Why Terrestrial Radio Will Never Be Great Again

There was a time when car radios cranked out the soundtrack of our lives.

Before that, families would huddle around the radio at home to hear serialized presentations, sporting events, and the latest music hits.

These days, radio is a bit of a forgotten toy.

Premium Solutions

There are more than 20 million people willing to pay for something that is available seemingly for free the old-fashioned way.

Sirius XM Radio (SIRI) begins 2012 with 21.9 million subscribers. Premium satellite radio is so popular that Sirius XM expects to add another 1.3 million more accounts than it loses this year, and that's despite a 12% price hike that began rolling out in January.

Think of it like people paying for cable television instead of settling for the free local channels that can be accessed with an antenna. Satellite radio's commercial-free music channels offer programming depth that isn't possible through ad-laden and wide-reaching terrestrial channels. Plus, the traditional stations -- with local or syndicated content -- don't have the big budgets to pay for marquee talent.

Surfing the FM and AM bands is still popular, but not with the kind of listeners that advertisers truly want to reach. If you're an advertiser, would you rather reach someone who won't flinch at paying $15 a month for premium radio or one who puts up with the shortcomings of conventional radio to avoid paying money for it?

You know the answer -- even though most of you still listen to AM and FM stations from time to time.

Turn the Knob

Clear Channel is the country's largest radio operator. It owns 850 radio stations, claiming to reach 238 million listeners a month. That's a lot of stations. That's a lot of people.

If ever there was a gauge for the health of terrestrial radio, it would be Clear Channel parent CC Media Holdings (CCMO). It reported earnings last week for all of 2011. How's it doing?

Well, Clear Channel's radio business saw its revenue climb 4% to nearly $3 billion last year. That's not too shabby, but an April acquisition of a traffic service accounts for all but $11 million of that increase. We would be looking at flattish results if it wasn't for the purchase, but it's not even that good. Last year's relaunch of its iHeartRadio app and a star-studded concert in Vegas to kick off the new streaming service helped prop results.

There were actually "slight declines in local and national advertising across various markets and advertising categories," the company confesses in its earnings release.

The economy's getting better. Car sales are starting to gain traction. Why isn't radio coming along for the ride?

Stream On

It's not just Sirius XM gnawing away at terrestrial radio's audience. Newer cars allow well-to-do drivers who happen to have smartphones the ability to stream Internet radio and music-discovery sites through their dashboards. Once again, terrestrial radio is losing more of the deep-pocketed listeners that advertisers want to reach.

Pandora (P) is leading the way here. It has deals with most of the automakers to deliver its customized playlists through car speakers.

Pandora won't be reporting its fiscal-year results until next week, but revenue through the first three fiscal quarters of 2011 soared 114%. There are now 40 million active users, 65% ahead of where Pandora was a year earlier.

Terrestrial radio is trying to take its fight digital. Clear Channel's pretty popular iHeartRadio app makes hundreds of its stations available wherever someone may be. Unfortunately, that also means that the local advertisers that are unwittingly overpaying for their terrestrial spots will find even less value in the product.

Thankfully for terrestrial radio station operators, we're in an election year. It's going to be a highly contested run through November, and that means a bump in political advertising. However, it will all be downhill from here.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article.