Tag: Global Radio

UK commercial radio sector revenues Q1 2011: local advertising hits 10-year low

Data published last week for 2011’s first quarter demonstrate that revenues of the UK commercial radio sector are still struggling to rebound from the previous two years’ ‘credit crunch.’

A large part of the problem is the coalition government’s swingeing cuts to its marketing budget since May 2010, which have afflicted commercial radio advertising much more significantly than other media [see blog]. Additionally, and very worryingly, in Q1 2011, revenues from local advertisers fell to their lowest level for a decade, even at a time when local radio might be thought to be making client gains from the decimation of the local newspaper industry.

As has been suggested here previously [see blog], the strategy of the largest commercial radio owner, Global Radio, to transform its local stations into ‘national’ brands would seem to be a recipe for disaster at a time when:
• the national advertising market for radio is shrinking so rapidly (down 34% in real terms between 2004 and 2010)
• the BBC continues to dominate the national radio marketplace with exceptionally well-funded, ubiquitous brands [see blog]
• Ofcom’s market research points to overwhelming demand from consumers for more local radio rather than more national radio [see chapter 4(d)]
• many local commercial radio offices have been closed just as local newspapers have closed in many local markets.

TOTAL UK COMMERCIAL RADIO REVENUES:
• Q1 2011: £126.9m (£137.9m in Q1 2010)
• Down 8.0% year-on-year
• First year-on-year decrease since Q3 2009

UK COMMERCIAL RADIO NATIONAL REVENUES:
• Q1 2011: £69.2m (£78.6m in Q1 2010)
• Down 12.0% year-on-year
• First year-on-year decrease since Q3 2009

UK COMMERCIAL RADIO LOCAL REVENUES:
• Q1 2011: £33.7m (£35.9m in Q1 2010)
• Down 6.1% year-on-year
• Lowest quarter since Q1 2001

Although the quarter-on-quarter trend during the last three years appears to be relatively flat, once the data is viewed in the longer term, it is apparent that the commercial radio sector has been unable to grow its revenues back to the peak achieved in 2004. Adjusted for inflation, the ‘real’ peak occurred in 2000 and, by 2010, commercial radio total revenues had fallen by 33%.

Following the impact of the ‘credit crunch,’ the subsequent blow to the sector caused by the government’s slashed expenditure on commercial radio advertising from its Central Office of Information [COI] has been catastrophic. COI spend on radio in the twelve months to March 2011 was down 80% year-on-year. In the year to March 2010, the COI had been the radio sector’s biggest advertiser by a factor of eight but, only one year later, it had been diminished to almost par with the second biggest radio spender, Autoglass.

In June 2011, the government confirmed that the COI will be axed altogether, offering no respite to the commercial radio sector. According to The Guardian:
“Instead the government intends to run advertising and marketing activity out of the Cabinet Office, hiring about 20 extra staff to complement existing communications teams.”

With local advertising revenues having hit a decade-low in Q1 2011, and national revenues having fallen 34% in real terms between 2004 and 2010, surely it should be time for commercial radio to ask itself:
• is the current local-station-turned-national-network policy the appropriate strategy for the current advertising market?
• is the current local-station-turned-national-network policy the appropriate strategy to satisfy radio listeners?
• how much longer can the ‘slash and burn’ strategy (as pursued by GWR, then by GCap, now by Global Radio) be applied to the commercial local radio industry before there is simply nothing left to cut?
• how much more shareholder value can be destroyed in commercial radio before revenues fall faster than costs can be cut?

A question I was asked by one senior radio executive last week was: how will all this commercial radio ‘slash and burn’ end? I wish I knew. Of one thing I am certain: it must eventually end in tears once the net book values of dozens of commercial radio licences have to be written down by millions of pounds in the accounts of their owners.

This process has already started tentatively:
• Global Radio valued its licences at £333m on 31 March 2010, after having swallowed a £54m ‘impairment’ write-down in 2008/9
• in 2009/10, the Guardian Media Group suffered an ‘impairment’ of its radio licences by £64m and now values them at £68m
• Times of India looks likely to have to take as little as £20m for Absolute Radio, a national station it had acquired for £53m only three years ago.
We have to anticipate more write-downs like these.

At some point, even millionaires must not enjoy watching as their radio assets are reduced to dust by shrinking audiences/revenues. But what can be done when those same owners have already starved the goose that had once laid the golden local commercial radio egg?

[Historical data from some previous quarters have been revised marginally at source]

When is a consultation not a consultation? When Ofcom consults about radio

Each of us has dozens of ‘consultations’ every day. You know the sort of thing. ‘I’m going to the corner shop – anything you want? A Kit-Kat? OK.’ However, if I came back with a cat rather than a chocolate bar, you would understandably be unhappy. That had not really been a consultation at all.

Ofcom’s consultations on radio are increasingly like that. Ofcom pretends it is going to listen. It doesn’t listen. And then it does whatever it wanted to do in the first place. Mmmm. Surely that is not really a consultation at all.

In June 2011, an Ofcom consultation asked six questions about a proposal by Now Digital (owned by radio transmission provider Arqiva) to extend the coverage of its Exeter and Torbay DAB multiplex to North Devon. One of those questions was:

“Q6. Do you consider that there any other grounds on which Ofcom should approve, or not approve, the request from Now Digital? Please explain the reasons for your view.”

However, Ofcom had apparently already decided that its ‘consultation’ was not a genuine consultation at all, when it explained:

“Before deciding whether to agree to Now Digital’s request, Ofcom is legally required to seek representations on the request from any interested parties. … Provided that the request meets the terms of the statute, the decision whether or not to agree to the request is at Ofcom’s discretion.”

So, Ofcom’s 21-page consultation document was really a complete waste of time and money. The decision was already made. And it would be even more of a waste of time and money for anyone to respond. But respond they did.

In July 2011, Ofcom admitted that, out of 234 responses submitted to its consultation, “the vast majority … were opposed to Now Digital’s request.”

Most objected on the grounds that:
• “agreement to the extension of the multiplex would enable the holder of an existing FM local commercial radio licence for Barnstaple to secure the renewal of that licence, precluding the advertisement of a new such licence (which otherwise would have been due to take place forthwith); and;
• the level of coverage of North Devon proposed by Now Digital was unsatisfactory as it would leave 30% of households in the area with no access to radio services in the event of a digital radio switchover.”

Did Ofcom care about this volume of public opposition? Not at all. Did it investigate why the share of listening to the merged Heart FM Devon had fallen dramatically to an all-time low last quarter (behind BBC Radio 2, BBC Radio 4, BBC Radio 1 and BBC Radio Devon) [RAJAR, 2011 Q1]? Apparently not. Ofcom explained:

“The [Ofcom Radio Licensing] Committee [RLC] noted the strong opposition to the fact that approval of Now Digital’s request would allow Lantern Radio Limited, the holder of the local [Heart] FM commercial radio licence for Barnstaple, to apply for a renewal of the licence and thereby preclude advertisement of a new licence. However, the RLC did not consider that this fact should preclude the granting of Now Digital’s request.”

And why not? Because Ofcom’s wholly unrealistic policy objective, for DAB to replace AM/FM radio, is still being doggedly pursued to the exclusion of any wider regulatory issues – consumer choice, market competition or the removal of barriers to sector entry. As well as to the exclusion of the majority of the 234 respondents to this consultation.

To put the same thing in Ofcom’s own weasel words: “What Now Digital Limited sought in its request is provided for in section 54A of the 1996 Act. Agreeing to the request would be consistent with the broad policy aims of that section. Namely, the extension and promotion of local DAB broadcasting with the consumer benefits of greater choice of services.” [emphasis added]

Now Digital promised to launch the first of three new DAB transmitters in North Devon within six months of Ofcom’s approval. And what about the remaining two? Now Digital promised these will be installed “six months after a positive decision in 2013 by Government regarding digital switchover”. Oh, so you mean ‘never.’

The ulterior objective of this proposal was that the promise to build a single new DAB transmitter in North Devon would enable Global Radio to automatically renew its existing FM licence in Barnstaple for a further eight years without a public contest, thus denying any potential new entrants. Ofcom simply rolled over and complied. And what did Ofcom suggest to the complainants who might not have felt that London-based Global Radio was offering them a genuinely local radio station in Heart FM? It stated:

“The RLC recognised the strength of feeling among many respondents to the consultation for there to be an opportunity for an alternative provider of a local radio service in North Devon to apply for a licence … Ofcom is always keen to facilitate new local radio services for listeners where such services are viable and therefore able to offer consumer benefits over the long term. To this end, the RLC noted that, in its response to the consultation, Arqiva stated that there is presently capacity for at least one further new station to be accommodated on the Exeter & Torbay local [DAB] radio multiplex.”

This is patronising rubbish. “Viable”? “Consumer benefits”? Can Ofcom please name any DAB-only radio station that is making an operating profit as a standalone business? No? Because there isn’t one. DAB radio has proven to be one massive financial black hole that has wasted approaching £1bn. Suggesting to consultation respondents that they start their own new local radio station on DAB is akin to Ofcom recommending these correspondents burn down their own houses.

All Ofcom has done is raise two fingers to the people of North Devon in this consultation. If I were Ofcom’s director of radio, Peter Davies, I would not consider booking a holiday in North Devon any time soon.

Unless Global were to return the favour by picking up the tab for his bodyguards?

Bauer Radio talks the DAB talk, but walks its Magic brand off DAB

Bauer Radio is the second largest commercial radio group in the UK. It publicly supports the government’s plans for DAB radio switchover. Only this month, Paul Keenan, chief executive of Bauer Media, told The Guardian: “What part if any is the BBC going to play on the local DAB level?” He went on to ask:

“Will there be some form of seismic content innovation or intervention that really pulls listeners across [to DAB]?”

Keenan need have looked no further than his own company’s DAB radio strategy to discover a form of “seismic content intervention” that might well result in pushing existing listeners away from DAB, rather than pulling them in. While Keenan was talking to The Guardian, Bauer was busy pulling the plugs on its ‘Magic’ brand from the DAB platform in the following areas:
· Aberdeen
· Ayr
· Birmingham
· Bradford & Huddersfield
· Cambridge
· Dundee & Perth
· Edinburgh
· Glasgow
· Kent
· Northern Ireland
· Norwich
· Peterborough
· Stoke
· Sussex Coast
· Swansea

If you were a loyal listener to Magic in one of these areas, your favourite station simply disappeared from the DAB menu in January 2011 (Magic had 1m out-of-analogue-area listeners per week, contributing 24% of the brand’s total hours listened, according to RAJAR). This change is surprising given that, as recently as May 2008, Bauer Radio decided to add its Magic brand to the DAB platform in the following areas:
· Aberdeen
· Ayr
· Birmingham
· Bradford & Huddersfield
· Cambridge
· Dundee & Perth
· Edinburgh
· Glasgow
· Kent
· Northern Ireland
· Norwich
· Peterborough
· Stoke
· Sussex Coast
· Swansea

In 2008, in most of these areas, Magic had replaced another Bauer brand, ‘Kiss’, which could not have pleased existing Kiss listeners. Now, in 2011, it is the Kiss brand that is replacing the Magic brand in all but three of these areas. Musical chairs, anyone?

In 2009, Bauer had said that it was investing in the “right long-term platforms for the right stations at the right time.” So, in 2008, Kiss was right for DAB whereas, in 2011, now Magic is right?

It is hard to believe that such precipitous content changes inspire consumer confidence in the DAB platform. But, sadly, the DAB platform has never really been about ‘radio’ and ‘listeners’. Loyalty to DAB radio? What’s that? For commercial radio, its pursuit of the DAB platform had been about the exercise of power, the expectation of profit and the promise of automatic renewals for the industry’s most valuable analogue radio licences.

It was also about a much coveted transfer of the power to determine which stations are broadcast to a cartel of commercial DAB multiplex owners, and away from the regulator. This is why station changes on DAB, such as Bauer’s (Kiss to Magic to Kiss) can be executed without a public consultation or impact assessment.* The regulator merely nods its head and makes a quick note in a file. So what role does Ofcom play in ensuring that the DAB radio platform “furthers the interests of citizens and of consumers” as mandated by law? The answer is: absolutely none. We might as well have a scarecrow in charge of digital radio at Ofcom.

The reason that Bauer Radio (with a 25% listening share of commercial radio) made these latest changes to DAB is that it is locked in a war with archrival Global Radio (38%). Neither company has a track record of developing its own successful radio stations from the ground up. Both companies are piled high with acquisitions and mergers of other radio businesses. As a result, the two compete with each other by moving their radio pieces around the chess board, rather than by innovation.

In January 2011, Global Radio extended its ‘Capital’ brand outside London, replacing the former ‘Galaxy’ brand and some local FM stations. Global describes the brand:

“Capital’s target audience of 15-34 year olds are big fans of popular music, they are media savvy and are on trend.”

To compete, Bauer Radio extended its Kiss brand to every available local DAB multiplex (replacing Magic). Bauer describes the brand:

“Kiss evolves around ever changing lifestyles and trends of the UK’s young 15-34 market … Every part of their day revolves around music.”

If, like me, you think that these two brands sound almost identical, understand that this phenomenon is the outcome of long understood business practice in the radio sector. In 1951, American economist Peter Steiner wrote:

“If, as is often suspected, [radio] broadcasters exaggerate the homogeneity of audiences and their preferences for certain program stereotypes, the tendencies towards [programme] duplication will be increased. … The problem, of course, is that a series of competing firms, each striving to maximize its number of listeners, will fail to achieve either the industry or the social good. Here, then, competition is providing a less than desirable result.”

In the UK, this is precisely why we have a regulator for radio broadcasting – to ensure that consumers benefit from a wider choice of content than a free market would provide. However, with its hands tied in DAB policy by the Broadcasting Act 1996, and its laissez-faire ‘do nothing until someone complains about it’ strategy, Ofcom has had no more impact on the DAB station menu than having no regulator at all.

DAB is the Wild West of radio where anything can, and often does, happen. Seemingly, it often happens with little concern for listeners or for those who paid good money for a DAB receiver. Without a sheriff in sight, or a cavalry about to ride over the horizon, the danger is that the public might come to view DAB radio as nothing more than a bunch of cowboys locked in a private war of one-upmanship.

Yet the radio industry wonders why the DAB platform is not stimulating more listening or more receiver sales.

[*NB: There was an Ofcom consultation in November 2010 about a change of format for the Kiss brand, but this did not touch upon Magic being dropped from DAB. Magic continues to be simulcast on DAB in nine areas where it is already available on FM or AM, as a contractual condition of its automatic analogue licence renewals.]

Having DAB cake and eating it: temper tantrums in the Global Radio playpen

Most of us mere mortals spend our lives trying to persuade people to give us what we want. We have to persuade our parents to buy us a new toy, persuade a potential employer to offer us a job, persuade the bank manager to give us a business loan. To make these things happen, we are taught to always be careful what we say – “Mind your P’s and Q’s”, our parents told us.

For the wealthy, there is little need for self-control over what comes out of their mouths. Whereas our only power derives from what is in our head, the power of the wealthy derives from what is in their offshore bank accounts. “P’s and Q’s” are barely a necessity when a platinum credit card can be flashed. Money obviates the need for persuasion. So the wealthy can pretty much say what they like, knowing that ‘money talks’ on their behalf, and it certainly seems to talk more loudly than any persuasion that the rest of us can muster.

This week we saw an outburst in The Guardian that would have done any rich, spoilt brat proud. But no, this was the founder and CEO of Global Group, Ashley Tabor, which owns Global Radio, the UK’s largest commercial radio group, demanding that the BBC “put their money where their mouth is” and invest more in DAB radio:

“Tabor said his company, which owns Heart, Classic FM, Capital and LBC, would not invest in new digital services until the DAB signal was sufficiently strong and widespread to match that currently provided by FM. He said the cost of the rollout of DAB and the strengthening of the signal in areas which can already receive it – estimated at between £150m and £200m – was the sole responsibility of the BBC. […]

‘Global has stepped up and said we are absolutely doing it, we have great new ideas of things we could do on digital but we are not going to bloody do it until our listeners can hear it in decent quality and that is something that we have been clear from the start the Beeb will need to do,’ said Tabor, the Global Group founder and chief executive. ‘They have always said yes [and] now is the time to do it. A lot of pressure is building on them to now actually put their money where their mouth is. It’s not actually a lot of money because it’s amortised over 10-12 years. I think it will happen’” [The Guardian removed ‘bloody’ from later editions].

Was I the only one baffled by Ashley’s line of argument? Although commercial interests own the lion’s share of DAB in the UK, the largest commercial radio group is insisting here that the cost of fixing DAB to make it work properly is the “sole responsibility” of the publicly funded BBC. Furthermore, Global Radio will only launch new commercial digital radio stations, from which it must expect to make a profit, once the BBC has underwritten the huge cost of making the DAB system fit for purpose using public funds. I remain baffled.

This was by no means the first time, and will probably not be last, that Global Radio has talked rubbish publicly about DAB radio. In its PR, Global paints itself as a driving force behind digital radio and is constantly demanding that DAB switchover be implemented as quickly as possibly. However, in practice, Global has shown no interest in developing DAB as a replacement for FM, having sold off the majority of its DAB licences. This hypocrisy has been documented on previous occasions in this blog, during which time Global’s attitude towards the BBC has shifted from ‘carrot’ to ‘stick’. History speaks volumes.

In October 2007, Global Radio cancelled the contract with Sky inherited from its acquisition of Chrysalis Radio that would have created a national Sky News Radio station on DAB. A Global spokesperson said then that “Global was not prepared to make the necessary investment in this project.”

In December 2007, Global Radio dropped live presenters from the digital radio station The Arrow which it had also acquired from Chrysalis Radio. The Arrow was removed from DAB in London in May 2008, removed from DAB in Scotland in February 2009, removed from satellite and cable TV in June 2009, and removed from DAB in the West Country in February 2010. It is now available over-the-air on only 5 local DAB multiplexes.

In January 2008, Global Radio dropped dedicated shows from the digital version of its Galaxy Radio brand, replacing them with simulcasts of local FM output.

On 31 March 2008, the day after Global Radio’s offer to acquire GCap Media had been accepted, the latter’s two remaining national DAB radio stations Capital Life and TheJazz were closed. GCap had already closed another national DAB station, Core, in January 2008.

In March 2009, Global Radio dropped digital-only station Chill from DAB multiplexes in Leicester, Nottingham and West Wiltshire. Chill was then removed from further local DAB multiplexes in July 2009, and from cable TV in July 2010. It is now available over-the-air on DAB only in London and Birmingham.

However, in April 2009, Ashley said that he appreciated that the BBC had the capacity to make a significant contribution to facilitate Digital Britain from a radio perspective, and that Global Radio was prepared to play a leading role. Confusingly, this was the same month it was announced that Global Radio had agreed terms to sell the majority of its DAB multiplex licenses.

In May 2009, in an interview bizarrely headlined ‘Global evangelist for digital radio: Ashley Tabor has a clear vision for his group…’, he said:

“I am really confident now that all the right things are happening that will get us to where we need to go. We are in favour of [analogue radio] switch-off, so can we do it quickly please?”

That same month, Ashley’s right-hand man at Global Radio, Stephen Miron, told a radio conference:

• “The future of our sector is intrinsically linked to the successful implementation of the government’s digital strategy and to the successful migration to DAB”
• “We need more of this in the coming weeks and months. Not just words, but action”
• “We need to get our act together to make the best possible case for consumers to switch to digital”
• “Global is up for the challenge and, as the largest commercial player, we are prepared to lead this charge.”

In July 2009, Global announced the completion of the sale of its DAB licences, the largest ever transaction of its type, which drastically shifted the dominant ownership of the UK’s commercial radio DAB system from the commercial radio sector itself to transmission specialist Arqiva.

Global Radio sold:
• its 63% shareholding in Digital One, the sole national DAB multiplex for commercial radio
• its 100% shareholding in Now Digital Ltd and Now Digital (Southern) Ltd, its local DAB multiplexes
• 12% of MXR Holdings Ltd.

These transactions left Global Radio with a 51% shareholding in MXR, owner of five regional DAB multiplexes, a half-stake in 3 CE Digital local multiplexes and a minority stake in Digital Radio Group, owner of one London multiplex. At a stroke, Global’s role in DAB had been reduced from the dominant player to an also-ran. However, this did not prevent Ashley from stating in the press release announcing these disposals:

“As a company we are leading the commercial radio industry in its drive to digital.”

Neither this press release, nor the Annual Accounts, revealed how much Global Radio commanded for its sale of these assets. All we know is that the last, shortlived chief executive at GCap Media, Fru Hazlitt, was so disenamoured of DAB that she had planned to sell the company’s controlling stake in the DAB national multiplex licence for £1 in January 2008 (the transaction was halted by Global’s offer for GCap).

None of these closures and disposals seemed to change Global Radio’s public enthusiasm for DAB radio. In July 2010, a government press release on digital radio included a quote from Ashley saying:

“We look forward to working with the government and other partners to bring the benefits of digital radio to a growing group of listeners.”

So what precipitated the change of heart in Ashley’s previously collaborative noises to the BBC from a ‘carrot’ into the ‘stick’ evident in his interview this week? Well, less than 24 hours earlier, the government had published a report on DAB radio switchover that was critical of many radio sector stakeholders for the lack of progress that had been made during the last decade. Those criticised included commercial radio, its trade body RadioCentre, the Digital Radio Development Bureau and its successor, Digital Radio UK. Some people can take measured criticisms like this in their stride. But others cannot.

Not only does Global Radio account for 38% of UK commercial radio listening, but the group funds a substantial portion of RadioCentre (£2.8m in subscriptions between September 2007 and March 2009) and of the Digital Radio Development Bureau and Digital Radio UK. Even so, why did this new government report exercise Ashley so much? Because:
• Global Radio needs DAB switchover to succeed for the company to hang on to its valuable analogue radio licences
• The responsibility for making DAB switchover happen now lies elsewhere, so Ashley has decided to pin the tail on the BBC.

Maybe Ashley is a graduate of the Malcolm McLaren and Stevo school of negotiation. This is the strategy where you make the most outrageous demands and the other person caves in for fear of not being invited to your party. This might work in the unregulated music business, where excess is viewed as a virtue, but in the radio industry there are laws and rules governing large parts of the business.

What would be the response of record companies if a radio owner were to march in and tell them that they should pay radio stations for playing their music, rather than the other way around? Or if you were to tell record companies that your radio stations would no longer play ‘hit’ records that line their coffers but, instead, would deliberately play unpopular songs that they did not want on the radio. Record company bosses would probably laugh in your face and ask their legal department to show you a filing cabinet full of royalty agreements with commercial radio dating back to 1973.

Getting your own way, all the time, only works when you have been given absolute power over your fag. Ashley phoning a journalist, stomping his feet at the BBC and demanding that it do this or that will have no effect whatsoever. His demands about DAB must have had BBC radio managers laughing their socks off on Wednesday morning. As Scott Taunton, the straight-talking managing director of UTV Radio, said of Ashley in 2009:

“He is a guy who is used to getting his own way. He isn’t from the same school of business, the same school of negotiation, that I am.”

So why exactly does Global Radio need DAB switchover to happen? Because:
• Global Radio was created by Ashley’s millionaire father for a son who is a radio obsessive (“I would literally have a radio in my [school] bag and the second I was allowed to put it on I would actually phone [presenter] Pat Sharp in the studio at whatever time, 10.30, 11.30, just to say hello and develop a relationship with him. He thought I was nuts,” said Ashley)
• Global Radio overpaid to acquire GCap Media in June 2008 for £375m, a mis-managed company whose performance was dropping like a stone, and whose market capitalisation had fallen from £711m in 2005 to £200m by year-end 2007
• Global Radio has already had to write down its assets by £194m in March 2009, reducing the group’s net book value to £351m from the total £545m it had paid for Chrysalis and GCap in 2007 and 2008 respectively
• Global Radio “is primarily funded by debt”, its accounts state, and external bank debt was £110m in October 2009, an amount that must be repaid in quarterly instalments by October 2012
• Global Radio has been hit hard in 2010 by the new government’s sudden 50% cut to its advertising spend (“The COI change has been larger than expected, very abrupt. It’s been pretty severe, more than 50%,” said Ashley)
• Ofcom is presently re-evaluating the price of Global Radio’s Classic FM licence, the most profitable in commercial radio and, if DAB switchover is abolished, the cost of that licence could be increased from its current £50,000 per annum to nearer £1m per annum from 2011 to 2018
• The Digital Economy Act 2010 renewed commercial radio licences for a further seven years only on the basis that DAB switchover will happen. If switchover does not happen, the government has the power to terminate all renewed licences by 2015 (or by two years’ notice, if later). However, in its accounts, Global decided to write off the ‘goodwill’ of its GCap acquisitions over twenty years.

For Global Radio, which owns more analogue licences than any other commercial radio group, this means that the value of its business could be reduced drastically if DAB switchover does not happen. Its one national licence would become a lot more expensive and then might have to be publicly auctioned, while its dozens of local licences could be terminated earlier than anticipated. Global needs DAB switchover to happen at all costs.

However, at every opportunity, Global decided to forgo investment in the DAB platform and, instead, to dispose of the majority of its DAB assets. This has left it with almost no remaining leverage to ensure that DAB switchover will ever happen. Furthermore, Ashley has alienated commercial radio competitors such as UTV, precipitating its resignation from the trade body RadioCentre in 2009. UTV’s Scott Taunton described Ashley as a “rich man’s son” and explained:

“For us it came down to Global, as the largest funder of the RadioCentre, making sure that the policies of the RadioCentre were in the interests of Global Radio. At times, for me, that meant the [trade body] was pursuing an agenda that wasn’t necessarily in the interests of all its members.”

So, Global Radio needs DAB switchover to happen in order to maintain the value of its analogue radio business. But it can do little itself directly, its biggest competitor Bauer is unlikely to help, and its smaller competitors have been alienated. Global had succeeded in wrangling a very beneficial deal from Lord Carter in the Digital Economy Act, but Carter exited quickly and the whole government has changed since then. The sting in the tail was that parliament included a get-out clause (if DAB switchover does not happen …) and now that clause looks more likely than ever to be invoked.

The pheasants look as if they might be coming home to roost at the Tabor estate. And what does a young man do when the train set his father made for him is not working the way he wants? He stomps his feet. He shouts. He issues demands. This week, the BBC has been on the receiving end. It should feel honoured. Ashley has demonstrated his belief that the BBC can do more to fix the DAB disaster than the whole of the commercial radio sector and its trade and marketing agencies added together. But, remind me, why should part of my BBC Licence Fee go to fix his plaything?

And what might Ashley think of doing next if the BBC does not bow to exactly what he wants? Will he be demanding that BBC director general Mark Thompson stands on his head in the corridor during short break, or runs around the perimeter of White City in his underwear fifty times in the pouring rain, or sits in the BBC library after work copying out chapters of ‘Paradise Lost’ by hand?

Are any of these shenanigans a strategy for the future of radio? All they demonstrate to the world is that large parts of the UK commercial radio sector seem to have completely lost the plot.

[declaration of interest: I was paid to advise DMGT on the offer made for GCap Media by Global Radio in 2008]

Back to the future of radio – the FM band

Help seemed to have arrived for those consumers who are confused by the contradictory messages they are receiving about DAB radio, digital switchover and the future of FM/AM radio. The government created a ‘hot topic’ web page that addresses these issues in the form of a ‘FAQ’. Does it help clarify things?

The government FAQ states:
• “We support 2015 as a target date for digital radio switchover” but, in the next sentence, it says that 2015 is “not the date for digital radio switchover”
• “FM will not be ‘switched off’ … and will continue for as long as it is needed and viable” but then it fails to explain the reason the government is calling it ‘switchover’
• “We believe digital radio has the potential to offer far greater choice and content to listeners” but then it asserts that “quite simply the listener is at the heart of this [switchover] process”
• “11 million DAB sets [have] already [been] sold” but, in the next sentence, it deliberately confuses ‘DAB radio’ with ‘digital radio’ which, it states, “accounts for around a quarter of all radio listening” [DAB accounts for only 16% of all radio listening]
• “Car manufacturers have committed to fit DAB as standard in all new cars by 2013” but it does not explain that only 1% of cars currently have DAB radio
• “Some parts of the country are not served well by DAB” but it then admits that “switchover can only occur when DAB coverage matches [existing] FM [coverage].”

Well, that makes everything crystal clear now. Switchover is not switchover. 2015 is the date but is not the date. It is the government that is insisting upon digital ‘switchover’ but it is a consumer-led process. Almost no cars have DAB now but, in 2+ years’ time, magically they all will. In parts of the UK, DAB reception is rubbish or non-existent, but ‘switchover’ will not happen until somebody spends even more money to make DAB coverage as good as FM … even though FM is already serving consumers perfectly well.

Sorry, what was the point of DAB?

While the UK government ties itself in increasingly tighter knots trying to explain the unexplainable, and to justify the unjustifiable, most of the rest of the world carries on regardless, inhabiting reality rather than a fictional radio future. In May 2010, a meeting in St Petersburg of the European Conference of Postal & Telecommunications Administrations considered the future usage of the FM radio waveband [which it refers to as ‘Band II’] in Europe. Its report stated:

“Band II is currently the de facto analogue radio broadcasting band, due to its excellent combination of coverage, quality and low cost nature both in terms of current networks available and receivers in the market. It is well suited to local, regional and national programming and has been successfully used for over forty years now. FM receivers are part of our daily lives and millions of them populate our households. FM radios are cheap to manufacture and for the car industry FM still represents the most important medium for audio entertainment.”

Its report concluded that:
• “Band II is heavily used in all European countries
• For the current situation the FM services are still considered as satisfactory from the point of sound quality but the lack of frequencies hinders further development
• There are no wide-spread plans or strategies for the introduction of digital broadcasting in Band II
• No defined final switch-off dates are given so far.”

Two paragraphs in the 28-page report seemed to sum up the present UK situation:

“The FM band’s ability to provide high-quality stereo audio, the extremely high levels of receiver penetration and the relative scarcity of spectrum in the band combine to make this frequency band extremely valuable for broadcasters.”

“As FM in Band II is currently, and for the foreseeable future, the broadcasting system supporting the only viable business model for radio (free-to-air) in most European countries, no universal switch-off date for analogue services in Band II can be considered.”

In the UK, we have just seen how “extremely valuable” FM radio licences still are to their owners. Global Radio was prepared to promise DAB heaven and earth to Lord Carter to ensure that a clause guaranteeing automatic renewal of its national Classic FM licence was inserted into the Digital Economy Act 2010. It got what it wanted and therefore avoided a public auction of this licence. Then, when expected to demonstrate its faith in the DAB platform, Global sold off its majority shareholding in the national DAB licence and all its wholly-owned local DAB licences.

Now the boot is on the other foot. Having succeeded in persuading the government to change primary legislation to let it keep commercial radio’s most valuable FM licence for a further seven years, Global Radio has now had to argue to Ofcom that analogue licences will become almost worthless in radio’s digital future. Why? In order to minimise the future Ofcom fee for its Classic FM licence. The duplicity is breathtaking.

When it last reviewed its fee for the Classic FM licence in 2006, Ofcom reduced the price massively because, it explained, it took

“the view that the growth of digital forms of distribution meant that the value associated with what was considered to be the principal right attached to the licence – the privileged access to scarce analogue spectrum – was in decline.”

In 2006, Ofcom had published a forecast for the growth of digital radio platforms which has since proven to have been wildly over-optimistic. It had predicted that 42% of listening would be digital by year-end 2009, whereas the outcome was 21%. In 2006, as a result of the steep decline it was forecasting in analogue radio’s usage, Ofcom reduced the cost of Classic FM’s licence fee by 95% from £1,000,000 to £50,000 per annum (an additional levy on the station’s revenues was also reduced from 14% to 6% per annum). The losers were UK taxpayers – the licence fees collected by Ofcom are remitted to the Treasury. The winners were Classic FM’s shareholders, who were gifted a cash cow by Ofcom bureaucrats who misunderstood the radio market.

Fast forward to 2010, and Ofcom is undertaking yet another valuation of how much Classic FM (plus the two national AM commercial stations) will pay during the seven years of its new licence, following the expiry of the current one in September 2011. Has Ofcom apologised for getting its sums so badly wrong in 2006? Of course not. Will it make a more realistic go of it this time around? Well, the signs are not good.

In its consultation document on this issue, Ofcom has repeated the same errors it made in other recent publications about the take-up of digital radio. In Figure 1, Ofcom claims that analogue platforms’ share of all radio listening has fallen from 87% in 2007 to 76% in 2010. This is untrue. As noted in my previous blog entry, listening to analogue radio has remained remarkably static over this time period. Ofcom’s graph has completely ignored the existence of ‘unspecified’ platform listening, the volume of which has varied significantly in different surveys. The graph below plots the actual numbers from industry RAJAR data.

Exactly the same issue impacts the accuracy of Figure 3 in the Ofcom consultation, which purports to show that analogue listening to Classic FM fell from 86% to 72% between 2007 and 2010. Once again, this must be factually wrong. Once again, the volume of ‘unspecified’ listening to Classic FM has simply been ignored and the decline of analogue listening to Classic FM has probably been overstated by Ofcom.

Confusingly, the platform data for Classic FM cited in Figure 3 differ from data in a different Ofcom document [Figure 3.34 on page 33 of The Communications Market 2010] which state that, in Q1 2010, 65% of listening to Classic FM was via analogue, 26% was via digital and 9% was unspecified. In Figure 3, the values for the same quarter are stated as 72%, 28% and 0% respectively. It is impossible for both assertions to be correct.

These inaccuracies have the impact of painting a quite different picture of Classic FM’s transition from analogue to digital listening than the market reality. These matters are not academic. They will have a direct and significant impact on the perceived value of the Classic FM licence over the duration of its next seven-year period. Sensible decisions about the value of the station’s licence cannot be made on the basis of factually inaccurate market data published by Ofcom.

Undeniably, Ofcom is between a rock and a hard place:
• An admittance that, in 2006, Ofcom got its digital radio forecast and its sums badly wrong and, as a result, has already lost the Treasury millions of pounds in radio licence fees, would require humility (and humiliation)
• Not admitting that, in 2006, Ofcom got it wrong would necessitate it to now fix the Classic FM licence fee at the same low rate as in 2006, or even lower, denying the Treasury millions more in lost revenue between 2011 and 2018
• Increasing the cost of Classic FM’s licence fee would be a tacit admittance by Ofcom that its entire DAB ‘future of radio’ policy is simply not becoming reality and that FM spectrum will still remain “extremely valuable for broadcasters”.

In 2006, the low valuation of Classic FM’s licence fee was built upon a top-down bureaucratic strategy which insisted that the UK radio industry was ‘going digital’, whether or not consumers wanted to or not. Now, it is even more evident than it was then that consumers are not taking up DAB radio at a rate that will ever lead to ‘digital switchover’ (whatever that phrase might mean).

However, reading the Ofcom consultation document, it is also evident that the regulator remains wedded to its digital radio policy, however unrealistic:

“We consider that this [Digital Radio] Action Plan is relevant when considering future trends in the amount of digital listening since it represents an ambition on behalf of the industry and Government to increase the amount of digital listening in the next few years.”

In the real world, Classic FM’s owner understands precisely what the international delegations who met in St Petersburg also knew – FM will remain the dominant broadcast platform for radio. Only the UK government and Ofcom seem not to accept this reality, still trying to go their own merry way, while the rest of Europe has already acknowledged at this meeting that:

• The FM band is “extremely valuable for broadcasters”
• The FM band is “currently, and for the foreseeable future, the broadcasting system supporting the only viable business model for radio (free-to-air) in most European countries”
• “No universal switch-off date for analogue services in Band II can be considered.”

[thanks to Eivind Engberg]

Radio in the Digital Economy Bill: the tail wagging the dog

The government’s forthcoming Digital Economy Bill will be the most significant legislation for the UK radio industry since the passage of the Communications Bill in 2002. Published at the end of November 2009, the Digital Economy Bill will propose ‘primary’ legislation that sets out a new regime for the licensing and regulation of commercial radio in all its forms – national analogue stations, local analogue stations and local DAB multiplexes.

The main thrust of the new legislation for commercial radio was contained in the Digital Britain final report published in June 2009. According to the Department of Culture Media & Sport, Lord Carter’s almost year-long consultation was intended to set out “the Government’s strategic vision for ensuring that the UK is at the leading edge of the global digital economy” and would introduce “policies to maximise the social and economic benefits from digital technologies”. Indeed, some of the changes proposed for the radio industry are forward-looking and designed to place the sector in a multimedia future in which it could survive and thrive.

However, some of the recommended changes to existing radio legislation are there only because parts of the commercial radio industry have lobbied for them to be there. At the time, these interested parties might have claimed that such changes would be beneficial to the commercial radio industry as a whole. Increasingly, other parts of that industry have realised that some Digital Britain proposals were lobbied for inclusion only because they suit the interests of a particular player, offering little or no benefit to the wider industry.

Worse, one proposal ties the future of the whole industry to a dangerous poker game with the government which commercial radio is unlikely to win. This is the Digital Britain proposal [page 102, paragraph 44] to automatically extend the existing licenses of the three national commercial radio stations for a further seven years. Why is this proposal there, and what does it have to do with the UK’s digital future? What price is the commercial radio industry being forced to pay for its inclusion?

During the Digital Britain consultation period, Global Radio had lobbied intensively to have the licence of its national analogue station, Classic FM, automatically renewed beyond its 2011 expiry date. In January 2009, I had written:

Classic FM’s licence expires on 30 September 2011 and it cannot be automatically renewed. This is a big problem. Whereas local commercial radio licences are still awarded (and re-awarded) by Ofcom under a ‘beauty contest’ system, national commercial radio licences are not. The system for national commercial radio licences is simple. Sealed bids are placed in envelopes. Ofcom opens the envelopes. The bidder willing to pay the highest price wins the licence. That’s it. This system is enshrined in legislation. Even if Ofcom wants a different system, it cannot change it without legislation.

As Classic FM’s new owner, Global Radio definitely wants a different system that will enable it to hang on to this most valuable asset. Global has been busy bending the ears of anybody and everybody who it might be able to persuade to interpret the broadcasting rules in a way that lets it keep Classic FM after 2011. Even Ofcom has had its lawyers busy examining the legislation to see what flexibility it has to interpret the rules in a way that might maintain the status quo.

Unfortunately, the legislation in the Broadcasting Act 1990 is quite specific:
“[Ofcom] shall, after considering all the cash bids submitted by the applicants for a national licence, award the licence to the applicant who submitted the highest bid.”

The solution for Global Radio was to lobby, lobby and lobby some more for the current legislation detailing the licensing system for national commercial radio to be revoked, changed, amended – whatever needed to be done to ensure that Global could hang on to its valuable Classic FM licence. When Digital Britain was published, it was evident that the phone calls and meetings had paid off handsomely. Lord Carter had listened and offered a solution – a significant change to primary legislation that would allow Global Radio to retain its Classic FM licence for a further seven years, replacing the existing legal requirement that it be re-awarded by Ofcom to the highest bidder in an auction in 2010.

Why exactly is Global Radio so desperate to hang on to Classic FM?

Firstly, Classic FM is a ‘cash cow’ and has always been the most successful of the UK’s three national commercial radio stations launched in the early 1990s. It attracts 40m hours listening per week which, at current sector yields, would earn it around £50m per annum revenues. However, its earning power is further enhanced by the affluence of its audience. Of its hours listened, 66% derive from ABC1 adults, 85% from ‘housewives’, and 68% from adults aged 55+, a target age group that very little commercial radio reaches. As a result, Classic FM is likely to be attracting more than 10% of total UK commercial radio revenues, significant for a single player out of 300 commercial stations. [RAJAR, Q3 2009]

Global Radio overpaid to acquire GCap Media for £375m in 2008. The challenge for Global is that the radio business is dominated by fixed costs. In other words, however many listeners an individual station has within its service area, that station’s costs are relatively static. Many of the stations in Global’s portfolio are medium-sized local operations, whereas Classic FM is a ‘giant’ with national coverage. Its profit margin probably far outstrips every other commercial station in the UK. Classic FM alone probably generates more operating profit than all Global’s other radio stations added together.

Classic FM occupies a unique position in the radio market (the only competitor in the classical music format is BBC Radio Three) and its market power has proven relatively stable over time, with a current listening share of 3.7%, only slightly down from 4.1% a decade ago. By comparison, GCap Media’s prime local radio assets also acquired by Global Radio have lost immense market power over the same period – the market share of London’s Capital FM down from 13.0% to 6.2%, and Birmingham’s BRMB down from 17.1% to 4.8%, for example. Thus, Classic FM is very much a ‘rock’ at a time many local commercial stations occupy a ‘hard place’. [RAJAR, Q3 2009 & Q3 1999]

Global Radio desperately does not want to partake in an auction for the Classic FM licence. It might under-bid and lose. It might over-bid and win. Either outcome would be a disaster, the former losing it the ‘crown jewels’, the latter allowing it to keep the licence but at a price that could lose the station its ‘cash cow’ status. Because there has been no auction of a national commercial radio licence auction since the early 1990s, nobody knows what the winning bid price might be. Worse, in the 1990s, the field had been open only to European Union companies. Legislation since then has opened up the bidding to the global market. Thus, a licence auction would be an extremely dangerous game for Global to play and, if it lost, would force it to write off its entire Classic FM balance sheet valuation only two years after it acquired the station.

Global Radio has a bargain on its hands in the current Classic FM licence. Not only does this one radio station attract more than a tenth of all commercial radio revenues, but its Ofcom-issued broadcast licence costs very little by market standards. The present cost is fixed at £50,000 per annum + 6% of revenues, probably amounting to around £3m per annum, not a huge expense for a station that generates around £50m. Why is the licence fee so little?

It is the regulator (initially the Radio Authority, now Ofcom) that sets the price of the licence, in the first instance according to the amount that the applicant has bid in its licence application to win the right to broadcast. The price of the licence is collected by the regulator but remitted directly to the Treasury in payment for the scarce FM radio spectrum used by the station.

In 1991, when it won the licence at auction, Classic FM had bid £670,000 per annum plus 14% of its revenues. In 1999, the Radio Authority increased this to £1m per annum plus 14% of revenues. However, in 2006, Ofcom reviewed the Classic FM licence payment and slashed it to £50,000 per annum plus only 6% of revenues. As the table below shows (using estimated amounts because the advertising revenues generated by Classic FM are not published), Global Radio purchased Classic FM just at the time when its licence started to cost significantly less than in previous years.

Why did Ofcom decide to reduce the cost of Classic FM’s licence so substantially? Because Ofcom believed that the analogue FM spectrum used by Classic FM would become less and less important with time, as listening via digital platforms, mostly DAB, rapidly replaced FM listening. Ofcom’s own forecast, made in November 2006, anticipated that digital platforms would account for 60% of all radio listening by 2011, the date when Classic FM’s licence expires. Quite how this justified a 95% cut in the licence fee, alongside a 57% cut in the revenue charge, was not explained by Ofcom. Essentially, Ofcom offered Classic FM’s owner the bargain analogue radio licence deal of a lifetime.

Ofcom’s forecast of digital radio listening turned out to be wildly over-optimistic, appearing to be based more on wishful thinking than on available evidence. Whilst Ofcom had forecast that digital platforms would account for 42% of radio listening by year-end 2009, industry data show the present outcome to be 21% for all radio and 20% for commercial radio. [RAJAR Q3 2009]

The inaccurate Ofcom forecast for consumer uptake of digital radio (never subsequently updated publicly) merely confirmed the belief within a large part of the radio industry that digital radio was about to exhibit exponential growth. This Ofcom forecast, accompanied by supporting comments from the regulator (for example, six months later, Ofcom director of radio Peter Davies said: “we are potentially at a Freeview moment with digital radio”), proved significant in misleading stakeholders into believing that the death of analogue radio was just around the corner. The regulator could not have got it more wrong.

Ofcom’s inability to forecast the radio market it regulated has resulted in a loss of millions of pounds of potential commercial radio licence fees for the Treasury, not only from Classic FM, but from the other two national commercial stations whose licence fees were also reduced. By Ofcom’s own estimate, under the previous formula the three stations combined had paid £7m per annum, but were now being charged less than £1.5m per annum. Over the four-year period until the three stations’ licences expire in 2011/2, the total revenue foregone to the Treasury will be around £22m. The Digital Britain proposal to extend these national radio licences for a further seven years, if the present licensing payment scheme is continued, would increase the total potential revenue lost to the Treasury to more than £50m.

Neither RAJAR nor Classic FM release data publicly showing the proportion of the station’s listening derived from digital platforms, but it presently seems unlikely that the station would voluntarily give up using FM for broadcasts after 2011 (when the present licence expires), and probably not even after 2018 (the revised expiry date if Digital Britain’s proposed seven-year licence extension were legislated). Effectively, the Digital Economy Bill would merely enable the largest player in the commercial radio sector not only to hang on to its ‘cash cow’, but to continue paying its present low licence payments to the Treasury for the FM radio spectrum it uses.

The losers from this arrangement are:
• taxpayers who, thanks to Ofcom’s poor forecasting, are now effectively subsidising the FM spectrum used by the commercial radio sector’s single most profitable asset
• the rest of the commercial radio sector who will never be able to match Classic FM’s operating margin because their own costs and revenues are considerably more constrained
• new entrants to the radio sector who wish to bid for the Classic FM licence when it expires in 2011 and are willing to pay a realistic, market price for the licence, but will be denied the opportunity by the government’s offer of an automatic licence renewal.

Politically, the proposals in the Digital Britain final report could not have isolated Classic FM as the sole commercial radio station to have its licence automatically renewed through new legislation. So the renewal proposal was extended not only to all three national commercial stations, but also to all local analogue stations that are broadcasting on the DAB platform. In July 2009, I suggested that this Digital Britain proposal was still iniquitous to the remaining local commercial stations that cannot or will not broadcast on DAB. It appears now that the Digital Economy Bill is likely to extend the proposed licence extension to all analogue commercial radio stations (whether or not they simulcast on DAB).

So every analogue commercial radio station will now be offered an automatic licence extension! Is that not a universal ‘good thing’? Well, no, because there is rarely a ‘free lunch’. Lord Carter was determined to extract a price from the entire commercial radio sector for bowing to persistent demands from Global Radio for new legislation to renew its Classic FM licence. The strings he attached are related to the government’s insistence that the whole radio industry use DAB as its main broadcast platform. This is why two entirely unrelated issues – Classic FM’s licence and DAB consumer uptake – have now become so intertwined in the proposed legislation.

In the seven-year renewal offered to every commercial radio licence, the government proposes to insert a clause that will allow it (via Ofcom) to terminate that licence extension with two years’ notice if the radio industry as a whole (commercial radio and the BBC) does not achieve these goals:
• 50% of radio listening to be via digital platforms by 2013
• DAB transmission infrastructure to be upgraded significantly.

It is a ‘carrot and stick’ approach: ‘We the government will give you all a free licence extension if you collectively promise to make DAB work. But, if we find you do not succeed in making DAB work, we will take your licences (and hence your businesses) away altogether’. The problem here is that the buck has been passed on to a wide and varied constituency of 300 commercial radio stations, many of whom have very little or no control over whether DAB can be turned into a successful delivery platform.

It is the entire commercial radio industry that will be expected to potentially pay the price with its own lives in exchange for changes to primary legislation that allow Global Radio to hang on to its ‘cash cow’ Classic FM licence. What seems even more unfair is that the entire DAB platform is owned and controlled by a mere handful of the largest UK commercial radio companies who, between them (and the BBC and transmission company Arqiva), wield the power to make DAB a success or failure.

If the largest commercial radio owner, Global Radio, had demonstrated incredible confidence in the DAB platform, maybe it might instil confidence in the rest of the radio sector that DAB could be made a consumer success by 2013. However, although Global Radio has regularly talked the DAB talk, it has hardly walked the DAB walk. Global had been the largest owner of commercial DAB infrastructure until, in April 2009, it sold its 63% stake in the national DAB multiplex and its wholly owned group of local DAB multiplexes. At the same time, it has sold or closed all but two of its digital-only radio stations, which exist now only as music jukeboxes.

Of course, for Global Radio, none of the DAB ‘strings’ really matter. It thinks it has got exactly what it wanted in the forthcoming Digital Economy Bill – to keep its valuable Classic FM licence. This is its significant short-term goal and may be the only thing that can keep the group afloat financially. Who knows? If the media ownership rules are relaxed, Global might be able to sell its entire radio business to Murdoch or RTL or MTG before the 2013 date of judgement on DAB is even reached.

For a while, many in the industry had seemingly been happy to line up behind Global Radio, uncertain of their own futures and relatively uninformed on these complex regulatory and legislative issues. But the truth is dawning on many – what is good for Global Radio is not necessarily good for the rest of the commercial radio industry. The future of commercial radio should remain in the collective hands of the industry itself, not be determined by one individual owner. And the issue of radio licence renewals should not have to be linked to the future performance of the DAB platform.

Digital Britain and the Digital Economy Bill offer a rare opportunity to update the regulatory regime for the entire commercial radio sector, rather than merely to offer one company a ‘phone a friend’ millionaire lifeline.

[For the purpose of transparency, I contributed sector analysis to two documents that were part of the Digital Britain process – a pre-consultation overview and the regulation of local radio.]

[Note to the table: the estimated costs of the Classic FM licence fee are simplified. Firstly, the cash amount paid increases annually from £1,000,000 in 1999 to £1,161,000 in 2006 and subsequently, in line with the Retail Price Index. The £50,000 cash payment will similarly be adjusted. Secondly, the revenue percentage paid is applied only to “advertising and sponsorship revenue attributable to national analogue listening hours”, but this data is not published, so 100% of estimated revenues have been assumed to derive from the FM platform.]

Radio in Digital Britain – sense and sensibleness

In the 13-page radio section of the Digital Britain Final Report published yesterday, there was not one mention of the word ‘switchover’ in the context of ‘digital radio switchover’. Neither was there a single mention of the word ‘switch-off’, as in ‘FM radio switch-off’. Throughout the document’s radio section, the new buzz phrase is ‘Digital Radio Upgrade’, meaning a drive to make DAB radio better and improve its consumer take-up. In Digital Britain, the notion of switching off FM radio broadcasting, notably for local stations, has been buried for good.

Not that you would have realised this fundamental policy shift by reading some of the press reports. “FM radio switched off by 2015”, said the headline in The Telegraph. “Government sets 2015 as digital radio switchover date”, said the headline in Media Week. “Digital radio switchover set for 2015”, said the headline in Broadcast. “Analogue radio switch-off set for 2015”, said the headline in The Guardian. These bold press assertions are contradicted by the Report’s recommendations that “FM spectrum is to be re-planned to accommodate the current MW services” (paragraph 43) and that “a new tier of ultra-local radio [which] will occupy the FM spectrum” (paragraph 39). The report is perfectly clear that FM is not to be switched off (at least, not in my lifetime).

It was almost as if the lobbyists for FM switch-off – the large commercial radio groups, most notably Global Radio – had written the press headlines the way they had wanted the outcome, regardless of the actuality. This was reinforced by an article that appeared in Media Week yesterday morning – only hours before Digital Britain was published – in which “a well-placed source” predicted “a schedule for the shutdown of FM radio” under the headline “Digital Britain to give radio licensees guaranteed protection”. That source proved not to be so well-placed.

The Media Week headline referred to the owners of the three national commercial stations who had been lobbying to have their licences extended by another term in order to avoid the impending auction of their frequencies, as required by existing legislation. I have written previously about Global Radio’s determination to seek an automatic renewal of its Classic FM licence, which otherwise expires in September 2011. So did Digital Britain give Global, TIML and UTV the renewals that they wanted?

The answer appears to be both ‘yes’ and ‘no’. Digital Britain will:
· extend all commercial radio licences, national and local, “up to a further seven years” for stations that simulcast on DAB
· insert a two-year termination clause into all new licences
· review all licences in future and determine whether the Digital Radio Upgrade is likely to be achieved by the end of 2013
· terminate licences if the Digital Radio Upgrade is not achieved
· then re-advertise the national licences under the existing auction scheme.

Not only does this add considerable strings to licence extensions of “up to” seven years, not only does it allow those extended licences to be terminated at two years’ notice, but it also puts the onus squarely on the licensees to make sure that the DAB platform succeeds (something which has not been achieved in the last decade). If the Digital Radio Upgrade does not hit its targets, the licensees lose their stations. This is a poker game that, whilst offering national stations a potential second life, also threatens to take that life away not so far down the line. For an owner trying desperately to convince its bank lender of the long-term value of its national commercial radio licence, Digital Britain has not offered anything in the way of future guaranteed revenue streams. As a result, indebted radio owners now have two guns pointed at their head – one from their bank manager and the other from Lord Carter.

Worse, even the licence renewals proposed by Digital Britain require new legislation to be enacted. If there is renewed turbulence in government, and with the ever-present threat of a snap general election, it is looking doubtful whether media legislation will be a priority in a Parliamentary timetable that will be rushing to legislate more significant political issues during this government’s final days. If new legislation doesn’t happen soon, then Ofcom will have to rush to advertise the Classic FM licence in an auction by early 2010 at the latest.

Furthermore, even if digital platforms do succeed in accounting for more than 50% of radio listening by the end of 2013, which station owner (either commercial or BBC) is going to be prepared to switch off their analogue signal and lose 50% of their listening at a stroke? In the case of a commercial station, losing 50% of listening would mean losing 50% of revenues, an idea that nobody will entertain. In this way, regardless of the speed with which the 50% criterion is reached, the outcome is the same – stations will have to simulcast on both analogue and digital broadcast spectrum for many years to come, a necessity that is almost doubling transmission costs during a period when sector revenues are falling precipitously.

For smaller local analogue radio stations, the future remains rather unclear. Another Digital Britain proposal (paragraph 26) to amalgamate local DAB multiplexes into bigger geographical units makes sense in order to bring economies of scale to multiplex owners, but unequivocally transforms DAB into a large-scale broadcast platform for national or regional operators. A local analogue station in Bridlington, for example, will find it even more expensive and inefficient to be on a ‘Yorkshire’ multiplex, thus restricting that local station’s future distribution platforms to FM broadcast and online. Neither will such a local station benefit from the automatic analogue licence renewal promised only to stations simulcasting on DAB. If anything, such stations’ predicament will ensure that FM continues to be the consumer platform for local radio, which still accounts for 40.7% of all radio listening [RAJAR Q1 2009].

Digital Britain’s acceptance of the important citizen benefits of local radio broadcasting is underlined by its (unexpected) proposal to license “a new tier of ultra-local radio” on FM and to re-plan the FM waveband if existing stations (ever) migrate from FM to DAB. Although the report is at pains to explain that it does not intend to “blur the lines between commercial and community stations”, it makes sense in the long run to consolidate a third tier of radio with the flowering of a whole new set of radio stations that genuinely want to serve local communities. With many small local commercial stations now barely breaking even, it might make sense to turn some of them into companies limited by guarantee and thus let them seek public subsidy from local councils and regeneration schemes.

Such an expansion of radio content in local markets could potentially invigorate the entire radio medium, making ‘local radio’ more of a ‘must have’, particularly following cutbacks in local news provision by local newspapers and regional television. It is also a potential antidote to the continuing transformation of many of our former local commercial radio stations into regional or quasi-national services (see the example of Radio 210 in my previous article on ‘Heart-ification’). As Digital Britain commented: “Today’s radio industry has been shaped more by the scarcity of the analogue spectrum than by market demand” (paragraph 4).

On the issue of public subsidy, the biggest disappointment for commercial DAB radio owners/operators must be Digital Britain’s insistence that “the investment needed to achieve the Digital Radio Upgrade timetable will, on the whole, be made by the existing radio companies” (paragraph 44). The report acknowledges that “this will require a significant contribution from the commercial operators” (paragraph 21) but suggests it should be funded by:
· savings from the negotiated 17% reduction in transmission charges as a result of the Arqiva/National Grid Wireless merger (paragraph 22)
· future savings from the ending of simulcast analogue and DAB transmission (paragraph 22)
· cost savings from the anticipated relaxation of co-location rules and the automatic extension of analogue licences (paragraph 25).

Although there is a brief mention of “residual access” to some of the funds left over from the BBC’s Digital Switchover Help Scheme being used to support DAB infrastructure build-out, the overwhelming message is ‘you guys are on your own to make DAB work’. The worry is that, when times were relatively good in the late 1990s/early 2000s, commercial radio did not manage to develop sufficient traction for the DAB platform. How is it ever going to succeed now in an environment where sector revenues are falling so rapidly?

So the conundrum continues, same as it ever was. Everybody wants DAB to work. Nobody except the BBC wants to pay for it. Commercial radio simply isn’t making a profit anymore. We can argue about how/why it got to that desperate situation, but nothing changes the fact that there is no surplus cash slopping around ready to invest in either DAB infrastructure or exclusive digital content. Without an ongoing commitment to both, even the limited migration of national radio services from analogue to digital transmission proposed in Digital Britain is unlikely to ever happen. Consumers follow content, not platforms (or, as Digital Britain says: “consumers will adopt new technologies when they are affordable and the benefits are clear” (paragraph 8)).

This is not at all to imply that Digital Britain does not offer a lot of sensible recommendations. Whereas the outcome of the Digital Radio Working Group in December 2008 was a remarkably theoretical report that appeared to bypass the harsh economic realities of the radio sector, the Digital Britain document is realistic and pragmatic, telling the radio sector that much of what it needs to do to make the DAB platform a success is in its own hands. How the radio sector moves forward with these issues in the coming weeks will determine how much further we continue to plod along the long DAB road. There is an increasingly stark choice for commercial radio – to give up now and accede the DAB platform to the BBC and Arqiva, or to press on and further endanger the viability of the entire commercial radio sector.

Lord Carter proffered a lot of home truths in Digital Britain and he threw down this gauntlet: “Any good business will invest in its future if it understands that future and the potential returns from its investment” (paragraph 8). What he did not do was throw commercial radio a map to get it to the buried treasure.

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On a purely personal level, I was pleased to see Digital Britain embracing several policies I had advocated for the radio sector:
· the two-year pilot scheme for an output focused radio regulatory regime takes up the idea of the Local Impact Test I proposed in November 2007
· the proposal to use the surplus from the Digital Switchover Help Scheme and the savings from the Arqiva/NGW merger for DAB infrastructure build-out was a strategy I suggested in October 2008
· the notion that ‘localness’ will prove a commercial radio station’s Unique Selling Point in the future global media village is a scenario I have included in client briefings and conference presentations for several years.

For the purpose of transparency, I contributed radio sector analysis to two documents that were part of the Digital Britain process – a pre-consultation overview and the regulation of local radio.

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.

DAB: actions speak louder than keynote speeches

Giving the commercial keynote speech at the Radio Reborn 2009 conference this week in London, Global Radio chief executive officer Stephen Miron banged the drum for the radio medium, banged the drum for Global Radio, and banged the drum for digital radio.

It was the last of these three exhortations that appeared particularly contradictory, given Global Radio’s track record with the DAB platform. However, nothing could stop Miron from proclaiming:

* “At Global, we believe that the government must set a clear and rightfully ambitious programme for digital migration.”
* “As you would expect from the largest commercial radio broadcaster, we plan to play an active role in helping ensure the successful delivery of that [digital] strategy.”
* “We back digital and we back the [Digital Britain] strategy, but we cannot afford to get this wrong.”
* “Digital Britain has made us focus our minds. Now the government must focus theirs.”
* “We have embarked on a clear path to digital, to DAB, and we need to make serious progress and do it quickly.” [emphasis added]
* “This means naming a date for [digital] migration …. A firm date needs to be set.”
* “The future of our sector is intrinsically linked to the successful implementation of the government’s digital strategy and to the successful migration to DAB.” [emphasis added]
* “We need more of this in the coming weeks and months. Not just words, but action.”
* “We need to get our act together to make the best possible case for consumers to switch to digital.”
* “Global is up for the challenge and, as the largest commercial player, we are prepared to lead this charge.”

Miron’s comments seem particularly difficult to reconcile with Global’s ‘actions’ on DAB, which hardly demonstrate confidence in the platform.

1. Global Radio exits DAB multiplex ownership
On 6 April 2009, it was announced that Global Radio sold its 63% stake in the sole commercial radio national DAB multiplex owner Digital One to transmission provider Arqiva. Global Radio also sold its local DAB multiplex business Now Digital to Arqiva. After almost a decade of operation, these multiplexes were still to generate an operating profit. Global Radio’s involvement in DAB multiplexes was thus reduced, at a stroke, from having been the biggest player to zero, writing off a decade’s worth of massive investment in the process, because the transaction is likely to have happened for a nominal amount.


2. Global Radio/GCap Media closes digital stations
Digital stations Capital Life and TheJazz, both of which had been carried on the national Digital One DAB multiplex, were closed on 31 March 2008, the day that Global Radio acquired GCap. (GCap had already closed another national digital station Core in January 2008).

In a recent interview, Tony Moretta, chief executive of the Digital Radio Development Bureau, tried to explain the closures of these stations: “Well, the main stations that went away – aside from all the Channel 4 stuff, which never launched and was nothing to do with DAB – where the GCap stations, such as The Core and thejazz also had nothing to do with digital.” [sic]

3. Global Radio turns digital station The Arrow into music jukebox
In December 2007, Global Radio dropped live presenters from the digital radio station The Arrow which it had acquired from Chrysalis Radio. The Arrow was removed from DAB in London in May 2008, and is now only available over-the-air on the 5 MXR regional DAB multiplexes. However, Global’s recent sale of its share in these multiplexes to Arqiva puts a question mark over the station’s future. Why would Global Radio pay Arqiva to carry a digital station in which it is has demonstrated no interest to develop?

4. Global Radio does nothing with digital station Chill
Part of Global Radio’s acquisition of GCap Media, Chill is also only available over-the-air on the 5 MXR regional DAB multiplexes (and not in London on DAB). Like The Arrow, Chill’s future looks very precarious. However, it would prove embarrassing to close these two digital stations before Lord Carter’s final Digital Britain report is published.

5. Global Radio cancels deal with Sky for digital news radio station
In October 2007, Global Radio cancelled the contract with Sky inherited from its acquisition of Chrysalis Radio that would have created a national Sky News Radio station on DAB. A spokesperson said then that “Global was not prepared to make the necessary investment in this project”.

6. Global Radio scraps digital-only shows on Galaxy Radio
In January 2008, Global Radio dropped dedicated shows from the digital version of its Galaxy Radio brand, instead simply simulcasting its local FM output on DAB multiplexes that also carry it.

So what is going on here? Miron’s speech is a large part of Global Radio’s public campaign to cosy up to Lord Carter ahead of the publication of his final Digital Britain report. Global needs a big favour from Carter if it is to retain a shred of intrinsic value on its corporate balance sheet – an automatic renewal of its Classic FM national analogue licence (see my earlier blog entry). In return for the favour it seeks, Global is responding to Lord Carter’s insistence that the radio industry speak with one voice on the issue of the transition from analogue to DAB radio.

The important thing here is to be seen to be saying the right things publicly about DAB – it’s great, it’s the future, we are committed to it, we love it. Forget the past. Forget our recent ‘actions’. Conveniently forget that, less than a month ago, we transformed our company from the leading player in DAB infrastructure into less than an also-ran. DAB is the future – we are part of that future. Our commitment is to say all the right things, and probably to do absolutely nothing. The endgame is to persuade government to amend primary legislation so that Global Radio can hang on to Classic FM, as Ashley Tabor explained: “It is one of those times when common sense has to prevail. Classic FM is a national treasure and to lose it would be tragic.”

The consumer and trade press willingly obliged by reprinting chunks of Miron’s speech without any kind of critique. This ensures that the press cuttings, demonstrating Global Radio’s glowing confidence in DAB, will land on Lord Carter’s desk and, Global hopes, convince him of the ‘common sense’ of not bothering to auction the Classic FM licence to the highest bidder (which is required by existing legislation). Here is a selection of that press coverage.

Broadcast magazine reported that “Miron’s comments mark the first time that Global Radio – the largest commercial player in the UK radio sector – has come out so strongly in favour of DAB and migration” under the headline “Global Radio chief demands DAB deadline”.

Radio Today reported that “Global Radio has also called on the government this morning to set a switchover date for DAB” under the headline “Industry unites for a DAB future”.

Marketing Week reported that Miron wanted the government “to name a date for a switchover from analogue” under the headline “Radio industry needs to be bold, says Miron”.

Media Week reported: “Global Radio has made one of its biggest interventions in the debate over the future of digital radio, with chief executive Stephen Miron calling on the Government to set a date for digital radio switchover”. The headline was “Global boss Miron calls on Government to name digital radio switchover date”.

The Guardian, to its credit, published the only report which acknowledged Global had “sold its majority stake in national DAB platform Digital One to transmission business Arqiva earlier this month”, though its headline nevertheless read “Government must be bolder on digital radio, says Global chief Stephen Miron”.

But today’s Sunday Times developed the theme by including this comment from Global Radio’s Ashley Tabor about digital switchover: “I am really confident now that all the right things are happening that will get us where we need to be. We are in favour of switch-off, so can we do it quickly please?” Maybe Lord Carter is tiring of Tabor’s persistent phone calls, so Ashley is now having to turn to weekend press puff pieces to labour his point.

The Sunday Times article’s headline, without a hint of irony, is “Global evangelist for digital radio”. Closing digital stations, selling off DAB infrastructure, baling out of DAB development deals – is this some kind of ‘do as I say, not as I do’ evangelist?

Classic FM – always check the expiry date before purchase

When Global Radio paid £375 million for GCap Radio in 2008, the portfolio of stations it acquired included Classic FM, the most listened to and most profitable of the UK’s three national commercial radio stations, and the only one of the three on FM. Classic FM was almost the only jewel remaining in GCap’s tarnished crown, after its management had destroyed the audiences/revenues of Capital FM and its other city FM stations by implementing disastrous content and commercial strategies. Classic FM presently has an 11% reach, a 3.8% share, 66% of its adult hours listened derive from the desirable ABC1 demographic, whilst 85% derive from ‘housewives’. Its only competitor in the classical music format is national BBC Radio Three, which has only a 4% reach and a 1.2% share but, of course, carries no commercials. Classic FM is a cash cow. [ratings: RAJAR]

There is only one problem for Global Radio. Classic FM’s licence expires on 30 September 2011 and it cannot be automatically renewed. This is a big problem. Whereas local commercial radio licences are still awarded (and re-awarded) by Ofcom under a ‘beauty contest’ system, national commercial radio licences are not. The system for national commercial radio licences is simple. Sealed bids are placed in envelopes. Ofcom opens the envelopes. The bidder willing to pay the highest price wins the licence. That’s it. This system is enshrined in legislation. Even if Ofcom wants a different system, it cannot change it without legislation.

As Classic FM’s new owner, Global Radio definitely wants a different system that will enable it to hang on to this most valuable asset. Global has been busy bending the ears of anybody and everybody who it might be able to persuade to interpret the broadcasting rules in a way that lets it keep Classic FM after 2011. Even Ofcom has had its lawyers busy examining the legislation to see what flexibility it has to interpret the rules in a way that might maintain the status quo.

Unfortunately, the legislation in the Broadcasting Act 1990 is quite specific:
“[Ofcom] shall, after considering all the cash bids submitted by the applicants for a national licence, award the licence to the applicant who submitted the highest bid.”

There is one, and only one, caveat in the legislation:
“[Ofcom] may disregard the requirement imposed by subsection (1) [above] and award the licence to an applicant who has not submitted the highest bid if it appears to them that there are exceptional circumstances which make it appropriate for them to award the licence to that applicant; and where it appears to [Ofcom], in the context of the licence, that any circumstances are to be regarded as exceptional circumstances for the purposes of this subsection, those circumstances may be so regarded by them despite the fact that similar circumstances have been so regarded by them in the context of any other licence or licences” [emphasis added].

Nothing more explicit is mentioned in the legislation about these possibly “exceptional circumstances”. The problem facing Ofcom is that, if it were to award the licence to Global Radio in a hypothetical situation where it had not been the highest bidder, whoever was the highest bidder would be likely to seek a judicial review, forcing Ofcom to explain in front of a set of judges the precise nature of the “exceptional circumstances” it had invoked. This would not be a pretty sight. There are no precedents because this part of the legislation has never been used before.

So what is the precise meaning of the ‘cash bid’ that has to be submitted to Ofcom in a sealed envelope? It is an amount to be paid annually by the winner throughout the licence period (increased annually by the rate of inflation). When Classic FM won the licence in 1991, it agreed to pay £670,000 per annum, plus 4% of its revenues as demanded by the regulator.

Later on, the Broadcasting Act 1996 allowed the regulator to extend Classic FM’s licence once, but on new terms, if the station agreed to simulcast its output on DAB. The regulator set Classic FM’s new licence payment as £1 million per annum plus 14% of its revenues from 1999. This new licence would have expired in 2007.

Then, the Communications Act 2003 allowed Ofcom to extend Classic FM’s licence again for a further four years but, once again, it could re-set the terms. Ofcom reduced Classic FM’s licence payment to £50,000 plus 6% of its revenues from 2007. This is the licence that expires in 2011.


Why did Ofcom decide to reduce the payments so substantially in its 2006 decision? It argued that the growth of listening via digital platforms was “leading to a decline in the scarcity value of the analogue spectrum”. Additionally, it argued that the licensee’s “share of advertising, derived as a result of access to the analogue spectrum, is likely to fall.”


Ofcom had forecast in November 2006 that digital platforms would account for 33% of radio listening by 2008, and 50% by 2010. By the time the Classic FM licence was due to expire in 2011, Ofcom anticipated that digital platforms would be responsible for 60% of radio listening overall. In other words, the FM licence would, by 2011, be accountable for only the minority of listening to Classic FM.

Ofcom’s forecast proved to be extremely wide of the mark. By Q3 2008, only 18.7% of radio listening accrued from digital platforms, little more than half of what Ofcom antcipated. The 50% threshold is unlikely to be reached even by 2015, and certainly not by Ofcom’s target of 2010. As a result of these forecasting failures, Classic FM (along with the other two national commercial stations) is now paying Ofcom an amazingly discounted rate for the licence fee to use analogue spectrum. The combined licence fees of the three national licensees would have been £7 million per annum under the previous regime, whereas these were reduced by Ofcom to less than £1.5 million (by Ofcom’s own estimate).

The net result of these changes is that Global Radio has a bargain licence on its books. Classic FM probably generates more than £20 million revenues per annum, but Global now pays only £1.3 million for its licence. The bad news is that Global Radio’s cash cow will end in September 2011. If Global does not win the re-advertised national FM licence, the value of its balance sheet could be up to halved. On the other hand, to keep this prize asset it will have to bid significantly more than the £50,000 annual licence fee it is paying now, so that Classic FM’s future profitability would be impacted anyway, even if Global managed to keep the licence.

However, there are plenty of other media owners out there who would like to have the UK’s only national commercial radio FM licence in their portfolio. The fact that the DAB platform has not grown anywhere near as quickly as anticipated in the UK simply makes this FM licence more valuable. The last time the licence was advertised in 1991, bids were only open to European Union applicants. Since then, legislation has opened up the bidding process worldwide. The licence format does not have to be classical music – the licensee can operate any format of its choice, apart from pop music (this caveat is in the legislation).

The fly in the ointment is that Ofcom adopted a new policy in 2007 that all its analogue local and national radio licences would be scheduled to expire on 31 December 2015, or five years from their commencement, whichever is longer. For Classic FM, this means that its next licence period would theoretically run only from 1 October 2011 to 1 October 2016. If a new bidder won the licence by offering the highest cash bid, five years is hardly enough time for a nascent business to establish itself and become profitable, particularly if it were to adopt a format other than classical music. The Ofcom policy seems unworkable in practice, and also seems biased in the incumbent’s favour.

Now, with an understanding of Global Radio’s desperation to hang on to its Classic FM licence almost at any cost, it is useful to re-read Paragraph 2.3 of the Final Report of the Digital Radio Working Group. Remember that Global Radio owns about 50% capacity of the UK’s commercial radio DAB transmission capacity and Global Radio accounts for 39% of commercial radio listening. The Report said:

“In exchange for its ongoing and future commitment to DAB, we believe the radio industry must have greater certainty and control of its future. Therefore, we propose that the government must relax some of the existing legislative and regulatory burdens placed on the radio industry, which will require parliamentary time, as outlined below and Ofcom should consider how to reduce some of the existing regulatory burdens.

First, the commercial radio industry must be granted a further renewal of its analogue services which are carried on DAB, and of DAB multiplex licences. [emphasis added]”

Now read this quote once more but replace the phrase ‘the radio industry’ or ‘the commercial radio industry’ with ‘Global Radio’. Aha! Wouldn’t it be great for Global Radio if the government could be persuaded to step in and somehow automatically renew its “analogue service” Classic FM licence, thus avoiding a licence auction in 2010? Even moreso if Global could be allowed to continue paying only £50,000 per annum (plus 6% of revenues) for the FM spectrum it uses? If you were Global, would you not be eager to offer the government a deal whereby you maintain your costly DAB infrastructure (and maybe even extend it) as the price you have to pay for securing the future of your most significant balance sheet asset?

From reading its Final Report, it certainly looks as if the Digital Radio Working Group bought into this argument. The next hurdle for Global Radio is to persuade Lord Carter and his Digital Britain team to buy into the same deal, which is: we promise to keep the DAB platform alive, despite it losing us a small fortune, if you ‘arrange’ legislation that enables us to keep the Classic FM licence for another decade. Thus, the government avoids the embarrassment of the DAB platform failing in the UK, and Global Radio might stand a better chance of staying in business.

To date, the other commercial radio owners have seemed happy to go along with this plan. They, like Global, would get to renew their radio licences automatically too (although none of their licences are as individually valuable as Classic FM’s). On the other hand, they too will be burdened with the continued costs of simulcasting their services on the DAB platform, with almost no financial return. However, despite most radio owners’ private dislike of the whole DAB ‘fiasco’, publicly they continue to stress their continuing support. Nobody turns down a ‘free lunch’, and a free licence renewal is an enticing offer for a radio industry still built upon oligopoly power rather than open competition.

The only question now is whether the government considers it politically worthwhile to ‘help’ the commercial radio sector with new legislation that would extend the licence status quo, in return for forcing onto consumers a ‘new’ DAB radio technology that is more than a decade old and has long been superseded by innovation.

Lord Carter’s pronouncements during the next fortnight might give us an idea of how important/unimportant it is to the government to: 1) bale out privately held Global Radio; 2) force further investment in improving/developing the DAB platform.