Ernst & Young surveyed 25 senior executives across 10 radio companies in cities of Mumbai, Delhi, Kolkata, and Chennai to investigate key challenges and issues facing the FM radio sector in India. A report.

The Indian private FM radio sector is growing rapidly and establishing itself as an integral part of the Indian advertising pie. To gain insight into the radio industry's strategies and investigate the challenges and issues facing the private FM radio sector, Ernst & Young surveyed 25 senior executives across 10 radio companies in cities of Mumbai, Delhi, Kolkata, and Chennai. To obtain different perspectives on the subjects covered in the survey, responses were sought from operators having varying scales of operations i.e. single city, regional and national.

Regulatory reforms, including opening up of the sector to private players and replacement of the fixed license fee regime with a revenue-sharing license regime have led to revolution in this sector. The radio sector seems to be generating a keen interest not only amongst domestic media companies but also foreign investors and global media conglomerates. Once private stations are permitted to broadcast news and current affairs and players are allowed to own multiple frequencies, the sector will see a further spurt of investment.

Key Findings

Key concerns such as the absence of a nationwide acceptable measurement metric to evaluate returns, lack of content differentiation, litigation over music royalties and several regulatory issues continue to loom large over the radio industry. Further, current revenues and cost structures make it generally unviable to be a third or fourth placed station in non-metros and smaller cities. However, this has not adversely impacted the rising interest and investment in radio as a medium.

Private FM radio companies in India have recorded an average growth of over 30 percent compared to last year's and expect to maintain growth at that level over the next two years. Nearly 80 percent of the surveyed companies expect to achieve turnover of over Rs. 50 crore within next two years. Further they expect that the share of advertising revenues from the radio would increase from three to five percent in 2007-08 to about five to seven percent in 2009-10.

Key findings of the survey were

• Majority of respondents (55 percent) felt that the industry could support around seven profitable players within a few years

• Most radio companies are adopting an operating model at the national level (30 or more stations), a key ad sales market level (6 to 20 stations) or regional cluster level (5 or less stations)

• While corporate advertising will continue to retain its importance, a shift is expected in key revenue sources in the coming years with Internet, emerging digital technologies, retail advertising, and cross media sales gaining ground

• All respondents hoping to have 25 or more operational stations expect to reach a headcount of 1,000 personnel in the next two years

• Expected growth in stations is likely to outpace the rate of hiring in radio companies, thereby resulting in shortage of staff, while high attrition rate is yet another concern for radio stations

• Most respondents would like to improve controls and processes in areas such as ad sales, deal management, promotions, maintenance, events, and inventory utilization

• Ad sales growth will be driven by the ability to sell differentiated content, sales talent retention, availability of real-time inventory information, and strong marketing initiatives

• Key elements of operating cost are payroll (30 percent of costs), marketing (7-30 percent of costs), music royalty (7-42 percent of costs), office rentals and administration costs (15-20 percent of costs) and license fee to the government (4 percent of revenues). Most stations use the same genre of content with little or no differentiation - primarily Bollywood shows, countdowns and talk/chat shows

Issues facing private FM radio industry

There is non-existence of a universally acceptable measurement system for the private FM radio sector in India. This was an issue which respondents were most concerned about. This is because it reduces the confidence of media agencies and advertisers in radio as a medium, as they are unable to evaluate the return on their radio spends. About 50 percent of respondents favored the diary method of measurement, 20 percent preferred day-after recall (Indian listenership track), and 15 percent preferred watch meters. The measurement issue is expected to improve to some extent once TAM's radio listenership research service called Radio Audience Measurement (RAM) commences nationwide (currently it provides data for Mumbai, Delhi, and Bangalore). This method is being used across 16 countries. Listenership information will be provided on a weekly basis by RAM and will support radio companies, advertisers, and ad agencies.

Ad agencies are welcoming a common measurement mechanism, to provide them with insights in the area of radio's effectiveness. A small amount of radio media plans has been noted in certain product categories. While radio is part of most media plans, there are several large advertisers who are yet to use radio in a significant manner, and a common measurement mechanism could be one way to encourage them to consider the medium.

Regulatory issues

Several regulatory factors continue to be an area of concern for the radio sector. These include:

• Restrictions prohibit foreign direct investment (FDI) in excess of 20 percent of the paid-up equity of the radio company. An increase in FDI limits would assist radio companies to finance losses in their gestation period. Given that foreign companies will have a significant stake in Indian radio companies, they may also be more willing to provide them with their international expertise. The Telecom Regulatory Authority of India (TRAI) has recommended that FDI limits be increased to 49 percent for companies in the FM broadcasting space, although previously it recommended 26 percent for companies that wish to broadcast news.

• Currently, no change in ownership is permitted for five years from the date of operationalizing a license. TRAI has recommended that majority shareholders/promoters be permitted to dilute their shareholding to 51 percent, or even lower after completion of three years of operating the license.

• Low number of FM radio frequencies are available due to large unused spectrum gaps between two frequencies (in India, this gap is mandated at 800Khz, while in the USA, it is as low as 200Khz). This could prove to be a serious issue if multiple frequencies are permitted to a radio company in a city.

• Different A and B category stations of one radio company are currently not permitted to share operating facilities. Further, content of one channel cannot be used by another channel. This prevents economies of scale and results in unnecessarily high operating costs. Permitting common use of operating facilities, and permitting content sharing across different stations of the same radio company, will result in a reduction in operating costs, and break-even periods.

• High rentals paid for radio towers to Prasar Bharati, due to the mandate to co-locate transmitters with existing facilities of All India Radio (AIR).

Revenues in FM radio sector

Under the current regulatory regime, a private FM broadcaster can have one station per city and a maximum of 15 percent of all stations in India. The survey indicates that respondents would ultimately operate in three distinct operational scales - at a regional cluster level (less than 5 stations in a region), a key ad sales market level (6-20 stations in the highest revenue potential cities) and a national level (over 30 stations across India). Each operating scale would have different cost structures and revenue opportunities. TRAI has recommended that the geographical basis for private FM bidding is changed from a city level to a district level. If accepted, this could produce regional clusters of radio stations. Existing operations will be given a three month window to migrate to a district level license, or will have to continue broadcasting in their current cities until the end of their current license period. Further, TRAI has mandated automatic renewal of licenses to only district level permission holders. TRAI has also recommended that once three channels (excluding AIR) in a district have been allotted to three different entities, other available channels can be given to any entity, subject to the condition that an entity cannot have over 50 percent of the total channels in a district. Companies are likely to continue investing in operationalizing acquired frequencies or acquiring new ones to attain a deeper regional or larger national footprint (in key cities with high ad spends, or at a large pan-India national level). The operating scales are clearly aligned to target regional, and/or corporate national advertisers.

Respondents believe that the key to boost industry revenues is the need to educate advertisers and planners about radio and its effectiveness and to adopt a universally accepted nationwide measurement mechanism that would evaluate returns across all FM stations. This would assist in educating advertisers and planners as well as give them the confidence to invest in radio as a medium.

Advertising revenue. Radio companies remain bullish on the growth of radio revenues. Nearly 25 percent of the respondents expected radio's current share of three to five percent to stay at the same level in 2008-09 while 42 percent of the respondents expected it to increase to five to seven percent of the advertising pie.

Inventory utilization. Inventory utilization varies across stations significantly. This fluctuation can also be witnessed in the estimates for utilization over the next two years. However, as more and more advertisers use FM radio as a medium, inventory utilization is expected to be on an upswing.

Growth drivers for advertising sales. Companies felt that key factors driving revenue growth in the FM radio sector are new content formats, genres and differentiated programming, increase in listenership, and attract advertisers, increased marketing to attract listenership, and create a perception in the minds of advertisers about radio as a viable and effective medium, availability of real-time inventory and ad sales information, retention of key sales talent and relationships, and extensive focus on events to enable advertisers to experience the effectiveness of radio.

 As radio is currently a secondary medium (after TV and print), radio companies may need to align themselves with established TV and print players in the short term, to enable cross-selling of radio to national advertisers. However, such radio sales would need to be protected from above-average discounting typical of larger media deals. Current sources of revenue will continue to retain their importance in the future as the key sources of revenue. However, other revenue sources such as on-ground activation, in-program placement, value-added services (VAS), Internet, and cross-media sales are also expected to become significant revenue streams for many radio companies in the next two years. Most respondents have deployed teams to pursue one or more of these revenue sources.

Operating costs. Key cost elements for a radio station comprise payroll, marketing, music royalties, license fees, rentals and other administrative costs. The cost composition varies significantly across stations in larger and smaller cities, particularly with respect to royalty and marketing expenses.

 Copyright owners are agreeable to a royalty regime based on sharing of revenues earned by each station, considering all the above factors of population/listenership and type of music. While copyright owners are demanding around 20 percent of top-line revenues, radio companies are agreeable to sub-five percent rates, as prevailing in several other countries. Stations with alternate content such as news, infotainment, health, and sports may however have a significantly lower break-even, particularly if such stations are an extension of a media company with an existing news gathering network or library of owned content and regulations permit content sharing.

Programming

The average composition of an hour of radio programming during prime time comprises 40 minutes of music, 9 minutes of advertisements and 5 minutes of jock talk. Music could increase to up to 55 minutes during non prime time. The ratio of advertisements to promotions is 3:1 on an average.

Programming genre. All stations define music formats such as contemporary, mass, and retro. Some stations use the same format consistently through the entire day, while others use different formats during different time bands. Most stations use the same programming genre with little or no differentiation.

Employee strength. Less than 20 percent of the radio companies surveyed had 500 employees currently, but this is expected to increase significantly in the coming years as the number of operational stations increases. All respondents targeting to have over 25 operational stations are expected to reach a headcount of 1,000 personnel in the next two years.

The average number of employees for a radio station varied significantly from company to company, and even within companies. Stations in large cities with high retail ad sales revenues had up to 60 employees, while large stations without high retail revenues had just 20-25 employees. The average for large stations was around 40-50 employees. For smaller stations, some had just 10-15 employees, while others had up to 25. Companies have initiated several measures to address these issues. To manage the shortage of resources, companies have resorted to tie-ups with training institutes, setting up/development of intensive in-house training programs, hiring experts (from India and abroad) to train new recruits. To address attrition levels, companies have implemented/ considered implementing salary benchmarking exercises, employee incentive plans, promotion schemes, cross-functional responsibilities, training programs and employee loyalty bonuses. Around 91 percent of the respondents felt that the above retention measures had been well defined for managerial levels, and 75 percent of respondents felt that they had been defined adequately for creative and support/operational employees. Employee stock options (ESOPs), work-life balance criteria and holiday plans were the least used methods to retain employees.

Conclusion

To realize true growth potential, radio companies should liaise with regulators on issues such as multiple frequencies per city, investment restrictions, tradability of licenses, spectrum availability, sharing content across stations and using common operating facilities. Implementation of TRAI's Phase III recommendations could significantly assist radio companies. The sector needs to address the critical issues it faces today by implementing a conducive method of determination of music royalties, increasing advertiser confidence in the sector through implementation of a universally accepted nationwide listenership measurement mechanism, by educating agencies and advertisers on the benefits of radio advertising and developing a pool of radio talent to meet future needs. Companies need to review their existing business plans and strategies keeping expected regulatory changes in mind. While there is an imminent need to explore new revenue streams, at the operating level, companies need to improve processes, controls and availability of timely information for decision-making, particularly in large multi-location operations. Station format clarity is needed in cities with more than three stations, to create station identity. There is also a need to centralize common functions across stations.