by Charles Metalitz, Chicago, IL
Editor's note: The following talk was presented
at the Council of Georgist Organizations conference Sept.
1, 2001, at the Holiday Inn-Pittsburgh Airport. It's based
on Henry George School Research Note #4, which is posted at
www.hgchicago.org (Select "our publications"). The
posted version includes data tables which are omitted here
due to space limitations. Chuck Metalitz is the Executive
Director of the Henry George School of Social Science,
Chicago.
This paper was written because I resented being
sold for $17
This paper stems from an event shortly before the
Des Moines conference last year. Chicago's only remaining
privately-owned classical music station, WNIB, was sold for
$165 million. Bonneville International Corporation bought
the station not because they wanted to continue or improve
its operation; what they really bought was a license to
broadcast to a market of nearly 10 million people. In
fact, they bought the market, at a cost of about $17 per
person.
Well, I used to listen to WNIB, and I resented being
sold for $17. I wanted to look into the business of
broadcast radio, and try to analyze it in Georgist terms.
Henry George pointed out that those who monopolize
natural opportunities could exact a toll on users, and that
speculation could lead to excessive costs of access which
eventually make productive use impossible.
What I found is, first, that the major asset of
broadcasters is privilege. Actually, I could have figured
that out just by reading the Chicago Tribune, who quoted
the publisher of a radio trade magazine: "These radio
stations are a license to steal. They're gushing oil
wells."
And, second, I found that speculation in broadcast
licenses does indeed appear to have reached a point where
productive activity is quite difficult, though not yet
impossible. One can make money in radio, but it's mainly
done by holding licenses rather than producing
programming.
Limited financial data about the radio
broadcast industry is available.
The 4,685 AM and 8,032 FM commercial stations
licensed in the United States have literally hundreds of
owners. Many are privately-held corporations with just a
few stations, or companies in other businesses - notably
newspapers - with a station or two among their holdings.
But the really valuable licenses, those serving large
metropolitan areas, are largely controlled by a few huge
corporations. One report claims that four companies
control the stations receiving 90% of radio advertising
revenue.
The biggest radio broadcaster, Clear Channel
Communications, owns 1,140 stations, including five or more
in each of the seven largest market areas. Infinity
Broadcasting, a subsidiary of multimedia conglomerate
Viacom, has 184 stations in 41 market areas, accounting for
13% of total U. S. radio advertising expenditures. Data on
licenses, assets, and revenues for these and thirteen other
large radio broadcast companies are shown in Table 1 (not
included here, but available at www.hgchicago.org).
Of course, some major broadcasters are missing from
that table. Disney, through its ABC Radio, owns 25
stations, one in Pittsburgh and the rest in larger markets.
Bonneville has 16 stations. This reminds us that, even if
the airwaves belong to the people and licensees must report
on their operations, they aren't required to release much
data and in fact the only financial data most release is
what's needed by investors. Disney doesn't report on
its radio operations because they're only a tiny part of a
huge conglomerate. Bonneville doesn't report because it
has only one shareholder, the Mormon Church.
In Chicago, of the 14 full-power commercial (class B)
FM stations, Clear Channel and Infinity each have 4,
Bonneville has 3, and Disney has one. Emmis
Communications, a smaller chain who also own newspapers,
has one, leaving one controlled by a local not-for-profit.
In Pittsburgh, a smaller market, the concentration is
somewhat less. Of ten full-power commercial FM stations,
Clear Channel has 4 and Infinity 3, with the others
owned by smaller companies.
The value of privilege is visible - but it
isn't going to the shareholders.
A large number of radio broadcast licenses have
changed hands during the past couple of years. Whenever a
station is sold, it is normal practice to report separately
the value of the license and the value of the physical
facilities. This data can give us a pretty good idea of
how much these privileges are worth in the market. The
cost of the license is amortized over a period of 10 to 40
years.
For most broadcasters, licenses constitute over 80% of
assets. And paying for these licenses will not be easy,
because for most broadcasters the cost of the licenses is
four to eight times their annual net revenues.
Data on operating income provides another view of how
little income is made using these expensive licenses (See
Table 2 at www.hgchicago.org).
Operating income is what's left of revenues after all the
salaries, maintenance, depreciation, and other costs
necessary to produce the broadcasts are paid. Of the 15
companies, only 3 were able to squeeze out an operating
profit in excess of 5% of assets, less than Treasury bills
paid that year. The same number, three companies, actually
had operating losses.
But the operating "costs" include amortization of
assets which, in fact, are for the most part gaining in
value. And another source of income can be a gain on sales
of assets, the assets being of course primarily broadcast
licenses. Each of these is an imperfect measure of
speculative gain - depreciation because it doesn't measure
increases in value and it includes actual physical wearing
out of wealth which will need to be replaced, and gain on
sales because it recognizes only assets sold during the
particular year, and may include their growth in value
during previous years. If we simply take the larger of
these two measures, added to operating earnings, things
look a little better. Nine of the 15 companies have
earnings in excess of 5% of their invested assets; two
still show deficits.
But even where there is profit from operation or
speculation, this can be diverted before it gets to the
common stockholders. Some of it goes to pay interest on
debt. Some is skimmed off by insiders holding various
special securities. Some pays for taxes. In the end, only
five of the fifteen companies were able to generate any
income for benefit of common stockholders.
While the data in the tables is based on the most
recent completed fiscal year (calendar 2000 for most
companies), more recent earnings reports aren't much
better. Of the 14 companies still extant as public
entities, only four reported positive earnings for common
stockholders thus far in the current year. (see, at
www.hgchicago.org, Table 3 - Operating Profit and Income
Available to Common Stockholders.)
The Radio Broadcast Spectrum is Being Auctioned
For many years, the way one got a broadcast license
was to apply for it. Whoever applied first, and fulfilled
all the requirements, was granted a construction permit
and license, which was routinely renewed as long as
regulations were approximately observed. Today, of course,
commercial licenses are virtually unavailable in or near
large cities, but quite a few channels are open in
less-populated areas.
However, it's no longer standard practice to simply
apply for a license. If more than one applicant is
interested in a channel, an auction process will be
followed. The FCC has designated 359 FM construction
permits for auction, with minimum opening bids ranging from
$2,500 to $400,000. These are not in major metropolitan
areas, but include some well-populated places such as
Normal, IL (McLean County, population 150,433, minimum
opening bid $250,000). The auction will begin December 5,
2001, and those wishing to use the proper name for their
activity might choose to bid on Speculator, NY (opening
bid $5,000, village population 348). An auction for up to
39 AM licenses is also being held.
As far as I can tell, the fiction that the spectrum
belongs to the people and the licensee does not own it will
be maintained with the results of these auctions.
Large operators have the advantage in getting
financing, but FCC pretends otherwise.
It is, I think, well-known that large corporations
can borrow cheaper than small ones. Therefore, as
expensive licenses increase the amount of upfront money
needed to get into the radio broadcasting business, it
becomes relatively more difficult for small operators, and
relatively easier for large ones, to own and operate
stations.
As one station broker put it, "First time buyers are
not going to get bank financing. In the present business
climate some experienced buyers are not going to get loans
unless they have 'outside' assets to pledge. Most bankers
do not understand the broadcasting business. If it does
not have a car title attached they are without a clue."
The FCC does not seem to recognize this problem. In
their paper which "explains why auctions are superior to
comparative hearings for selecting among mutually exclusive
applications for spectrum licenses," FCC staff address the
concern that small businesses may be unable to compete,
using phrases reminiscent of economist jokes: "Given
efficient capital markets, the bidder with the best
business plan, producing the highest expected profits,
will get the best financial backing and will be able to
place winning bids." The paper, of course, does not
consider any other method of spectrum allocation.
Not only the radio broadcast spectrum is being
auctioned
It isn't merely, or even principally, the radio
broadcast spectrum that's being auctioned. Spectrum
auctions for all services through February, 2001 raised $31
billion in actual or anticipated revenues, and quite a few
additional billions are included in the "balanced" Federal
budgets of the future. As a percentage of the total
budget, these figures are minuscule, but they seem to
represent an outright sale of a privilege in order to
balance an operating budget.
How much of the planned revenue will actually appear
remains questionable. A prominent example is NextWave
TeleCom. After submitting winning bids totalling $4.87
billion in 1996, NextWave declared bankruptcy and was
unable to pay. Although the FCC re-auctioned the licenses - for $15.9 billion - in 2001,
the appeals court ruled that the re-auction was improper
and the licenses still belonged to NextWave's creditors.
The outlook for radio broadcast license values
While investors appear to be banking on an increase
in license value, there are reasons to question whether
this will occur. The simple dynamics of a speculative
privilege market provide one reason. Eventually license
prices could become so high that nobody can make any money
using them, and there will be no "greater fools" to sell
to. But for now, since some operators are able to generate
a decent return on investment, prices may continue to
rise. In fact, as the overall market (population and
spending) continues to grow in most areas, it is possible
that growth will eventually bail out the speculators.
Other worries for license-holders come from new
competitors, Internet radio and satellite radio.
Many broadcast stations nowadays copy their programs
to the Internet, where they are available to anyone
properly equipped. How to profit from these broadcasts may
be more of a question, as most advertisers are not willing
to pay to reach listeners outside of their own respective
market areas. It might be possible to arrange subscription
charges to support the service, but this hasn't been done
on a large scale.
Satellite radio will be introduced late this year by
two companies, XM Satellite Radio and Sirius Satellite
Radio. These mutually incompatible systems are designed
mainly for in-car listening. For the cost of equipment
($300-$500, although it will be included in some new cars)
plus $12.95/month, customers will get their choice of 50
commercial-free (Sirius) or 100 limited-commercial (XM, six
minutes per hour) stations.
Not that the success of satellite radio would remove
privilege from the equation. These operations also use
part of the radio spectrum and, if they're successful,
their licenses will become more valuable.
Henry George's solution might cause some
dislocation
As Henry George would have expected, the cost of
privilege is making production difficult. I think most of
us understand George's remedy - since spectrum is a limited
natural resource and exclusive rights are necessary to use
it efficiently, the community should collect the rent. As
a practical matter, this means that a heavy tax on valuable
broadcast licenses should replace some taxes on productive
activity. Speculation would then be unprofitable, the cost
of licenses would fall to nearly zero, and independent
entrepreneurs would be able to compete. George proposed
that such a change be made immediately.
But George's remedy might cause some difficulty.
Most broadcast companies haven't sufficient assets to cover
their debts unless the value of licenses is considered.
Table 4 (at www.hgchicago.org) subtracts the estimated
license value from the total assets for each of the fifteen
companies, and compares it to long-term debt. Only two of
the companies may have tangible assets greater than their
long-term debt.
While negative book value does not invariably result
in bankruptcy, there does seem to be problem here. If
license values are abolished, somebody is going to find
that they don't have the assets they thought they had. A
similar problem exists when any type of privilege is
abolished.
Conclusion
I don't think many people here are surprised to see
that, in the broadcast spectrum as elsewhere privilege has
made production more difficult. For us as consumers, it
means just plain lousy radio. Henry George's solution,
regular payment of rent by license-holders to the
community, would solve the problem but cause some
dislocations.
For further information, contact Chuck Metalitz,
Director of The Henry George School of Social Science at
417 S Dearborn St. #510, Chicago IL 60605; or phone
312/362-9302, or email taxpayer@pobox.com.