Unexpectedly Intriguing!
August 12, 2005

It is now nearing time for the leadership of Air America Radio's parent company, Piquant LLC, to make some hard decisions regarding the future of the enterprise. Ever since the current company was formed in May-June 2004 by the core group of Air America's original investors following the blowup of the network's first parent company, Progress Media, Air America Radio (AAR) has avoided making payments on its obligations to the Gloria Wise Boys and Girls Club of New York. As a result of the fallout of the scandal surrounding how the money came to Air America, that bill has now come due, and the New York Post (free, registration required) has reported AAR on-air personality Al Franken's statement that company's management has decided it must now begin making payments on this obligation.

Piquant's obligation to the Gloria Wise Boys and Girls Club is substantial, totaling $875,000 without interest. According to the New York Post's report of August 6, 2005, Piquant paid $50,000 into an escrow account managed by the company's lawyer as the first step toward repaying its obligation on Friday, August 5, 2005. This move came despite the New York City Department of Investigation's request that AAR pay the full $875,000 into an independently managed escrow account that would allow payments to be made to the charity only with the approval of the Department of Investigation while under investigation. The failure of Air America's parent company to set aside the full amount is an clear indication that they do not have this kind of cash in the bank, and their failure to place funds into an independently managed escrow account suggests that it is important to the company's management that the money remains in their control.

Additional evidence that AAR has insufficient cash reserves is also apparent in the company's recent delay in making deposits to support the company's payroll. Late on Thursday, July 28, 2005, Air America Radio's employees were left to face a weekend of uncertainty as the company was unable to deposit funds in time to support the direct deposit of the employees' paychecks the next day. Fortunately, the company made a sufficient deposit with the company's payroll management service in time to provide the employees' paychecks on Monday, August 1, 2005.

From a business standpoint, the sudden reemergence of AAR's obligation to the Gloria Wise Boys and Girls Club couldn't have happened at a worst time. Looking at the factors that drive the company's revenue, the ratings for Air America have continued to be anemic over the most recent reporting periods, with the few signs of strength it has shown recently in small markets being outweighed by continued sliding in its larger radio markets. Since ratings directly affect what AAR's affiliates may successfully charge advertisers, this indicates that revenues from AAR's broadcast operations will be essentially static for the foreseeable future.

Assuming that the company's revenues will not be significantly changing in the near term, the additional cost of repaying AAR's obligation to Gloria Wise will hit hard on management's ability to grow AAR's business. In a nutshell, money that has to go to repaying the Gloria Wise Boys and Girls Club is money that cannot be applied to other business needs, whether it be advertising, developing new programming, or simply paying regular operating expenses, such as the company's payroll. That's not to say that the doors are in imminent danger of closing; it does however suggest that some serious restructuring may soon be in the works to reduce AAR's costs.

Added to these financial woes, AAR's direct competition in providing programming for the leftist-oriented political talk radio audience, Democracy Radio has become stronger in recent months. This growing strength may be seen in the recent purchase of "The Ed Schultz Show" by Randy Michaels, the former CEO of Clear Channel Radio. The move is significant since Michaels was responible for syndicating Rush Limbaugh's show nationwide.

Given what's currently known about Air America Radio's financial situation and the stronger competition it faces within its niche in the radio programming industry, which makes the industry less attractive from AAR's perspective, the radio network's position within the business strategy matrix has shifted to be in the lower right corner:

Air America Radio - Business Strategy Matrix - August 2005 - Lower Right Corner

This sector of the business strategy matrix suggest that the company's management team would best consider a strategy of harvesting its remaining resources or divesting in part or in whole from the business altogether. Ideally, harvesting would take the form of an opportunistic sale to another party, but given the network's history of troubles, this option appears unlikely. More likely, the company's management will opt to begin divesting from the business by pruning back the least valuable parts of its product line or by withdrawing altogether in its current form through bankruptcy.

AAR's management might pursue the divestment option by adopting a two-pronged strategy. In the first part of such a strategy, the network would discontinue its lowest rated programming, but the real basis for deciding what programming to cut would be based on a measure of what shows generate the greatest revenue for the least total cost. Here, the deal the company recently negotiated with KSCO-AM to carry only Al Franken's and Randi Rhodes' shows on KSCO's sister-station, KOMY-AM in Santa Cruz, California suggests the form this portion of AAR's strategy might take, as the network was only able to convince the station to carry these two shows from its product lineup.

The second part of the strategy AAR's management might implement would involve discontinuing the company's strategy of pursuing additional broadcast affiliates and instead opting to emphasize the network's broadcasts through its Internet and satellite venues. AAR enjoys strength in the Internet broadcast arena given the involvement of left-wing political financier Rob Glaser with the network. Glaser's influence as the CEO of RealNetworks and interest in the network as the current chairman of the Piquant LLC likely plays a large role in making the company's Internet broadcast operations viable. This strength in the company's Internet broadcast operations compared to the company's traditional radio broadcast operations through its affiliates may be seen in the list of its online advertisers, which includes General Motors' Onstar service. By comparison, GM has stated that it will not provide advertising for any of the network's regular broadcast outlets.

In a late-breaking development, which supports a strategic move by AAR to emphasize its Internet operations, the network announced that it will bring former Clear Channel official Russ Gilbert to the network as Vice President of its Interactive operations. In this position, Gilbert "will oversee all Web initiatives for the company, including multiple revenue streams, premium services, content administration, alliances with other progressive Web sites and integration of Air America’s Web presence with its affiliate radio stations."

In terms of satellite broadcasting, the network enjoys the benefits of having recently negotiated a long-term contract with XM radio in April 2005 to provide its programming over XM Radio's satellite system. Like the network's Internet broadcast operations, the satellite venue provides a more revenue efficient means of delivering Air America's programming, offering substantially greater broadcast coverage area and access to the growing numbers of XM Radio subscribers.

While not an impossible situation from which to recover, Air America Radio's management has its work cut out for them. The overall ability of the network to sustain its operations will be challenged unless the network is able to increase its revenue (unlikely given its current circumstances) or reduces its costs to make its operations viable. Still, another option would be for AAR to find another "white knight" to come in and provide a new infusion of capital to keep the business afloat, much as RealNetwork's Rob Glaser did when AAR nearly failed in 2004. Without such a savior, many hard decisions lie ahead for the radio network's leadership.

Previous Analysis of Air America Radio's Business

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