“Above all else, Durham FM will be local” …. a promise is a comfort to a fool

Durham must be unique in Britain in that it once had its own local radio station and then had it taken away. BBC Radio Durham closed down in 1973 when the BBC, then limited to just twenty local radio services around the country moved the station in its entirety to Carlisle. It was reasoned that Durham could be adequately served from the north by Radio Newcastle and from the south by the then Radio Teesside. The same arguments can be heard today when, despite the proliferation of electronic media over the past thirty years, all the mass media serving the Durham area are based on Tyneside, on Teesside, in Darlington or in London. Our research and consultations confirm an almost universal desire for Durham to have its own radio station – for Durham and from Durham.

These words are taken from the winning licence
application submitted to Ofcom by The Local Radio Company in January 2005 for the new Durham FM licence. The application continued:

There is an unduly low level of contact between the City of Durham and the many towns and villages which surround it. Those representing the towns and villages in the Districts away from the City also point to a reluctance to travel between those towns and villages. Local people feel marginalised by the existing media. When most local news and information comes from media dominated by out-of-area conurbations is it surprising that local awareness and pride starts to suffer? We see this as a major opportunity for Durham FM to provide an entertaining and informative local radio service which will have wide appeal…..

Durham FM will broaden the range of local commercial radio services by offering the only programming to focus exclusively on Durham City and the surrounding districts. In addition to the full range of national services, the proposed TSA is served by local radio stations based around Tyneside and Teesside. From the BBC there are BBC Radio Newcastle and BBC Radio Cleveland, while from commercial radio Metro Radio, Magic 1152, Century FM and Galaxy 105-106 all broadcast from Tyneside with TFM and Magic 1170 having their studios in Stockton-on-Tees…..

Only 8% of total news time on Metro Radio was devoted to stories drawn
from the proposed Durham FM editorial area…. With slightly more time devoted to news bulletins than on Metro, local news [on Magic 1152] about the Durham area featured a little more frequently, but still only 10% of news bulletin time was devoted to material directly relevant to the Durham FM TSA…. [On Century FM] our independent monitoring agency failed to identify a single reference to anywhere within the proposed Durham FM TSA…. There was no locally relevant news [on Galaxy FM] for the Durham FM area….

Durham FM will focus entirely on Durham and the districts surrounding it. Our programmes will be locally produced and presented from studios in Durham by people who know and understand the area. This independent monitoring of the existing services shows that no other ILR station in the area provides anything approaching the level of relevant local news and information which are demanded by the local population and will be offered by Durham FM. During the period monitored very few local news stories were included and there were very few locally relevant programme items on any of the four ILR services. Durham FM will become established as the only dependable, independent and up-to-the-minute source of information about what’s happening in the towns and villages of the Durham area….

Local material is vitally important to the success of Durham FM. Our detailed quantitative research, detailed later in this application, confirms that a gap exists in the Durham radio market for a greater quantity of Durham city and county news and local information. Whether expressed in terms of speech items that listeners would like to hear or those that they consider ‘essential’ listening it is local Durham and North East regional news, along with local weather forecasts and traffic and travel news for the Durham county area, that head the list of requirements….

All programmes on Durham FM will be locally produced and presented with the exception of a nationally networked chart show during three hours on a Sunday afternoon/evening and one latenight ‘phone-in of three hours duration each week. A limited further amount of appropriate network programming may be added outside weekday daytime once our local audience is established, after the second year on-air, but a minimum of 18 hours per day will always be locally produced and presented.

Following up this written application, Ofcom asked The Local Radio Company explicitly:
Are there any cost-saving sharing of resources planned arising from Durham FM’s close geographical proximity to both Alpha 103.2 and Sun FM?

The written answer from The Local Radio Company was:
It is our intention to operate Durham FM as a separate radio station with its own facilities, staff and objectives.

At its meeting on 7 April 2005, Ofcom’s Radio Licensing Committee [RLC] considered
three competing applications for the new Durham FM licence and decided to award it to The Local Radio Company. Ofcom explained that this decision was made because:

…the speech commitments contained in Durham FM’s Format (such as a seven-day local news service) would improve Durham-specific news and information provision in the area, and that the overall programming proposals contained in the Format were both deliverable and would cater for local tastes and interests, as demonstrated by the group’s research. The RLC considered that, in relation to Section 314 of the Communications Act 2003, Durham FM’s programming proposals contained a suitable proportion of local material and locally-made programmes. The station will offer locally-made output for 18 hours per day, and the Format includes commitments to delivering a range of local material. The Committee noted that, after two years on air, the station’s Format gives it the ability to air networked programming at off-peak times, if it so chooses. [emphasis added]

Durham FM launched on 5 December 2005. The station failed to come anywhere close to the audience forecasts made in its licence application (see table). A radio station’s revenues are closely proportionate to the total hours listened to it. On that assumption, Durham FM must have been around 74% below its revenue target for Year Three – a catastrophic performance for a business that is operated on largely fixed costs. So how come The Local Radio Company’s forecasts in its licence application were so wildly optimistic? The application had said:

We have no doubt that these audience projections are realistic and achievable in the light of our experience of comparable services throughout Britain…. We have every confidence that Durham FM’s locally focussed programming, backed by a significant launch budget, will establish a substantial audience within a relatively short period of time.

And how come Ofcom was so confident that the Local Radio Company could meet these targets? Ofcom said:

Durham FM’s audience and revenue forecasts were considered to be achievable, and in this context RLC members noted the excellent ratings performance and track record of both Sun and Alpha in nearby areas which have a line-up of competitor stations very similar to that which the new Durham service will face.

So just how “excellent” were the performances of the neighbouring Sun and Alpha stations owned by the same applicant?

When Ofcom’s Radio Licensing Committee met in April 2005 to consider the Durham licence, it was becoming evident that Sun and Alpha were losing listening at an alarming rate, both stations having peaked in 2002 under previous owner Radio Investments Ltd. Similar audience losses were experienced across most stations owned by The Local Radio Company, following its disastrous decision in 2004 to homogenise the branding and content of its portfolio under the slogan “music:fun:life”. Essentially, the group sucked the quirky ‘localness’ out of its local stations and, unsurprisingly, listeners subsequently turned off in droves.

The end result? Durham FM presently has a 4.0% share of listening in its local market of 201,100 adults. By comparison, Galaxy has a 9.5% share, Magic 6.4%, Century/Real 6.5% and Smooth 4.8%. Metro FM and TFM together probably take 7.5% (Durham FM chooses not to itemise these two stations in its RAJAR report). BBC local radio takes a significant 8.8% share, even though Durham is only on the periphery of both BBC Radio Newcastle and BBC Radio Tees. [RAJAR Q1 2009]

In December 2008, The Local Radio Company submitted an application to Ofcom to move Durham FM’s studios to Sunderland, effectively closing the Durham location, but continuing to provide ‘local’ programmes for Durham from Sun FM in Sunderland. It argued that “the losses for Durham FM are significant”, the details of which had “been provided, in confidence, to Ofcom”. It argued that “this co-location will allow the station to build its audience on a more stable and secure financial basis” because “it has a poor financial history” and that “the proposals will be imperceptible to listeners in the local market place”.

At its meeting on 23 February 2009, following a five-week public consultation, Ofcom’s Radio Licensing Committee refused this request to move Durham FM to Sunderland because it decided that “the case for the existence of exceptional circumstances had not been made”. However, Ofcom did suggest that it could reconsider this request “later in the year” following publication of the Digital Britain final report. Interestingly, Ofcom noted that a previously approved request in March 2008 to allow the Durham station to share programming with Alpha FM in Darlington “has been scrapped by the licensee [so as] to secure all-local programming output on Durham FM”.

With an immediate move to Sunderland now off the agenda, The Local Radio Company moved on to Plan B. Next, it applied to Ofcom to effectively merge the output of Durham FM and Alpha in Darlington into one station to be called “Alpha”. So what would remain of the promised local programming for Durham? “Weekday breakfast programming and four-hour daytime shows on Saturday and Sunday will remain separately and locally produced in Durham….”, said the application. “At all other times, local programming will originate from Darlington”. Boldly, the application argued that “the character of the [radio] services will remain substantially unchanged” and “the essentially local nature of the [radio] services will remain”.

Suddenly, Durham and Darlington were to become a single local radio market:
We believe there is considerable editorial justification in combining much of the local programming of Durham FM and Alpha, and in originating the shared programmes from Darlington. Until 1997, when it became a unitary authority, Darlington was part of County Durham and still very much leans culturally towards the county. Equally, for listeners and advertisers in the county, the attraction of a local radio service focusing on Durham is greatest for those more remote from the Tyneside conurbation, particularly those in the towns nearer to Darlington. The general public, listeners and advertisers are accustomed to the County Durham local press being substantially based in Darlington.

Am I the only one who finds this line of argument totally unbelievable? Firstly, it directly contradicts the opposite assertions made in The Local Radio Company’s application for the licence four years earlier that Durham was not well served by other media in the region. Secondly, the licence application had demonstrated there were few community links between Durham and either Tyneside or Teesside. Thirdly, my personal experience is that, having lived in Durham for seven years, I never visited Darlington (which is 19 miles away by road), though I did go to Newcastle (16 miles) and Sunderland (13 miles) regularly. However, Ofcom barely blinked at the contradictions and was so eager to go along with the story that it approved this proposal without any kind of public consultation, stating:

Durham has already regionalised four of those hours, and the request sets out clearly the affinities between the two areas [Durham and Darlington]…. This is not seen a major change to the stations’ output, and the request is granted.

So, for the second time, Durham has effectively lost its local radio station and now retains only a local breakfast show hanging by the barest thread. I am not trying to argue that Durham must have a local commercial radio station, regardless of how much money it might lose. But, once again, the outcome for radio listeners in Durham seems to raise questions about the robustness of our system of local radio licensing:
· Before advertising the Durham licence in 2004, did Ofcom properly evaluate the potential for local radio advertising revenues in the market?
· How carefully did Ofcom scrutinise the application by The Local Radio Company, before awarding it the licence, in order to separate the ‘spin’ from the reality?
· Did Ofcom monitor and assess the Durham station to ensure that the promises made in its licence application were executed on the ground?
· Why is a ‘promise’ explicitly made in a radio licence application not a contractual promise? Or are the proposals promised in an application simply disregarded by Ofcom once an applicant has been awarded the licence?

The local station in Durham must have failed because either/and:
· It was licensed to fail – no commercial radio station could survive in too small and too poor a local market – in which case Ofcom should never have advertised the Durham licence
· The Local Radio Company did not paint a truthful picture in its licence application of the economics of opening a Durham station, and Ofcom did not critique it sufficiently
· The Local Radio Company’s execution of its business plan for the Durham radio station was badly flawed

In any of these cases, somebody needs to put up their hand and simply admit ‘we got it wrong’. What galls is that both The Local Radio Company and Ofcom appear to have almost connived to come up with a ridiculous new storyline – Durham is a lot closer to Darlington than we realised – which simply contradicts everything that had been said previously, but conveniently glosses over any notion that the present predicament was the result of poor judgement.

To be fair to The Local Radio Company, its latest submission to Ofcom did reiterate:
The present proposal to simply add two further hours of daily weekday sharing is made in the light of the difficult financial situation facing all stations such as these. Relevant financial information has been supplied to Ofcom in confidence.

It might engender much more respect for the parties if, instead of these economic vagaries cloaked in confidentiality, the application to Ofcom to request deconstruction of the Durham station had simply said:
We screwed up as a station owner, you screwed up too as a regulator, and all we can do now is the two of us try and salvage the situation to ensure that the citizens of Durham can at least retain the shell of a local radio service, even if not the substance. Between us, we recognise that all we have done is add insult to injury, repeating the BBC’s unwarranted removal of a local radio service for Durham in 1973. Our sincere apologies to the people of Durham. All we can hope is that, by both of us learning from our mistakes, this travesty will not be repeated either for a third time here in Durham or elsewhere.

What Northeast England now has in the enlarged ‘Alpha’ is the makings of yet another regional radio station that could (if Sun FM were included) cover the huge area stretching from Tyneside down to Yorkshire. It would then become the fifth regional station in the area, adding to Galaxy, Smooth, Magic and Real. As for genuinely local radio serving the Durham area, The Local Radio Company’s licence application already demonstrated very clearly that neither Metro Radio nor TFM cover Durham editorially. This leaves Durham, whose population seriously lacks economic mobility, back out in the local radio wilderness once again. If that isn’t public policy failure, then what is?

Durham must be unique in Britain in that it once had its own local radio station and then had it taken away. ….

Once is an accident, twice is a ……..?

Global Radio and TLRC: a tale of two sickies

Global Radio is the UK’s largest radio group, accounting for around 40% of all commercial radio listening. Each week, its stations are listened to by 37% of the UK adult population (18.5m persons) for an average 9.3 hours per week.

The Local Radio Company [TLRC] is one of the UK’s small radio groups, accounting for around 1% of all commercial radio listening. Its stations are listened to by 1% of the UK adult population (680,000 persons) for an average 7.6 hours per week.

In Global Radio’s accounts filed with Companies House, its auditor noted on 22 April 2009:
“… there is a material uncertainty which may cast significant doubt over the ability of the group and parent company to continue as a going concern”.

In The Local Radio Company’s accounts filed with Companies House, its auditor noted on 5 March 2009:
“…. there remains in existence a material uncertainty which may cast significant doubt about the Company’s ability to continue as a going concern”.

Both Global Radio and The Local Radio Company had lost substantial amounts of listening to their stations over recent years. In commercial radio, there is a close relationship between the amount of listening to radio and the revenue generated by that radio listening.

The graph below shows that, between Q4 2001 and Q4 2008, the majority of stations presently owned by Global Radio lost significant amounts of market share in their local markets, particularly those in smaller markets.

The graph below shows that, between Q4 2001 and Q4 2008, the majority of stations owned by The Local Radio Company lost significant amounts of market share in their local markets, regardless of their size.

Global Radio was created from the acquisition of GCap Media and Chrysalis Radio, whilst GCap Media itself had been created from the earlier merger of GWR Group and Capital Radio Group. The graph below shows the listening accrued by the notional aggregation of these groups over time. The volume of listening in 2008 (8.9bn hours per annum) was down 24% on what it had been five years earlier. The data is not like-for-like, as it includes sundry station launches, closures, acquisitions and sales during this period.
Using sector average yields for each of these years, the Global Radio stations’ estimated revenues from advertising sales were likely to have been around £223m in 2008, down 20% on five years earlier. (The £ amounts are actual and not adjusted for inflation.)

The Local Radio Company was created in 2004. The graph below shows the listening recorded by RAJAR to its stations, which was down to 351m hours per annum in 2008. Again, the data is not like-for-like, as it includes sundry station launches, closures, acquisitions and sales during this period.

Using sector average yields for each of these years, The Local Radio Company stations’ estimated revenues from advertising sales were likely to have been around £9m in 2008. (The £ amounts are actual and not adjusted for inflation.)

Commercial radio is a largely fixed cost industry. This means that the cost of running a radio station is broadly the same whether it is listened to by 1m people or 100,000 people. This creates challenges in times when audiences are falling (as in now). Less listening equals less revenues, but it is much harder to cut costs. As a result, operating margins of radio stations tend to be badly squeezed when listening is falling. The massive investment in DAB infrastructure that the commercial radio industry has made over the last decade has squeezed its margins even more tightly.

Examination of the annual accounts of Global Radio, GCap Media and Chrysalis Radio makes it possible to estimate the revenues and operating profit of what now comprises Global Radio over the last few years. The group revenues are remarkably close to the revenue figures derived from listening data in the earlier graph.

The key assumption that produces the £6m operating profit figure for 2008 is that Global has managed to shave 10% from its operating costs year-on-year (equivalent to about £24m per annum of cuts). That is a very tough challenge in a fixed cost industry. If, in fact, Global has cut its overheads by less than 10%, the operating profit figure for 2008 would be lower (anything less than an 8% cut would transform this £6m estimated operating profit into an operating loss).

For The Local Radio Company, operating losses are de rigueur. Its annual accounts show the company’s diminishing revenues (down to £15m in 2008) and persistent operating losses. The revenue figures in the graph below are greater than the revenues estimated from listening data in the earlier graph because they additionally include revenues from a jointly owned advertising saleshouse (the two income sources are nowhere isolated within the accounts).

For both Global Radio and The Local Radio Company, as their respective auditors noted, there exists doubt about their ability to continue as going concerns. The Local Radio Company accounts, published on 4 March 2009, noted pertinently:
Revenues are down year on year and, within a fixed cost business such as broadcasting, this has a direct impact on the Group’s profitability and cash position.”
Someone had to rescue The Local Radio Company from its predicament. This week, UKRD Group reportedly acquired The Local Radio Company after a protracted struggle.

This is the point where the stories of these two radio groups diverge. By contrast, Global Radio remains remarkably upbeat about its own prospects. A series of press articles appeared this week variously entitled ‘Global Radio anticipates profits’ (Broadcast), ‘Global Radio expects steady profits despite ad slump (The Guardian), ‘Global Radio declares steady profit despite auditor’s warning’ (Brand Republic) and ‘Global Radio shrugs off warning with £31m profit’ (The Times).

In The Times, Global Group chief executive Ashley Tabor said that in the year to 31 March 2008, revenues were £269m and profits were £31m (notionally, if Global had then owned its current assets). He admitted that advertising revenues had fallen “by double digits, between 15% and 20%” in the year to March 2009, but insisted that “underlying earnings will be roughly the same”, even allowing for a fall of about £40m in revenues. This is a remarkable assertion.

If revenues were to fall by £40m year-on-year, but earnings remained the same year-on-year, then costs too would have to fall by £40m. Basic maths. For Global to cut its overheads by £40m would require around a 17% cut to the cost base it inherited from GCap Media and Chrysalis. And this would have to be achieved within a year to maintain earnings at their same level. This is a very tall order.

Ashley insists that, for the year to March 2008, revenues would have been £269m and profits £31m. My estimates for calendar year 2007 (detailed above) were £264m revenues and £24m of operating profit. These figures are relatively close. Then there is a divergence of opinion. For the year to March 2009, Ashley seems to be forecasting revenues of £229m and profits of £31m. My estimates for calendar year 2008 (detailed above) are revenues of £222m and operating profit of only £6m.

My ‘operating profit’ figure excludes any potential, one-off gains made from radio station sales. Ashley’s ‘earnings’ figure is more likely to be pre-tax profit. I am more interested in quantifying the health of the underlying business, which is the running of radio stations. From that perspective, it is difficult to see how the future can look positive for Global Radio. As The Times noted today: “Global probably lost money in the year to March 2009, but we will not see those accounts until next year”.

The elephant in the room is Global Radio’s cost of debt servicing. Chrysalis was acquired using £84m of debt at an interest rate of 6.125%. GCap Media was acquired with £126m of debt at an interest rate of Libor plus 3.4% (equals 4.771% today). Interest payments currently total more than £11m per annum, enough to wipe out the estimated operating profit.

If the advertising market falls further in 2009 (Ofcom forecasts a 20% decline in radio revenues year-on-year), Global Radio will be under immense financial pressure. The Bank of Scotland (now part of Lloyds Bank) has a mortgage over Global’s assets as security for these loans. In the meantime, Global is still hoping to sell some of its local stations in the Midlands (sales required by competition law) to arch-rival Bauer Radio, reportedly for £38.8m cash. Bauer can afford to play a patient, waiting game in a buyer’s market. The longer it holds out, the greater the pressure on Global to sell. If Bauer can wait long enough, it might even be able to acquire these stations (and others) at a knockdown price from the Lloyds Bank bargain bin.