Public spending cuts impacted commercial radio 2010 revenues by £24m

Who was UK commercial radio’s biggest advertiser in 2010? British Gas? No, it was second. Autoglass? No, it came third. Volkswagen? No, it was fourth. Unilever? No, it came fifth.

Radio’s biggest advertiser in 2010 was the government (in the guise of the Orwellian-sounding Central Office of Information [COI]). Not only was the government the biggest advertiser on radio, but it was far and away the biggest advertiser by miles. The government’s £30m expenditure on radio in 2010 exceeded the sum total of British Gas, Autoglass, Volkswagen and Unilever.

After the coalition government was formed in May 2010, it immediately executed Conservative Party strategy to cut public expenditure on commercial advertising by 50%. Before the election, I had predicted that this Conservative policy would have a disastrous impact on commercial radio revenues [see my May 2010 blog]. It did.

Although the coalition had been in power for little more than seven months by year-end, COI expenditure on radio was quickly slashed from £50m in 2009 to £30m in 2010. Additional (non-COI) public expenditure cuts reduced radio’s revenues by a further £4m in 2010. This £24m total was a significant loss to commercial radio, and represented 9% of national revenues, or 5% of total revenues.

Did radio suffer greater cuts from the COI than other media? Seemingly not. Radio’s share of COI ad spend was 27% in 2010, slightly higher than the previous year. The reason the impact was so great for radio was the sector’s much greater dependency upon public money than competing media (television, the press, billboards).

In June 2010, the Radio Advertising Bureau had said bravely: “We are optimistic that radio’s strengths will be recognised as COI budgets come under ever greater scrutiny.” Evidently, radio strength’s were not.

By September 2010, the Radio Advertising Bureau said that it was “working with a wide range of advertisers to bridge the gap” left by public expenditure cuts. What was the outcome?

There were some impressive gains for radio from other clients in 2010:
* British Gas increased its expenditure on radio from £5m to £9m year-on-year (particularly impressive since it had only spent £2m on radio in 2007);
* Autoglass increased its expenditure on radio from £5m to £9m year-on-year (50% of its ad budget);
* increased its expenditure on radio from £1m to £5m year-on-year;
* More Than increased its expenditure on radio from £2m to £4m year-on-year;
* Mars increased its expenditure on radio from £1m to £4m year-on-year;
* Asda multiplied its expenditure on radio eight-fold to £3m year-on-year.

The problem was that even these gains combined did not match the loss from government spending cuts. The huge challenge the commercial radio industry still faces is its history of increasing dependency upon one very large advertiser.

Additionally, there were other clients that either spent less in 2010, or might in 2011:
* Blockbuster Entertainment was radio’s sixth biggest advertiser in 2010 (spending 50% of its ad budget on radio), but filed for bankruptcy in the US in September 2010;
* Sky TV reduced its expenditure on radio to £4m in 2010 from £7m the previous year;
* BT reduced its expenditure on radio to £4m in 2010 from £7m the previous year;
* Proctor & Gamble reduced its expenditure on radio to £4m in 2010 from £6m the previous year;
* Specsavers had been the second biggest spender on radio in 2009, spending £8m, but dropped out of the top 20 in 2010.

However, these single-digit losses were dwarfed by the £24m reduction in public expenditure on radio advertising in 2010.

In terms of product sectors, motor vehicles rebounded from the recession and led the field in 2010 with £90m expenditure on radio. The finance sector similarly rebounded to £52m in 2010. On the other hand, the property sector did not rebound and its spending on radio of £8m in 2010 was down 42% compared to two years earlier. Likewise, online retailers spent only £2m on radio in 2010, down 55% from two years earlier.

Public expenditure on radio fell from the number one product sector in 2007, 2008 and 2009 to fourth place in 2010. Inevitably, given that the coalition was only elected mid-2010, the cuts to public expenditure are likely to have as much impact on radio in 2011 as they had in 2010. Neither is there any prospect of these cuts being restored under the present government.

Total radio sector revenues for 2010 are likely to be up slightly year-on-year [see my Oct 2010 blog]. This is not something to shout about, given that Q2 and Q3 in 2009 had produced commercial radio’s lowest recorded revenues this millennium. However, it is an achievement in an environment where expenditure by commercial radio’s biggest advertising client fell off a cliff (as the graphs above demonstrate visually).

Unfortunately, in the longer term, unless commercial radio succeeds in improving its performance with listeners, both in absolute terms and in comparison with BBC radio, it cannot expect its revenues to return to levels recorded a decade ago. By 2009, UK commercial radio revenues had fallen by 32% since 2000 in real terms. Radio’s revenues from national advertisers had fallen by 47% during that period. That will be an almost impossible expanse of ground to regain.

[data source: Nielsen Media Research]

UK commercial radio revenues Q3 2010: still no sign of “renewed growth”

2008 had been a bad year for commercial radio revenues, down 6% year-on-year. 2009 was a worse year, when revenues fell a further 10% year-on-year. So how is 2010 shaping up? Radio Advertising Bureau data for Q3 2010 demonstrate that, although revenues are likely to be up marginally for the calendar year, they have yet to regain the substantial losses suffered during those previous two years.

Why? Because commercial radio’s falling revenues are largely the result of structural decline, something that the ‘credit crunch’ of 2008/9 merely exacerbated. Adjusted for the impact of inflation, commercial radio revenues peaked in 2000 and, by 2009, were down 32% in real terms. The single-digit improvements we might see in 2010 will claw back only a tiny part of these enormous losses.

* Up 3.2% year-on-year to £124.1m, but remember that Q3 2009 had been the sector’s second lowest this millennium.

In May 2010, the Radio Advertising Bureau had told us that “the [commercial radio] sector has turned a corner and not only halted [revenue] decline, but moved into renewed growth …”

Industry data has yet to validate this assertion. The last two quarters produced the third and fourth lowest revenue totals of the decade, showing that the radio sector is certainly not out of the woods yet. More than anything, the industry’s revenues still seem to be bumping along the bottom. “Renewed growth” is not on the horizon yet.

* Up 5.0% year-on-year to £62.8m.

* Up 3.1% year-on-year to £36.8m.

* Down 1.2% year-on-year to £24.5m.

The revenue data for the long term [see graph above] illustrate clearly the transformation of the commercial radio sector from a healthy growth industry in the 1990s to one that stagnated after 2000, and which has subsequently moved into decline. Whilst revenues from local advertisers have simply stalled in recent years, revenues from national advertisers seem unlikely to ever recover from substantial declines suffered since their peak in 2000. This has necessitated significant restructuring of the commercial radio sector in recent years.

For those larger commercial radio stations that depend upon national advertisers the most, the outlook continues to look bleak. Data from Nielsen estimated that advertising spend by the government’s Central Office of Information [COI] fell by 47% in 2010 year-on-year. COI expenditure has been a greater proportion of commercial radio revenues than of any other medium, making radio particularly vulnerable. In May 2010, in my blog I had predicted:

“A 50% budget cut to COI expenditure on radio would lose commercial radio £26m to £29m per annum, 6% of total sector revenues. A 50% budget cut to all public sector expenditure on radio would lose commercial radio £44m to £48m per annum, 9% of total sector revenues.”

Not only have these cuts been realised, but the Cabinet Office is continuing to pursue a plan for the BBC to carry public service messages for free, rather than pay commercial broadcasters for airtime [also predicted in my blog in May 2010]. This could lose commercial radio a further 6% to 9% of revenues.

In 2009, even before these drastic cuts to government expenditure on advertising, commercial radio was attracting only 4% of total display advertising expenditure in the UK, one of the lowest proportions globally [see Ofcom report]. What is UK radio doing so wrong that Ireland, Spain and Australia achieve more than double that amount? And why was that percentage already falling before the COI cuts, demonstrating the radio medium’s comparative lack of appeal to potential advertisers?

There could not be a worse time to be a commercial radio station dependent upon national advertising. Yet now is the precise time when several large commercial radio owners are busy transforming their local and regional stations into national ‘brands.’ As a response to the sector’s structural challenges, this is tantamount to cutting off your nose to spite your face. ‘Localness’ has consistently been shown to be the most important Unique Selling Point of local commercial radio, according to Ofcom research. Throw that localness out the window and all that remains is a music playlist which can be generated by any computer application.

UK commercial radio has always been good at making ‘cheap and cheerful’ local radio, but has been rubbish at making national radio that could compete with the BBC’s incredibly well resourced national networks. The recent decisions of commercial radio owners to switch from production of local radio services with a track record of success to production of ‘national’ ones that have a history of relative failure create massive risks for an industry already in decline.

History tells its own story. The launch of the UK’s first three national commercial radio stations between 1992 and 1995 had much less of an impact on radio listening than had been anticipated. By 1997, Richard Branson had decided to sell Virgin Radio (for £115m) – it was obvious that national commercial radio was not going to be a massive money-spinner. In 1997, Virgin Radio’s listening share had been 2.6%. Last quarter (Q3 2010), it had fallen to 1.2% (renamed Absolute Radio after another sale in 2008 for £53m), while the combined share of the three national stations was 6.8%. [source: RAJAR]

BBC national networks account for almost half of all radio listening. The only time that their share has not exhibited long-term growth was during the early 1990s, when Radio 1 self-destructed under the management of Matthew Bannister. Since that disaster, the BBC’s national networks have been successfully clawing back listening year-on-year.

The current scenario in which the owners of commercial stations that were licensed to serve local audiences have decided to subvert that purpose to take on the might of the BBC national networks is either brave, or madness, depending upon your viewpoint. What I see is a monolithic BBC that has existed continuously for nearly a century, and then I see three national commercial radio stations that have had a succession of at least three owners each during their almost twenty-year struggle to attract listeners.

National commercial radio. Just why are parts of the commercial radio industry so eager to emulate an idea that has only led to well documented failure?

UK commercial radio: Q2 2010 national revenues down 40% since 2003

It seems like only yesterday that the Radio Advertising Bureau [RAB] was telling us that:

“The [commercial radio] sector has turned a corner and not only halted [revenue] decline, but moved into renewed growth …”

In fact, it was 20 May 2010 and the reason for the RAB’s optimism was the sector’s 2009 revenue performance. Yes, revenues in 2009 were down 10% year-on-year and yes, back in 2008, they had already been down 6% year-on-year. But, as I noted at the time, mere numbers never seem to get in the way of the trumpeting of a “terrific achievement.”

Fourteen days prior to the RAB pronouncement, a general election had ousted the Labour government and introduced a new Conservative/Liberal coalition. The writing was clearly on the wall that tougher times were ahead for the commercial radio sector. At the beginning of May 2010, I had
spelled out emphatically the dire implication for commercial radio revenues of an incoming Conservative government:

“The Conservative Party pledged in its manifesto to reduce advertising expenditure by government departments, if elected. The planned cuts would be significant, 40% of the COI 2008/9 budget of £540m, according to one press report. … A 50% budget cut to COI expenditure on radio would lose commercial radio £26m to £29m per annum, 6% of total sector revenues.”

And so it came to pass, even though the Radio Advertising Bureau was still insisting in June 2010:

“We are optimistic that radio’s strengths will be recognised as COI budgets come under ever greater scrutiny.”

But budget cuts of 50% cannot be executed that recognise the radio medium’s strengths. Since May 2010, public funding of commercial radio has fallen sharply from 18% of sector revenues and will not be bouncing back anytime, at least not while the Conservative Party holds the public purse strings. The largest commercial radio owners have been hit the hardest, whilst the smaller local stations (that rely much more on local advertisers) have been little impacted.

As a result, it was no surprise that commercial radio revenue data for Q2 2010 were released quietly without fanfare or further pronouncements about “renewed growth.” The notion that commercial radio revenues had “turned a corner” looks even more hollow now, a mere four months after the Radio Advertising Bureau had uttered those words.

* Up 1.9% year-on-year, but remember that Q2 2009 had been the sector’s most disastrous;
* Q2 2010 total revenues are the third lowest this millennium (after Q2 and Q3 in 2009).

* No change year-on-year, but remember that Q2 2009 revenues were already down 16.1% year-on-year and, before that, Q2 2008 had been down 15.9% year-on-year;
* Q2 2010 national revenues are the second lowest this millennium (after Q3 2009).

* Up 1.7% year-on-year, but remember that Q2 2009 was already down 6.0% year-on-year and, before that, Q2 2008 had been down 8.4% year-on-year;
* Q2 2010 local revenues are the lowest since Q2 2009 and, before that, Q1 2002.

The most frightening facts about the Q2 2010 data are:
* National revenues have fallen 40% since Q4 2003;
* National revenues have fallen to a level the sector had attained in 1998 (earlier, if inflation is considered) when there were about eighty fewer commercial radio stations.

If Q2 2010 was bad for commercial radio, then the following quarters are likely to be worse, as the impact of government expenditure cuts will have wreaked havoc across complete quarters of commercial radio’s national revenues. The outlook for the commercial radio sector looks anything but “terrific”, though trade body RadioCentre was still peddling eternal optimism in its September 2010 newsletter:

“Whilst revenue for Q1 2010 was up 7.3% year on year, the best performance and highest growth for 2 years, Q2 proved more of a challenge with the election and subsequent cuts in government expenditure. However, the RAB is working with a wide range of advertisers to bridge the gap, and the current outlook for quarter three is that we’ll see a modest growth, even despite COI cutbacks.”

And, after this week’s Radio Advertising Awards (where, ironically, “government departments and campaigns scooped the most awards,” wrote Marketing Week), the RAB was still proclaiming “… the outstanding work which has seen our [commercial radio] sector return to growth …”

Suffice to remind you that Q2 and Q3 in 2009 witnessed the commercial radio sector’s lowest recorded revenues this millennium, so that any year-on-year increase will have been achieved from a base of absolute ‘rock bottom’. To add to the gloom, Minister for the Cabinet (and the government’s Paymaster General) Francis Maude
told The Times last week:

“We are looking at whether we should be expecting the BBC — when people are paying their Licence Fee — to carry some public information advertisements. It wouldn’t be a propaganda operation but this is public service broadcasting. The taxpayer might say, ‘Should I be paying out my taxpayer’s money for the Government to pay ITV to carry public information advertisements?’”

So the worse news for commercial radio is that it could be about to lose whatever remaining government advertising has survived, if public service announcements are to be switched to BBC Radio. After all, not only would such a policy save the government a further £30m per annum, but BBC Radio reaches 67% of the UK adult population per week, greater than commercial radio’s 64%.

In May 2010, I had predicted that the government could adopt just such a policy:

“If a government were to return to the post-War COI policy of using public broadcasters to air its Public Service Announcements, rather than paying commercial rates for airtime, up to 18% of commercial radio revenues would disappear at a stroke.”

I am sufficiently ancient to remember the intriguing, but rather bizarre, Public Information Films that used to grace BBC television. I also remember the Public Service Announcements that local commercial radio stations were required to broadcast for free when the Independent Broadcasting Authority was the sector regulator. So such a policy would be nothing new and should have been anticipated by the sector.

But what can commercial radio do? The key is the word ‘commercial’. The industry was foolish to have ever considered public expenditure on radio advertisements anything more than an ‘extra’ that was bound to disappear some time at the whim of politicians. That time is now. The same way that the government is mounting a war on ‘benefit scroungers’ who are said to have become too reliant on public handouts, the Conservatives are effectively waging a war against ‘COI scroungers’ … commercial broadcasters whose sales teams knew they could rely on government advertising handouts to meet their revenue targets and earn their bonuses.

How did the industry let itself get into this state? ‘Commercial radio’ was always meant to be ‘commercial’, not publicly funded. In exactly the same way, ‘local commercial radio’ was always meant to be ‘local’. It is the very point at which you begin to lose sight of who you really are that you set off down a rocky road that leads to inevitable oblivion.

Local Commercial Radio, know thyself.