Sale Of CBS Radio The End Of An Era

Over- the-air radio may go the way of book and music stores. To understand why that’s significant, a look nearly 90 years of American broadcast history through the CBS eye

The CBS Corporation may be doing the right thing for investors and Wall Street by looking at selling its extensive big city radio broadcasting business, as Chairman and CEO Leslie Moonves announced to investors on March 15.

But the symbolism of CBS getting out of the business that started it as a broadcaster is disheartening when you look at what the medium has meant for generations.

When sold, it will signal that over-the-air, free to the public radio stations are barreling down the path that has seen the disappearance of bookshops, video outlets, music stores, and many other businesses. It will be the latest victim of the digital revolution that has swept aside once traditional forms communications and commerce.

It makes me wonder what Arthur Judson would have thought. In case you don’t know that name, he was the founder of CBS, and the creator of its first nascent radio network, which he called United Independent Broadcasters. He’s the guy who brought in William Paley, who built CBS into a broadcast giant in TV and radio. To most people Paley was founder.

As CBS Radio moves toward obsolescence it is worth recalling the true story of how The Tiffany network got from there to here.

An early portrait of Arthur Judson

Around 1926, Judson was unhappy that his New York City and Philadelphia-based talent agency was not able to get work for all of its artists and musicians on NBC’s two radio networks. NBC was the first big national radio broadcaster.

Judson, who was born in Dayton, Ohio on Feb. 17, 1881, was a child prodigy as a violinist, reputed to have started playing at age eight. He entered college in 1899 and two years later was named the dean of the music school at Denison University in Ohio.

After seven years of teaching and celebrated violin performances, Judson moved to New York City to pursue his professional dreams. However, he couldn’t make enough to live. So he also took a job selling ads and doing music reviews for a magazine, Musical America.

As his performing career wound down, Judson spent eight years working for the magazine interacting with artists and administrators of orchestras, music venues, agencies and more. In 1915, at age of 34, he quit to run the Philadelphia Orchestra.

Judson soon created a talent agency to represent the musical artists he had met and wanted to help. In 1922, while still running his agency, he became manager of the New York Philharmonic.

That meant he was both a seller and a buyer of talent, which in the modern era would be considered unethical. Then it was seen as a smart business strategy.

By the second half of 1920s, Judson had become one of the most active artist managers in American orchestral music, but still not powerful enough to force NBC radio, run by David Sarnoff, to keep his clients regularly employed.

So in 1927, Judson began stringing together his own radio network, United Independent Broadcasters. When he went looking for affiliates and backers, he met William Paley, the scion of a wealthy Philadelphia family that ran a successful cigar company and dabbled in radio stations.

The Paley’s cigar business, which included the La Palina brand, made the family millionaires and allowed young Bill Paley to attend the best private schools and graduate from the Wharton School at the University of Pennsylvania.

He soon was active in the family business.

Paley saw that advertising La Palina and other brands on radio led to more sales. So Paley, his father Samuel, uncle and other investors bought a struggling 16-station radio network in 1927 called the Columbia Phonographic Broadcasting System. If nothing else, Paley’s father reasoned, it would help them sell more cigars.

Within a year cigar sales had more than doubled, and the Paley family were believers in the power of the young medium. They bought out their partners and by the following year Paley had expanded CBS to 117 affiliated stations.

One of those partners was Judson, and that ended his role as an active manager at CBS. However he maintained a large number of shares in the new Columbia Broadcasting System (about 20 percent) and remained on the board of directors.

His relationship with CBS was a boon to Judson’s real business. By 1930, his Columbia Artists Management, having merged with or acquired seven other agencies, was the largest provider of musical talent to orchestras in America, with more than 125 top artists on its roster. That also gave it a powerful position in radio.

Meanwhile under Paley, CBS quickly grew into a national force in broadcasting, able to compete head to head with NBC’s two radio networks (the second of which in the late 40s became ABC).

In the 1940s, the golden era for radio as an entertainment communications medium, Paley spent freely on talent. He raided high profile NBC stars like Jack Benny, Bing Crosby and the popular due of George Burns and his wife Gracie Allen. That bought in a huge audience.

Spending more money than NBC and his uncanny eye for talent and popular taste wasn’t the only way Paley was a disruptor in his quest to make CBS radio a national powerhouse.

In the 1920s, most radio stations were seen as local businesses, in the same way newspapers operated locally. The stations depended on local ads and bought some programming from networks, but usually not in a scheduled pattern.

William Paley around 1939

Paley changed all that. He saw that good content drew in listeners and that advertisers would gladly pay to reach that audience. He gave higher quality programs to the affiliated stations for a lower price than what they had been paying. However, they had to carry the CBS brand and run the shows – all the shows – in a regular pattern (on the same night each week). That way they could be promoted and build a loyal following.

MUTUAL JOINS NBC AND CBS IN THE RADIO NETWORK RACE

There was a third national radio network that began in 1934, the Mutual Broadcasting System, with a different business model. It was a cooperative created by more than 100 local stations to share programming. It was where The Lone Ranger and many other hits started.

Mutual lasted until 1987, spinning off other networks along the way. It was acquired that year by an aggressive radio program producer, distributor and syndicator, Westwood One, which phased out the Mutual brand name in favor of its own.

In 1987, Westwood one expanded again, swallowing up the NBC radio stations and network operations. So in short order two of the three original American radio broadcast networks had been sold by the founding businesses – leaving only CBS as the keeper of the legacy flame.

Westwood One in 1994 was taken over by Infinity Broadcasting, then the second largest operator of radio stations.

Then in 1996, Westinghouse – the largest operator of radio stations - bought Infinity

After years of fighting to keep the network independent, Paley's successor Lawrence Tisch sold CBS in 1995 for $5.4 billion. At that point, the three direct descents of the three original U.S. radio network companies had all become one.

Westinghouse, an electrical power supplier and manufacturer dating back to 1888, also had early roots in radio. In 1920 it put the first commercial station on the air, KDKA in Pittsburgh, Pennsylvania.

Westinghouse was also an early investor in Radio Corporation of America (RCA), which launched the NBC networks. It owned 20 percent for a time.

Merged together as CBS, the company shed all of the Westinghouse Electric legacy divisions, including nuclear power operations.

Then in 1999, CBS was acquired by Viacom, a company that had been created in 1971 when the government forced CBS to spin off its TV syndication business.

By the turn of the new century, Viacom was controlled by National Amusements, run by the savvy New England lawyer and movie theater mogul Sumner Redstone. The year before Viacom had also acquired Paramount Pictures for about $10 billion after a heated bidding war.

In 2005, Viacom split its businesses into two public companies. Viacom included cable TV services such as MTV and Nickelodeon along with Paramount Pictures.

The rest of Viacom became CBS Corp. It was reborn with the radio and TV broadcasting operations and Showtime pay TV network. Redstone retained voting control over both.

Earlier this year, Redstone at age 92 and ailing, finally gave up operational control of CBS to CEO Leslie Moonves. Redstone has shown great confidence in Moonves who during his 21-year run has built the network into a major entertainment conglomerate. Under his leadership CBS has been known for high quality content for TV and radio. Under Moonves, that has kept CBS at or near the top of the ratings for a decade.

The problem has been that audiences for both TV and radio have shrunk over 20 years as viewers and listeners migrated to cable, satellite and new digital platforms. TV was able to charge ever-higher prices for ads as viewership shrunk but radio was battered by the competition.

Redstone has always run his companies for the investors, which means doing everything possible to keep the stock price high.

That created constant pressure to earn more profits and return dividends to investors. When stock buybacks that reduced the number of shares wasn’t enough, the next step asset sales.

In 2014, that led CBS to sell off divisions that owned and operated outdoor billboards in major cities across the U.S. (and sister divisions overseas), for $1.56 billion. It got another $225 million for the foreign billboard assets.

Now two years later CBS is looking to do a similar transaction by selling the radio operations to free up more cash. It will also shed what is seen as a slow growth business.

There is a difference, however, between billboards and radio. Billboards are something you glance at from the highway. Radio’s shows and talent become personal friends of longtime listeners. The CBS brand in radio is more meaningful to the image of the company than any billboard.

CBS does not break out what it makes from radio but it is profitable. However, business was down 6 percent last year, the company reported in February. Even so, CBS Radio still ranks as first or second among all stations in four of the top five U.S. media markets (New York, L.A. Chicago and San Francisco).

The business reason to get out of over the air radio now was that the value of the FCC licenses that CBS holds was dropping. That led to the decision in December 2015 by CBS to write down the book value of the stations. The non-cash write off was $297 million, plus taxes, or a total of $484 million.

According to a study done to determine the size of that tax write-off, CBS reported data that shows the average value of the 117 radio stations was about $167 million each. If all the stations are sold at that level, CBS will gain nearly $20 billion.

That will be important as CBS looks to market its radio business. There are very, very few obvious potential buyers. The law makes it difficult for a foreign company to buy CBS radio.

Among the big domestic players, the largest radio station operator, now known as I Heart Media (formerly Clear Channel Communications), with 850 AM and FM radio stations, isn’t in a position to do a deal. Although profitable, it has a heavy debt load and may soon have to go bankrupt.

CBS is unlikely to sell any stations until after the November election in any case because there will be a bonanza of political advertising which will boost the property to a peak valuation.

CBS has been vague about what they are selling. It obviously includes the stations but it is unclear what happens to the networks. CBS operates radio news and entertainment networks, and in the last few years has aggressively built a sports network that reaches about 300 affiliated stations.

CBS can learn from ABC’s mistakes. The Disney-owned broadcaster sold its radio stations and radio networks in 2007 to Citadel Broadcasting (except for Disney Radio and the ESPN networks).

Citadel kept the ABC brand for two years before it ran into financial trouble and was acquired by Cumulus Media. They rebranded the ABC stations as the Cumulus Media Networks.

In 2013, Cumulus Media merged with Dial Global Radio Networks which had acquired Westwood One. They renamed it all Westwood One.

In 2014, Cumulus dropped carriage of ABC News on the stations and replaced it with CNN radio.

To get its brand back on the air, in 2015 Disney/ABC launched new branded networks for both AM and FM stations. It also began to offer programming based on popular network TV shows such as Good Morning America and Jimmy Kimmel Live.

So CBS faces a big task in finding a buyer, or more likely a number of buyers, for the stations, and then maintaining the importance of its brand.

Judson continued to live a busy life after CBS. His agency’s near-monopoly on musical artists for orchestras was investigated by the federal government in 1939, forcing him to restructure and sell some divisions.

He continued running the New York Philharmonic until 1956 when he retired at age 76. A wealthy man, Judson died in 1975 at age 93 in New York City.

CBS Chairman/CEO Leslie Moonves

Now CBS, the last of the legacy free-to-air radio networks, is going on the block as audiences turn to other mediums. What would Judson have done? Whatever it took to keep his artists working and his business going – just as Moonves is doing.

It still seems to me, however, there should be a tiny tear coming from the famous CBS eye, as it parts company with the business that started it all.