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Going with Google

June 2, 2007

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Going with Google
Emmis swings unique advertising deal that could shake up stagnant radio biz
Sat. June 02 - 2007
Anthony Schoettle   -  aschoettle@ibj.com
IBJ staff
Emmis Communications Corp. is turning to Google in its search for relief from a radio-industry slump.

The local media company is tapping the power of the popular Internet search engine to sell advertising for its Indianapolis and New York radio properties. The move follows a 15-month experiment that netted Emmis’ radio group more than $1 million in other markets.

The arrangement—which initially involved Emmis’ radio stations in Chicago, Los Angeles and St. Louis—gives stations access to Google’s vast list of advertisers. In turn, Google can add value for its ad clients by helping them get their
message in front of radio’s broader audience.

Emmis, with 23 North American stations, isn’t the only radio company working with Californiabased Google to help fill ad slots. San Antoniobased Clear Channel Radio signed a deal this year and New York-based CBS is in the process of negotiating one.

But all eyes are on Emmis as it prepares to expand its Google deal.

“Emmis is the first group really to stick its neck out with this deal, and I give them credit for that,” said Doug Ferber, senior associate for Star Media Group, a Dallas-based firm that advises media companies. “Emmis has always been at the forefront of trends and technology, and I
think this is another example of that.”

It appears Emmis is ready to stick its neck out even further.

Until now, Emmis and Clear Channel only have used Google to sell ad spots late at night or early in the morning that they couldn’t otherwise unload. But Emmis and
Google are renegotiating the deal to include drive-time spots, said Rick Cummings, Emmis Radio division president.

“This idea has alarm bells ringing in the industry,” said Robert Unmacht, principal of iN3 Partners
Inc., a Nashville, Tenn.-based media and investment-banking consultancy. “[If Emmis can] lure in a new advertising base while not comoditizing the price of ads, the power of this deal could be significant given Google’s reach and breadth of advertisers.”

If Emmis is successful, radio industry observers said, it could signal a seismic shift in the way advertising is sold. Radio stations have seen their advertising revenue threatened over the last five years as competition for listeners from satellite radio, the Internet and technology like the iPod grew fierce.

“That will be the real test,” said Cummings. “If [Google] can take prime-time inventory and deliver it to their customers [at premium rates], that will really show the
value.”

The radio-Google partnerships are made possible by Google’s $1.24 billion purchase in 2006 of California-based dMarc Broadcasting, a firm whose software allows marketers to place ads on radio stations. That move paved the way for Google’s effort to extend its dominance in Internet advertising to other media.

The software allows marketers to bid on advertising spots in specific geographic areas and aimed at certain demographics during desired times. Google clients can monitor on-line how much they’re spending, where and when their ad is playing, and even listen to a recording of the ad.

But to make the system work, Google needs access to a large chunk of radio advertising inventory, including the prime-time spots its advertising clients are most likely to be drawn to, industry analysts said.

Google’s worldwide reach means the Internet search engine has about 10 times more advertisers than most radio groups, industry experts said, and radio stations are eager to gain access to those advertisers.

Meanwhile, radio reaches more than 95 percent of all people in North America, and though Google is growing in strong demographic areas, it’s still only reaching about 68 percent of North Americans.

Google’s success in radio is critical for the company, because its lofty valuation is partly based on investors’ expectations that it will be able to expand its Web advertising business to media like radio, newspapers and television.

Though Emmis officials have been hesitant to project what the Google deal could bring in upon maturity, sources close to the
company believe it could mean tens of millions of dollars annually in new revenue.

During its last fiscal year, Emmis brought in $271.9 million from its radio properties, and industry experts said if the full potential of the Google deal is realized it could boost that cash stream by more than 15 percent.

The deal is just one more way for Emmis to broaden its revenue base during a difficult time for radio, company Chairman Jeff Smulyan told analysts in a recent conference call. He characterized the relationship with Google as still in the “experimental” stages.

Not all radio station operators look at the relationship favorably.

Ed Christian, chairman of Milwaukeebased Saga Communications, has been among the most vocal skeptics, scoffing at the notion that Google will bring new advertisers to radio. He even joked to reporters that Google could potentially attract “Swedish sweater knitters” as U.S. radio advertisers.

Christian’s view is typical of those who believe Google will tap current radio advertisers instead of bringing in new business.

But Google CEO Eric Schmidt said during a recent conference call with reporters and analysts that his company would work hard to introduce new advertisers to radio, and avoid conflicts with radio operators and their existing clients.

Emmis has the right to refuse any ads—and even terminate the deal altogether on 90 days notice, Cummings said, but he added there have been very few instances that Google has sold to existing Emmis clients.

Others fear Google will use auction-like
sales tactics that will drive down prices.

“I understand the fears here,” said Tom Taylor, executive editor of Radio-Info.comand a long-time radio industry expert. “[Radio operators] could lose control of their inventory and pricing. The fear is, when you give someone else control of your inventory, then they sell it at lower prices.”

Proponents of the Emmis-Google deal think it will ultimately drive prices up by creating more demand for radio advertising.

Emmis and Google evenly split the ad sales revenue, but Emmis officials said if the deal is expanded to prime-time they would expect to keep closer to 80 percent of the take.

A 30-second radio ad can air for less than $100—especially at non-prime times, and a full week’s run can be as little as $2,500. In the local market, a single 30-second drivetime spot costs between $300 and $500.

Officials for Clear Channel, which owns WFBQ-FM 94.7, WRZX-FM 103.3 and WNDE-AM 1260, don’t think rates will be a problem.

“Google has proven its ability to gain premiums for advertising inventory, and that fits perfectly into our broader strategy of building value for advertisers while increasing our overall revenue yield,” said John Hogan, Clear Channel Radio’s CEO.

Google, for its part, is ramping up for its extended deal with Emmis, adding dozens of employees with radio sales background in recent months.

“Now it’s time for them to really move the needle on these ad sales to prove this can work,” Unmacht said. “The radio industry is known for being reactive. This might finally be a move that is proactive.” •

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