not with the level of customization that Spotify offers. Terrestrial
broadcast stations don’t offer the opportunity to develop playlists so the only option for
consumers is to listen to a station that plays a desired theme such as country, rock and
roll, or jazz.
Pandora allows the user to create music lists similar to Spotify. Like Spotify, they
offer a free service that’s accompanied by advertising or Pandora One, which is free of
advertising and requires a monthly subscription fee of $4.99. Pandora estimates that
they have 200 million users and over 80 percent use the service through a mobile
device (Pandora, 2014). This compares to Spotify, which is a privately held company,
with an estimated 75 million users (Pressman, 2014).
Apple’s products such as the iPod, iPhone, iPad, and laptop computers offer the
user access to a library of approximately 43 million songs. ITunes radio offers specific
content by genre, as well as numerous podcasts which cover items such as news
shows, comedy, book reviews, and many other subjects. There is no subscription fee
for most of the iTunes products however listeners must purchase songs, albums, and
some podcasts. Over time, ITunes can become very costly. For the devices that allow
for internet access, most of the services previously described are available as Apps.
Prices of the devices range from $49 for a basic iPod to thousands of dollars for an
Apple laptop computer (“IPod Touch", 2014). According to Tim Cook, Apple’s CEO, the
28. Cumulus Media 27
company has approximately 800 million iTunes accounts, far exceeding their
competitors (“F2Q 2014 earnings conference call,” 2014). This figure is based on their
worldwide audience and there’s no information available regarding the size of their US
audience.
Satellite radio began in the early years of the 21st
century by two companies
named XM and Sirius. Both provided seamless coverage from coast to coast and
offered stations with a variety of programming ranging from music, entertainment, news,
and sports. Listeners were required to purchase separate receivers and pay a
subscription fee for the service. In 2008, the FCC approved the proposed merger
between the two companies. With the era of Apple’s iTunes and other internet based
broadcasting quickly approaching, the intent of this merger was to help the satellite
radio industry continue to be a competitive force (Kharif, 2008). Today, Siruis/XM
claims to have over 25 million subscribers and offers 3 subscription levels ranging in
price from $9.99 to $18.99 per month with the more expensive subscriptions offering
more channels as well as internet access to programming. Most major automobile
manufacturers offer Sirius/XM in their vehicles by incorporating the technology required
to listen to their stations into the AM/FM audio units however after a trial period, the
vehicle owner must subscribe to continue the service (“Sirius/XM Welcome,” 2014).
Listeners have many choices today and the following chart will show how they
are positioned to compete.
29. Cumulus Media 28
Position of Rivals in the Market
Figure 1. Comparative Market Positions of Rivals in Broadcast Radio Market.
Figure 1 shows the market positions of broadcast radio groups vs. satellite
providers and companies that don’t use any type of terrestrial broadcasting. Due to their
impact on broadcast radio listenership, they must all be considered when evaluating the
external environment.
Based on this analysis, terrestrial broadcast stations that who are not active in
streaming are the most vulnerable. Looking at iHEART media, their portfolio is heavily
invested in terrestrial broadcasting however they’re also developing their streaming
presence which gives them additional revenue opportunities and exposure to listeners
who may have low awareness of their station or brand. Apple’s ITunes is in the most
favorable position. Their library of media gives them a competitive edge to offer more
variety to listeners. Also, the number of iTunes user accounts is over twice the number
of Pandora. Even though the data for the US market is not available from either, their
30. Cumulus Media 29
size gives them the advantage by having a distribution channel that the others haven’t
earned. Neither company offers live news, sports, weather, and traffic information
however, the listener has the option of using broadcast radio for this content. CBS’
presence in the streaming industry is small compared to Cumulus and iHEART,
however their corporate overall financial position is strong. Sirius/XM has a monopoly
on satellite radio but their system differentiates them from all of the others in terms of
coverage area. Their coverage has no terrestrial signal limitations, whether it’s being on
the fringe of a broadcast area or listening at night when some stations run lower power
or are off the air. In these areas, where a listener wants live news, sports, and weather
information, satellite radio is the best option. Spotify has neither the name recognition
nor the size of a user base that compares to the others.
Value Proposition
The preceding section discussed competition within the industry, who the players
are, and the positions they hold in the market. Broadcast radio offers the greatest value
proposition for a radio listener. From a cost perspective, it’s the most economical of all
media choices and with the resources of ownership or affiliation with organizations such
as Cumulus, the listener has access to almost every type of content that one would find
in a service that would cost much more. Based on their presence in terrestrial and
digital formats and as the cost of receiving the digital signal declines in the future, the
company will be experienced and prepared to offer quality content through both types of
media and give them a long term competitive advantage.
31. Cumulus Media 30
Strategic Moves Rivals Will Likely Make
iHEART radio is likely to continue their strategy of acquiring terrestrial stations,
increasing their streaming presence, and marketing their streaming services to other
large broadcast firms such as Cumulus and CBS. They also have an opportunity to
offer their streaming services to smaller firms that don’t have the financial resources,
experience, or marketing power of iHEART. This is a win-win for all parties, particularly
the smaller entities, because streaming can increase advertising revenue. Pandora and
Spotify are likely to continue with their specialization in music and individual station
creation. Neither of them own terrestrial broadcast stations and the barriers to entry
may be cost prohibitive, so those resources could be best used in their area of core
competency which is music.
Apple will likely continue to build their music library and expand their podcasts.
They are the only firm in this group that produces hardware and the competitive
landscape in the technology business, which is shown by the short life cycle of many of
their products, requires them to focus on product development rather than diversifying
into broadcast media that may produce a smaller return on investment than their core
business.
Sirius/XM is likely to grow their presence in the automotive business and
concentrate on subscription sales that incorporate their proprietary hardware with
internet streaming. The barriers to entry in the satellite broadcast industry require a
significant financial investment that no one is likely to pursue unless they can sell other
services that the satellites can provide.
32. Cumulus Media 31
Industry’s Key Success Factors
The overall key success factor is the ability of a station to differentiate
itself from others in the market.
Consolidation has taken place and one result has been that much of the
programming is now syndicated and has taken the place of much of the local
programming. As an example, WTMA is an AM station located in Charleston, South
Carolina, with a population in the metropolitan area of 669,157 (“Best Place to Live,”
2014). This station’s schedule from Monday through Friday includes a local morning
show from 6 AM until 10 AM and the remainder of the schedule consists of syndicated
shows hosted by Michael Medved, Red Eye Radio, First Light, Herman Cain, Clark
Howard, The Savage Nation, Mark Levin, and John Batchelor (“WTMA Weekly program
schedule,” 2014). Of the 24 hours of broadcasting, only 4 hours is dedicated to local
content. The fact that these syndicated shows can be streamed from many sources
gives the listener a reason to defect to another broadcaster. That intent could be
diminished if the station invested in development of local shows and differentiated itself.
This local content may result in more local advertising and without local identity, the
station may blend into the crowded field of competitors.
Another key success factor is to have a digital presence because with advertising
revenue increasing at a rate of 15% vs. a terrestrial rate of revenue decline of 4%
(Kinsella, 2014), the survival of a terrestrial station may hinge on how well it positions
with streaming. When the local stations carry broadcasts of events such as local
sports, political events, and remote broadcasts with businesses, this could increase
33. Cumulus Media 32
their listenership and generate more advertising revenue. It also creates differentiation
where a large company such as iHEART media, would be an unlikely competitor.
Industry Outlook
The broadcast radio industry is in a period of evolution going from a terrestrial
based operation to a mix with streaming. There are several factors that create a
challenging environment for the station owners. Public displeasure with new antenna
construction along with the current state of new license availability create barriers to
entry which has the potential to increase the cost of acquisition of an existing station.
Technology has created greater accessibility to broader program content however, it’s
also increased the competitive landscape which forces stations to run more efficiently
but at the same time, pits local stations against the immense resources of large
corporations. Advertising remains the main revenue stream for a radio station so
there’s a conflict between the revenues that digital media has produced and the need
for the station to maintain a local presence so it remains a comprehensive choice for its
listeners. Apple’s iTunes does not offer the same content that broadcast radio does
however if they chose to enter this market, the size of their customer base along with
their financial resources could pose a threat to local radio. Satellite Radio offers
seamless reception and a wide variety of programming and the cost of subscription is a
barrier for many listeners. Pandora and Spotify specialize in music content and despite
their success in that niche, they appear to be a complementary source of entertainment
rather than a substitute. Based on these factors, it appears that investment in this
industry where the return is the greatest is with the larger companies such as iHEART
media and Cumulus.
34. Cumulus Media 33
Summary of External Analysis
The process of analyzing the external environment of an industry is important
when considering or increasing an investment in a particular industry. The numerous
factors to consider along with the complex and rapidly changing business environment
make a thorough external analysis essential. When a firm is considering entering a new
industry or expanding in one that it currently participates in, the time and money spent
to conduct this analysis is good for long term financial health. The terrestrial radio
broadcast industry continues to evolve as consolidation takes place and the larger
media groups such as iHEART, Cumulus, and companies yet to be created will likely
become the industry’s dominant force.
Internal Analysis
The internal analysis of an organization is necessary to make the best strategic
decisions by evaluating the strengths and weaknesses, core competencies, and
willingness of each stakeholder to achieve the mission of the organization. In this
section of the paper, we will look at various aspects of the company, its resources, the
long-term and short-term objectives, financial performance, the overall strategy, value
chain analysis, and a TOWS analysis.
Organizational Analysis
Cumulus Media is the second largest owner of broadcast radio stations in the
US. Its business is divided into two entities with one being broadcast radio and the
other as a syndicator and content provider to more than 4,500 affiliated stations
throughout the US. Cumulus has a strategic alliance with IHEART radio, a division of
Clear Channel Communications, to carry selected radio stations on their digital platform
35. Cumulus Media 34
(iHEART Radio, 2011). The company is based in Atlanta, Georgia and has offices in
New York and Dallas.
Corporate Vision and Mission
Cumulus’ goal is to provide diverse programming to maximize the number of
loyal listeners and to generate revenue through advertising and affiliate fees. Their
vision is “Cumulus Radio strives to create the next generation radio broadcast
enterprise” and their mission statement reads “by leveraging great people and
technological excellence, we provide high quality local programming choices for our
listeners; targeted audiences with disposable income for our advertisers; and rewarding
career environments for our employees (Cumulus. com. 2015).”
Leadership
Cumulus’ leaders have been challenged with growing a profitable enterprise in
the competitive broadcast radio industry because unlike their predecessors who had
limited markets to reach in a changing but fairly consistent technological environment,
the Telecommunications Act of 1996 created a new entity in radio broadcasting called
the conglomerate. These leaders were the pioneers in a new frontier and should be
lauded for the risks that they took and the successes they’ve achieved. Cumulus’
corporate governance is comprised of the Chairman who is charged with presiding over
shareholder and board of director meetings, as well as other duties as assigned by the
board of directors. The President, who is also the Chief Operating Officer has general
duties of supervising and controlling the business, and is given the authority to act as a
signatory for the company. The Chairman may also delegate signatory duties to any
Vice President during his absence. Other members of the board of governance are a
36. Cumulus Media 35
Secretary, Treasurer, and an unlimited number of assistants of each pending approval
of the board of governors (SEC.gov. 2002).
The current Chairman, President, and CEO is Mr. Lewis Dickey, Jr., is one of the
founders of the company and assumed the position of CEO in 2000. He received his
Bachelor’s and Master’s Degrees from Stanford University and earned his MBA from
Harvard. Prior to Cumulus, Mr. Dickey was a consultant to the broadcast industry, an
author, and sits on the National Association of Broadcasters Board of Directors. He is
one of the seven members of the Cumulus Board of Directors and oversees an 8
member executive team (Cumulus.com., 2015).
Culture, Social Responsibility, and Structure
During this research, there was no information available on any Cumulus
corporate initiatives regarding activities to preserve the environment or for giving back to
the community. However, the role of a socially responsible corporate citizen and
individual efforts in these areas are handled by individuals and local radio stations.
Alexis Glick, who is a member of the Cumulus Board of Directors, is involved in a non-
profit organization that seeks to improve the health of children through good nutrition
and exercise. The local radio stations owned by Cumulus are also active in community
events. One example is the Medal of Honor Bowl game that’s held every January in
Charleston, South Carolina. This is a fund raising event with a portion of the proceeds
donated to Wounded Warriors of South Carolina. Radio station WTMA of Charleston is
one of the sponsors of the event (Medal of Honor Bowl – Charleston, 2015). CSR,
which is an organization that rates companies on their corporate social responsibility,
gives Cumulus an overall score of 51 vs. 55 for an all industry average and scored
37. Cumulus Media 36
poorly in environment and governance however no specific details were available.
Their highest scores were in the area of community (csrhub.com, 2015). There was no
credible information regarding any current ethical issues related to Cumulus.
Summary of Organizational Analysis
Cumulus Media is one of the original broadcast radio conglomerates who carried
out their vision by using acquisitions and joint ventures to integrate themselves into the
industry. Their strategic alliances with affiliate stations give them additional sources of
revenue for the media that they syndicate. They’ve taken the their alliances one step
further by allowing iHEART radio, which is owned by their competitor Clear Channel, to
carry Cumulus stations on this digital platform. Their vision and mission statements are
clear about their intentions and how they plan to accomplish their goals. Their lack of
visible community and environmental involvement is a cultural improvement that would
benefit all stakeholders in their organization. Their corporate governance appears to
adequately provide for a system of checks and balances.
Analysis of the Company’s Resources
A company’s resources can be classified as either tangible or intangible and
depending on the type of business, one may require strong tangible resources such as
an oil company while others rely on more intangible resources such as the reputation of
a company in the service industry. Regardless, all companies require both types of
resources and the following information will describe those that belong to Cumulus
Media.
38. Cumulus Media 37
The company’s tangible assets can be categorized as physical resources,
financial resources, technological assets, and organizational resources (Gamble et al.,
2014).
Physical - Strong
Cumulus’ Balance Sheet filed as part of their latest 10k report (Cumulus Media,
Inc., 2014) does not give a breakdown of their physical assets however they list
property and equipment, net of $254,702,000 and broadcast licenses valued at
$1,596,337,000. Their property and equipment shows a decline in value from the
previous year and the broadcast licenses show an increase but without more
information, such as industry benchmark data or a list of acquisitions and divestitures,
it’s difficult to properly ascertain if these values are considered good news or bad.
Physical resources of a broadcast radio station would include leases on property and
equipment, transmitters, broadcast equipment, antennas, real estate, their FCC station
licenses, contracts with radio show hosts and other media providers, all of the radio
station logos, and trucks used for remote broadcasts.
Financial - Moderate
Cumulus shows current assets such as cash, marketable securities, and
receivables of $377,055,000. (Gamble et al., 2014) also state the company’s ability to
borrow and its credit rating as part of the tangible asset portfolio. Standard and Poor’s
(2015), one of several credit rating services, has given Cumulus a long term credit
rating of B on a scale that ranges from AAA as best to D which is the lowest score. The
B rating indicates that the obligor has the financial means to meet its obligations but
warns that adverse economic or business conditions may affect their ability to pay.
39. Cumulus Media 38
Technological Assets – Strong
Cumulus owns 525 radio stations in the US and with that, each station has their
own logo, website, jingles, and some even have slogans which could be trademarked.
Show content and music are also the property of the owner or artist and when a
Cumulus station or affiliate broadcasts a show or plays music, they are required to
obtain permission and in many cases, pay a fee for its use. Cumulus’ strength comes
from its ability to broadcast content across different platforms.
Organizational Resources - Strong
Each radio station, just like a typical office, requires an IT infrastructure including
items such as servers, computers, phone systems, and possibly telecommunication
systems such as satellites, to allow for video conferencing and other long distance
communication. The organization should also have a chart showing the chain of
command as well as an HR program that handles all human relations functions and is a
source for protecting the rights of the company’s employees and the interests of
stakeholders.
Intangible Resources - Strong
According to Gamble et al.(2014), the company’s intangible resources can be classified
as human assets and intellectual capital, brands, company image, and reputation
assets, relationships, and company culture and incentive system. Their latest 10k
report (Cumulus Media Inc., 2014) $315,490,000 of intangible assets which represents
a 22% increase from 2012. Unfortunately, there is no benchmark to compare this to so
the strong rating is based on the percentage of increase.
40. Cumulus Media 39
Human Assets and Intellectual Capital - Strong
Cumulus has a significant inventory of human assets. Looking at their
executives, Lewis Dickey received his education from both Stanford and Harvard and
has written a book discussing leadership and strategy. His brother, who is also a
Stanford graduate is the Vice President in charge of Content and Programming.
Treasurer and CFO Joseph P. Hannan worked for several organizations in the
broadcast industry and as a graduate from a different type of university, brings a
different perspective. Other members of the executive team come from backgrounds
such as a director of programs and a former radio station owner (Cumulus Media.com,
2015). The collective experience of this group as well as the board of directors and
other staff is an asset that is valuable to this organization.
Brands, Company Image, and Reputation - Strong
Each radio station operates on a certain theme such as news and talk radio,
sports, different types of music, and business. Although the Cumulus name appears in
places such as websites (WTMA.com, 2015), the station’s theme is their brand. As an
example, Cumulus owns radio station WIXV located in Savannah, Georgia. Their
theme is rock and roll music and they have branded themselves with the slogan “the
rock of Savannah – I 95.” In addition, the last three figures in the station’s call sign
make up the roman numerals for 95. The phrase “I 95” represents the interstate
highway that runs to the west of Savannah (rockofsavannah.net, 2015). Suppliers to
Cumulus, such as syndicated program owners, have the convenience of negotiating
contracts with one entity rather than with individual station owners. Advertisers have
the advantage on the Cumulus website where they segment their markets, list each
41. Cumulus Media 40
station individually and included in these listings, is a media kit that contains information
about the theme of each station, the demographic, on-air hosts, interactive solutions, a
list of their current advertisers and a signal coverage map
(Savannah.cumulusradio.com. 2015). Cumulus dedicates an entire web page with
endorsements, or what they refer to as case studies, from some of their advertisers
(Cumulus Results, 2015). Cumulus would benefit from branding the Cumulus name so
regardless of the listener’s location, the Cumulus name would represent the company’s
good reputation.
Relationships - Strong
Cumulus developed an alliance with its main competitor, Clear Channel
Communications when they reached an agreement to carry Cumulus station’s content
on IHEART radio, Clear Channel’s digital platform. This strategic alliance allowed
Cumulus to minimize the cost of entry into the digital world and for Clear Channel, it
allowed them to sell advertising on Sweetjack, which Cumulus developed to allow local
businesses to advertise daily specials on their stations (iHEART Media Inc., 2015).
Clear Channel benefited from leveraging Cumulus’ presence in advertising in local
markets.
In May of 2014, Cumulus formed a joint venture with Big Machine Label Group to
launch a new record label for promoting country music and increase listenership on
Nash, which is a Cumulus platform and is carried on all of its country music-themed
stations. Ultimately, the goal is to attract a larger listenership and generate advertising
revenue and music sales (Cumulus and Big Machine, 2014).
42. Cumulus Media 41
Company Culture and Incentive System - Weak
The company’s website has a page dedicated to careers. It contains a very
basic description about the company and how wonderful it is to work for them. There is
no mention of any intrinsic value concepts such as educational assistance, internships,
promotion from within, or opportunity to move to different areas of the country. There
are two testimonials from current employees and there’s no mention of diversity. Based
on the fact that the two featured employees are Caucasian, it appears that they aren’t
thinking about a diverse workforce that matches the demographics located in the
markets they represent (Cumulus Careers, 2015).
Capabilities - Strong
The most valuable resource, whether tangible or intangible, is of no use unless
there is human intervention as the catalyst. The capabilities of Cumulus begin by
drawing from the aforementioned resources and using skilled employees to produce
results that will benefit the organization. One of the company’s capabilities is the way in
which their organization operates their radio stations. This includes their sales
department who must sell advertising to generate revenue. An example of this skill is
the design of their website that enables a potential advertiser to look at the Cumulus
stations in a given market, review the media kits to determine which stations fit best with
the products they are selling, and then using the other data included in these kits to
decide where they want to spend their advertising dollars. The result has been a 121%
increase in broadcasting revenue between 2011 and 2013 (Cumulus Media, Inc. 2014).
Another capability of the Cumulus organization is to sell services to smaller non-
Cumulus stations. These services include radio show preparation, software for station
43. Cumulus Media 42
operations as well as a program to help independent station run effective local
promotions (Cumulus Media, 2015).
Core Competencies and Sustainable Advantages - Strong
The core competency of Cumulus is the ability to make strategic acquisitions of
broadcast radio stations that adds listeners to the Cumulus family, and to develop
strategic alliances with other organizations as a means of leveraging their core
competencies to Cumulus’ advantage.
When Cumulus Media was formed in 1997, they set out to take advantage of the
recent changes in ownership rules that resulted from the Telecommunications act of
1996 and to build a conglomerate of stations that offered diverse content to attract as
many listeners as possible thus attracting advertisers and generating revenue. Their
aggressive plan brought them from relative obscurity in 1997 to holding the position as
the 2nd
largest owner of broadcast radio stations in the country. As described earlier in
this analysis, their growth was not unlike other fledgling organizations which resulted in
reaching a point where they assessed their current position and made whatever
changes were necessary to continue moving forward. As they saw the market shifting
towards digital platforms, they used another of their core competencies of developing
strategic alliances and entered into an agreement with iHEART Radio to carry the
Cumulus content on their digital platform. They understood that development of a
digital platform would be costly and take many years to develop and brand so they
turned to a company with a core competency that Cumulus did not have. The combined
activities of smart acquisitions and knowing when to create a strategic alliance has
formed the foundation that will help them maintain a sustainable competitive advantage.
44. Cumulus Media 43
Distinctive Competence - Strong
A distinctive competence is a skill or process that an organization prefers that
even trumps a core competency (Distinctive competency, 2015). Cumuls’ distinctive
competency is to take their acquired radio stations and create a market where their
brand is best served. Instead of purchasing every all-news station in a particular
market, they are skilled and own brands that are distinct so they attract as many
listeners as possible in a given market without cannibalizing from each other. As an
example, in the Charleston, South Carolina market, they own WTMA whose format is
news and talk, 93 Jamz, with a format of hip-hop and R&B, 95 SX which features hit
music, Nash 96.9, a country music station, and Magic 107.3 that is referred to as the
best R&B (Charleston.Cumulus. com, 2015).
Summary of Resources
Cumulus has developed a group of tangible and intangible resources that have
formed the basis for their success in the radio broadcast industry. This analysis has
shown their greatest area of strength which is the ownership of valuable FCC operating
licenses. We have yet to look closely at their financial position which will be reviewed
later in this analysis. Their intangible resources include the branding and trademarks of
their radio stations and the way in which they organize their sales efforts to minimize the
decision making challenges that their customers face. Their other intangible resource,
and the most important one, is their employees, executives and board members.
Development of their skills will have a positive effect on the company’s financial
performance and give them a sustainable competitive advantage. Cumulus should
45. Cumulus Media 44
devote more resources to develop a sustainable company culture and to promotion of
its commitment to diversity.
Analysis of Objectives
Measurement of a company’s performance allows management to monitor the
progress made towards its goals and provide data to support changes that may be
necessary along the way. W. Edwards Deming, who was a famous management
consultant in the 20th
century, devised a system referred to as the Deming cycle of
PDCA which stands for plan-do-check-act. This process allows an organization to
develop objectives for achieving its goals, implementing those plans, checking the
progress at various intervals, and altering the direction as necessary. The concept that
he was promoting is continuous improvement (Deming.org, 2015). In this section of the
Cumulus analysis, we will look at the Cumulus objective setting process and identify
how well they’ve achieved their goals.
The vision of Mr. Lewis Dickey Jr., was to acquire groups of radio stations
located in small and medium size markets. He was raised in a “radio family” with father
Lewis Dickey Sr., who owned a few small stations and formed the Midwestern
Broadcasting company (Inside Radio, 2015). Once the Telecommunications act of
1996 was passed, Mr. Dickey’s vision changed to include the expansion of the quantity
of station ownership and formed Cumulus Broadcasting Company. He carried out the
“do” portion of the Deming cycle and by the year 2000, Cumulus owned almost 300
radio stations. The “check” that was brought on resulting from allegations of accounting
improprieties which when they were corrected, left the company without any cash to
fund further expansion. Mr. Dickey “acted” and consequently sold some of the Cumulus
46. Cumulus Media 45
stations which raised cash and kept the company from failing. His “plan” then became
to expand from smaller markets to larger and wealthier areas of the northeast. The
Deming cycle continues at Cumulus today (Radioworld, 2002). As mentioned
previously, the company continued with additional strategic acquisitions and formed an
alliance with iHEART radio to penetrate into the digital market.
In the Cumulus 10k report from 2013, it states that the company has not
abandoned its original goal, which is to acquire radio stations of brands that are
differentiated by content and serving local communities. To reach their financial goals,
they have developed proprietary software, continuously train their sales staff, and
provide them with the tools they need to convey the vision of developing local
advertising as the preferred medium and that their growth strategy in focused on
increased listenership and the revenues from advertising that will follow. Cumulus’
experience in the broadcast radio industry offers their local radio stations the benefits of
economy of scale in general administrative functions as well as a competitive advantage
in areas such as value chain activities, their brand name, and specific skills and
knowledge that apply to the broadcast radio industry (Cumulus Media, Inc. 2015)
Evaluation of Financial Performance
Financial Condition Analysis and Summary
The broadcast radio industry continues to evolve from terrestrial based
operations to a mix with digital platforms. As substitutes to broadcast radio such as
satellite radio, pre-recorded music such as Itunes and the proliferation of digital
platforms have increased, the industry has been forced to form alliances to achieve
economies of scale and improve programming in order to compete with the plethora of
47. Cumulus Media 46
alternatives. Competition in general, breeds efficiency and continuous improvement but
consumer preferences will be the main driver of the fate of broadcast radio.
The company’s total revenue has increased by 120% from 2011 through 2013
which has generated an operating profit increase of 274% for the same period. They
had net income in 2011 and 2013 and posted a loss for 2012. There is no data
available other than consolidated statements, to support an analysis such as revenue
per station or revenue per station based on audience size or market so further analysis
will be necessary before an investor should make a financial commitment. There are
some key financial ratios that will form a basis of comparison.
Figure 1. Cumulus Media vs. iHEART Media. Adapted from finance.yahoo.com (2015)
Gross Profit Margin, which shows how well a firm can cover its operating
expenses, is clearly a strength of iHEART media and is of concern for Cumulus as it’s
gross profit margin is trending downward. Cumulus should review their cost of sales to
as well as their sales trend in their revenue stream to determine why it’s in decline and
48. Cumulus Media 47
develop a plan for recovery. However, Cumulus has strength in their operating profit
margin and iHEART should look at their operating expenses, particularly in selling,
general, and administrative and find ways to take advantage of economies of scale.
The current ratio, which is a measurement of how well a firm can cover its current
liabilities, is in good position with both companies however Cumulus is in a much
stronger position in 2013 and iHEART’s decline in this measurement, warrants a review
of their current liabilities such as short term debt obligations and their accounts payable.
Renegotiating short term debt payments and terms for their accounts payable liabilities
along with examining their expenses might reveal why this situation occurred.
IHEART’s working capital exceeds that of Cumulus by a significant amount and some of
these funds could be used to pay down short term obligations but not to create a
shortage of working capital. This also involves a much deeper analysis than what is
included here. Finally, the Long Term Debt to Capital ratio is an indicator of balance
sheet strength and the company’s creditworthiness. A ratio below .25 is desirable and
both firms are significantly higher suggesting that their capital structure is heavily
weighted on debt (Gamble, et al., 2014).
This section represents a summary of some key indicators. Cumulus has
relative strength in its operating profit and liquidity however the company is highly
leveraged and should consider restructuring its debt or selling some of its assets to put
it in a stronger competitive position.
Crafting a Strategy
The flow of strategy making in an organization is dependent on the corporate
structure. In a large conglomerate such as General Electric, the CEO and other
49. Cumulus Media 48
executives are removed from the operational aspects of their divisions however they set
the goals for the entire organization and each business unit’s management team
determines the goals that are necessary for them to the organization’s overall financial
targets. Cumulus is involved in one business so their strategy making is handled on
one level which is referred to as Business Level Strategy (Gamble. 2014). In their 2013
10k report, they stated their intentions to use the following tactics to put their company
in a strong position to continue to grow and increase stockholder value. These tactics
can be developed using certain criteria such as financial, market share, and other highly
valued goals.
Criteria Test
Department goals must be written so they are in alignment with corporate goals
and must be measurable. Edwards Deming, who was responsible for development of
what is referred to as the Deming Circle included the steps of plan-do-check-act (PDCA,
2015). The theme of this process is once an objective was set in motion to achieve a
goal, it must be measurable and have the ability to be modified and was the tool to
foster continuous improvement. The Deming Circle is a great tool to use for a goal’s
criteria test. The “Plan” phase helps to decide what the company wants to achieve and
is a good double check to make sure that it’s in alignment with the company’s mission.
In the case of Cumulus, they stated that they wanted to make acquisitions that were a
good strategic fit and not making them for the sake of acquisition (Cumulus Media Inc.,
2013). Their goals for acquisition could include a list of radio stations they wanted to
acquire or a market they wanted to dominate and answer the question of where they
wanted to be and projections both financial and organizationally of what they wanted
50. Cumulus Media 49
their organization to look like. Then, they would enter the “Do” phase which is the act of
acquiring. Next, is the “Check” phase at which time they would measure the progress of
the goal to see if they were at the milestone they expected to reach and the “Act” phase
is used if the milestones they anticipated were not reached (PDCA, 2015). The
following is the list of tactics that Cumulus wants to use.
Focus on unique brands
These include station format such as country music, news and talk, or top
40 and this uniqueness will provide a means to attract local advertisers and the revenue
stream that accompanies them. Through their years of experience, they have
progressed down the learning curve and have developed exclusive systems to manage
their customer relationships. Through internal growth or by acquisition, Cumulus intends
to grow their portfolio of stations by leveraging their assets and attract additional
advertising revenue.
Further Leverage Operating Efficiencies
Cumulus has a competitive advantage through an experience-based proprietary
management system that is deployed company-wide. This standardized process of
managing their radio stations has set a benchmark that would be difficult for a
competitor or new entrant to copy.(Cumulus Media Inc., 2013). The synergy created in
this organization allows them to function as a low cost provider with an expense
structure less than that of the competition and simultaneously appealing to a broad
audience of listeners (Gamble, 2014).
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Use experience to provide consistent operations.
As Cumulus acquires more stations, it can use the systems and processes
they’ve developed to integrate acquired properties in an efficient and speedy manner.
Continued growth will provide an economy of scale creating a position of strength when
negotiating with vendors. The process of continuous improvement is enhanced by the
experience as owners of hundreds of radio stations. Cumulus can leverage this
knowledge and implement it throughout its entire organization.
Refine their large-scale operations to achieve efficiencies.
With the size of their company, Cumulus continuously looks for ways to minimize
expenses while growing its revenue base that provides capital for growth in each
market.
Operate in a fiscally responsible manner.
Cumulus strives to manage their finances in a way that reduces their reliance on
debt and allows for greater amounts of free cash flow. The financial analysis shown in
this paper does not indicate that the company is adhering to its pledge to reduce their
debt reliance.
Making acquisitions that are sensible
Cumulus’ strategy is not to blindly acquire radio station but to use their
experience to acquire assets that fill market gaps and have the potential to generate
value for the organization. They believe that long-term success in the broadcast radio
industry must include the competitive advantages of large scale ownership including the
simplification of the processes for the purchase of advertising.
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Cumulus states their overall strategy is to diversify their operations through
acquisition and expand their content to attract a broad base of listeners. They also strive
to create industry-leading research so that advertisers can make well informed
purchase decisions as easily as possible. They also intend to use their experience and
both tangible and intangible assets to methodically grow their enterprise (Cumulus
Media Inc., 2013).
Value Chain Analysis
The value chain of an organization is comprised of primary activities beginning
with one or more inputs and ending with generating a profit. These primary activities
are classified into five categories: supply chain management, operations, distribution,
sales and marketing, and service with the ultimate goal of generating a profit and
increasing the value of the raw material which in this case are the necessary
components to create, establish, and operate a radio station. This does not apply
exclusively to manufacturing but is also used in service industries such as hotels and
radio stations. The other section of the value chain involves the support of primary
activities with the ultimate goal of looking at every input and determining how much
value it adds, if any, and how to reduce costs without compromising quality and service
It’s important for a company to assess the components for each link in the value chain
and determine if they add value and how much. If they don’t add value, are they
necessary for production of the finished product? There are processes that are used to
measure the value added by each link of the chain such as the following: determine if
the link gives the company a differentiation or cost based advantage and which one is
more important for sustainable advantage. Looking at program content, which includes
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music, syndicated shows, and local hosts, differentiation ranks higher in importance vs
cost. Although the cost of royalties paid to musicians, contracts with syndicated show
hosts, and salaries paid to local hosts must be considered, if the company wrings out
costs to a point where they lose valuable content, then listeners will defect and
advertising revenue will decline. There must be an economic balance when assessing
this link of the value chain so that differentiation is given a higher priority. Radio
stations own or lease trucks used for remote broadcasting and cars used by
salespersons to visit with their accounts. These vehicles require scheduled
maintenance, repairs, and fuel. Despite the fact that without these vehicles it would be
difficult to conduct business, Cumulus could create a cost advantage in several ways:
one is to negotiate lower fuel prices with the promise of using the supplier exclusively
for all maintenance and repairs. Another cost advantage might be to purchase these
vehicles pre-owned instead of new or to lease them and avoid the costs associated with
the aging. This strategy would have almost no effect on the successful completion of
other value chain activities and could have a positive effect on the company’s profit
margin. On the support side, commodity purchases such as office supplies and
telephone systems can be negotiated without impacting the end product and with the
size of the Cumulus organization; they could negotiate the website contract for all of
their stations and produce cost savings. (Gamble, 2014).
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SWOT Analysis
The SWOT analysis is used to identify the internal strengths and weaknesses of
an organization and the opportunities and threats from the external environment. Once
this exercise is complete, an organization is ready to develop a strategy that leverages
their strengths, determines if they have the resources to improve their weaknesses and
if not, how critical they are to the success of a strategy. Then, the external environment
is measured by the opportunities such as a growing market for a product of service, the
vulnerability of a competitor that can be exploited for gain, or through an acquisition of a
company that fills a competency void or to increase capacity. Finally, the analysis looks
at threats such as economic issues, scarcity and escalating cost of raw materials, or an
emerging strategy that a firm is unprepared to compete with (Gamble, 2014).
56. Cumulus Media 55
SWOT Analysis
Strengths (Internal)
Economies of scale and established
processes create buyer power.
Domination in certain markets creates high
barriers to entry
Alliance with iHEART Radio to carry Cumulus'
stations on their digital platform
Lack of availability of new station licenses
increases value of Cumulus owned licenses
Diversity of experience in the management
team and on the board of directors
Weaknesses (Internal)
High long term debt to equity ratio affects
the ability to borrow capital
Reliance on syndicated programming
increases supplier power and diminishes
differentiation
Lack of national-level content production
competency creates vulnerability and
dependence on producers outside of the
company
No proprietary digital platform
Opportunities (External)
Increasing the use of digital plaforms opens
stations to large geographic audiences, smart
phone and computer listeners, and attracts
more advertisers
Purchase exclusive rights to air popular talks
shows, purchase them outright, or produce
them.
Produce their own shows
Offer to sell programming to Sirius / XM
Threats (External)
Disruption in alliance with iHEART radio
could result in a high expense to develop and
promote a Cumulus proprietary digital
platform
Movement from local content to syndicated
programming jeopardizes station recognition
in the community
Consolidation reduces demand for many
radio station positions which could lead to a
decrease in supply of talent
Increased capabilities of substitutes such as
Apple could reduce the demand for
broadcast radio
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Strengths (Internal)
Cumulus has generated an economy of scale and established processes to
create buyer power. When an advertiser is researching a market and is considering a
Cumulus station, they simply go to the Cumulus website for that market where the
advertiser can see the number of stations, their format, links to the individual station’s
websites, and a media kit (Cumulus Media, Inc. 2014).
The fixed costs to build the websites, the templates for the media kits, and the
processes for presenting such can be spread among 500 + radio stations
(Cumulus.com 2015). Cumulus’ presence in their respective markets includes the
ownership of several stations so one of their strengths in dominating the ownership of
stations in a market is the creation of barriers to entry as there are a limited number of
stations available in each market and as mentioned before, a new entrant may require
the resources of Cumulus to compete.
In 2011, Cumulus created a strategic alliance with iHEART Media to carry
Cumulus stations on their digital platform (Clear Channel.com, 2011). This enabled
Cumulus to leverage the experience Clear Channel and gave it immediate recognition
with the iHEART Media brand. The alliance also allowed Cumulus to redirect their
financial resources from building a digital infrastructure to other uses.
Cumulus Radio currently holds 525 FCC radio station licenses (Cumulus.com,
2015) and as previously stated in this paper, the FCC is not accepting any applications
for new stations (FCC, 2014) so with the demand for licenses increasing and the supply
remaining static, this should increase the value of their licenses and raising the barriers
to entry by the increased price a license holder might demand for selling it.
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Cumulus’ executive team, as well as their board of directors, are an intangible
asset and a competitive advantage in the market. Their collective experiences inside
and outside of the broadcast radio industry as well as the amount of time served in
broadcast radio give the company a strength in decision making and long-term planning
(Cumulus.com, 2015). Other operators could create an executive team and board of
directors however the cost and time of hiring the level of talent at Cumulus would be
very difficult to reproduce at a pace that would facilitate immediate market presence.
Weaknesses (Internal)
According to their 2013 Income statement (Cumulus Media, Inc., 2015), Cumulus
has a long-term debt to capital ratio of .84 which Gamble, et al.(2014) states that any
ratio greater than .25 indicates that a firm is heavily dependent on debt. This weakness
could be a factor if economic conditions change, a new entrant emerges, or if their
alliance with iHEART radio dissolves and they are forced to develop their own digital
platform.
Cumulus-owned stations are reliant on syndicated programming and this
increases the seller power, particularly when a contract with a popular talk show host is
up for renegotiation or if they violate the terms of their contract. As an example, in
2013, popular talk show host Rush Limbaugh considered not renewing his contract with
Cumulus. According to Politico (2013), because of alleged derogatory remarks made
about a Georgetown University college student by Limbaugh, Lewis Dickey, Jr., CEO of
Cumulus estimated that his company lost over $2 million in advertising revenue
because of the alleged remarks and the fact that Cumulus kept airing the Limbaugh. He
came to an agreement to stay on with Cumulus and if he had departed, the negative
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financial implications for Cumulus and its affiliates would have taken a long time to
recover from.
Cumulus does not produce their syndicated shows. As stated in the previous
paragraph, Cumulus could have lost millions of dollars and had to find a replacement for
Limbaugh who could attract the same volume of listeners and the advertising revenue
that was lost.
Cumulus currently airs its content on Clear Channel’s iHEART Radio digital
format. Although this eliminated the need for Cumulus to develop their own digital
brand and sped up their appearance on the internet, it also leaves them vulnerable if
Clear Channel decides not to renew the contract. Clear Channel has a vested interest
in the advertising revenue that they earn by carrying Cumulus stations however if
Cumulus were to make other strategic moves such as acquiring a radio station that
would threaten a station owned by Clear Channel, this has the potential to create a
problem for Cumulus.
With Cumulus’ large scale of operation, they are able to spread fixed costs
across 525 radio stations which gives them a competitive financial advantage over
smaller station groups or independent stations. This represents possible acquisition
opportunities for Cumulus at a lower price vs. buying a group of stations.
Opportunities (External)
Streaming of broadcast radio has increased at a rapid rate and provides an
opportunity for Cumulus to expand their digital presence. According to Kinsella (2014),
advertising revenues for digital platforms are increasing at 4 times the rate of traditional
terrestrial radio station revenue and with the increased popularity of smart phones and
60. Cumulus Media 59
other technology, it makes good economic sense for Cumulus to reap the benefits of a
larger digital presence.
Another opportunity would be to purchase exclusive rights or outright buy the
shows. If the company had the capability to produce their own shows that would have
national appeal, it would reduce their dependence on others and create a valuable
brand for Cumulus. Amazon.com (2015) recently produced a sitcom called Transparent
and won a Golden Globe award for their efforts (Guardian.com, 2015). They continue
to carry shows produced by other companies however their dependence on outside
sources was diminished with this success.
Currently, Cumulus’ content is aired by their own stations, through iHEART radio,
and by affiliates. One market that they are missing is satellite radio such as Sirius / XM.
Despite the fact that their subscriber population is relatively small, Sirius / XM capable
radios are available as standard equipment in many automobiles and the content of
Sirius / XM is tailored to a specific sport, news type, or music preference (“Sirius/XM
Welcome,” 2014). If Cumulus were to air some of their local stations on Sirius / XM,
they would not be the first mover because Sirius / XM currently airs a small number of
terrestrial broadcast stations (SiriusXM, 2015) however, they would give their loyal
listeners the opportunity to listen to their stations when the listener was out of broadcast
and cell phone reception range.
Threats (External)
If the strategic alliance with iHEART radio was disrupted, this would leave
Cumulus with no digital platform and result in a loss of revenue, listenership, and
