Consolidation Is Taking the "Special" Out of Specialty Audio-Video

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I remember the first time I met Mark Cuban. My father, when he was the publisher of radio trade publication Inside Radio, ran a high end convention for top level radio executives that featured speakers like Peter Drucker and Steven Covey, hosted in Scottsdale Arizona. To say the atmosphere was jubilant in the post-1996 consolidation era would be to understate the obvious. Radio companies were merging and being bought like never before. CBS-Viacom and Clear Channel were doing their best impersonation of the board game Hungry, Hungry Hippos as they gobbled up every radio station they could swallow. Wall Street and banks made them immediately flush with cash as a big consolidated company could cut costs, work more efficiently and generate more profits. As a result radio stocks soared during the go-go 1990's and into the early 2000's, only being eclipsed by the newly born dotcom phenomenon. Cuban was on a panel with the likes of Randy Michaels (Clear Channel), Michael Jordan (CBS-Viacom), Mel Karmazin (CBS-Viacom), Norm Pattiz (Westwood One) and many others talking about the future of radio. Weeks later Cuban would sell his Broadcast.com to Yahoo.com for over $3,000,000,000. He then sold his stock, bought a basketball team and has lived happily ever (except for those NBA fines from David Stern).

Being revisionist historians, we know today that the dotcom bubble blew up like a neutron bomb with the radio business imploding right behind it. Consolidators in the radio business only had one plan (and one plan only) which was to use borrowed money to build bigger and bigger media companies with the goal of selling said media conglomerate to another bigger media company. The problem was that radio consolidators can't run a radio station to save their lives. Voice tracking a rock station in Cleveland with a generic jock and music shows a lack of understanding of the fact that terrestrial radio's power is that it is geographically specific to the area. Consolidators never got that point and still can't figure it out, as they love cutting costs more than life itself. Speaking of cutting costs - why not ask one program director to program four or five stations in a market for the same or less money. That will boost the bottom line as people get fired, right? How about slashing commissions for your depleted sales staff while adding more and more ineffective spots in each commercial break? It's easy to see why radio stocks today are penny stocks with little chance of ever rebounding. Consolidation killed off competition and was powered by big bank money (banks that taxpayers bailed out because of lame loans) and private equity money. Radio will never be the same if it even survives the next generation. Stations that sold for 16 times one year top line revenues sell today for one time top line earnings. It's over.

Consolidation fever isn't only a phenomenon in the radio business. The consumer electronics business was profoundly affected by consolidation in the early 2000's as private equity firms and publicly traded conglomerates moved in to show specialty AV businesses just how things can be done. Nortek, the parent company of Sunfire, Speakercraft, Elan, Panamax, Furman and other brands, on the first day of the all-important CEDIA show set the tone of the event by filing for Chapter 11 protection. Planar, a company known for making video products for military use, bought Runco from Sam Runco at a record price (reportedly $39,000,000) but somehow let the company's namesake walk out the front door as dealers struggle to sell ultra-high-priced video that often has reliability issues in the field to consumers who today are tight on cash. D&M Holdings (owner of Denon, Marantz, McIntosh, Escient, Boston Acoustics, Snell and other brands) became a privately held company and has sought private equity funding to help them through these difficult times as their mighty brands struggle. This list goes on and on as publicly traded companies, private equity firms and bank-backed investment groups stick their toes into the often-profitable waters of specialty AV and consumer electronics.

What consolidators fundamentally don't understand is that audio-video businesses are "special" because of the people that build the brand, design the product and sell the goods. Nobody truly needs a $10,000 AV preamp or a $20,000 video projector, but the passionate people behind the products evangelically sell the merits of these products to reps, dealers and consumers; yet it is almost always the founders, the disciples and the true believers who end up on the unemployment line when cost-cutting consolidators take over. Another critical mistake that all AV consolidators make is that they quickly pull away from marketing. While a company can live for a matter of a few months without getting a specialty AV brand's message out there - many of the above mentioned brands have gone years now without significantly marketing to new and legacy customers. Ironically, these brands were in many cases built brick by brick with print and online ads to the enthusiast AV audience and beyond, yet consolidators in their frenzy to slash expenses to affect their quarterly, short term revenues for Wall Street leave their brands to die a slow and unnatural death.

Not all AV consolidators are failures. The private equity firm that owns MartinLogan and a good chunk of Paradigm, Shoreview Industries, takes a more "Berkshire Hathaway" approach to running specialty AV companies. Shoreview keeps much of the management, development and engineering team in place when they buy into a company. They also keep their foot on the accelerator with marketing so that their people have the enthusiasm and consumer demand to drive new sales and new markets for long term growth. Paradigm today is gaining market share, especially with their Anthem electronics line, when other competing companies are retreating from their leadership positions.

While hedge funds and Wall Street wonks are good at making money by market arbitrage and or any number of Ponzi-like schemes such as the much ballyhooed derivatives business - the specialty AV business is built on the cult of personality of real people like Bob Stuart, Mark Levinson, Gayle Sanders, Sam Runco, Bob Carver, Jeremy Burkhardt, Dan D'agostino and many others. AV dealers are also organically grown businesses that like to know that their insurance policy for selling a high dollar product is that they can call the founder of the company up and get problems solved if problems ever arose. Yes, this business model is old school but it works fantastically.

There are a new crop of brands that could be the next list of specialty AV brands and personalities. Direct resellers also aim to get in on the game but for consolidation in the AV business - this isn't a Wall Street commodity to play quarterly games with. Specialty AV brands need to be handled with care. If they are to be owned by a big company - they need big money to develop new products, create new customers and to go to the next level. Sucking these AV companies dry in the short term will fail just as it did in the radio business. Consolidators who don't understand what is special about their brands need to respectfully divest from said brands and find buyers (like how Klipsch recently sold off Aragon and Acurus to two engineers) that see the potential of the respective business. It doesn't take consumers long to figure out when something's fishy in Denmark. At that point, things can be fatal for an AV brands in ways that can't easily be recovered from.


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