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Incomplete draft report analysing a new strategy presented by GCap Media plc to turnaround the UK's largest commercial radio group, written by Grant Goddard in February 2008.

Incomplete draft report analysing a new strategy presented by GCap Media plc to turnaround the UK's largest commercial radio group, written by Grant Goddard in February 2008.

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'GCap Media plc: The Titanic Of The UK Commercial Radio Sector' [incomplete draft] by Grant Goddard Document Transcript

  • 1. GCAP MEDIA PLC: THE TITANIC OF THE U.K. COMMERCIAL RADIO SECTOR [incomplete draft] by GRANT GODDARD www.grantgoddard.co.uk February 2008
  • 2. INCOMPLETE DRAFT REPORT EXECUTIVE SUMMARY The new GCap strategy faces three overarching challenges: 1. Write offs Hidden in the detail of Hazlitt’s strategy document is the caveat that “the figures contained in this statement exclude the effect of the initiatives and any intangible write-downs, goodwill impairment, or profit or losses on disposal”.1 In other words, the promised full-year profit improvement of £12.3 million does not take into account any balance sheet adjustments that might accompany the closures of theJazz, Planet Rock, Xfm Scotland, Xfm South Wales and Xfm Manchester.2 In our opinion, these adjustments could prove significant and might easily dwarf the promised savings. GCap has often seemed reluctant to write down the valuations of its licences until forced to by disposal or closures. For example, it was not until it sold its two Century Radio stations to Guardian Media Group in October 2006 for £60 million that GCap wrote down their book values by £11.5 million.3 The longterm declining audiences and revenues of the majority of its licences (analysed in more detail below) lead us to believe that GCap’s balance sheet remains considerably overvalued, with the net book value of its intangible assets and goodwill most recently valued at £402.4 million on 30 September 2007.4 GCap (and its predecessors GWR and Capital Radio) had paid high prices to acquire radio licences, often based on their scarcity, rather than these businesses’ ability to generate profits for their owners:  Xfm Scotland alone was acquired for £33.7 million in 2000  Planet Rock was valued at £6.4 million in 2006 when GCap took control,  the greater part of the ‘Gold Network’ (which is not earmarked for immediate closure) was valued at £4.9 million in 2007. The closure or sale of these radio licences, however necessary to reduce continuing losses, is also likely to demonstrate how much shareholder value has been destroyed by GCap and its forerunners’ willingness to participate in a radio licence ‘land grab’ until now. 2. Listening in decline Also missing from the new strategy document is acknowledgement that audiences and revenues of GCap’s key brands on analogue platforms are continuing to fall, even after the group has implemented a series of earlier strategies designed to stop the rot. Instead, the presentation talked about how “the ‘One Network’ enjoy[s] long-term local loyalties”, despite the audiences of 1 GCap Media. Strategy Presentation, 11 February 2008. p.7. GCap said it will attempt to sell the three analogue Xfm licences by 28 March 2008, though there is doubt whether a bidder will wish to acquire an operation losing £0.8 million per annum when, in the absence of a buyer, Ofcom would be likely to re-advertise these licences. 3 GCap Media. Preliminary Results to 31 March 2007, 30 May 2007, p.20, para 3a. 4 GCap Media. Interim Results to 30 September 2007, 23 November 2007, p.18. 2 GCap Media plc: The Titanic Of The U.K. Commercial Radio Sector [incomplete draft] ©2008 Grant Goddard page 2
  • 3. INCOMPLETE DRAFT REPORT many of its key local stations being in decline.5 The strategy similarly talked about GCap’s “aim to grow [Xfm London’s] audience” without mentioning that the station has lost substantial listening in the last year.6 Table 1: GCap Media brands – hours listened per week (‘000) Q3 2005 Total GCap Media Q3 2006 141,091 135,916 -3.6 -3.7 65,477 59,196 -10.9 -9.6 14,219 13,202 -15.5 146,337 Q3 2007 -7.2 44,524 43,819 % change year-on-year The One Network 73,510 % change year-on-year GCap Gold Network 16,837 % change year-on-year Classic FM 44,069 % change year-on-year 1.0 Like-for-like basis in 2005 and 2006 excludes Century Network 7 [source: RAJAR] -1.6 Although listening to its national station Classic FM has remained stable, listening to GCap’s ‘One Network’ and ‘Gold Network’ continue to fall at rates that do not appear to have been improved by the group’s recent strategies (see Table 1). Our opinion is that Hazlitt’s promised full-year profit improvement of £12.3 million could be entirely negated by continuing loses in audiences that will inevitably lead to diminishing revenues. Table 2: GCap Media revenues total revenues broadcast brands multiplexes other £m like-for£m like-for£m actual like % change £m actual like % change £m actual % change £m actual % change 2004/5 2005/6 2006/7 252.3 220.2 200.1 207.3 193.0 -12.7 -6.9 232.5 199.4 175.5 186.5 168.4 -14.2 -9.7 8.7 10.9 14.9 25.3 36.7 11.1 9.9 9.7 -10.8 -2.0 [source: GCap Media accounts] Broadcast revenues continue to be the group’s most important source of income, comprising almost 90% of GCap’s total revenues (see Table 2). GCap’s like-for-like broadcast revenues fell by 9.7% between year ended 31 March 2006 and year ended 31 March 2007, a reduction of £18.1 million.8 This was accompanied by a 3.6% reduction in total hours listened to GCap stations on a like-for-like basis (see Table 1).9 In its most recent results, GCap’s broadcast revenues increased by 3.8% yearon-year for the half-year ended 30 September 2007, although Finance Director Wendy Pallott admitted this growth was achieved “against some relatively easy comparatives”.10 However, in the long term, continuing declines in audiences for GCap’s main brands are likely to further erode its broadcast revenues. The real danger is that these continuing declines in hours listened could have a greater impact on GCap’s long-term profitability than any cost-cutting 5 GCap Media. Strategy Presentation, 11 February 2008. p.3. GCap Media. Strategy Presentation, 11 February 2008. p.5. 7 Q3 2007 has been used throughout as the most recent audience data, due to RAJAR’s withdrawal of the Q4 2007 data. 8 GCap Media, Preliminary Results to 31 March 2007, 30 May 2007, p.8. 9 RAJAR, Q3 2005 vs Q3 2006. 10 GCap Media. Interim Results to 30 September 2007, 23 November 2007, p.9. 6 GCap Media plc: The Titanic Of The U.K. Commercial Radio Sector [incomplete draft] ©2008 Grant Goddard page 3
  • 4. INCOMPLETE DRAFT REPORT exercises. Radio advertising is a relatively low-cost commodity that commands a remarkably steady unit price (cost per thousand impressions) for its customers. As a result, it proves almost impossible to force through price rises if not accompanied by offering advertisers some kind of material benefit. Put simply, declining audiences will inevitably lead to declining revenues, making it imperative that GCap adopts radical and effective strategies to tackle the problems with the consumer appeal of its stations’ content. Although the new strategy outlined by Hazlitt is projected to deliver a £12.3 million improvement in full-year profits, it would only require a reduction in likefor-like broadcast revenues by 7% year-on-year to totally negate the impact of her measures.11 3. Advertising recession    decline in consumption macro situation earnings expectations lowered 11 GCap Media. Strategy Presentation, 11 February 2008. p.1. GCap Media plc: The Titanic Of The U.K. Commercial Radio Sector [incomplete draft] ©2008 Grant Goddard page 4
  • 5. INCOMPLETE DRAFT REPORT GCAP’S CONTINUING OPERATIONS Hazlitt’s strategy focuses “on maximising the revenue and profit potential of five key brands on FM and broadband” which she states are the platforms “consumers want and which offer the greatest growth potentials”.12 These are: the ‘One Network’, Capital Radio, Xfm and Choice FM in London and national station Classic FM. Additionally, Hazlitt has labelled GCap’s ‘Gold Network’ as a “transitional brand” in which investment will be “scaled back” pending possible closure in four to six years time.13 Each of these continuing operations is examined in turn. 1. THE ‘GOLD NETWORK’ Ten months after spending £3.95 million on the buy-out of 18 ‘Gold Network’ stations, GCap now says it is only prevented from closing the whole network by the fact that its “AM transmission contracts run until between 2012 and 2016,” making “immediate exit from AM not an option”.14 In April 2007, GCap had acquired the 80% stake it did not already own in 18 ‘Classic Gold’ stations from UBC Media for £3.95 million cash, a deal which valued these stations at £4.94 million. In July 2007, GCap merged them with its existing ‘Capital Gold’ network of similarly formatted ‘oldies’ stations to create the 25-station ‘Gold Network’. Ralph Bernard, then GCap Chief Executive, had said: “Classic Gold is an integral part of our advertising proposition. Acquiring these stations will enable us to create a single classic hits network with the potential to become a fast-growing national brand as audiences increasingly migrate to digital platforms”.15 Table 3: Total Hours Listened to GCap Media’s ‘Gold Network’ (‘000 hours per week on like-for-like basis) 25,000 20,000 15,000 10,000 5,000 0 2000Q3 2001Q3 2002Q3 2003Q3 2004Q3 2005Q3 2006Q3 2007Q3 [source: RAJAR] While its competitors have made considerable headway with radio stations that similarly play ‘oldies’ using the ‘FM’ waveband and digital TV (Bauer’s ‘Magic’, 12 GCap Media. Strategy Presentation, 11 February 2008. p.1. GCap Media. Strategy Presentation, 11 February 2008. p.4. 14 GCap Media. Strategy Presentation, 11 February 2008. p.3. 15 GCap Media. Acquisition of Classic Gold radio licences to create Classic Hits network, press release, 25 April 2007. 13 GCap Media plc: The Titanic Of The U.K. Commercial Radio Sector [incomplete draft] ©2008 Grant Goddard page 5
  • 6. INCOMPLETE DRAFT REPORT Global Radio’s ‘Heart’ and GMG’s ‘Smooth’), GCap’s ‘Gold Network’ has been held back by only being available on the lower quality ‘AM’ waveband and on ‘DAB’. Audiences have fallen precipitously in recent years (see Table 3) and there is no reason to believe that revenues have not followed this trend. Table 4: GCap Media’s ‘Gold Network’ – performances of the eight most listened to stations hours listened per week ('000) station Q3 2000 Gold London Gold South East Wales Gold Bristol/Bath/Wiltshire Gold Norfolk/Suffolk Gold Manchester Gold Kent Gold Hampshire Gold Essex 6,648 1,194 1,647 1,258 420 634 841 872 Q3 2007 2,921 857 784 704 649 502 406 326 % change local in hours market listened ranking Q3 2000 - Q3 Q3 Q3 2007 2000 2007 -56 -28 -52 -44 55 -21 -52 -63 13 6 6 8 16 8 8 n/a 16 8 9 11 15 11 10 16 [source: RAJAR] GCap’s re-branding of the 25 stations in 2007 has not halted their continuing decline (see Table 4). Within days of its latest strategy announcement, GCap shut down the marketing and public relations departments of the ‘Gold Network’, a sure sign that the operation will be “dramatically scaled down” until closure at some point in the future.16 GCap also announced a new policy to be “lobbying vociferously for AM switchoff” which would seem to be at odds with its conviction that ‘DAB’ will not become a future platform.17 There are several national radio brands – Scottish Media Group’s Virgin Radio, UTV’s TalkSport and the BBC’s Five Live – which broadcast in analogue only on the ‘AM’ waveband, and who are wholly dependent on the rapid take-up of digital radio in order to close their AM transmissions. GCap’s disavowal of ‘DAB’ will make these stations’ continuing reliance on ‘AM’ greater than ever, which will make the switch-off of ‘AM’ even less likely. 2. THE ‘ONE NETWORK’ GCap’s new strategy that “FM is the backbone of the radio industry” reflects the fact that its ‘heritage’ stations (‘FM’ stations mostly opened in the 1970s to serve metropolitan areas) are “the source of the majority of our revenue”.18 Its strategy document says it “will continue to develop programming and advertising initiatives to leverage our FM audience of 15 million listeners…”19 However, this figure is misleading and only serves to draw attention to the loss of listeners that GCap has suffered since its creation in 2005. 16 Tristan O’Carroll. GCap wields jobs axe at Gold Radio, Media Week, 15 February 2008. GCap Media. Strategy Presentation, 11 February 2008. p.3. 18 GCap Media. Strategy Presentation, 11 February 2008. p.2. 19 GCap Media. Strategy Presentation, 11 February 2008. p.2. 17 GCap Media plc: The Titanic Of The U.K. Commercial Radio Sector [incomplete draft] ©2008 Grant Goddard page 6
  • 7. INCOMPLETE DRAFT REPORT Table 5: GCap Media absolute reach (‘000 adults per week like-for-like) Q3 2005 Total GCap Media The One Network Classic FM The Gold Network Xfm Choice Century (discontinued) 16,600 8,110 5,842 2,019 760 605 1,574 Q3 2006 Q3 2007 16,366 7,429 5,898 1,796 1,133 592 1,618 15,265 7,172 5,844 1,499 1,181 784 - [source: RAJAR] NB: ‘Total GCap Media’ excludes ‘Century’ network in 2005 & 2006 Whilst GCap Media’s stations, in total, achieve 15.3 million listeners per week, not all of this listening is on the FM platform. The ‘One Network’ (on ‘FM’) has 7.2 million listeners per week, but appears to be losing audience at an alarming rate of approximately 0.5 million per annum (see table 5). Our previous reports have highlighted the substantial losses of listeners and listening suffered by the ‘One Network’ (GCap Media – the end of the road [Enders Analysis 2008-01e] and UK Commercial Radio Consolidation [Enders Analysis 2007-88]) since the millennium. Table 6: Total Hours Listened to GCap Media’s ‘One Network’ (‘000 hours per week on like-for-like basis) 120,000 100,000 80,000 60,000 40,000 20,000 0 2000Q3 2001Q3 2002Q3 2003Q3 2004Q3 2005Q3 2006Q3 2007Q3 [source: RAJAR] GCap’s new strategy for the ‘One Network’ seeks to “harmonise [our] stations into a coherent national buy for advertisers,” supported by “a customer-facing campaign focusing on the strength of the network and the value of the brand”.20 However, nowhere does that strategy acknowledge, let alone address, the fact that the ‘strength of the network’ is slipping through GCap’s hands as listeners desert its stations in quantity (see Table 6). It is worthwhile reiterating our analysis that, in 2000, ‘One Network’ stations now owned by GCap had been ranked first (by listening share) in 12 local markets, whereas today not a single one of those stations is the leader in its local market (see GCap Media – the end of the road [Enders Analysis 2008-01e]). 20 GCap Media. Strategy Presentation, 11 February 2008, p.5. GCap Media plc: The Titanic Of The U.K. Commercial Radio Sector [incomplete draft] ©2008 Grant Goddard page 7
  • 8. INCOMPLETE DRAFT REPORT Table 7: GCap Media’s ‘One Network’ – eight most listened to stations station hours listened per week ('000) Q3 2000 95.8 Capital Radio GWR Essex FM Invicta FM Southern FM 96 Trent FM 96.4 BRMB Beacon FM 25,037 4,842 4,370 5,720 4,886 3,949 6,705 3,282 Q3 2007 10,144 4,385 3,843 3,371 2,822 2,479 2,291 2,179 % change local in hours market listened ranking Q3 2000 - Q3 Q3 Q3 2007 2000 2007 -59 -9 -12 -41 -42 -37 -66 -34 2 1 1 1 1 1 1 3 7 2 2 3 3 3 8 5 [source: RAJAR] The significance of the ‘One Network’ to GCap’s future prosperity cannot be understated. This network alone generates 60% of GCap’s revenues and, within that, eight of the 41 stations account for more than 50% of the network’s aggregate profits and audiences.21 However, six of the eight most listened to stations in the ‘One Network’ have suffered substantial losses of listening since 2000 and must also be suffering declining revenues (see Table 7). Hazlitt insists that all 41 stations in the network are currently making an operating profit, despite the significant audience losses.22 These issues remain unaddressed in the new GCap strategy. Instead, the strategy focuses on recent activity that has homogenised the station’s logos and on-air jingles across the network, little more than windowdressing that would seem to have little direct impact on the central issue of declining listenership. Prior to his recent departure, GCap Group Operations Director Steve Orchard had referred to the ‘One Network’ as “a big and powerful network” which ranked as “the ninth biggest economy in the world”.23 Orchard was keen to stress that GCap was “getting more efficient in our conversion of listening hours to pounds, improving by just over 2% this year”, but such increased efficiencies ignore the fundamental problem with the ‘One Network’ which is: listeners and listening has been in decline for years and show no signs of reversal.24 Furthermore, Hazlett’s strategy for the ‘One Network’ notes that, in the second half of 2007, GCap “networked a number of high quality shows”.25 Last November, Steve Orchard had cited GCap’s “detailed [consumer] research over the last 12 months” that identified “an increasing desire to have some network stardust integral to the schedule”. He argued that, “in order to compete more effectively with the BBC networks [for listeners], we need to offer up quality which is of a national standard”.26 It proves difficult to reconcile GCap’s research with the results of Ofcom’s market research which found that “the replacement of local [radio] presenters with a high-profile networked 21 GCap Media. Preliminary Results for the 12 months to 31 March 2007, 30 May 2007, p.8. GCap Media. Strategy Presentation, 11 February 2008. p.5. 22 GCap Media. Strategy Presentation, 11 February 2008. 23 GCap Media. Interim Results presentation, 23 November 2007. 24 GCap Media. Interim Results presentation, 23 November 2007. 25 GCap Media. Strategy Presentation, 11 February 2008. p.5. 26 GCap Media. Interim Results presentation, 23 November 2007. GCap Media plc: The Titanic Of The U.K. Commercial Radio Sector [incomplete draft] ©2008 Grant Goddard page 8
  • 9. INCOMPLETE DRAFT REPORT presenter was also largely rejected [by consumers] on the grounds that highprofile presenters are already accessible on syndicated commercial or BBC national services …”.27 GCap’s plans for the ‘One Network’ would appear to involve a reduction in onair local content outside of peak hours, following Ofcom’s recent relaxation of networking restrictions.28 Such a change would, in our opinion, only be likely to exacerbate the recent losses in listening even further. If Hazlitt acknowledges that the ‘FM’ platform and GCap’s ‘One Network’ are the ‘backbone’ of the radio industry, then additional investment would seem necessary in content (not merely celebrity presenters) that will attract listeners away from the BBC. Even former GCap Chief Executive Ralph Bernard recognised this when he said he expressed hope that, one day, the commercial radio sector would be able to compete more powerfully against the BBC by producing ‘programmes’.29 Although GCap espouses the concept of “high quality programming to compete effectively with the BBC”, it has consistently failed to follow through with substantial investment in original content that could stem audience outflows.30 3. CAPITAL 95.8 FM London’s Capital FM is the flagship station of the ‘One Network’ and accounts for 12% of GCap’s revenues. Its dramatic fall from grace has epitomised GCap’s seeming inability to implement long-term strategies at its stations that will maintain the interest of listeners (and therefore advertisers). Table 8: Total Hours Listened to GCap Media’s Capital FM (‘000 hours per week) 30,000 20,000 10,000 0 2000Q3 2001Q3 2002Q3 2003Q3 2004Q3 2005Q3 2006Q3 2007Q3 [source: RAJAR] Hazlitt’s decision to rescind the policy of limited advertising inventory on the station was long overdue. Capital FM’s declining audiences had been wrongly attributed by station management to listener fatigue with on-air advertisements, rather than listener dissatisfaction with the station’s content. 27 Ofcom/Essential Research. The Future of Radio: Localness, London, 22 November 2007. p.5, para.1.24. Ofcom. The Future of Radio: Statement, London, 7 February 2008. 29 Raymond Snoddy. Raymond Snoddy on media: Pod people will decide radio’s future, Marketing, 17 August 2005. 30 GCap Media. Response from GCap Media plc to Ofcom ‘Future of Radio’ consultation, part two, [undated], p.1. 28 GCap Media plc: The Titanic Of The U.K. Commercial Radio Sector [incomplete draft] ©2008 Grant Goddard page 9
  • 10. INCOMPLETE DRAFT REPORT Hazlitt estimates that a return to nine minutes per hour of inventory will generate £1.8 million marginal profit in 2008/9 and £3.6 million in 2009/10.31 Although she asserts that “demand for advertising space on Capital currently outstrip supply”, our concerns are the same as those for the entire ‘One Network’ – that the outflow of listening may not yet have been arrested.32 The central plank of the new Capital FM programming policy appears to be “improved music sweeps with ten songs in a row every hour between 10am and 5pm”.33 This is the same strategy that Paul Jackson, Managing Director of GCap’s London brands, implemented during his previous tenure at Virgin Radio, where that station too marketed itself using the slogan ’The Home of Ten Great Songs In A Row’. Our opinion is that the strategy did not succeed in uplifting Virgin Radio’s listening figures, and is similarly unlikely to impact Capital FM either. This strategy originated in the competitive US radio market long before the birth of the mp3 player, and where at-work radio listening is a much more significant phenomenon. As James Cridland commented last year, when he was Virgin Radio’s Director of Digital Media: “Maybe we have concentrated a little too hard in the past on playing non-stop music – ‘here’s another 10 great songs in a row’ – which maybe worked at some point in time in the past, but maybe that isn’t the way that radio should be going and that, actually, we should be concentrating on the bits that go in between the songs, because those are the big differentiators between what we are doing and what people like Felix [Miller, Chief Executive of Last.fm] or my iPod on ‘shuffle’ does”.34 The appointment of celebrity Denise Van Outen to co-host Capital FM’s breakfast show has undoubtedly generated significant press interest in the station and could broaden the appeal of the show. However, we remain unconvinced that Johnny Vaughan, who has hosted the stations’ flagship show since the departure of Chris Tarrant in 2004, will ever recapture the universal appeal of his predecessor. In April 2007, Vaughan extended his GCap contract by one year and predicted that “this will be my last year”.35 Vaughan’s departure would offer GCap a rare opportunity to completely re-evaluate its breakfast show strategy and implement a new show with more mass appeal. 4. Xfm LONDON GCap predecessor Capital Radio had acquired Xfm London in 1998 for £16 million, the station having struggled for a year as an independent operation to attract significant numbers of either listeners or advertisers. Capital hoped to emulate the success that EMAP had enjoyed with Kiss FM London, after having acquired it in 1992. Both stations target a youth audience, with Kiss FM licensed to play ‘dance music’, while Xfm played ‘indie’ and ‘modern rock’. 31 GCap Media. Strategy Presentation, 11 February 2008. p.5. GCap Media. Strategy Presentation, 11 February 2008. p.5. GCap Media. Strategy Presentation, 11 February 2008. p.4. 34 Guardian Changing Media Summit, London, 22 March 2007. 35 Matt Eley. Why Johnny Vaughan has remained a Capital kind of guy, Ham & High, 12 April 2007. 32 33 GCap Media plc: The Titanic Of The U.K. Commercial Radio Sector [incomplete draft] ©2008 Grant Goddard page 10
  • 11. INCOMPLETE DRAFT REPORT However, GCap has perpetually found it difficult to grow Xfm’s audience to anywhere near the level of Kiss FM’s, despite London being acknowledged as one of the centres of rock music in the world. Table 9: Total Hours Listened to GCap Media’s Xfm London (‘000 hours per week) 5,000 2,500 0 2000Q3 2001Q3 2002Q3 2003Q3 2004Q3 2005Q3 2006Q3 2007Q3 [source: RAJAR] Xfm presently ranks 20th in the London radio market (compared to Kiss FM’s 9th position) and, humiliatingly, attracts less listening than either the BBC World Service (available only digitally) or BBC Radio Three. Hazlitt’s new strategy promises to “build upon the credibility established by Xfm as a new music authority in FM in London”, though the station’s performance begs the question as to how much ‘credibility’ the station must really have amongst its target audience of 15-34 year olds. Table 10: Xfm London – average weekday audience (‘000) 70 Q3 2006 60 Q3 2007 50 40 30 20 10 23.00-23.30 22.00-22.30 21.00-21.30 20.00-20.30 19.00-19.30 18.00-18.30 17.00-17.30 16.00-16.30 15.00-15.30 14.00-14.30 13.00-13.30 12.00-12.30 11.00-11.30 10.00-10.30 09.00-09.30 08.00-08.30 07.00-07.30 06.00-06.30 0 [source: RAJAR] Xfm’s poor performance in Q3 2007 can largely be credited to its decision in May 2007 to replace its DJs with back-to-back music selected by listeners between 10am and 4pm on weekdays. This policy led to significantly lower audiences during this important daypart in the following quarter (see Table 10). GCap Media plc: The Titanic Of The U.K. Commercial Radio Sector [incomplete draft] ©2008 Grant Goddard page 11
  • 12. INCOMPLETE DRAFT REPORT Xfm Managing Director Nick Davidson had argued that listeners “are used to being able to control what they watch or listen to as, these days, people are inundated with choice.”36 However, our opinion at the time was that broadcast radio does itself no favours by trying to emulate the personalised music experiences offered by either the iPod or by Last.fm (see Radio: Last.fm is not the problem [Enders Analysis 2007-80e]). Hazlitt’s strategy document promised that “in the coming months, a full review of Xfm’s output will ensure that we have the right on-air and online offering”.37 As with both the ‘One Network’ and Capital FM, such a review would seem to be a necessary prerequisite to any prospect that an increase in revenues can be achieved from the London marketplace. 5. CHOICE FM LONDON GCap predecessor Capital Radio completed its acquisition of Choice FM for £15 million in 2004. Although, at the time, Capital’s manager Graham Bryce promised “we can categorically say we are not going to be like Kiss FM”, the purchase was largely motivated by Capital’s inability to succeed with Xfm in growing its penetration of the youth market in London dominated by Kiss FM since 1991.38 Choice FM’s black music format is now remarkably similar to that of Kiss FM, although the station was originally licensed specifically to serve the black community in South London. Table 11: Total Hours Listened to GCap Media’s Choice FM London (‘000 hours per week) 5,000 2,500 0 2000Q3 2001Q3 2002Q3 2003Q3 2004Q3 2005Q3 2006Q3 2007Q3 [source: RAJAR] While listening to Choice FM has shown remarkably positive growth (see Table 11), the station’s revenues have not grown similarly because, according to Hazlitt, the station “has suffered from lack of understanding amongst the advertising community”.39 GCap’s avowed ambition for Choice FM is “to 36 Xfm. Xfm launch Xu – Radio To The Power Of U, press release, [undated] GCap Media. Strategy Presentation, 11 February 2008. p.5. 38 Jules Grant. Choice FM in programme changes after Capital buyout, Brand Republic, 17 March 2004. 39 GCap Media. Strategy Presentation, 11 February 2008. 37 GCap Media plc: The Titanic Of The U.K. Commercial Radio Sector [incomplete draft] ©2008 Grant Goddard page 12
  • 13. INCOMPLETE DRAFT REPORT monetise it more effectively on-air and to grow audiences online”, said Hazlitt.40 6. CLASSIC FM Launched in 1992, Classic FM has proven the most successful of the three national commercial radio stations and is the only UK commercial radio station offering a classical music format. Table 12: Total Hours Listened to GCap Media’s Classic FM London (‘000 hours per week) 50,000 40,000 30,000 20,000 10,000 0 2000Q3 2001Q3 2002Q3 2003Q3 2004Q3 2005Q3 2006Q3 2007Q3 [source: RAJAR] Unlike GCap’s other main brands, listening to Classic FM has remained stable in the long run (see Table 12) and offers advertisers an attractively up-market audience, of which 70% are in the ABC1 socio-economic group. Whilst GCap has problems with other brands losing listening and revenues, Classic FM continues to make a positive contribution due to the unique appeal of its content. 7. LOCAL DAB MULTIPLEXES In addition to its stake in the national Digital One DAB multiplex, GCap has stakes in 24 of the UK’s 42 local DAB multiplexes currently in operation. These comprise:41  100% stake in Now Digital, owning 12 local multiplexes  73% stake in Now Digital East Midlands, owning two local multiplexes in Leicester and Nottingham  67% stake in South West Digital Radio, owning one local multiplex in Plymouth  50% stake in CE Digital, owning three local multiplexes in London, Birmingham and Manchester  46% stake in DRG, owing one local multiplex in London 40 41 GCap Media. Strategy Presentation, 11 February 2008. Digital Radio Development Bureau. Multiplex Operators, January 2008. GCap Media plc: The Titanic Of The U.K. Commercial Radio Sector [incomplete draft] ©2008 Grant Goddard page 13
  • 14. INCOMPLETE DRAFT REPORT  24% stake in MXR, owning regional multiplexes in Northeast England, Northwest England, South Wales, the West Midlands and Yorkshire GCap has the greatest exposure to DAB multiplex infrastructure of any UK radio group, and made a loss of £3.7 million on its local DAB multiplexes in the year ended 31 March 2007.42 Hazlitt’s strategy statement is unequivocal in signalling the group’s desire to abandon the DAB platform altogether: “DAB, with its current cost structure and slow consumer response, is not an economically viable platform for ‘New GCap’…. In the short term, and without massive investment and improbable changes to government policy, it is not a platform on which we can grow”.43 However, GCap’s partners in half of its local DAB multiplexes are Bauer Radio, Global Radio, Guardian Media Group, UTV and Scottish Media Group, which makes their divestment a challenge unless the rest of the commercial radio industry decides to abandon the DAB platform altogether. Hazlitt explained the situation: “To be clear, if we had a free hand and were able to terminate our existing [DAB] transmission contracts, we would do so and we would hand our DAB multiplex licences back to Ofcom”.44 GCap is also hamstrung in abandoning local DAB by two further issues. Firstly, its transmission contracts do not expire until between 2012 and 2016 and have “limited break clauses” that would render GCap liable for fees until their expiration, regardless of whether it utilises the spectrum or not.45 Secondly, many of GCap’s FM licences were automatically renewed by the regulator for a further eight-year period as a result of them being simulcast on the local DAB multiplex. This was a ‘carrot’ incorporated into the Broadcasting Act 1996 designed to encourage radio groups to invest in the then nascent DAB technology. Hazlitt explained: “What this means is that all the top ten ‘One Network’ stations have been renewed on this basis and, if we withdrew the DAB services, under current legislation, Ofcom would have to re-advertise our licences. So, in short, whilst we would like to get out of DAB, we can’t”.46 The danger is that GCap’s consolidated annual operating loss on DAB local multiplexes of £3.7million could grow considerably if other radio owners were to follow GCap’s lead and decide that the DAB platform is no longer worth pursuing. In 2006/07, GCap’s local multiplexes received £5.0 million revenues from content owners for local DAB multiplex spectrum.47 Although part of this revenue is unlikely to be vulnerable as it accrues from the BBC (which in total spends £3.6 million per annum to lease spectrum on local multiplexes owned by commercial radio), the remainder is dependent upon other commercial radio groups persistence with DAB.48 This places GCap in an even more difficult position, as it can neither abandon local DAB multiplexes, nor mitigate against increased losses from those local DAB multiplexes in future years. 42 GCap Media. Strategy Presentation, 11 February 2008, p.11. GCap Media. Strategy Presentation, 11 February 2008. 44 GCap Media. Strategy Presentation, 11 February 2008. 45 GCap Media. Strategy Presentation, 11 February 2008. 46 GCap Media. Strategy Presentation, 11 February 2008. 47 GCap Media. Strategy Presentation, 11 February 2008, p.11. 48 Deloitte & Touche LLP. BBC Trust: The BBC’s Efficient And Effective Use Of Spectrum, December 2007, p.40. 43 GCap Media plc: The Titanic Of The U.K. Commercial Radio Sector [incomplete draft] ©2008 Grant Goddard page 14
  • 15. INCOMPLETE DRAFT REPORT Ofcom’s ability to resolve this impasse is restricted by the wording of the Broadcasting Act 1996, which will not let a local commercial station withdraw from DAB without the risk of losing its analogue licence in a subsequent ‘beauty parade’. Some in the industry have proposed that Ofcom invoke a ‘DAB armistice’ – a six-month period during which stations could withdraw from DAB without the risk of losing their licence. However, such a policy would require a legislative amendment, and one ‘industry insider’ commented to the press that “there would be an avalanche of licences handed back”.49 Instead, Hazlitt has suggested that “if DAB is to survive as a platform, particularly at the local and regional level, it must be on a much lower cost basis. That means re-planning the [local DAB] networks on the basis of much more efficient use of spectrum in place of a large number of very small and economically unviable local multiplexes which exist today”.50 GCap is already talking about these issues to Ofcom, but insists that “it is in the interests of all parties, including the transmission companies, that these changes happen sooner rather than later”.51 Grant Goddard is a media analyst / radio specialist / radio consultant with thirty years of experience in the broadcasting industry, having held senior management and consultancy roles within the commercial media sector in the United Kingdom, Europe and Asia. Details at http://www.grantgoddard.co.uk 49 Juliette Garside. How radio killed the digital star, The Sunday Telegraph, 17 February 2007. GCap Media. Strategy Presentation, 11 February 2008. 51 GCap Media. Strategy Presentation, 11 February 2008. 50 GCap Media plc: The Titanic Of The U.K. Commercial Radio Sector [incomplete draft] ©2008 Grant Goddard page 15