Radio Offers A Compelling Value Proposition For Advertisers – IHeartMedia Is The Best In The Space (NASDAQ:IHRT)

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Several things have happened in the past few weeks that have kept my investment in iHeartMedia (IHRT), and the radio sector at large, in the front of my mind. First, by staying up to date on SEC filings I learned that Brigade Capital Management, a global hedge fund with $25 billion assets under management, took a 15% ownership stake in IHRT. Clearly they are bullish on radio. Taking the opposite view is Bank of America who recently downgraded IHRT to from buy to neutral. Finally, repeated breaking news stories about various corporations boycott of advertising on Facebook (FB) is relevant to the media industry generally, and I wanted to explore implications for IHRT. My intent with this article is to share a bit more detail about each of these items, but more importantly to put them in context of the forward looking prospects for the radio industry generally. In fact, the bulk of my article will be devoted to showing why radio may be the best place for companies to put their advertising dollars to work. This has implications for several other publicly traded radio companies like Sirius XM (SIRI), Saga Communications (SGA), Townsquare Media (TSQ), Beasley Broadcast Group (BBGI), Salem Media Group (SALM), Entercom (ETM), and Cumulus (CMLS). IHRT is unique among them because they have the biggest reach and are more diversified, with revenue streams coming from digital sources in addition to traditional broadcast. Between their scale and the opportunity for growth in digital, I peg IHRT as the best among radio stocks to invest in.

Institutional Interest in IHRT

A hedge fund taking a position in a given stock is no reason for retail investors to commit their own capital to the same. Plenty of hedge funds fail to generate returns in excess of the market averages. The long term annual returns of said hedge funds need to be scrutinized before putting much emphasis on their stock picks. As it relates to Brigade Capital Management, I unfortunately couldn’t find any reliable data regarding their returns. Nonetheless, we do have access to some information that can help determine how much weight ought to be placed on their recent purchase of IHRT.

First, having $25 billion in assets under management is no small thing. That is within sniffing distance of Seth Klarman’s Baupost Group which has $28 billion. For the hedge fund to attract that many dollars gives them clout. That much money puts Bridage within the top 30 largest hedge funds in the world.

Second, a quick read of the hedge funds objectives from their website makes it clear that IHRT’s business model and identity is right in their area of expertise, or circle of competence if you will:

The firm employs a multi-strategy, multi-asset class investment approach to credit investing, focused on companies with leveraged balance sheets. The investment process Brigade utilizes is fundamentally driven, focusing on asset coverage and free cash flow, with an emphasis on capital preservation. Brigade manages various credit investment strategies, including long/short credit, opportunistic credit, structured credit, distressed debt, traditional high yield and long/short equity, amongst others.

The Brigade investment team possesses deep sector expertise across the leveraged finance markets and has extensive experience in capital restructurings and bankruptcy reorganization.

IHRT has a rather leveraged balance sheet indeed, and emerged from bankruptcy midway through 2019. Given their areas of focus, if Brigade sees value in the shares it reinforces the bullish case. Indeed, they see so much value in the shares that they took a 15% ownership stake. It should be noted that even with this large position, the SEC filing makes it clear that activism in not their intent:

…. the securities referred to above were not acquired and are not held for the purpose of or with the effect of changing or influencing the control of the issuer of the securities and were not acquired and are not held in connection with or as a participant in any transaction having that purpose or effect.

In other words, Brigade thinks that the future for IHRT is bright in it’s current condition. No need for agitating for change at the board or C-suite level. It is also indicates that their opinion on the economic prospects for radio broadcasters is positive.

Bank of America downgrade

Taking the other side of the trade is Bank of America. Their downgrade included a price target drop from $12 to $10, and moved them from a buy rating to neutral. Oddly, the day the news was published about the downgrade IHRT closed at $8. A $10 price target means 20% upside. Curious that 20% upside is neutral in their world.

Facebook Boycott

*Image from adweek

All over the news of late has been company after company announcing that they are taking a break from advertising on Facebook. Their reason is that Facebook isn’t taking a hard enough stance against hate speech. According to Politico, 800 companies have withdrawn ads, representing millions of dollars in lost revenue. Those participating in the boycott include Coca-Cola (KO), Unilever (UL), and Ford (F), among others. What does this have to do with IHRT and radio? It is possible that some of these companies will increasingly turn to radio for their advertising needs in the absence of a presence of Facebook.

Here is where we get into the meat of the article. Many perceive radio as a sector in decline, increasingly overshadowed by the rise of all things digital and especially by the behemoth of social media. The surprising reality is that radio reaches more people than any other medium. According to a blog post on 99firms.com:

Broadcast radio reaches 228.5M US consumers; more than any other content medium. The most important positive factor working in radio’s favor is its reach. Even in a developed market like the US, advertising exposure statistics show that its reach compares favorably to TV (216.5 million consumers), smartphone apps/web (203.8 million), and smartphone video (127.6 million). In fact, many advertisers seem to be rediscovering the importance of radio advertising in recent times, which accounts for a sustained increase in radio ad spend after a brief drop in the 2008-2009 period.

While the most popular place and way to listen to the radio is in the car, radio is actually getting a notable bump in popularity alongside the adoption of smart speakers:

*Image from hubspot.net

Our state of the art tech friends Alexa and Siri are helping us tune into the grandfather of electronic media, good old broadcast radio. It is as relevant as ever. Some more fun facts:

– “90% of Millennials, generation X, boomers, Hispanics and African Americans report listening to the medium.” People age 12 and up in the United States listen to 13 hours of radio per week, on average.

– Measured in 2018 according to Forbes, “AM/FM radio reaches 91% of the 18-34 age group (the most important age group that advertisers target), compared to 73% for live/time shifted television. AM/FM radio also has a broader reach than all online search sites, social media and e-commerce websites.”

Data from the Pew Research Center shows that radio is second only to television as a local news source, beating online channels.

– An interesting article from the Radio Advertising Bureau shares that,

Listeners value radio – for news, entertainment and companionship. 60% of radio listeners cite radio as their source for music. 73% of listeners say that their favorite station is an important part of their music streaming experience. 35% of listeners say that radio keeps them informed of emergencies. Radio keeps listeners informed about local news (39%). 34% state radio improves their mood.

Radio personalities connect with and influence listeners. 1 in 2 listeners have a favorite radio personality whom they’ve been listening to for an average of 8 years. Listeners (78%) share what they hear from their favorite personality with their family and friends. 77% of listeners would try a brand recommended by their favorite radio personality. 83% of radio listeners value and trust their favorite personalities’ opinions.

So we see that while many other forms of electronic media have emerged and even come to show dominance, radio has grown alongside them.

The Field is White, Already to Harvest

We covered that radio is still exceptionally popular and relevant for listeners. This alone is reason enough for advertisers to take advantage of radios reach. But what else can we learn about the affect on companies and their advertising agendas? Radio offers distinct advantages to companies wanting to advertise even when compared to social medias might.

#1 Return on Investment

Knowing you are getting the bang for your buck gives radio a leg up on other mediums. Data from Nielsen analytics in January of 2016 shows the ROI that was generated by radio ads across several categories:

*Image from mediapost.com

Various articles I have read peg the average ROI across categories to be between $6 and $12 for every $1 spent on radio ads. Clearly the retail category benefits most from radio air time. How can they track and calculator these returns?

It can be tricky for companies to track how efficacious a given advertising campaign is for their top and bottom lines. There are only so many ways to go about knowing if sales dollars came as a result of an ad someone saw or heard. But with radio, it is easier to track. This has to do with the fact that a lot of radio listening happens in the car. This matters because driving in the car puts people in close proximity and easy access to the very businesses featured on an advertisement. Driving in your car puts you closer to the point of sale.

The logic flows naturally: if you hear or see an ad for a clearance event at TJ Maxx (TJX) while you are chilling at home, it is not going to be convenient to get up and head to the store. Maybe dinner is in the oven. Maybe you are watching your kids. Maybe your favorite TV show is on. But if you are in the car listening to the radio, odds are that you are within ten minutes or less of the store featured in the ad. You can get their quickly and easily. That is why radio is especially effective, and that makes ROI easier to track. If a notable increase in store receipts or online clicks immediately succeeds an radio advertisement, it makes sense that the surge was a result, at least in part, of people hearing the ad.

Nielsen has been doing this kind of research for more than a decade. An article from BusinessWire.com explains:

The Portable People Meter (PPM) from Nielsen Audio detects inaudible watermarks embedded in the audio portion of a broadcast program or commercial. The PPM tracks what station was heard at what time. The listener information for specific commercials is then linked to 60 million households of frequent shopper data in a single source view to determine how the radio ads influenced the sales of products that were purchased in the listener’s household. All matches are performed in a privacy-compliant, non-personally identified manner.

The “watch” (or hear) data is matched with the “buy” data from Nielsen Homescan® (a program where households scan the bar-code of items they purchase) and nearly 70 million shopper households from Catalina. This single-source view provides the retail sales impact of TV, online, mobile, CRM, radio and print advertising.

Back in 2017 Nielsen sent a 20 page guide to various radio station clients entitled “Radio (NYSE:RE) Discovered, A Brand Manager’s Guide To Radio”. The intent was to provide for those stations a resource that they can share with companies who may not comprehend the power of radio. In it, many of the aspects of radio that we have been discussing were shared. In that guide was the following case study:

As the critical holiday shopping season approaches, and retailers are challenged by fierce competition from online stores such as Amazon, the guide recaps a campaign effect study from a major retailer. It found that store visits were 20% higher, visits to the retailer’s website were 75% higher, click-through rates soared 160% for the retailer’s online ads and product searches jumped 40% among those exposed to the radio ads. Significantly, radio advertising increased sales in-store and online for that retailer.

The buzzword here is attribution. From radiomatters.org:

The game-changer has been attribution. Radio advertisers can now measure response to broadcast advertising in the same way they measure response to digital advertising. And within this reporting are key components that help advertisers understand how, when, and why customers respond, and how to effectively lean into those trends to drive even more engagement and response:

1. Website Traffic Attribution

We all know that website traffic is an excellent indicator of media response – devices are always within reach, and when a listener hears a spot that resonates, it’s quick and easy to search and find the advertiser’s website. Radio can now take credit for the role it plays in this natural response path by measuring traffic increases immediately after a spot airs.

2. Foot Traffic Attribution

We also know that radio broadcast advertising drives foot traffic, and it can now be measured to show advertisers increases that occur in the days, weeks and months following the airing of spots.

With these powerful new tools, radio can effectively connect the dots to help advertisers maximize the potential ROI for every dollar spent on radio.

ROI is inexorably tied to reach. If an ad gets in front of more people, it will generate more sales dollars because it will reach more people who want that type of product or service. Citing more data from Nielsen analytics and their ability to track radio advertisements and who listens to them, an article from Westwood One says:

In one demonstration, a brand spending $22 million a month in television saw monthly reach soar from 68% to 90% with a 20% reallocation to AM/FM radio. Same budget, 32% lift in reach.

Experts in radio marketing had the following to say about those skeptical of what radio can do in terms of ROI:

I would give the client examples of others growth/return on investment they have seen since being on radio. We have a lot of clients who grow more than 10%-20% per year when they do it the right way.

– Christine Overfelt, 5 years in radio

We have a proven track record of growing businesses anywhere from 4 to 25% per year by using a return on investment system…

– Aric Bremer, 20 years in radio

#2 Captive Audience

Radio advertising is also effective because of the captive audience effect. When you are in the car listening to the radio and an ad comes on, all there is to do is listen to it. Sure you could change the channel, but if you do that you are just going to find another ad. Furthermore, many folks have a favorite radio station or a favorite radio program and surfing through other stations might mean you miss what you are trying to hear. So you hear the ad. Captive audience. This stands in contrast to things like Facebook. It is beyond easy to just skip over Facebook ads. In fact, I have found that my mind has subconsciously developed the ability to not even notice ads that pop up on my feed. Ads look different, and if I don’t see one of my friends names before any given post I know it is an ad and I just glaze over it. This doesn’t happen as much with radio. With TV, commercials mean that you get up to go the bathroom or pull your dinner out of the microwave. They are easy to skip. Same with YouTube videos and hitting the skip button. Driving in the car listening to radio is an environment where competition for attention is sparse. Leadsrx gives us the data:

Advances in technology have changed the way that people interact with media. Ad avoidance now plays a bigger role in advertising decision-making than it did just ten years ago. Ad avoidance is particularly problematic in the digital space where consumers can easily adjust their attention to other areas or use ad blockers to avoid advertisements.

Customers are more likely to engage with different types of media simultaneously and they may be performing other activities simultaneously. According to a recent study from NPR, multitasking among their audience was the highest while watching television. Often, their listeners would be engaging with their brand materials or even listening to their radio/podcasts while the TV was on in the background.

However, when attentiveness was compared while only watching TV or listening to radio, it was found that listeners were much more attentive while listening to radio. The listeners agreed too, with 74% saying that they felt like they were more attentive while listening to NPR than watching television.

#3 Targeted Audience

The key to effective advertising is reaching the right people at the right time. You don’t want to be airing a rippin’ ad for a brand new Harley Davidson during a broadcast entitled “Crocheting with Catherine”. That probably isn’t the demographic you want. Because of how radio is formatted, advertisers can confidently reach the folks that are most likely to buy their stuffs.

An article from entrepreneur.com explains:

Along with print and TV, radio is one of the most popular forms of conventional, “offline” advertising. It can also be one of the most effective. This is partially because radio is oriented around formats, which gives business owners a big advantage in targeting audiences vs. print or TV.What’s a format? Think “classic rock” on the FM band and “talk radio” on the AM stations. Odds are your target market is predominantly tuned into one or two specific stations in your metro area. If you can discover which stations those are, you may have found the sweet spot in your marketing.

Not only do you want to target the right format, but time of day, gender, age of listener, and so forth should all be considerations. People with each of those criteria are more inclined to gravitate towards certain types of programming than others. Starbucks would likely want to air their radio ads during morning news segments so they can catch commuters heading to work. That demographic is very likely going to be interested in a cup of coffee to start their day. Similarly, SeekingAlpha could air a radio advertisement on American Public Media’s “Marketplace”, which discusses the economy and markets and is often aired during the evening commute. Folks listening to “Marketplace” will be interested in the service SeekingAlpha provides. Between having a captive audience mentioned above and this target audience idea, radio is unique among mediums.

#4 Cost Effective

Radio is among the most cost effective of all mediums on which to advertise. TV spots for example take a film crew, actors, script writers, sometimes animators, etc. in order to put together. Radio, on the other hand, requires only a writer and someone to read it and record it. Check out this snippet from leadsrx:

Interestingly, between these two graphs we learn that what people think and the actual data are in agreement! Radio has lower production costs.

#5 Omnichannel

The real success for larger companies with bigger advertising budgets can come by employing several mediums simultaneously. If people see an ad on TV and hear about the same product or service on the radio, they are more likely to remember it:

*Image from Nielsen.com

This awareness builds unaided brand name familiarity and leads to consumer spend. We will mention elsewhere how radio can enhance the effectiveness of other mediums.

#6 Protection from Ad Fraud

What is predicted to become the second biggest market for organized crime within the next five years? Yup, ad fraud, coming only after the drug trade. It costs advertisers millions of dollars every year. I like this definition of ad fraud:

“Digital ad fraud is any deliberate activity that prevents the proper delivery of ads to the intended audience, or in the intended place.”

This kind of criminal behavior upends the entire premise of advertising: you have to spend money to make money. With ad fraud, the phrase gets whittled down to, “you spend money”. While estimates vary A LOT regarding how much money is lost due to ad fraud due to the difficulty in tracking it, one guess pegged 2017 losses to more than $14 billion.

There are plenty of ways to commit ad fraud, to include hijacking hyperlinks so that users are re-directed to the wrong place and malware bots that mimic human behavior and generate fake clicks and installs. The reason I mention it here is because ad fraud is mostly a digital crime. Fraudsters focus on the web, because that is where they can most easily make a handsome profit. Radio is well insulated from ad fraud, giving it a unique advantage up on newer forms of advertising that are internet based.

Satisfaction Guaranteed

Westwood One, “the national-facing arm of Cumulus Media (CMLS)” and the largest audio network in the nation, believed so much in the power of radio advertising and the advantages that we have talked about that in October of 2017 they gave their clients a historic “ROI Guarantee”. Specifically, they guarantee that companies will see a return of at least $1.10 for every dollar they spend. If that return isn’t achieved, Westwood will run additional ad spots at no cost. Inside Radio shares:

That number is conservative compared to ROI studies that have shown radio delivers an average ROI of six to one. But Suzanne Grimes, Cumulus Media executive VP, Corporate Marketing, and Westwood One president, says it’s “enough to assure you as an ad partner you will get a return on your investment.”

Based on 23 studies the network has done with national brands to demonstrate radio’s ROI, Grimes says she’s confident in making the guarantee. “We’re willing to do this to de-risk radio investment for people that may be new to radio or rediscovering radio,” she says; it also works for clients who are looking to justify the investment to their company.

This shows the conviction that radio companies have regarding the power of their medium.

Case Studies

1- Procter and Gamble

Among those convinced that radio advertising works is consumer packaged goods giant Procter and Gamble (PG). They stayed away from radio for more than a decade, but in 2017 started becoming increasingly involved. They aired approximately 500,000 ad spots in 2017, 1.22 million in 2018, and 2.32 million in 2019. Interestingly, this increase in radio ads coincides with a recovery in revenue after years of decline:

*Data from morningstar.com

Lest you think that the sales growth was a result of acquisitions, note the organic sales growth:

Fiscal year ending June 30 2016 2017 2018 2019 9 months ending March 31 2020
Organic Sales Growth .75% 2% 1.4% 5% 6%
Organic Volume Growth -1% 2% 2% 2% 4%

*Data from 10K’s

Accelerating revenue driven by improving organic growth. In various conference calls, they also indicate robust market share gains. I believe that this growth is due at least in part to better advertising, to include more radio.

The Chief Brand Officer at PG, Marc Pritchard, sat down with the CEO of IHRT Bob Pittman for a podcast in January of this year to discuss their strategy. An article from Inside Radio reported:

P&G is known for meticulous use of research and Chief Brand Officer Marc Pritchard explained how it uses reams of data “to get the one-to-one precisions” in media buying. “It’s why we rediscovered the power of audio,” Pritchard said in a conversation with Bob Pittman. When P&G reinvented its marketing strategy, it opened a door to “different types of audio opportunities,” he recounted, including broadcast, satellite and internet radio. “These all offered new opportunities with new ways to engage consumers. We followed consumers where they are spending their time,” Pritchard said.

Note the “one-to-one” precision phrase. This has to do with what we have discussed previously, that of ad fraud. With online advertisements, it is guaranteed that many of the reported impressions are fraudulent. No one actually interested in the product accounts for a scary amount of views, clicks, or downloads. With radio, there is a much greater probability that for every set of speakers that ad comes out of, at least one person will hear it.

Procter and Gamble isn’t the only mega-cap that believes in the power of radio. I was surprised to learn just how many great companies employ radio as a primary means of advertising. Check out these rankings from 2018:

*Image from mediamonitors.com

HUGE names are on that list. For 2019 data, the top three spots went to:

#1 – Home Depot: 2.6 million radio ad spots

#2 – GEICO (owned by Berkshire Hathaway (BRK.A): 2.51 million ad spots

#3 – Procter and Gamble: 2.32 million ad spots

Big money is flowing into radio.

If you want more examples, follow this link to an article on mediavillage.com that shows the pronounced positive effect of radio on:

– a cable network trying to draw viewers to a new season of a TV show, whose use of radio at only 5% of the total ad budget extended incremental reach by 15% and garnered 20% of total impressions.

– an aftermarket auto retailer whose use of radio increased customers by 64% and had an ROI of $21.

– a quick service restaurant, whose incremental reach was broadened by 43% with only a 20% allocation of the ad campaign budget going to radio.

The Trouble Is…..

Have I shared enough data to convince you of the power of radio? The evidence is mountainous. Nonetheless, none of it matters if marketing crews at various corporations across the world aren’t aware of or don’t understand the compelling facts. Pierre Bouvard, Chief Insights Officer at Cumulus Media (CMLS), shared the following (forgive me for the length of the quote, but it is remarkably valuable content):

AM/FM radio’s massive reach is lost on most advertisers. For four years, Advertiser Perceptions studies of over 1,200 media agencies and marketers have found the perceived reach of U.S. radio is stunningly lower than Nielsen reality.

Why are media agencies and their clients so out of sync with actual consumer media habits? Legendary marketing professor Mark Ritson explains, “There is increasing global evidence that marketers are basing their media choices on their own behaviour or that stoked by the digitally obsessed marketing media, rather than actual audience data.”

Acknowledging this, Colin Kinsella, the CEO of Havas Media North America, says, “The biggest risk for radio is the 26-year-old planner who lives in New York or Chicago and does not commute by car and does not listen to radio and thus does not think anyone else listens to radio.”

There is a stunning difference in how Americans actually spend time with devices and media versus how media decision makers perceive how consumers spend their time.

When it comes to AM/FM radio, media decision makers believe consumers spend 8% of their time with AM/FM radio. Nielsen reality? Nearly double at 15%.

Why is there such a disconnect between media decision makers perceptions of consumer media time spent and reality?

Brands often ask their media agencies to peer over the horizon to predict emerging media platforms. Constant time spent examining small consumer trends can exaggerate their perceived size. Media conferences and trade publications tend to focus on new platforms and emerging media. As such, “objects may appear larger than they are.”

Marketers suffer from an excessive focus on “what’s new and next.” Legendary media agency CEO Jon Mandel famously quipped, “All my clients suffer from E.M.F. Emerging Media Fever. It’s highly contagious and there’s no cure.”

“When you consider how technology is completely changing the way people listen, view and engage with media, it really is no surprise that the buy side underestimates the time that consumers spend with radio,” says Erica Farber, President and CEO of the Radio Advertising Bureau. “The reality, however, is plain and simple – consumers love radio – they listen and they listen a lot.”

Radio stations have a lot of work to do to show companies how compelling their proposition is. With so many companies walking away from advertising on Facebook and other social media platforms, now is the key time to do it.

iHeartMedia

Nearly all of my commentary has had to do with radio generally. But my interest is in IHRT specifically, as I believe they are one of the best publicly traded radio companies. They are the biggest audio media company in the U.S. This includes number one spots based on reach in broadcast radio (2X that of the nearest competitor), digital radio (5X that of their nearest competitor), and podcasts (2X that of the nearest competitor). In radio, reach is everything, and IHRT reaches more people in more places than anyone else. IHRT is also diversified. Broadcast radio is certainly their bread and butter, but they have an every growing presence in digital and podcasts. In fact, in the most recent quarter their podcast unique audience grew by 35% and revenue shot up 80%. Total digital revenues went up 22%, and now makes up almost 13% of total revenue.

The growth of podcasts and digital radio is nothing to sneeze at, and IHRT is the commercial leader in the space (NPR narrowly beats them, but NPR is not commercial. They are a public non-profit).

*Image from ihrtmedia.com

The IHRT radio app has over a billion downloads and more than 85 million registered users. Between google play and the app store, the app has been reviewed 2.5 million times with an average rating of 4.6. The basic version of the app is free, but has upgrade options for purchase.

Monetization

Getting revenue from podcasts is a bit different than traditional radio. It is also potentially more lucrative, depending on the popularity of the podcast. An article from Forbes claims:

Popular podcasts can charge advertisers between $10 to $50 for every 1,000 listeners, approximately two or three times the ad rate for broadcast radio. Many “blue-chip” advertisers now sponsor podcasts and a growing number are producing their own.

Furthermore, there is potential for more reliable income streams. Some podcasts use a subscription model. The same Forbes article mentions one such platform:

In April 2019, Luminary was launched and positioned itself as the Netflix of podcasts. Luminary began with 1,000 hours of ad-free original and exclusive podcast content costing subscribers $7.99 monthly.

Other options are to charge a fee per episode. The potential for IHRT to pursue these different ways to monetize their audio content is significant.

The total market for podcasts has grown at a remarkable rate, and is estimated to continue:

*Image from techcrunch.com

65% CAGR is dizzying.

Now, IHRT made $72 million in digital revenue in the last quarter. Only a portion of that is from podcasts specifically. The runway for growth is tremendous as they use their huge reach as a springboard for more podcast growth. Comments from the most recent conference call paint the picture:

We are one of only two major podcast publishers who grew in terms of unique audience from February to March, another sign of our strong momentum. We also grew usage by 35% year-over-year based on unique audience. And more importantly, our podcast revenue in Q1 grew 80% year-over-year and is currently pacing at over 100% year-over-year for Q2.

…. revenue is generated by podcast publishers, not distributors. But as further evidence of the power of podcasting, we did see usage for podcasting on our own iHeartRadio app, increase over 100% year-over-year and 29% month-over-month, making us one of the largest podcast distributors as well.

…. we’ve sort of got a flywheel effect going now because we’ve got such a large broadcast radio audience that we can continue to promote these podcasts the way others can’t. I think we ran the numbers. We give it something like $100 million of broadcast radio advertising, cost us nothing because it was advertising we didn’t sell. But by using that to promote podcast, it gives us a machine to continue to crank out these hit podcast.

Podcast does have a long way to go towards monetization. More from techcrunch:

Despite the growth in ad revenue and relatively high CPMs, the industry is significantly under-monetized. Using data from Nielsen, IAB and Edison, we calculated that podcasts monetize through advertisements at only $0.01 per listener hour — less than 10 times the rate of radio. Podcast monetization per listener hour has increased over the past year, up 25% by our calculations, but still substantially lags all other forms of media.

With time, this gap will close as it already has been.

IHRT Library

Some of the most popular podcasts of all time are published by IHRT. This includes “Stuff You Should Know”, which consistently ranks in Apple’s top 10 on iTunes and is downloaded millions of times every month. The also have the Ron Burgundy podcast and Crime Junkie. These are the shows they publish. They distributor hundreds more, which doesn’t bring in lots of money but attracts people to their platform.

Case Study

A testament to the growth and future potential for podcasts is an example from SiriusXM, which rumor has it is going to buy the “Stitcher” podcast platform from Scripps. The price tag? $300 million. How much did Scripps pay for it back in 2016? $4.5 million. That is a dizzying compounding of value. The value of IHRT podcast library is surely growing in value similarly.

Conclusion

Make no mistake, IHRT results are going to be terrible this year. They already took a massive impairment charge in Q1 that left them with -$11.60 EPS. Q2 will likely show a tremendous slowdown in revenue and perhaps an operating loss. Nonetheless, I believe that IHRT is a strong long term play. Accumulating shares now and dollar cost averaging throughout a rough 2020 is my plan. Radio is in a unique position now to take market share from other mediums and show the advantages they have. I view their broadcast radio segment as reliable, and their digital segment as the real growth machine. Even in the midst of COVID-19 madness, their podcast revenue has exploded.

They have a cash rich business model. In the last quarter alone, they generated $0.47 of FCF. That is up 4% over last. Per the 10K and conference calls, that will be devoted to paying down debt. Once the debt is out of the way, there will be vast opportunity for dividends, share buybacks, consolidating other radio stations into their network, buying and/or creating podcasts to publish, and so forth. Between now and when debt gets down to more manageable levels, it might be quite a ride sticking with IHRT. But long term, it is the component of my portfolio that has particularly exciting potential.

Disclosure: I am/we are long IHRT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

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