What is Power Ratio
Power ratio shows how much revenue a broadcast media company earns compared to how much it would be expected to earn given its market share. It is calculated as follows:
Company Revenue / (Audience Share * Total Market Revenue)
BREAKING DOWN Power Ratio
Companies want to have a power ratio of at least 1.0, which indicates expected revenue levels. A higher power ratio indicates a greater amount of revenue received from the company's audience share. Power ratios show how well media companies convert their ratings into advertising revenue. Values greater than one indicate a company that is outperforming its industry.
Power ratios help media firms evaluate their own performance and, in the case of a possible acquisition or merger, evaluate the performance of a target media company. Analysts and investors also pay close attention to power ratios because they provide insight into how efficient companies are at converting ratings into revenue. Power ratios can also be used to compare the revenue performance of one category of media (e.g., the Internet) to another category (e.g., newspapers).
While power ratios measure efficiency at generating revenue relative to audience, they do not measure a broadcaster’s profitability. In other words, a broadcaster might have a high power ratio yet be unprofitable, for instance, due to high programming costs.
Which Factors impact Power Ratios?
A 2005 academic study of power ratios for broadcast radio stations in the United States that was published in the Journal of Media Business Studies found that as a radio station's audience share grows, its market revenue share grows disproportionately. Conversely, its audience share shrinks, a company’s market revenue share decreases disproportionately. When looking at the 100 largest U.S. broadcasters, that same study, as well as others, also found that power ratios for a given broadcaster can be lower than expected due to a relative lack of demand for its audience relative to other audience segments. Station format can positively (news/talk) or negatively (e.g. Easy Listening and those targeting ethnic minorities) influence the power ratio. In general AM stations generate lower power ratios than FM ones do.
When analysts and management teams evaluate power ratios, they also look at ratios for specific day parts and demographic groups, for instance, the covered 18 to 49-year-old segment. They also assess the trend over time periods. Management teams’ evaluation of power ratio impacts programming investments, talent recruitment and compensation, and station purchase decisions as well as long-term corporate planning decisions.