Two Iconic Business Models That Failed — 2

How Arbitron royally roiled the world of radio

January 2008 By Denny Hatch

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If I had been asked to track my radio listening back when I was a kid, it would have been a no-brainer.

I would have been delighted to fill out an Arbitron diary, collect the $1 bills and send the diary back. It would have been a precise record of what I listened to. For example, I loved the commercials. Not only were they fun and inventive, but also it never occurred to me to jump to another program because, with so few stations, I was not interested in anything else at the time. And I might miss something.

Would sponsors be interested in the listening habits of a 10-year-old kid? I did not pay the bills, but I was a recommender. I remember persuading my parents to buy Ovaltine (“Captain Midnight”), Grape Nuts Flakes (“Hop Harrigan”) and Wheaties (“Jack Armstrong”).

Yes, advertisers would have been happy with me as a listener and with Arbitron as an audience measurement service.

Fast Forward to the 21st Century
I still listen to a lot of radio. So when Arbitron contacted me to say they were interested in a record of what radio I listened to for a week, I agreed. I was curious to find out what I listened to in a week.

I failed miserably. I listen to radio in three places:

1. Home office. All day the radio is tuned to WRTI-FM, commercial-free Temple Public Radio that plays classical and jazz music. This is of no interest to Arbitron or its clients, who only want to know about commercial radio listeners.

2. Car. When I drive, I always have the radio on. However, two buttons on the steering wheel allow me to switch from AM to FM and from station to station. I seldom listen to commercials, which means I jump all over the place. Among the stations: WHYY commercial-free National Public Radio; WPHT (Michael Smerconish, Glenn Beck, Rush Limbaugh, Sean Hannity); WIP Sports Talk Radio; SR950 Sports Radio, KYW and WCBS (New York, both all-news stations); WYSP-FM (Eagles Games); and WNTP-AM Talk Radio (Bill Bennett, Laura Ingraham, Michael Medved and other conservatives). I have no idea how long I listen to each station, but seldom more than 15 minutes before I jump stations to avoid the commercials. It is impossible (and dangerous) to jot down notes in an Arbitron diary while tooling along at 60 mph on I-76 or I-95.

3. In bed. I have a tiny portable radio with a pillow speaker. When I wake up in the middle of the night, I bounce among the stations listed above, hoping to find someone boring enough to put me back to sleep. It is not only impossible to keep track of which station or program I listen to—or for how long—but if I had to keep the light on to record everything I listened to, it would defeat the whole purpose of trying to get back to sleep.

I returned the diary to Arbitron after a week. I had tried to make sense of my radio listening, but I knew in my gut it was useless.

Arbitron Troubles in 2003
In his March 11, 2003, story in Forbes titled “Bad Ratings for Arbitron,” Seth Lubove wrote:

After randomly selecting thousands of households in a radio market and sending written notification, Arbitron (nyse: ARB), then calls each house to get consent before sending out diaries for each person over the age of 12. Presuming they agree, the diary keepers spend a week recording the radio stations they listen to and at what times. But fewer and fewer people are picking up the phone when Arbitron calls. That, in turn, means fewer diaries are filled out. Since peaking at 42.7% in 1995, response rates have fallen to 34.5% as of last fall. With fewer diaries backing up the ratings, the radio broadcasters who live or die on the ratings are wondering how good they are in the first place. “When response rates reach a lower level, you become concerned about how representative the sample is to the population, because you don’t know the listening patterns of those people they can’t reach,” says Charlotte Lawyer, director of sales research for Susquehanna Pfaltzgraff’s Susquehanna Radio division, a 31-station radio station chain. Lawyer is also the chairperson of the National Association of Broadcasters’ Committee on Local Radio Audience Measurement, an influential group of radio research executives who are airing their complaints about Arbitron in public. In January, Lawyer’s committee blasted Arbitron for its “alarming lack of aggressiveness in implementing measures to stem these declines.”

Enter Portable People Meters
This past year, Arbitron turned its business model—and the radio industry—upside down. Instead of sending out diaries, the company tested high-tech “Portable People Meters (PPMs)”—little electronic gizmos the size of a pager that will automatically record what is being listened to and for how long. The meters can clip on your belt and automatically record your listening experiences every 15 minutes, whether you are in the office or home or in the car. At night, it unobtrusively can rest next to your pillow speaker.

Once a day, you insert your Portable People Meter into another gizmo that (1) recharges it and (2) sends the day’s listening record over the phone lines to Arbitron.

Presumably, this new business model allows not only for much more accurate information from fewer people, but gets this data to Arbitron quicker.

The Philadelphia Story
The beta site for the new PPM system was Philadelphia. And the results of the test show that radio audience measurement was shaken to the core.

For starters, my radio listening habits are not an anomaly. Like me, a lot of people not only dial-switched, but also had a tough time with the hand-written diaries. In a May 9, 2007, story in the Inquirer titled “Phila. dial-flippers churn radio ratings,” Michael Klein wrote:

The initial report, covering March 8 through April 4, showed little change in rankings among rock, oldies and news formats. However, the time spent listening sank dramatically; the weekly average among listeners ages 12 and older dropped from 20 hours last fall to 12-1/2. PPM indicated that Philadelphians listen not to two or three stations, as paper diaries said, but to five or six. This dial-switching has sent audience sizes soaring. Under diaries, only all-news KYW-AM (1060) claimed a weekly cumulative audience of greater than one million people. Now, according to PPM figures, nine stations had a “cume” of more than one million. Light rock WBEB-FM (101.1) had the largest cumulative audience - just over two million people - followed by classic hits WOGL-FM (98.1), KYW and classic rock WMGK-FM (102.9).

Blaise Howard, general manager of Philadelphia’s WBEB-FM, called the new system “a complete paradigm shift in the way radio is measured.”

Arbitron’s Thom Mocarsky told Alex Mindlin of The New York Times that the changes reflected a refinement in the data.

Refinement? For some stations it represents a windfall. For others it is a catastrophe. For example, as a result of Portable People Meters in Philadelphia, WDAS-FM (adult urban contemporary) nosedived from being ranked #2 in Fall 2006 to #7 in March 2007. WMMR-FM (rock) rose from #6 to #3 and WMGK-FM (Classic Rock) went from #8 to #5.

At stake is how advertisers will divvy up the $290 million spent annually in Philadelphia—and $20 billion spent nationally—for radio advertising. For example, in the September 6, 2007, edition of The Wall Street Journal, Sarah McBride wrote:

Lower radio ratings are already hitting stations in their pocketbooks. Mary Meder, president of advertising buyer Harmelin Media Inc. in Bala Cynwyd, Pa., says some stations have already been forced to cut rates because of their decline in the rankings. Some radio advertisers are holding back from buying more ads in Philadelphia until they see what happens with rates in the New York market when the People Meter rolls out there.

The Problem With Youth
Arbitron has found that members of a key market segment are notoriously unreliable. Brian Stetler of The New York Times summed up the problem:

Ceril Shagrin, an executive vice president for corporate research at Univision Communications, a major Spanish-language broadcaster, found that the ratings for Radio La Kalle 105.9 FM in New York fell sharply when the people meters were tested in October. She expressed concerns about the reliability of the Arbitron sample. . . Researchers often try to persuade hard-to-reach age groups to participate by paying them more. While Arbitron does not release specific information on incentives, it said it offers 18- to 24-year-olds two to three times as much as the average respondent. The company will increase the age for incentives to 34 in 2008. Even once recruited, the younger people pose challenges for sampling studies. “On an average day, half of 18- to 34-year-olds don’t provide usable data,” Ms. Shagrin said. Young people may leave the people meter, which is roughly the size of a cellphone, at home because carrying it is inconvenient in certain situations, as when on a date or while playing sports.

The Costly Delay
Until its data acquisition problem is settled, Arbitron has delayed its national roll out of the PPM system for nine months, causing a furor. As Kay Bachman reported in Media Week on November 7, 2007:

The company plans to take the rest of 2007 and the bulk of 2008 to address concerns its customers have with the PPM service, getting back to its original roll out schedule in 2009. Although Arbitron’s new plan was meant to appease its critics, it still got a tongue-lashing. “Like most things involving Arbitron, the devil is in the details. I don’t think it makes sense to announce any timetable. What should drive this is getting the data right, and getting Media Rating Council accreditation. While some people were willing to let them launch Philadelphia with the promise accreditation would be done quickly, I’m not ready to see them resume the rollout anywhere else until they have an accredited service. We trusted them once, so shame on them. But, if we trust them twice...shame on us,” said Bob Neil, president and CEO of Cox Radio, one of the four broadcasters along with Clear Channel, Cumulus Media and Radio One that issued the ultimatum to Arbitron to fix low samples among young demographics, “or else.”

As a result of the delay—and unhappiness caused in the radio arena—Arbitron’s stock dropped 26% on November 7, down to 34 from its recent high of 55.63 before recovering to 40. As of this writing—Jan 10, 10:27 ET—ARB is 39.54 (-1.15%)