http://www.progress.org/cg/license02.htm

The electromagnetic spectrum is, economically, land, in that it is a natural resource which cannot be manufactured. Accordingly, the economic value of a license to use a portion of the spectrum is determined not by its cost of production, but by its usefulness in comparison to licenses available for free. And, due to anticipation of future increases, the market value of a perpetual (or any long-term) license can grow to levels higher than can be supported by current use of the license.

Using financial reports filed by owners of radio broadcast licenses, this Research Note shows that license values are approaching, or may even have reached, such levels. It also shows that the main asset on these companies’ books is their licenses. This means that, while Henry George would recommend that substantially all the rent of these licenses be collected thru taxation, such a policy would be a major inconvenience for such companies.

This Research Note also provides some information about auctions of radio broadcast licenses, and their role in the Federal budget.
 
The Henry George School of Social Science, Chicago, Illinois, is a not-for-profit adult education school of political economy. For further information contact the School at 417 S Dearborn St. #510, Chicago IL 60605; or phone 312/362-9302.

This paper was presented September 1, 2001, at Labor and Land: America’s Lost Legacy, the annual conference of the Council of Georgist Organizations.

This paper was written because I resented being sold for $17

This paper stems1 from an event last year, shortly before the Des Moines conference. Chicago’s only remaining privately-owned classical music station, WNIB2, 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 analyse it in Georgist terms. George pointed out that those who could 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 Tribune3, 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.

Warning

I should issue a warning at this point. I have just told you what I found. It probably doesn’t surprise most of you. It’s pretty much what Henry George told us to expect. Most of what follows is a bunch of numbers. It may not be very interesting.

I’m going to give some background on the industry, then some detail to support the assertions made above. Then I’ll treat some related matters, including the implications of spectrum auctions, future trends in license values, and, of course, Henry George’s recommendations. Limited financial data about the radio broadcast industry is available.

 The 4685 AM and 8032 FM commercial stations licensed4 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.5

The biggest radio broadcaster, Clear Channel Communications, owns 1,140 stations, including five or more in each of the seven largest market areas.

Table 1: Licenses, Assets, Revenues for Some Major Broadcasters For most companies . . . The value of licenses constitutes more than 80% of assets. Assets are four to eight times annual revenue.
Company	Licenses		Total assets	Net revenue	as percent of total assets
	number	est value			license value	net revenue
Beasley Broadcast Group	44	$143.7	$218.2	$107.8	65.9%	49.4%
Big City Radio	16	$109.3	$129.8	$23.8	84.2%	18.4%
Citadel Communications	204	$1,362.2	$1,485.6	$348.0	91.7%	23.4%
Clear Channel	1105	$29,760.5	$33,685.2	$2,431.5	88.3%	7.2%
Cox Radio Inc	83	$2,144.7	$2,317.8	$369.4	92.5%	15.9%
Cumulus Media	186	$505.0	$954.9	$218.0	52.9%	22.8%
Emmis Communications	23	not reported	$920.0	$239.6	not reported	26.0%
Entercom Communications	95		$1,473.9	$355.3	0.0%	24.1%
Hispanic Broadcasting	47	$866.9	$1,204.6	$237.6	72.0%	19.7%
Infinity (with billboards)	184	not reported	$33,689.7	$4,037.2	not reported	12.0%
Radio One	43	$1,564.9	$1,765.2	$226.2	88.7%	12.8%
Radio Unica 1	7	$102.0	$185.9	$30.1	54.9%	16.2%
Regent Communications	44	$209.3	$252.7	$53.7	82.8%	21.3%
Salem Communications	76	$358.1	$470.7	$110.1	76.1%	23.4%
Spanish Broadcasting	24	$511.2	$634.7	$122.7	80.5%	19.3%
All dollar figures are in millions Net revenue is gross revenue less agency commissions. All figures apply to most recent fiscal year, generally ending December 31, 2000 Pro forma figures used where applicable Compiled by Chuck Metalitz, Henry George School/Chicago August 28, 2001

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.

Table 1 shows that 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 revenues7.

Table 2 shows another view of how little income is made using these expensive licenses. 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 value8. 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 end9, only five of the fifteen companies were able to generate any income for benefit of common stockholders.

Table 2: Operating Income and Related Factors Operating income is very small relative to investment but increases somewhat when appreciation in license value is considered
	Total Assets	Depreciation & Amortization	Operating Income	Gain on asset sales	As a percentage of total assets
					Operating Income	Op+(D&A or Gains)
Beasley Broadcast Group	$218.2	$18.1	$10.8	$0.0	4.9%	13.2%
Big City Radio	$129.8	$4.9	$(13.0)	$0.0	-10.0%	-6.3%
Citadel Communications	$1,485.6	$76.5	$2.4	$0.8	0.2%	5.3%
Clear Channel	$33,685.2	$798.7	$241.0	$783.7	0.7%	3.1%
Cox Radio Inc	$2,317.8	$43.0	$90.8	$475.2	3.9%	24.4%
Cumulus Media	$954.9	$44.0	$(28.7)	$75.6	-3.0%	4.9%
Emmis Communications	$920.0	$21.5	$75.9	$0.0	8.2%	10.6%
Entercom Communications	$1,473.9	$43.5	$130.9	$41.5	8.9%	11.8%
Hispanic Broadcasting	$1,204.6	$34.3	$68.3	$0.0	5.7%	8.5%
Infinity (with billboards)	$33,689.7	$0.7	$727.8	not reported	2.2%	2.2%
Radio One	$1,765.2	$63.2	$8.9	$0.0	0.5%	4.1%
Radio Unica	$185.9	$6.1	$(18.6)	$0.0	-10.0%	-6.7%
Regent Communications	$252.7	$8.6	$0.8	$17.5	0.3%	7.3%
Salem Communications	$470.7	$25.5	$6.5	$29.6	1.4%	7.7%
Spanish Broadcasting	$634.7	$13.1	$31.3	$0.1	4.9%	7.0%
Note: Clear Channel gains include non-radio and/or non-US gains of unknown amount All dollar figures are in millions All figures apply to most recent fiscal year, generally ending December 31, 2000 Pro forma figures used where applicable Compiled by Chuck Metalitz, Henry George School/Chicago

Table 3: Operating Profit and Income Available to Common Stockholders By the time interest is paid and other expenses covered (including various preferred stock arrangements) and taxes), little is left for common stockholders.
	Operating Income	Gain on Asset Sales	Operating plus Gain	Pretax Income	Income Available to Common
Beasley Broadcast Group	$10.8	$0.0	$10.8	$(0.9)	$(29.8)
Big City Radio	$(13.0)	$0.0	$(13.0)	$(31.2)	$(31.2)
Citadel Communications	$2.4	$0.8	$3.2	not reported	$(77.3)
Clear Channel	$241.0	$783.7	$1,024.8	$713.5	$(66.4)
Cox Radio Inc	$90.8	$475.2	$566.0	$534.5	$305.9
Cumulus Media	$(28.7)	$75.6	$46.9	$(1.5)	$(49.1)
Emmis Communications	$75.9	$0.0	$75.9	not reported	$4.8
Entercom Communications	$130.9	$41.5	$172.4	$79.0	$21.2
Hispanic Broadcasting	$68.3	$0.0	$68.3	$68.6	$41.5
Infinity (with billboards)	$727.8	not reported			$(816.1)
Radio One	$8.9	$0.0	$8.9	$(75.8)	$(85.0)
Radio Unica	$(18.6)	$0.0	$(18.6)	$(33.1)	$(32.3)
Regent Communications	$0.8	$17.5	$18.3	$15.0	$(4.8)
Salem Communications	$6.5	$29.6	$36.1	$17.1	$10.1
Spanish Broadcasting	$31.3	$0.1	$31.3	$(5.7)	$(10.6)
Note: Under "Infinity", the income available to common is for parent company Viacom All dollar figures are in millions All figures apply to most recent fiscal year, generally ending December 31, 2000 Pro forma figures used where applicable Compiled by Chuck Metalitz, Henry George School/Chicago August 28, 2001

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 entities10, only four reported positive earnings for common stockholders thus far in the current year.

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 permit11 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 auction12, 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 of this year, 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 held13.

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.”14

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 bids15.” 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 revenues16, and quite a few additional billions are included in the “balanced” Federal budgets of the future17. 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.18

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.19 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.

A look at Table 4 shows why this might cause some difficulty. Most broadcast companies haven’t sufficient assets to cover their debts unless the value of licenses is considered. The table subtracts the estimated license value from the total assets for each of the fifteen companies, and compares it to longterm 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 audience and 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.

Footnotes

1 This isn’t the first time I’ve written about the broadcast spectrum. In a 1988 memo to Common Ground, Sam Venturella and I estimated an annual rental value of $1.7 billion nationwide for television and radio broadcast licenses. That’s a relatively small figure in the context of a multi-trillion-dollar economy, and Common Ground did not pursue the topic.

2 Technically, two stations were sold, WNIB and its satellite WN IZ in Zion. W NIZ had been acquired by WNIB many years before to reduce signal interference and improve coverage, and both stations broadcast the same programs.

3 “WNIB sale leaves classical music fans out on a limbo” , Chicago Tribune, December 4, 2000.

4 From Broadcasting and Cable Yearbook, 2001 Edition . This source does not specify that only com mercial stations are included, but comparison with FCC data clearly shows that noncommercial stations are excluded.

5 Ernest F. Hollings and Byron Dorgan; “Your Local Station, Signing Off” Washington Post June 20, 2001

6 Viacom Corporation Annual Report on Form 10K for year 2000.

7 All figures are for the most recent fiscal year, which ended December 31, 2000, except Emmis ended February 28, 2001 and Spanish Broadcasting ended September 24, 2000. Pro form a figures are used where applicable and available.

8 “Disregard reported earnings, which are debited for a noncash amortization charge on assets (acquired broadcast licenses) that are appreciating over time. Focus on net income plus depreciation.” From “Streetwalker,” Forbes Magazine, June 11, 2001

9 Some of the other differences between operating income and income available to common stockholders: For some companies, pretax income includes operations other than broadcast radio. Costs of restructurings, currency gains and losses, and other special charges can also affect the differences between income from operations, net income, and after-tax income.

10 Citadel was taken private early in 2001.

11 The construction permit automatically leads to a license provided that routine requirements are met.

12 FCC Auction Number 37.

13 FCC Auction Number 32. As described in their notice DA 00-2416, 39 mutually exclusive sets of applications have been received, but engineering adjustments or other adjustments may remove some of these sets from the “mutually exclusive” category.

14 “A Short Primer on Station Financing” from the web site of Dave Garland Media brokerage, August 14, 2001.

15 Evan Kwerel and Walt Strack “Auctioning Spectrum Rights”. FCC, February 20, 2001.

16 “FY 2002 Budget Estimates to Congress”, p. 55; Federal Communications Commission

17 [US]Budget for Fiscal Year 2002, Historical Tables, p. 130-132 anticipates nearly $39 billion from “Spectrum auctions and major asset sales” during fiscal years 2001-2006.

18 “Nextwave hires Lucent to build wireless system” Chicago Tribune July 04,2001. Also “Wireless ruling ‘a major blow ’: FCC chief says reversal shakes up auction policy”; AP/Dallas Morning News June 29, 2001

19 “Satellite Radio Rivals Picking Up Static; Media: Beaming broadcasts from space to cars is proving to be financially and technically challenging. Los Angeles Times; June 3, 2001