November 20, 2013 Mr. Michael Wright Vice President and Chief Of
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November 20, 2013 Mr. Michael Wright Vice President and Chief of Staff, Office of the President Wayne State University 5700 Cass Ave., Suite 3100AAB Detroit, MI 48202 RE: WDET Consulting Report Background Wayne State University (the “University” or the “Licensee”) has engaged Public Radio Capital (“PRC”) to perform an operational and business assessment of WDET FM (“WDET” or the “Station”). The Station is licensed to Wayne State University and operates as a public radio station with a news and information and music mix format serving the Detroit, MI market (ranked 12th by Arbitron) with approximately 3.9 million people within its primary coverage area. The engagement included the following elements: • Preparation of a comparable market valuation of the Station (see Appendix B) • Preparation of a comprehensive assessment and business model examining two scenarios: o Status Quo Scenario: No change in operations, ownership, or programming o Alternative Operating Scenario(s): Changes that might enhance services and improve business metrics Director of Consulting, Dennis Hamilton conducted the assessment including a site visit (October 15-16). PRC Analysts, Evran Kavlak and Louis Caputo managed the business model analysis and narrative report. A narrative summary of the business model is found in Appendix A. Executive Summary • WDET is growing its membership base and underwriting revenue o Despite significant recent gains, long term projections indicate the need for a subsidy will continue • Operations are stable and best practices are evident in practice and results Page | 1 • An opportunity exists to enhance the public service, improve financial performance, and extend the Wayne State University brand o The Licensee’s annual WDET subsidy of $500,000 can be reduced or eliminated over time • WDET’s format and programming work and are well executed • The Station’s recent (last three years) performance figures are moving closer to the comparable station averages nationwide • Station management staff is professional, well trained and motivated by their mission • The past struggles of the Station, while lingering in memory, is eclipsed by present day performance • New operating and management structures should be considered for operational efficiency and sustainable growth o The Station will benefit from a strategic growth strategy and plan o The Licensee will benefit from exploring an alternative operating scenario . A management/operating partnership with Detroit Public Television (“DPT”) could significantly enhance all aspects of WDET’s performance and significantly benefit Wayne State University • WDET infrastructure and space are adequate • WDET can become a media leader in Detroit Findings Management The Station is without a general manager and has a history of management difficulties dating back several years. However, the most recent management made good hires, created strong operational systems, and emphasized best practices. As a result, the Station is functioning well in all operational areas. In addition to an opening for general manager, the program director position is vacant. In place of those positions, the University has installed two co-managers to oversee the Station and maintain services. An interim program director has been named to maintain program/format continuity. The interim management and programming arrangement is working well and the Station is maintaining best practices. In fact, the Station has improved its core revenue sources of listener contributions and underwriting. If WDET is to continue its current operations with no significant changes in programming or other disruption, the interim management solution is adequate for the next several months. If the University takes action on an alternative operating model addressed later in this report, then those positions can be considered during modeling of that new operating/ownership structure. Page | 2 Public Service Audience, membership, revenue to population, and revenue to listener metrics and others indicate that the Station is currently performing well with an upward trajectory. In particular the Station has experienced a double-digit growth in its core revenues sources of contributions and underwriting for the past three years. There is no reason to assume at this point that that trajectory will stop although it will likely flatten in time as the Station fully utilizes its revenue potential. Based on comparable public radio station metrics, WDET still has some room to grow to meet comparable levels. The business model narrative that follows illustrates projected performance for the next five years under a status quo scenario. Programming The Station airs primarily an NPR style news and information programming with music overnights and on weekends. The format is well executed and the design works. We see no reason for any changes in the basic format approach at this time. There may be reason on occasion to adjust some timing or other programmatic elements, but as is, the programming is solid. Serving over 150,000 weekly listeners, the programming is designed using best practices and generates loyalty and listening. From PRC’s perspective, there is an absence of media leadership in Detroit. WDET has shaped a foundation from which that leadership might evolve. Its dedication to principled journalism, its desire to increase quality investigative reporting is evident, and its match with Detroit Public Television (“DTV”) (see below) could create a media company that becomes a Detroit institution, national leader, and center of focus for quality content and news seekers and makers. Long-term Financial Outlook PRC, in collaboration with WDET management, developed a comprehensive business model (the “Model”) projecting a 5-year pro forma financial outlook under a base-case scenario (the “Status Quo Scenario”). In developing this Model, PRC has taken into account a variety of station-specific data and market-related factors including, but not limited to, the following: • WDET financial results from FY2006 though FY2013, along with FY2014 YTD numbers; • Membership and underwriting details, and listening trends; • A peer group analysis looking at the financial and listener performances of several sets of Corporation for Public Broadcasting (“CPB”) supported stations, broken out by format, serving similarly sized markets, as well as those serving post-industrial cities with relatively low income. This analysis indicated that WDET’s historical financial results from FY2010 through FY2012 were generally in line with those of its peers serving similarly sized, post-industrial, markets airing a news/information format, while there is some more room to grow revenues, particularly on the membership and underwriting side; Page | 3 • Market-specific factors such as education and income level, and market competition; and • A detailed coverage area analysis. As indicated by the comparable analysis (See Appendix A for more information), WDET could still capitalize upon some untapped revenue potential by increasing its ability to convert listeners into contributing members and to attract new underwriters. This could result in an additional 8% growth in membership and 13% growth in underwriting before reaching the comparable station levels by FY20161. The Status Quo Scenario shows solid revenue growth continuing through FY2015 then leveling out. To illustrate, between FY2009 and FY2012, contributions and underwriting, two of the largest sources of revenue, increased by 51% and 59% respectively. From FY2012 through FY2015, a 1% growth in membership and a 10% growth in underwriting are projected. After FY2015 the growth rates stabilize at approximately 4% annually. Operating expenses are expected to grow at an average of 3% annually. Despite the recent growth in revenues and the projected growth through the forecast, it is anticipated that the incremental revenues will not be sufficient to cover expenses, resulting with a cash shortfall2 in WDET operations ranging from $427,000 to $464,000 per year that will need to be subsidized. Changes to the operating/management structure could substantially reduce or eliminate that need by potentially reducing expenses and/or finding new revenue sources (See Alternative Operating Scenario below for more information). The following graph shows the projected operating revenue and expense trends under the Status Quo scenario. Revenue and Expense Trends - Status Quo (Excluding Wayne State University Transfer) $4,500,000 Actuals $4,000,000 $3,500,000 $3,000,000 $2,500,000 $2,000,000 FY FY FY FY FY FY FY FY FY FY FY 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total Operating Revenues before Transfer 2,320,0 2,360,0 2,880,0 3,470,0 3,340,0 3,330,0 3,400,0 3,520,0 3,650,0 3,780,0 3,910,0 from Wayne State University Total Operating Expenses before 3,350,0 3,230,0 3,580,0 3,800,0 3,750,0 3,760,0 3,870,0 3,990,0 4,110,0 4,220,0 4,350,0 Depreciation 1 Revenue potential based upon the difference in membership revenue per listener and underwriting revenue per listener between WDET and the comparable stations using the FY2012 results. 2 As measured by Earnings before Interest Depreciation and Amortization (EBIDA), and before Transfer from Wayne State University Page | 4 The status quo scenario presumes no changes in programming, no additional services or staffing, no reserves or capital expenditures. Structure WDET management is supervised by and reports to the University’s Vice President and Chief of Staff. For the most part the Station