Friday, 15 May 2009

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).

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.

Wednesday, 13 May 2009

Digital radio: never mind the content, feel the bandwidth?

It’s a simple equation. The BBC has had an unfair share of the analogue spectrum but digital enables the commercial players the space to compete on a much more equal footing.”
Steve Orchard, operations director, GCap Media in Music Week, 9 December 2006, p.10.

For almost an eternity, the UK commercial radio industry has complained vociferously that it has been discriminated against because the BBC has the use of more analogue spectrum than it does. The argument has been made repeatedly that commercial radio will always ‘under-perform’ against the BBC as long as the BBC is allocated more space on the FM waveband. To support this argument, its proponents hold up the fact that the BBC has four national channels on FM, whilst commercial radio has only one (they choose to ignore the fact that, additionally, the BBC has 40 local stations on FM, whilst commercial radio has 200+ local stations on FM).

When DAB radio arrived a decade ago, there was a widely held notion within commercial radio that the new technology provided an opportunity to even the score with the BBC. Whereas the government was unlikely ever to re-allocate analogue spectrum to provide equal amounts to the BBC and its commercial competitors, in digital spectrum the commercial sector pushed ahead with DAB (before the BBC did) and a successful ‘land grab’ rewarded it with much more DAB spectrum than the BBC. The prognosis was that, in the future, DAB would replace analogue usage, and that the commercial sector’s dominance of digital spectrum would eventually reward it with the dominance over the BBC it craved.

It is difficult to say precisely how much more DAB digital spectrum the commercial radio sector has than the BBC. With DAB, there is a degree of flexibility because you have the choice to either use a section of spectrum for one station (in high audio quality) or for two or three stations (in lower audio quality). Commercial radio and the BBC each have one national DAB multiplex (though their coverage of the UK is not identical). Additionally, commercial radio has 46 operational local and regional multiplexes that cover the most populous parts of the UK. These multiplexes probably more than double commercial radio’s superiority over the BBC in DAB spectrum. But then commercial radio also leases some space on its local multiplexes to the BBC for its local stations. This makes comparisons complicated.

Whatever the detail, it is obvious that commercial radio has control of far more DAB digital spectrum than does the BBC. To compound the situation, commercial radio also has control of far more Freeview digital radio spectrum than does the BBC. So, as had been hotly anticipated a decade ago, surely by now commercial radio must have the upper hand over the BBC in digital radio listening. The answer is ‘yes’ – commercial radio had almost been winning the digital race – and ‘no’ – it is no longer. In fact, the latest RAJAR data show that commercial radio’s share of digital listening (40.5% in Q1 2009) has fallen below its share of analogue listening (41.6% in Q1 2009) for the first time.

These data cover all digital listening to all stations available on digital platforms (including simulcasts of analogue stations). However, because of the RAJAR methodology, the data do not include time-shifted listening to ‘listen again’ and ‘podcast’ radio content. These are both areas in which the BBC offers far more content (and markets it much more heavily) than does commercial radio. If it were possible to incorporate this time-shifted listening into the above data (which it is not), it is likely that commercial radio’s share of listening would be much lower than its present 40.5% via digital platforms.

The long-held belief that commercial radio would somehow automatically win the war with the BBC on digital spectrum purely because it controlled more spectrum had always been mistaken. This belief assumes, somewhat bizarrely, that each consumer randomly spins their radio dial and then leaves it on whatever frequency the radio has landed on. Only by utilising such a random system of selection would usage ever be proportionate to the amount of spectrum. Unfortunately for the commercial radio sector, consumers are not mindless idiots. Anyone endowed with an Economics GCSE can easily see the gaping holes in this notion. Apparently few in the commercial radio industry could.

Consumers make choices and the radio station they decide to listen to is the one from which they expect to derive the most ‘utility’. This is why ‘content is king’. This is why BBC Radio Two and Three both use equal amounts of spectrum, but the former has a 16% share, and the latter 1%. And this is why one fantastic radio station will always attract more listening than any number of mediocre ones (viz Atlantic 252, Laser 558, Luxembourg 208). It is not about how much spectrum you occupy, but about what you do with it. Consumers are motivated to listen by your content, not by your spectrum.

For commercial radio, after a decade of trying to convince itself and others that its abundance of digital spectrum would somehow entitle it to automatically trash the BBC, the dream (and it was a dream) is now over. Belatedly, it is back to the drawing board. As the BBC, PrimeTime, Bauer and Planet Rock have demonstrated, if you put some content on digital radio that consumers want to listen to, then they will listen (if they are made aware it exists through a marketing campaign). Digital radio would have a lot more listeners today if that simple truism had been understood by more players in the commercial radio sector a decade ago.

Monday, 11 May 2009

Commercial radio and RAJAR: the truth is out there (somewhere)

Is it me, or is it becoming increasingly difficult to reconcile the numbers in the latest RAJAR radio ratings data with the write-ups of those numbers in the trade and consumer press?

Commercial radio regains share from BBC”,
said the headline in Media Week.

Commercial radio share drops 40%”,
said the headline in Broadcast.

Commercial radio’s share of listening still falling”,
said the headline in Marketing Week.

Commercial radio’s audience …. grew from 31.2m to 31.5m listeners a week”,
said The Telegraph and, using precisely the same wording, said the BBC.

Commercial radio’s market share dipped slightly to 41.6%,”
said a different story in The Telegraph.

Commercial radio had an audience of 31.5m adults, increasing its reach and share of the audience compared to the previous year,”
said The Independent.

These reports appear contradictory and inconsistent. This is partly due to poor reporting, but it also because there are a number of different metrics used to measure the audience for radio (and thus for commercial radio). These include:

Commercial radio’s weekly reach amongst adults (15+) is up quarter-on-quarter (from 61.5% to 62.1%) and up year-on-year (from 61.6% to 62.1%). In the long term, the trend still appears to be downward.

Average hours per adult (15+) listener to commercial radio are down quarter-on-quarter (from 13.7 to 13.5 hours per week) and also down year-on-year (from 13.7 to 13.5 hours per week). The long-term trend is downwards.

Total hours listened to commercial radio (adults 15+) are down quarter-on-quarter (from 427m to 426m hours per week) and are up year-on-year (from 424m to 426m hours per week). The long-term trend is downwards.

Commercial radio’s share of total radio listening (15+ adults) is down quarter-on- quarter (from 42.2% to 41.6%) and up year-on-year (from 41.1% to 41.6%). The long-term trend is downwards.

As can be seen from the above graphs, the numbers naturally oscillate across time, regardless of their long-term trends. This makes it easy each quarter to pick out at least one measure that shows a gain, either quarter-on-quarter or year-on-year or both, and highlight that number alone in a
press release. There is always some number, whatever it is, that is going to be ‘up’ rather than ‘down’. Without placing that solitary ‘up’ number in any context, many journalists simply jump upon the press release and proclaim that everything is ‘up’. And so it was this quarter.

It would be great to be able to report that commercial radio in the UK had turned the corner and was bouncing back, attracting more listeners for longer periods of time, and trouncing the BBC. Unfortunately, the facts say otherwise. The only thing that some of these ‘up’ headlines in the press prove is the sector’s ability to spin a good yarn. However, an industry that believes its own PR is an industry in trouble.

Complacency is a large part of the problem that has led the commercial radio industry to where it is today – not a particularly happy place. If all this fake positivity around the RAJAR results simply encourages further complacency in commercial radio, it could hasten the death of the industry.

Everybody likes to hear good news. Nobody wants to be a bad news bear. But for an industry to be taken seriously, it needs to be imparting factual and accurate statements about the state of its health.

To its credit, only The Independent had the temerity to
ask: “Why are radio audiences rising, and how come the industry is in crisis?

Sunday, 3 May 2009

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?