Entercom's (NYSE:ETM) fourth-quarter earnings report may highlight the difficulties that face terrestrial radio stations in today's challenging environment, and the way that desperate measures can sometimes backfire.

Fourth-quarter revenues increased by 14% to $118.5 million, although Entercom's station operating expenses increased by 14% to $69.2 million.

Entercom's net income decreased 51% to $6.9 million, or $0.17 per share. Its profitability was also hit by legal settlement fees to the tune of $8.3 million, as well as a 41% increase in interest expense. Free cash flow decreased by 23% to $17.5 million.

The legal fees relate to settling up with the New York attorney general and the FCC regarding "sponsorship identification practices," better known by the term "payola," although Entercom didn't admit wrongdoing. The settlement's just another reminder of the challenges that face terrestrial radio companies.

A high-profile news story notably left unmentioned in the company's press announcement was the notorious contest recently held by one of Entercom's radio stations, resulting in the death of one of its contestants. You probably heard the sad story of the woman who died of water intoxication in a recent radio contest to win a Nintendo Wii. The station in question was owned by Entercom. There are doubtlessly ramifications coming from that massively bad PR stunt; the family has filed a lawsuit related to the incident, and it's appealing to the FCC to pull the station's license. Furthermore, it makes sense that radio companies need to think long and hard about what type of activities constitute simply going too far in their bid to win listeners.

Unfortunately, decreasing quarterly profit isn't the exception to the rule for Entercom. Flash back over the last year, and you'll see that quarterly profit decreased all last year, too. Entercom didn't give much in the way of first-quarter guidance this time around, either. It said that same-station net revenues and same-station operating expenses will increase in the low single digits. It also said its tax rate will increase in 2007.

Entercom faces competition not only from its terrestrial rivals like Clear Channel (NYSE:CCU) and CBS (NYSE:CBS), but also all the other options that people have for their listening pleasure, such as satellite radio from XM Satellite Radio (NASDAQ:XMSR) and Sirius (NASDAQ:SIRI), which are attempting to merge into what could be a stronger combined entity.

If there's one thing Entercom does have going for it, it's the cash it returns to shareholders in the form of a dividend. (It's been recommended by Motley Fool Income Investor for that reason.) Many investors feel that concerns about radio's competitive challenges are overblown. Personally, though, I believe there are more attractive industries in which to invest.

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XM Satellite Radio is a former Rule Breakers pick.

Alyce Lomax does not own shares of any of the companies mentioned.