Will Radio Broadcasters Tune Out Arbitron?

Arbitron confirmed in its first-quarter earnings report that the defection of key radio broadcasters to Nielsen for diary-based ratings services in certain small to mid-sized markets  will adversely impact revenue by about $10 million per year starting in 2010. The 10-Q filing also yields a glimpse of how the country’s leading supplier of radio ratings data plans to supplant any additional contract losses in the sticker-diary business and invigorate organic growth with the national rollout of its electronic portable people meter (PPM).

After a 45-year absence, The Nielsen Co., known for measuring TV ratings, re-entered the radio ratings business in November 2008.  Clear Channel Communications, the nation’s largest owner of radio stations, and Cumulus Media said they signed with Nielsen because of improvements made in audience recruitment measures. However, the true reason might have more to do with audit costs than with sampling concerns, as Arbitron customers have long complained about its ratings service fees.

Arbitron is campaigning to get its (higher fee) PPM-based ratings service accepted as the new currency for radio advertising. In 2008, Arbitron brought its PPM service to 14 radio markets, representing almost half of all potential U.S. radio ad sales, including the three largest cities in the United States: New York, Los Angeles, and Chicago. The company opened up one market in the March-ended quarter and hopes to commercialize an additional 18 PPM markets by year end, according to the SEC filing.

Arbitron’s efforts to transition customers from paper diaries to its PPM platform could be delayed, in my opinion, as broadcasters continue to voice concerns about compliance (participants must wear a pager-like device), sample quality, and audience demographics (under-representation of Hispanics, blacks, and other minorities).

Although most of its largest customers, including Clear Channel and Cumulus, have signed PPM-based ratings agreements with Arbitron, it will likely be several years before Arbitron’s income statement realizes the full impact of the deals. Against the backdrop of soft advertising sales, Arbitron is sensitive that many broadcasters are starved for cash. Ergo, customer contracts allow for phased-in pricing toward the higher PPM service rate over a period of time.

In its core (diary-based) rating services, Arbitron is fighting back against anticipated moves by Nielsen to steal additional market share. In response to customer requests, the company is working to strengthen the sampling quality of its diary services. Improvements include adding cell-phone only households (to capture greater participation of 18 - 34 segment) and promoting online options to paper-and-pencil diary non-responders.

Arbitron has touted the benefits-from improved compliance to more accurate data collection-of mobile E-diary formats to its customers for many years. The truth is that radio broadcasters are more concerned with the cost of data collection than its accuracy. (How will radio stations justify ad rates if better sampling methodology reveals less listeners are tuned in than previously thought?.) If Nielsen offers Arbitron customers cheaper audit fees to switch their dials, Arbitron could revise upward the expected $10 million in lost sales per annum.

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