Government expenditure cutbacks clobber UK commercial radio

As soon as the coalition government came to power in May 2010, it implemented Conservative Party policy to make substantial cutbacks to the amount of public money spent on government marketing campaigns. Commercial radio was hit the hardest because, more than any other medium, it had become increasingly dependent upon government expenditure on advertising airtime.

In 2010, before the general election, I had predicted [see my blog] that the impact of these cutbacks would prove “disastrous” for the commercial radio sector. I had calculated that a 50% cut in total public expenditure on commercial radio advertising would lose the sector £44m to £48m in revenues, equivalent to 9% of total sector revenues.

Interviewed by BBC Radio Four, I was asked if my scenario was not overstating the potential impact on commercial radio. I argued that it was not – the amount spent by the government’s Central Office of Information [COI] on commercial radio dwarfed all other radio advertisers by miles. By February 2010, government expenditure on radio commercials was greater than that of the second, third, fourth and fifth largest advertisers combined.

The Radio Advertising Bureau had put a brave face on the losses from its biggest advertiser. In June 2010, it said: “We are optimistic that radio’s strengths will be recognised as COI budgets come under ever greater scrutiny.” In September 2010, it said it was “working with a wide range of advertisers to bridge the gap” left by public expenditure cuts.

However, the latest data from Nielsen show that the impact upon commercial radio has been even greater than I had forecast. In the year to February 2011, COI expenditure on radio advertising was down 70% year-on-year, much greater than the 50% cut that had been anticipated from previous Conservative Party pronouncements. In total, commercial radio lost £44m per annum from all public expenditure on radio, compared to the previous year.

The worse news was that, as the graph above shows, the fall in COI expenditure has become steeper in recent months. As a result, the impact on the sector in 2011 is likely to be just as severe as it was in 2010. The hard fact is that this is not a temporary cyclical loss for commercial radio – these revenues will not rebound for as long as the coalition government remains in power.

The graph shows clearly that no individual or group of advertisers have been able to substitute entirely for the losses caused by government cutbacks, although some gains were made from clients in 2010 [see my blog]. No commercial advertiser spends more than £10m per annum on radio, whereas the COI had spent £58m in the year to March 2010 (but was down to £17m by February 2011). This is simply too big a gap to be filled by a few individual commercial advertisers.

Media Week reported recently that “the more optimistic media owners are hoping the COI’s former spend [on radio] can be clawed back by year’s end.” It is hard to see how that can be realistically achieved, given the scale of the £44m per annum loss from public sources to date, particularly in the face of declining consumer disposable incomes.

In an attempt to offer a positive outlook, Media Week suggested: “But the situation is set to improve. From April [2011] onwards, there will no longer be any comparable year-on-year COI spend left in the system, as purdah [sic] kicked in 2010.”

Perhaps what Media Week was trying to say was that COI expenditure will level off this year once the savage cuts have been in situ for more than a year. Yes, inevitably, but that does not in any way help an industry that has just witnessed £44m per annum of revenues disappear into thin air. Remember that total commercial radio revenues in 2010 were only £523m, already down from £641m in 2004. Now a further huge 8% chunk of income has gone.

Another commentator recently noted optimistically: “The [radio] medium took £523 million in revenue in 2010, up 3.3% year-on-year, and 2011 looks like another positive year of growth, not the inevitable management of decline forecast by some.”

However, once inflation is taken into account, 2010 commercial radio revenues fell in real terms [see my blog]. Far from a decline being “forecast by some,” the industry’s own data demonstrate that decline has been occurring since 2004 in real terms, long before the recent cuts to government expenditure. Adjusted for inflation, commercial radio revenues in 2010 were lower than they had been in 1998.

This is not the time for spreading unfounded optimism based on ignorance of the facts. If anything, the impact of government cuts has proven to be more than “disastrous” and will necessitate even more restructuring of the commercial radio sector in the short term. This could include the closure of further unprofitable digital ventures and of sector support agencies whose subscriptions will begin to appear increasingly discretionary when the axe has to fall somewhere.

UK commercial radio revenues underperform the 2010 media market

Marketing magazine’s annual survey of the top 100 advertisers announced some good news:

“More than three-quarters of the UK’s top 100 advertisers increased their adspend in 2010, defying predictions that the year would mark a steep decline in marketing budgets. By channel, the biggest year-on-year increase was in TV advertising, with a 17% rise, according to Nielsen; print, outdoor and cinema spend also rose.”

So, good news for radio too? Marketing continued: “The only medium in which spending fell was radio, falling 6% on 2009 levels.” Oh dear.

Why was radio so badly hit in 2010? Partly because of commercial radio’s greater dependency than other media on public expenditure which, as Marketing explained, was cut drastically in 2010:

“The government’s commitment to slashing public-sector spending was reflected in the 50% year-on-year decline in the COI’s [Central Office of Information] adspend to £105.4m.”

And partly because the volume of commercial radio listening has been in decline for the last decade, and sector revenues are a product of listening.


Encouragingly, 2010 witnessed a 3% year-on-year increase in the total volume of commercial radio listening, the first increase since 2001. However, total radio listening (commercial + BBC) had increased in 2010 by 2%, making commercial radio’s gain only marginally greater than the total market.

As for the other issue of slashed public expenditure on commercial radio, although 2010’s loss of £24m seemed bad [see my blog], 2011 could prove to be worse. On Friday, the Cabinet Office recommended the scrapping of the 60-year old Central Office of Information:

“As part of the changes, the COI will be replaced with a new body, the Government Communications Centre, with a wider remit and responsibility for keeping a tight reign on advertising and marketing spend. … The report does not say how much the government might cut from its £1bn annual communications bill, or how much of the £540m spent on everything from TV, radio and posters to sponsorship might be reduced.”

This would prove a further financial blow for commercial radio, since COI expenditure on radio of £30m in 2010 still contributed as much as 11% to the sector’s national advertising revenues, even after having been slashed by the coalition government.

Although Marketing’s (Nielsen) data reported that radio’s national revenues fell by 6% in 2010, the commercial radio sector’s own numbers showed a 6% increase. This discrepancy is puzzling. Nevertheless, analysis of the industry’s dataset tells us:


TOTAL UK COMMERCIAL RADIO REVENUES:
2010: £522.6m (£505.5m in 2009)
Up 3% in absolute terms
First year-on-year increase since 2007
Down 1% at constant prices [RPI]

UK COMMERCIAL RADIO NATIONAL REVENUES:
2010: £276.2m (£259.4m in 2009)
Up 6% in absolute terms
First year-on-year increase since 2007
Up 2% at constant prices [RPI]

UK COMMERCIAL RADIO LOCAL REVENUES:
2010: £144.3m (£144.7m in 2009)
Down less than 1% in absolute terms
Lowest value in absolute terms since 2001
Down 5% at constant prices [RPI]
Lowest value at constant prices since 1992

This apparent collapse in local advertising revenues would appear to mask a dichotomy that is taking place in the radio sales market. For those stations in small groups or independently owned that rely almost entirely on local revenues, the market for local advertising has already rebounded from the recession. The closure of many local newspapers, the cuts to local council freesheets and the closure of many local radio station offices owned by large radio groups have left these genuinely local stations in an opportune position to hoover up more local advertisers.

On the other hand, local radio stations that have been transformed recently by Global Radio into ‘national brands’ (Heart, Capital) seem to be abandoning their interest in local advertising markets. If I owned a local business in Eastbourne, I would like to know how effective an advertisement would be on the local Heart FM station in my immediate area of Eastbourne & Hastings. This is no longer possible because Global Radio has done away with RAJAR audience data for many local markets. The smallest market that RAJAR can tell me about now is “Sussex” comprising 1.3m adults – much too big a coverage area for an advert for my one local shop in Eastbourne.

This new strategy seems inconsistent with the Heart FM licence for Eastbourne & Hastings which Ofcom insists is “A LOCALLY ORIENTED CONTEMPORARY AND CHART MUSIC AND INFORMATION STATION…” So, please will Ofcom explain how Heart FM can be a “locally orientated” station if, as a potential advertiser in Eastbourne, I can no longer determine how many people would hear an advertisement broadcast on the station?

RAJAR explained the changes to its data: “Campaigns transferred from Q3 2010 to Q4 2010 will contain the old station definitions and they will be visible Q4, however the data will not be accurate. Please re-plan the campaign using the new regional definitions available in Q4.” In plain English – audience data for local stations have been removed and merged into regional groupings from last quarter.

So, it would seem that the ‘nationalisation’ of the content on Global Radio’s Heart and Capital brands has been accompanied by ‘nationalisation’ of advertising sales. If ever there seemed like a wrong time to be pursuing national advertisers for commercial radio, surely it must be now [see my blog]. In real terms, national advertisers spent no more on commercial radio in 2010 than they had in 1997. However, in 1997, there were only 200 commercial radio stations, whereas now there are 300.

I am reminded of a meeting in 2007, just weeks before EMAP was sold, with its chief executive when I asked him if he felt there was anything that the group’s radio division should have done differently. Local advertisers, he told me. We neglected local advertisers in pursuit of the larger amounts we could earn from potential national advertisers. But we turned our backs on previously loyal local advertisers who quickly lost interest in our stations without regular contact from our salespersons.

Here is a lesson to be learnt from the UK’s second largest commercial radio group. Don’t look your local cash cow in the mouth.