Following a piece I wrote on terrestrial radio, I had the good fortune of meeting John Dickey, executive vice president of Cumulus Media, on a plane ride from Washington, D.C., to Atlanta. The misfortune of our delayed flight turned into a wonderful opportunity to learn why John thinks his business is undervalued and Sirius and XM Satellite Radio have an uphill battle going forward.
David Meier: Welcome, John! Thanks again for the interview. How did Cumulus Media (NASDAQ:CMLS) get started?
John Dickey: Lew, my brother [and Cumulus Media's CEO], and I have been in business since we were in college together. He had originally started a software company that focused on radio and television. That company eventually morphed into a consulting business that we started together back in the late '80s. We eventually grew that consulting business into a large, nationally respected strategy-consulting firm focused predominantly on radio, but also doing a lot of work in the television industry. We started to buy radio stations at that point and found ourselves in a position where we owned an FM radio station in Nashville, Tenn., and we owned an AM and an FM here in Atlanta, where we eventually moved in the early '90s.
The original business plan for Cumulus was to be a consolidator of small-market radio stations, but initially our vision wasn't to have this company be much larger than a dozen or so markets. After we got the company off the ground and bought our first stations, we quickly realized what a great advantage it was to focus on consolidating these middle to small markets. Then we started to blow past the original scope of our business plan and that eventually led to Lew and I joining the company full-time, assuming operating roles in this venture, and dedicating our working lives to it. So that is how the business really got started.
David: It's amazing how things can change along the way, isn't it?
John: It is. From the original architecture of the company, with the original intent of being sort of passive investors -- although keeping an active eye on it -- to working at it and driving it full-time, it has been quite a ride.
David: What does Cumulus look like today? Can you give us a snapshot?
John: Today, Cumulus is in 61 rated markets -- we have one market that is not rated. Depending on the day, we own approximately 314 radio stations. We are the second-largest owner and operator of radio stations in America -- in the world, actually -- behind Clear Channel (NYSE:CCU), and we are one of the top six or seven radio consolidators in terms of total revenue. So the metrics that I think are really the most telltale are the number of radio stations and the footprint that we have in terms of operating.
David: For those who may not be familiar with the radio business, what are the things to look for when evaluating a radio operator?
John: Well, I think operating margins are certainly telltale financial metrics that you use to distinguish between good and not-so-good operators. We go to great lengths to break out margins to our investors and categorize our stations by their respective margin levels. And when we look to acquire stations, margins are certainly key factors.
I don't mean to imply that high margins necessarily [equal] a great operator. We have passed on several acquisitions with fairly high margins because we did not agree with the operating philosophy used to generate them. So there are right ways and wrong ways to achieve margin expansion in our business and that ultimately, I think, determines the pecking order of operators in radio today.
We consider ourselves to be one of the best at understanding how to drive margins in our business without sacrificing the quality and the local side of our product and obviously the service we give to the communities and to our advertisers.
David: OK, let's move to the topic that is on most people's minds. With the emergence of satellite radio, there is a sense in the market that terrestrial radio is dead. Is it?
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David Meier does not own shares in any of the companies mentioned. The Fool has a disclosure policy.
