Reprinted with permission from Current; the
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A most deliberate rush for frequencies

Public Radio Capital got another vote of confidence from the philanthropic community this month--a $200,000 grant from the Ford Foundation. The Denver-based nonprofit backed by several foundations and CPB since its founding three years ago, is working on expansion financing for dozens of pubradio stations and has helped 10 line up the means to buy new frequencies or preserve their present operations. In this commentary, PRC's managing directors summarize what they've learned at the intersection of pubradio and the world of finance.

Originally published in Current, July 26, 2004
By Marc Hand and Susan Harmon

Before the end of this year, listeners in Amarillo, Texas will have their own public radio service for the first time. KAEZ in Amarillo is the latest addition to the High Plains Public Radio network based in Garden City, Kan. Several factors converged to make it happen: A relatively small public radio organization was prepared to take action, a visionary donor and local foundation got involved, and a commercial broadcaster decided to sell.

Amarillo is one of many areas where grassroots initiatives are seeking to expand public radio services by buying stations. Another batch of station acquisitions may occur with the one-time FCC auction of FM commercial channels in November. There is growing evidence that we can make the most of public radio's potential, especially in the 50 largest markets, only if we develop three or more stations with distinct formats in each of these markets.

To expand broadcast service when frequencies are scarce, public radio must make concerted local efforts, with supportive national activities, to add stations. Without a collective sense of urgency about these developments, we will lose opportunities to make significant gains in audience and to protect the service and ownership of existing public radio stations.

Ken Stern, executive VP of NPR, said, "The Kroc gift has liberated us and allowed us to dream bigger," according to the Chronicle of Philanthropy. Just as a major gift bolsters the vision and capacity of an organization, new capital assets--such as additional radio stations--can bolster an institution's reach, service, revenue and community standing.

Taken to the level of public radio service overall, it is not enough that we own slightly more than 700 stations nationwide. We must "dream bigger" about how many public radio stations it takes to maximize our service potential.

Getting in the game

The late Kenneth Dayton, former CEO of Dayton Hudson Corp. (now Target Corp.), a leading philanthropist and longtime advocate for public radio, said shopping centers can thrive when they have two or more high-quality anchor stores. He made the point to illustrate that public radio could expect the same result if it developed two or more high-quality stations in the same market. His insight has been borne out, as the chart below indicates.

You may already be familiar with that bar graph developed by the Station Resource Group, which uses different colors to represent the audience size for each of the public radio stations in the 25 largest markets. The stations' combined percentage audience share in the market is measured on the scale at the left. Clearly, markets with more public stations provide greater and more diverse public service to more people.

Mike Starling, NPR's VP of engineering, estimates that because 23 of the top 50 markets are served by only one NPR member station and 15 markets have just two, 84 million people in these markets are in effect underserved by public radio. This population would be better served with more public radio outlets.

Commercial broadcasters have been on an aggressive buying spree since 1996, when the Telecommunications Act removed the ceilings on the numbers of stations a corporation can own overall and within a market. Even before the rules changed, these broadcasters understood the economic advantage of operating more channels under single ownership.

The dynamics have also changed in the noncommercial band. Thirty years ago, most public broadcasters felt fortunate to have one outlet in a community. As public radio audiences grew and stations focused their formats, the advantage of multiple stations in one market became more evident. Now, public radio wants to launch distinctly formatted stations, but there are no vacant frequencies left in major markets.

Noncommercial religious broadcasters have outpaced public radio's growth in the past decade, applying for new station and translator channels and buying others. Public broadcasters, in contrast, lacked a coordinated national strategy and mechanism for growth and are now playing catch-up.

For years, Minnesota Public Radio was the only public broadcaster with the vision and determination to pursue this strategy ambitiously. Three years ago, members of the Station Resource Group decided that for public radio to reach its potential, many more public broadcasting organizations needed access to capital and the expertise to buy radio stations. Public Radio Capital was created to be the acquisition arm of public radio--a company within public radio that focuses solely on planning for and acquiring new stations.

Two of the first PRC projects now have track records. In 2001, Colorado Public Radio purchased commercial stations to meet its goal of providing dual services in Denver. One channel now carries news and information and the other broadcasts classical music. Since then, audience numbers for the new dual service have grown rapidly and CPR has added approximately 100,000 listeners. The number of donors helping support the Colorado network grew by 29 percent and its membership revenue increased by 41 percent.

In the other case, Nashville Public Radio also added an all–news-and-information service by acquiring an AM station but left a mix of music and news on its FM channel. The result: total listenership increased 26 percent and underwriting 15 percent in two years.

In the past three years, PRC has helped public broadcasters secure and finance public radio service in Albany, N.Y.; Amarillo, Texas; Baltimore; Frederick, Md.; Portland, Ore.; Sacramento, Calif.; Salt Lake City; Tacoma, Wash.; Cape Cod and Nantucket Island, Mass.; and northwestern Indiana, as well as in Denver and Nashville.

We're also working on more than 35 confidential projects in various stages. Most of these projects will either preserve or expand outlets for public radio programming. The experience has given us a clearer picture of marketplace dynamics.

Ready on the High Plains

Momentum is a critical factor in making acquisitions. It is important for the licensee to align its overall growth strategy with plans to acquire radio stations. It is critical that board members, licensee representatives, major donors and other stakeholders understand the vision, process and urgency of the expansion. Where stations aim to acquire channels, their leaders should develop credible business plans with 10-year financial projections of revenue and expenses based on sustainable formats.

Organizations have the best chance of acquiring a channel if they're prepared to act quickly when an opportunity becomes available. Those that aren't ready may see their opportunities snatched up by other buyers inside or outside of public broadcasting. High Plains Public Radio was one of 12 public broadcasters selected to participate in Public Radio Capital's More Channels, More Service Project, which was supported by the stations and a major CPB grant. In this 10-month initiative, High Plains and the other participants worked with our staff and consultants to develop comprehensive acquisition strategies based on detailed market and financial analysis, organizational capabilities and strategic planning.

Coming out of this process, High Plains was ready to take action. On behalf of the licensee, Public Radio Capital contacted commercial station owners in the Amarillo market and found an FM station owner interested in selling. High Plains moved at top speed and now expects to close on the acquisition in August

We worked with other public broadcasters who were not so fortunate. A major public radio organization licensed to a state university had an oral agreement to buy a station at a certain price but lost the deal when it took two weeks to obtain all of the licensee's necessary approvals for a letter of intent. A commercial broadcasting group put together a higher offer and beat us to the punch.

The lesson learned is that public broadcasters must be ready to move quickly when a deal is on the table.

Opportunities in AM and FM

Opportunities to buy radio stations can be scarce and expensive. In the top 50 markets, single commercial FM stations sold for an average of about $22.5 million in the past three years. In contrast, single AM stations in the same markets went for an average of about $5.5 million. Noncommercial FMs have sold over the past three years in the range of $500,000 to $5,500,000.

November's FCC Auction--which will sell the bulk of remaining vacant commercial FM channels--offers public radio a special chance to pick up new channels. Public Radio Capital is representing public broadcasting licensees bidding on more than 20 channels. These are frequencies that the FCC decided to sell all at once on the assumption that they would generate more money and interest as one larger group on the auction block.

Aside from those in the auction, nearly all commercial FMs in the top 50 markets are priced beyond public radio's reach. Unless we have significant contributions from individuals or foundations, public radio's business models can't generate enough listener contributions and business underwriting to permit purchases at prices topping $20 million.

AM stations are still affordable in many communities, however. In the past three years, Community Wireless Public Radio in Park City, Utah; and WAMC in Albany, N.Y., as well as Colorado Public Radio and Nashville Public Radio have bought AMs.

The most listened to and successful format on AM radio is news/talk, so, despite FM's overall dominance, AM acquisitions still have considerable potential for expanding public radio news services. Technologists expect AM audio to improve markedly as both AM and FM move to digital transmission in years ahead.

In the case of noncommercial FMs, prices usually reflect population size. Buyers pay a premium for stations such as Baltimore's WJHU (now WYPR) that have a revenue history and a continuing audience. Public radio stations that go on the market are often licensed to institutions such as school districts and universities that are vulnerable to chronic financial problems.

That's what happened in Portland and Milwaukee, two recent cases we know well. When last year's statewide budget crisis moved the Portland Public Schools to sell KBPS-FM, we represented a community group, the KBPS Public Radio Foundation, that bought the station. This was the first time a school board had sold a public radio station since 1990, when the Chicago school board sold WBEZ.

In Milwaukee last year, the school board decided to retain the license, but seek an organization to operate the station. Public Radio Capital is assisting a community group, Radio for Milwaukee, in these negotiations. The local group, chosen by the school system for negotiations, expects to sign an operating agreement this summer and plans to launch a music format aimed at younger listeners by the end of this year.

In about a fifth of Public Radio Capital's current projects, licensee institutions are evaluating their reasons and capabilities for operating public radio stations. The earlier we can intervene in this evaluation process--helping the institution to assess the risks and returns of various options--the likelier these stations will remain as public-service assets.

Less often we get calls from brokers and owners selling individual or groups of stations, including commercial AMs, small-market FMs and rare noncommercial FM stations. We expect to have opportunities to buy small station groups or portions of larger ones. Public radio would have to move quickly to complete these deals.

In the past three years, we have learned a lot about the potential of tax-exempt financing for public radio acquisitions. It has worked for the buyers in Park City, Denver, and Nashville, and it's planned for three more acquisitions in the next six months.

Three years ago, we saw how a Baltimore community group could quickly obtain loan guarantees from board members, making it possible for Your Public Radio Inc. to buy the station for $5 million from Johns Hopkins University.

Public radio is beginning to understand the importance of building cash reserves and generating cash surpluses for the year. It gives them the most important credential qualifying them for tax-exempt bond financing. But our learning curve in nonprofit finance still lags behind those of universities and governmental entities that routinely use tax-exempt financing and build substantial reserves and endowments.

As a system we should develop investment pools to guarantee tax-exempt bonds for stations' acquisitions. We have only begun to educate foundations and philanthropists about public broadcasting's need for capital and how it can help expand the station system.

Prospects for success

Despite the tough marketplace and high prices for radio frequencies, public radio has already demonstrated that it can compete. We have success stories to celebrate. We know people want more public radio programming, as evidenced by the continued growth of our audience. Experience indicates that if we multiply the number of distinct formats available in the top 50 markets, we can reach many of the 84 million people NPR estimates are currently underserved. And our case has two more especially compelling points:

1. Public radio is one of the last locally-owned media in America.
2. Public radio is a trusted forum for debate and a platform for new and diverse voices, including local content.

When opportunities arise, we must have our finances projected and decision-making processes sharpened so we know what's possible and how to achieve it. We're working with public broadcasting organizations to explain these transactions to the capital markets and their public service value to the philanthropic community. Only by adopting this comprehensive, coordinated and communicative approach can we ensure that many other communities will have opportunities like Amarillo's.

Marc Hand and Susan Harmon are the managing partners of Public Radio Capital. Hand has a career history of executive leadership in public and commercial broadcasting including station ownership, financing and brokerage. He can be contacted at mhand@publicradiocapital.org. Harmon has more than 30 years' senior management experience at public broadcasting stations and leadership on national boards of directors. She can be contacted at sharmon@publicradiocapital.org.