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In the US, commercial radio stations make much of their revenue selling airtime to advertisers, who put on the air radio advertisements. Of total media expenditures, radio accounts for 6.9%. Radio advertisements or "spots" are available when a business or service provides valuable consideration, usually cash, in exchange for the station airing their spot or mentioning them on air. The United States Federal Communications Commission (FCC), established under the Communications Act of 1934, regulates commercial broadcasting, and the laws regarding radio advertisements remain relatively unchanged from the original Radio Act of 1927, enacted to deal with increasing problems of signal interference as more and more stations sprung up around the country.
The first radio broadcasts aired in the early 1900s. However, it wasn't until 1919 that radio stations began to broadcast continuously, similar to the modern practice. In the United States, on November 2, 1920, KDKA Pittsburgh became the first radio station to receive a commercial license from the government. KDKA engineer Frank Conrad may have been the first to broadcast a radio advertisement on his own experimental station in 1919 when he thanked a Pittsburgh music store on the air for supplying him with phonograph records, although that was for trade, not cash.
Most early radio stations were put on the air by the manufacturers of radio equipment, such as Westinghouse and General Electric or by department stores which sold radios, such as Gimbel's, Bamberger's and Wanamaker's. After all, if they wanted customers to buy radio sets, there had to be stations for them to listen to. At first, they weren't concerned with the stations making a profit, if sets were being sold. But as more stations began operating, station owners were increasingly faced with the issue of how to maintain their stations financially, because operating a radio station was a significant expense.
In February 1922, AT&T announced it would begin selling "toll broadcasting" to advertisers, in which businesses would underwrite or finance a broadcast, in exchange for being mentioned on the radio. WEAF of New York (now WFAN) is credited with airing the first paid radio commercial, on August 28, 1922, for the Queensboro Corporation, advertising a new apartment complex in Jackson Heights, Queens, near the just-completed #7 subway line. However, it appears other radio stations may actually have sold advertising before WEAF. As early as May 1920, an amateur radio broadcaster leased out his "station" in exchange for $35 per week for twice-weekly broadcasts. And, in Seattle, Washington, Remick's Music Store purchased a large ad in the local newspaper advertising radio station KFC, in exchange for sponsorship of a weekly program, in March 1922. Additionally, on April 4, 1922, a car dealer, Alvin T. Fuller, purchased time on WGI of Medford Hillside, Massachusetts, in exchanges for mentions.
During radio's golden age, advertisers sponsored entire programs, usually with some sort of message like "We thank our sponsors for making this program possible", airing at the beginning or end of a program. While radio had the obvious limitation of being restricted to sound, as the industry developed, large stations began to experiment with different formats. Advertising had become a hot commodity and there was money to be made. The advertising director at Shell Oil Co., urged radio broadcasters to deal directly with relevant advertisers, and sell tie-in commercial spots for established radio programs. Like newspaper ads at the time, Sanders figured that advertisers and radio would both benefit from selling ad spots to get the attention of listeners. Radio was an already prominent medium, but Sanders referred to his initiative as radio 'growing up' in terms of its business aspects and how it dealt with advertising.  The "visual" portion of the broadcast was supplied by the listener's boundless imagination.  Comedian and voice actor Stan Freberg demonstrated this point on his radio show in 1957, using sound effects to dramatize the towing of a 10-ton maraschino cherry by the Royal Canadian Air Force, who dropped it onto a 700-ft. mountain of whipped cream floating in hot-chocolate filled Lake Michigan, to the cheering of 25,000 extras. The bit was later used by the USA's Radio Advertising Bureau to promote radio commercials.
The radio industry has changed significantly since that first broadcast in 1920, and radio is big business today. Although other media and new technologies now place more demands on consumer's time, 95% of people still listen to the radio every week.Internet radio listening is also growing, with 13 percent of the U.S. population listening via this method. Although consumers have more choices today, 92 percent of listeners stay tuned in when commercials break into their programming.
There is a broad range of choices for type and length of radio commercials. With changes in the radio industry and better production technologies, the mode of commercial presentation has changed, and commercial advertisements can take on a wide range of forms. The two primary types of radio ads are "live reads" and produced spots.
Cousin to the ad-libbed commercial, live read refers to when a DJ reads an advertiser's spot on the air, delivered from a script, fact sheet or personal knowledge. It can also refer to when the DJ "endorses" the advertiser's goods or services. The Radio Advertising Bureau defines an endorsement as: "A commercial in which the...program personality personally recommends an advertiser's product or service, often done live during the program."
Produced spots appear to be more common. A spot is 'produced' if the radio station or an advertising agency record it for the client. Produced commercial formats include: straight read with sound effects or background music, dialogue, monologue (where the voice talent portrays a character, as opposed to an announcer), jingles, and combinations of these. Studies show that the quality of the commercials is as important to listeners, generally, as the number of ads they hear.
Radio stations today generally run their advertising in clusters or sets, scattered throughout the broadcasting hour. Studies show that the first or second commercial to air during a commercial break has higher recall than those airing later in the set.
Nielsen Audio is one of the primary providers of ratings data in the United States. Most radio stations and advertising agencies subscribe to this paid service, because ratings are key in the broadcast industry. Ad agencies generally purchase radio based on a target demographic. For example, their client may want to reach men between 18 and 49 years old. The ratings enable advertisers to select a specific segment of the listening audience and purchase airtime accordingly. Ratings are also referred to as "numbers" in the business.
The numbers can show who is listening to a particular station, the most popular times of day for listeners in that group, and the percentage of the total listening audience that can be reached with a particular schedule of advertisements. The numbers also show exactly how many people are listening at each hour of the day. This allows an advertiser to select the strongest stations in the market with specificity and tells them what times of day will be the best times to run their ads.
Besides the basic numbers, most radio stations have access to other data, such as Scarborough, that details more about the listening audience than just what age group they fall into. For example, some data will provide the types of activities listeners participate in, their ethnicity, what type of employment they do, their income levels, what kinds of cars they drive, and even whether or not they have been to a particular entertainment venue, for example.
Radio stations sell their airtime according to dayparts. Typically, a station's daypart lineup will look something like the following: 6am-10am, 10am-3pm, 3pm-7pm, and 7pm- midnight. The spots running after midnight, from 12am-6am, are referred to as "overnights". Though this schedule of dayparts can vary from station to station, most stations run similar daypart lineups and sell their advertisements accordingly. Drive times, or morning and evenings when people are commuting, are usually the most popular times of day and also when each station has the most listeners. The "rates", or what the station charges the advertiser, will reflect that.
Rates can also be affected by the time of year an advertiser runs. January is almost always a very slow time of year, and many stations run specials on their rates during that month. This is not the case in warm weather markets like Florida, where "snow birds" migrate and increase population. In this situation rates are usually at their highest as the population swells. The cost of radio advertising also varies on how well the parties negotiate. During busier times of the year, stations can actually sell out of ads entirely, because, unlike the print media, radio stations only have a limited number of commercial units available per hour. During the dot-com boom, some stations ran as much as twenty minutes of ads per hour. While commercial levels are nowhere near as high today, with the average station running approximately nine minutes of ads per hour, peak periods can and do sell out.
Thus, advertising rates will vary depending on time of year, time of day, how well the station does in the particular demographic an advertiser is trying to reach, how well a station does compared to other stations, and demand on station inventory. The busier the time of year for the station, the more an advertiser can expect to spend. And, the higher ranked a station is in the market, according to the ratings data, the more an advertiser can expect to get charged to run on that station.
Advertising rates can vary depending on the length of spot the advertisers elects to run. Although sixty second spots are the most common, stations also sell airtime in thirty, fifteen, ten and two second intervals. Thirty-second ads have always been popular in television advertising, but radio stations just adopted this format recently. Clear Channel kicked off the "Less is More" initiative in 2004, utilizing thirty-second commercials in markets across the US. Though studies show that fewer commercials cause better recall rates, research indicates that traditional sixty-second spots may be the better option, with higher brand and message recall than the newer thirty-second ads.
Stations also run ten-second spots, or "billboards". Typically, this type of spot runs adjacent to some station feature, such as the traffic report, stating, "This traffic brought to you by...", and is usually limited to about thirty words. Fifteen-second spots are generally reserved for station promotional announcements, although some stations sell them.
In addition to traditional radio advertising, some stations are selling airtime during their streaming broadcasts. In the past, the radio station stream included only the commercials that were also running on air. CBS announced it would begin airing 'live reads' in its streaming radio broadcasts, sold and voiced separately from the stations' regular spots, noting the efficacy of live endorsements.
More than eight out of ten Americans feel listening to commercials in exchange for free radio is a "fair deal". Furthermore, broadcast radio advertising often offers the advantage of being localized and inexpensive in comparison with other mediums such as television. Thus, radio advertising can be an effective, low-cost medium through which a business can reach their target consumer. Studies show that radio ads create emotional reactions in listeners. In turn, consumers perceive the ads as more relevant to them personally, which can lead to increased market awareness and sales for businesses running ad schedules. Twenty-five percent of listeners say they're more interested in a product or business when they hear about it on their preferred station.
Local DJs create a personal relationship with their listening audience, and that audience is more likely to trust what they say and respond to their message. Live endorsements are growing in popularity, as advertisers seek new means to reach consumers and cut through the surrounding clutter. Studies show that live reads have recall and response rates higher than the typical recorded spot. Perhaps because of the relationship listeners develop with their favorite station, twenty-six percent of listeners are more interested in a product or business when a DJ endorses it. As more advertisers turn to live endorsements, heavy demand is placed on DJs to announce them. And, as the number of available DJs shrinks, those that are left are often inundated with requests to do endorsements.
The Communications Act of 1934 established the FCC, which, in turn, regulates the broadcasting media. In response to the payola scandal of the 1950s, the FCC established guidelines, known as "sponsorship disclosure" rules. These rules apply to both pay-for-play and advertisements alike, recognizing that consumers deserve to know "by whom they are being persuaded". Of particular note to advertisers is Section 317 of the Act, also known as the "Announcement of Payment For Broadcast" provision. It states, in general terms, that where money, services or other valuables are directly or indirectly paid to a radio station, in exchange for mentions on the air, the station must disclose that fact. For example, if a cell phone provider gives a free cell phone to a station's DJ, who then talks about that cell-phone provider on the air, perhaps mentioning what great service he has, the announcer must disclose that it is an advertisement.
Usually, listeners are able to discern radio advertisements from entertainment content. The Communications Act does include an "obviousness" exception: where it is obvious that something is a commercial, the announcement-for-payment provision does not apply. However, where anything of value has changed hands in exchange for mentions on the air, a station has a duty to disclose it.
The Federal Trade Commission is also responsible for broadcast industry regulation, in terms of false or misleading advertising practices. In October 2009, the FTC published guidelines regarding endorsements, requiring clear disclosure of the connection between an advertiser and an endorser. Under the FTC guidelines, an endorser is responsible for disclosing any "material connections" they have with a seller/business.
In recent years, there has been a trend toward the blurring of entertainment/editorial and advertising content. Marketers are "embedding" products into the media so that consumers are not aware they are being advertised to. In radio, it is sometimes difficult to tell where DJ chit-chat ends and an advertisement begins.