Impact on CBS if Pandora Becomes the Biggest Threat to Radio

Pandora, an internet radio service, has been pushing into the drive-time radio market. This market targets listeners during prime commuting hours. As this remains one of the more popular times for people to tune-in to local radio broadcasts, advertisers are typically willing to pay a premium for airtime during these hours. Traditionally, this market has been dominated by larger radio services like Clear Channel and CBS. But can the stalwarts withstand Pandora’s push? While Pandora’s expansion could reverberate through the radio broadcasting market as a whole, we highlight here the particular impact this trend could create on our outlook forecasts for CBS Radio. ^[1]

CBS (NYSE:CBS) primarily competes with other media conglomerates like Disney (NYSE:DIS), Time Warner (NYSE:TWX), Viacom (NYSE:VIA) and News Corp (NASDAQ:NWS) in the broadcasting and cable networks business.  Like its counterparts, CBS also relies significantly on advertising revenues that are a function of both advertisement pricing and viewership. Our price estimate for CBS’ stock stands at $19.72, which is slightly ahead of the current market price.

CBS Radio

Radio remains one of the CBS’ larger profit drivers. CBS Radio operates 130 radio stations in the U.S. and offers its audience several formats through the combination of on-air, online and new media platforms. CBS radio, in conjunction with CBS-owned TV stations, constitutes about 27% of the company’s stock value, by our estimates.

CBS radio has lost market share over the past few years, primarily due to divestment of some ratio stations as the company focuses its efforts on larger markets. We estimate that the company’s share of the radio market declined from a little under 11% in 2005 to about 8% in 2009. With a renewed focus on major markets and improvement in the advertising sector, we estimate that CBS will be able to maintain stable market share around 8% going forward.

However, increasing competition from satellite and internet radio could shake CBS’ position in the years ahead.

Pandora Advancing into Drive-Time Market

Pandora has a critical edge on traditional radio players through its advertising capabilities. According to Ford’s digital marketing manager, Pandora can use several metrics like age, gender or musical taste of the user to increase the effectiveness of advertising. ^[2] In 2011, Ford (NYSE:F) is expected to launch cars with embedded software that will operate Pandora through voice controls. Additionally Mercedes-Benz, owned by Daimler AG (ETR:DAI), is also promoting Pandora’s radio service in its vehicles. ^[2]

While these developments will likely have similar effects on a variety of broadcasters, we consider here the particular impact to our outlook for CBS Radio. ^[1] CBS could combat Pandora’s momentum with its own internet radio offering (Last.fm), but what might be the impact to our price estimate under the scenario in which Pandora eats into the company’s market share? ^[3] If CBS’ radio market share declines to 6% by the end of our forecast period (vs. our 8% forecast) there could be roughly 5% downside to our price estimate, pushing our number just under market price.

To see the impact of radio market share on CBS’ stock value, drag the trend line in the modifiable chart above.

You can see the complete $19.72 Trefis price estimate for CBS’ stock here

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1. Update: Sentence added 1/13/11 to clarify the broader impact of Pandora’s expansion beyond CBS Radio exclusively. [↩] [↩]
2. Pandora Chases Drive-Time Radio After Capturing Mobile Market, Bloomberg, Oct 12 2010 [↩] [↩]
3. Update: Sentence amended 1/13/11 to more explicitly label our hypothesis as scenario analysis. [↩]