Radio One is the largest radio group whose target audience are African-Americans in the United States. They were able to achieve these great position they have today because of efficient strategies, like purchasing small, underperforming radio stations, then changing their formats, and applying the latest technology and innovation to suit their target audience. Radio One’s present situation is considerably its peak, in its broadcast history, because they are continuously expanding and acquiring more stations as time passes. The issue they are facing now is the financial and strategic concerns of their newly acquired stations, which were the divestiture of the Clear Channel – AMFM Radio Company merge. It provided them an unprecedented growth opportunity, so that they could increase the number of stations that they hold.
Radio One was able to come up with a strategy which effectively provides urban-oriented music, entertainment and information, since their target audience are the African-Americans. They were able to pinpoint a group of people with high potential regarding growth, and since the African-Americans are the largest minority group in the United States of America, they are projected to have a greater speed of population growth, as compared to the general population in a projected time of 15 years. Not only were these African-Americans have a high population growth rate, they also have fast rates of income growth in the past years, and is keeping up as of late. They are also the one who listens to the radio longer, as compared to the averages of those who are in the general population of the country.
Broadcast Cash Flows (BCF)
Looking closely at the Broadcast Cash Flows of the newly acquired markets for 2001 and onwards, we could see an increasing pattern. For 2001, the New Markets BCF was 76,436, which increased in the following year, which were 89,711. It again increased in the following year, 2003, becoming 101,966, and again for the following year, which was increased and became 115,277.
Of these potential markets, the highest contributor of the BCF was Houston, with 27,236 BCF in 2001 and 38,780 in 2004. It was closely followed by Los Angeles, which has 19,023 and 32,794 in 2001 and 2004 respectively. It clearly shows that there is high audience composition, a high number of African-American listeners in these places. The BCF of these new markets comprise more than 50% of the total BCF of Radio One – comparatively larger than that of the existing markets from already established stations. For the year 2001 the BCF of the existing stations add up to 59,598 and for 2002, it became 68,538. It then increased to 78,820 and 90,643 for the years 2003 and 2004 respectively. The BCF of the existing stations comprise only about 40% of the total BCF the Radio One gets.
When you deduct the corporate expenses to the BCF of the potential markets, it will yield important values essential for Radio One. In the year 2001, the corporate expenses sum up to 18,176 for all the new markets. If you deduct this to the year’s BCF which is 76,436, you would get 58,260. For the year 2002, the BCF is 89,711 and deducting the expense which is about 20,432, it would be 69,279. For 2003, the expenses total up to22,624, and deducting it to that year’s BCF which is 101,966, would lead to 79,342. For the 2004, the BCF is 115,277 and deducting expenses which are about 24,857, it would lead to 90,420. You could clearly see that as the time continues, even though there is also the corresponding increase in the corporate expenses, all were reciprocated by high Broadcast Cash Flows in Radio One’s pocket. The amount being incremented for each year increases evidently. When you deduct the expenses, you would still get an increasing pattern in the values of the companies new market additions’ gains even though burdened with expenses.
In order to know how much the new stations were able to produce, you apply actual taxation to the values that came up when the expenses were subtracted to the Broadcast Cash Flows. For the year 2001, the value derived was 58,260. When you apply 34% taxation, you would get 38,451.6 as actual value. For the year 2002, the derived value was 69,279, and if applied with 34% tax, it would be 45,724.14 actual values. For the year 2003, the value derived was 79,342. With a tax of 34%, it would then be 52,365.72. For 2004 the derived value was 90,420. With a 34% tax, it then becomes 59,677.2. When you applied the taxation, the value you arrive with was the projected total value wherein every deduction was already made. This was the actual performance of the new markets, the acquired stations of Radio One.
The case focuses the rate of return in a discounted cash flow analysis, wherein an investment is said to make good sense if it is above, and doesn’t make any sense if it is below. This is based on Radio One’s cost of capital, or in other terms the weighted average if the cost, plus or minus a risk premium that represents the specific characteristics which are risky to the project.
The firm’s cost of capital was also an important point to consider because each area, each category of capital is weighed, compared and thoroughly analyzed in order to make the information derived important. This essential information includes the common stock, the preferred stock, bonds and also any if those long term debt.
In Radio One’s discounted cash flow, the cash flow for a certain year may be projected for some more years in the future with a certain level of accuracy, but afterwards, may not be accurate anymore. Thus, the cash flows may not be forecasted accurately. Thus, the value which will be that will be used to represent the subsequent cash flows would be referred to as the terminal value. A terminal value could represent a big part of the Radio One’s figures for a few successive years. Doing so saves efforts from the company, thus giving them the idea what to expect in the future.
Analysis and Implication
Radio One made a very crucial and important move with regards to acquiring additional stations from what was a divestiture from Clear Channel and AMFM companies. Because of these, they were able to raise their profits essentially, and this move is important in their goal to manipulate and control radio supremacy for African-Americans. Looking closely, they were able to hit a great opportunity because it is projected to last for a very long time.