It's The Economy... Part One

Some random thoughts about how public radio does business.

* Public radio can accomplish anything it wants to as long as its economic model is adjusted along the way. Morning Edition on the satellite in real time? Some station listeners will choose satellite over local, but with the right business model, the program and local stations would still thrive.

* Underwriting income exceeds listener contributions at many stations. Public radio is also getting close to the point where national underwriting income to networks could exceed station fees. It’s a significant shift from grass roots funding to marketplace funding. The industry would do well to discuss the implications.

* One reason it’s not all that easy to be a station manager is having to manage five or more disparate revenue streams – individual giving, major donors, foundation grants, licensee or government subsidies, and underwriting sales. There are others but those are the big ones. There aren’t too many businesses that require managers to be good at so many different ways of generating income.

Words To Work By

"I hear public radio and I hear our optimism and idealism, our belief in civil discourse, our sense of history and accomplishment and adventure. I hear our delight in being alive." - Jay Kernis, NPR Senior Vice President for Programming, speaking at the PRIMA Winter meeting, January 2002.

Why Listener-Hour Pricing Is Not Working

Fees for NPR's Morning Edition and All Things Considered are based, in large part, on listener-hours. The idea is that every hour of listening these programs generate for a station has a financial value. Some of that value comes from listener contributions and some comes from business supporters. When the listener-hour pricing model was introduced, the goal was to make an NPR listener-hour so profitable for the station that the station would want as many of them as they could get. It was a win-win proposition.

But it hasn't worked out that way. Here's why. NPR's fees for Morning Edition and All Things Considered pricing work out, on average, to be about half of the net revenue generated by these programs -- net revenue being the amount of money raised minus the direct cost of raising the money. That's a problem because, as with any public radio industry average (the statistical mean), the majority of stations tend to be below average performers.

Put another way, it is very likely that the majority of stations are sending the majority of their net revenue from drive time to NPR.

That's not a winning formula. Financial surpluses from drive time help pay for general operating costs, they fund innovation, and they fund investment in future growth. Drive time must become more profitable for stations if public radio is to grow.

Some of that burden rests with stations that have below average fundraising performance. But even the top-performers are going to face tough times if the cost of network programming eats away at their share of drive time revenues.

Fundraising Philosophy

The industry received good news when the Station Resource Group released its report on public radio revenue in FY 2003. Net income from individual giving was at an all-time high. Net income per hour of listening was close to an all-time high. In FY 2003, public radio generated 1.37 cents of net revenue per listener-hour.

That statistic, net income per listener-hour, is often used as a benchmark by stations looking to assess the performance of their fundraising efforts. There are two things to remember when doing this. First, it is an average for public radio. As such, the majority of stations did not achieve this level of performance. Second, it obscures the most important distinction between the top-fundraising stations and all others – fundraising philosophy.

Some stations choose to raise what they need each year. Other stations choose to raise as much as they can while keeping pledge drives and fundraising costs under control. That second group -- which includes stations of all formats, licensee types, and market-sizes -- is netting upwards of 2 cents per listener-hour. It doesn’t seem like much when you’re talking in pennies, but improving from 1.37 to 2 cents per listener-hour translates to 45% more net revenue.

That’s at least $100,000 in additional net revenue for the average station. It’s there for the taking, but only when a station deliberately chooses to reach its full potential.

Fundraising Puzzler

So you need to spend some more money on programming. Maybe you want to start a new local program. Or your NPR dues went up. You need $200,000 in new revenue. How much money do you have to raise every year to cover this new expense?

The answer is: About $300,000. Why? Raising money has a cost. Let's say your station spends 33-cents to raise a dollar, a little better than average for a public radio station. For every dollar you raise, just 67-cents is available for spending. It's simple arithmetic: $300,000 x $.67 = $201,000. Factoring in the cost of raising money, the fundraising goal has to be around 50% higher than your target.

It's an equation you can bank on. Just don’t forget to give the development department the $100,000 it needs to raise this money.*

* The actual cost of raising additional dollars will vary depending on the tactics used. For initial budgeting, the station average cost per dollar raised is a good rule of thumb.

Cosmetrics

Cosmetrics are numbers that look like meaningful statistics even though they have no real value. Cosmetrics are often used to put a pretty face on an otherwise unflattering circumstance. While generally benign, trying to use them for business decisions can be dangerous. Cosmetrics also create the occasional public relations problem. The press around the Tavis Smiley Show is a recent example this.

The Cosmetric in question is that “the Tavis Smiley Show had a 29 percent African American audience, highest of any show on the NPR network.” Sounds impressive, doesn’t it? But it is a big number because the Tavis Smiley Show wasn’t on as many stations as most NPR shows.

Tavis Smiley was on 83 NPR stations. Had the program been on the same number of stations as Fresh Air (458 stations) or Talk of the Nation (244), the percentage of African American listeners would have gone down sharply. That's because the Tavis Smiley show was initially marketed to and cleared by stations that target African American audiences. The stations that had not yet cleared the show had far fewer African Americans to contribute to the Tavis Smiley national audience. So getting more stations (a good thing) would have reduced the percentage of African Americans listening; making it look like the program was attracting fewer African Americans even when the number of African American listeners would have gone up.

The lesson here is that percentages are never good measures of success because they can change for the wrong reasons. Real numbers of people listening, not percentages, are the true measure of success. The first step to improving public radio’s public service is focusing on the metrics that matter. That’s the subject of a future entry. In the meantime, we'd make our lives easier by not covering up reality with a thick layer of Cosmetrics.

Hundreds and Hundreds of Millions Spent

Public radio stations spent just over six cents to generate one hour of listening in FY 2003. That’s $694 million in operating expenses and 11.5 billion hours of listening.*

The 6 cents to serve one listener for one-hour number has held fairly constant over the years. In the last decade, public radio spent in the neighborhood of five billion dollars to generate 85,000,000,000 hours of listening. That’s $5,000,000,000 over ten years to get and keep the listening we have. We’re using round numbers here.

Now suppose public radio wanted to keep its current audience and accelerate audience growth among minorities at the same time. How much would it cost, on average, to increase minority listening by three national percentage points?

Assuming that costs for a new initiative are at public radio’s current average cost per hour of listening, the tab starts at around $20.8 million per year. That’s all local costs – programming, operations, fundraising, marketing, and administration. Up the annual total to at least $25,000,000 to cover national programming costs not funded by stations.

While this is a permanent investment, let’s consider a 10-year horizon for planning purposes. To increase minority listening while keeping the audience we have, public radio needs to invest an additional quarter of a billion dollars, locally and nationally, over the next decade.

An additional $250,000,000.

Targeting new audiences is not cheap. Once public radio set goals to reach new listeners, it should invest appropriately. Spending anything less is spitting into the winds of reality.

* Sources: The CPB-funded Brody Weiser Burns “Having It All” report and the Arbitron Nationwide Average Quarter-Hour audience of 1.76 million listeners reported by the Station Resource Group in its 2003 revenue update.

Here’s a link to the Audience 98 report on minority listening to public radio. It is an excellent study on how public radio’s programming actually transcends traditional demographic definitions. It continues to inform national policy on minority programming.

Billions and Billions Served

Public radio provided more than 11.5 billion hours of public service in FY 2003. That’s an estimated 11.5 billion hours of listening to public radio in one year.*

Let that sink in for a moment.

The public consumed more than 11.5 billion hours of public radio’s mission – news, information, music, and entertainment programming – in a single year. Over the past decade, the public has spent more than 85 billion hours listening to public radio. That’s more than 85,000,000,000 hours of public service.

And the best news of all? Listening to public radio continues to grow while listening to commercial radio continues a decline that started long before satellite radio and Internet streaming.

We must know something the commercial radio people don’t know.

* Based on the Arbitron Nationwide Average Quarter-Hour audience of 1.76 million listeners reported by the Station Resource Group in its 2003 revenue update.