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'2005 - The Year Of Radio Mergers' by Grant Goddard

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An analysis of the potential for merger and acquisition activity in the UK commercial radio sector during 2005, written by Grant Goddard in January 2005 for The Radio Magazine.

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'2005 - The Year Of Radio Mergers' by Grant Goddard

  1. 1. 2005 – THE YEAR OF RADIO MERGERS by GRANT GODDARD www.grantgoddard.co.uk January 2005
  2. 2. The unexpectedly sudden approval of the Capital/GWR merger last month signals that 2005 is the year when the UK commercial radio industry will be transformed by mergers, acquisitions and rumours thereof. By the end of this year, the notions behind the introduction of “independent local radio” in 1973 will finally be laid to rest. Back then, the government planned that each city and town should have its own commercial radio outlet, managed by a board of directors living in the vicinity, funded predominantly by local capital, employing local staff to produce programming specific to that town’s concerns. Much has happened since 1973 to change the UK media landscape beyond recognition, but commercial radio is still struggling to attract the loyalty of increasingly fickle, media-deluged consumers. Last year, listening to local commercial station fell to its lowest level for a decade. By the end of 2005, only a handful of the UK’s 278 independent local radio stations will remain locally owned, and most already have nationally networked programmes in their schedule. Stations owned by large groups play the same music from one end of the country to the other, and their national brand names are replacing former station identities that had communicated local relevance. Since the Communications Act was legislated in 2003, the radio industry has been on the edge of its seat, waiting for the first sign of mass consolidation that was the inevitable outcome. An earlier attempt in 2002 by GWR to brazenly pre-empt the relaxation of ownership rules by extending its dominance in the West Country was firmly thwarted by the Competition Commission. GWR already controlled 77% of local radio advertising revenue in Bristol and Bath, and 84% in Taunton and Yeovil, when it tried to take control of a regional station “Galaxy 101” that covered these same towns. The Commission rejected GWR’s ambition to increase these figures to 90% and 99% respectively, a decision that sent shock waves through a radio industry that had become accustomed to exploiting such high market concentrations. Phil Riley, CEO of Chrysalis Radio which had sold Galaxy 101 to GWR, commented at the time: “If the Competition Commission had allowed the deal to stand, it would have sent a clear signal that any number of combinations [of mergers] were allowed. But this ruling means there is no automatic green light. Whoever decides to try to merge or acquire radio stations and increase their share of the market is going to have to make a call about whether they are likely to fall foul of the Competition Commission.” Since May 2003, when the Commission finally said “no” to GWR, mergers and acquisitions have been the most discussed topics within the radio industry, though nothing at all happened until September 2004, when Capital and GWR announced that they would join forces. The green light unexpectedly given to this deal by the Department of Trade and Industry now gives other radio owners such as Chrysalis a better understanding of how far they can push the dominance of their stations in local markets without falling foul of competition law. The creation of one giant radio owner in the shape of the merged Capital/GWR is bound to encourage a rash of similar transactions amongst smaller players in the market. 2005 – The Year Of Radio Mergers ©2005 Grant Goddard page 2
  3. 3. The Communications Act itself relaxed previous radio ownership rules and requires that at least two local commercial radio operators exist in each area, in addition to the BBC. The maximum number of stations that can be owned by one group in a local market is controlled by a “points” system, similar but more complex than the Radio Authority system it replaced, that accounts for coowned stations’ overlapping transmission footprints. Such restrictions relate only to the population served by a group’s stations, and not to the share of radio listening or radio advertising that the group achieves within a local market. The effect is that, as long as sufficient plurality of ownership exists in a market, the requirements of the Act are fulfilled, even if one of the two radio owners attracts 99% of commercial radio listening and the other a mere 1%. This emphasis within the Communications Act on plurality rather than market share is the precise reason why UK competition law has suddenly become more relevant to radio owners seeking mergers and acquisitions than any specific broadcasting law. A proposed merger can qualify for investigation by the Competition Commission if the business to be merged controls at least 25% of the market for a good or service within a geographic market. Because of the relative scarcity of radio broadcast licences in the UK, a radio group’s share of radio advertising can often surpass this threshold in at least one of the local markets in which it operates. The commercial radio industry refutes the opinion that their stations’ considerable market shares constitute undue influence, arguing that the market for radio advertising is not a distinct market, but rather is only part of a much larger market for media advertising that includes television and the local press. However, in its last two investigations of the radio industry, the Competition Commission rejected such arguments and declared that the radio advertising market is a separate market that must not be dominated by any single radio group. The need to comply with competition law has come particularly difficult to longestablished radio groups whose very origins derive from a former media regulator, the Independent Broadcasting Authority, having granted them a monopoly over radio advertising in their local market between 1973 and 1989. “If we do see more substantial radio consolidation,” explained Richard Hitchcock, a media analyst at Numis, “companies will have to think about the local advertising implications and consider more disposals of individual stations and asset swaps as part of this big wave of consolidation they were expecting.” Andrew Walsh, media analyst at Altium Capital, added: “It was never going to be the free-for-all some people were hoping for. People focus on the media regulations and forget about the competition law behind it.” Suddenly, the skills of competition analysis within local markets have become a pre-requisite to understanding the seismic shifts in radio station ownership that are likely to happen in the coming year. Unfortunately, such analyses are made more difficult because the advertising revenue figures of individual stations are not made public (as they are in the United States), effectively hiding from the public gaze how firm a grip a particular radio group has on the radio advertising market in a particular city. 2005 – The Year Of Radio Mergers ©2005 Grant Goddard page 3
  4. 4. A complementary measure of a radio group’s dominance within a local market is the amount of radio listening its stations’ attract, as a proportion of all listening to commercial radio. If anything, such audience share data tends to underestimate the ability of a dominant radio group to generate revenue, and to overestimate less popular stations’ struggle to turn listeners into cash. As the Competition Commission has noted, newer smaller stations within a market operate at a considerable competitive disadvantage compared to “heritage stations” that have enjoyed more than a decade’s head start on establishing links with both listeners and advertisers. KM Tindle CN Sunrise UKRD Lincs FM LRC Saga SMG GMG Wireless SRH EMAP Chrysali s UBC market Capital / GWR TSA market rank share of commercial radio listening in metropolitan markets - 2004 Q3 48,862,000 UK 36% 2% 15% 11% 8% 7% 5% 4% 2% 2% 1% 1% 1% 1% 1% 0% 1 10,435,000 London 32% 0% 19% 16% 0% 5% 4% 5% 0% 0% 0% 0% 3% 0% 0% 0% 2 2,686,000 Manchester 22% 0% 25% 12% 0% 5% 5% ? 0% 1% 0% 1% 0% 0% 0% 0% 3 2,006,000 Birmingham 33% 2% 6% 33% 0% 4% 0% 2% 15% 0% 0% 0% 1% 0% 0% 0% 4 1,834,000 Glasgow 14% 0% 3% 0% 44% 7% 22% 2% 0% 0% 0% 0% 0% 0% 0% 0% 5 1,769,000 Liverpool 21% 1% 39% 1% 0% 4% 7% 2% 0% 0% 0% 0% 0% 0% 0% 0% 6 1,373,000 Newcastle 25% 0% 39% 22% 0% 3% 0% 1% 0% 0% 0% 0% 0% 0% 0% 0% 7 1,284,000 Bristol/Bath/Swindon 61% 10% 3% 2% 8% 3% 1% 2% 0% 0% 0% 5% 0% 0% 0% 0% 8 1,279,000 Wolverhampton 37% 4% 6% 29% 0% 5% 0% 2% 12% 0% 0% 0% 0% 0% 0% 0% 9 1,273,000 Preston/Blackburn 29% 0% 32% 1% 0% 11% 8% 2% 0% 2% 0% 0% 0% 0% 0% 0% 10 1,265,000 Sheffield 8% 1% 34% 18% 0% 12% 11% 3% 0% 0% 0% 0% 0% 0% 0% 0% source: RAJAR/RSL The merged Capital/GWR group will account for more than a third of all commercial radio listening across the UK (a further 2% is accounted for by UBC, to which GWR’s AM stations were “warehoused” to comply with ownership limits imposed by the former Radio Authority). The industry expects the next merger will be between EMAP and SRH, whose combined share of commercial radio listening would be 23%. Between them, these two radio “supergroups” – Capital/GWR and EMAP/SRH -would control almost two thirds of all radio listening in the UK, making the remaining radio owners look decidedly small by comparison. This will force the hands of Chrysalis, The Wireless Group, Guardian Media Group and Scottish Media Group to quickly form alliances to hold their positions in the market. Paradoxically, the large radio groups need to ensure the existence of the small groups to ensure that they themselves comply with the Communications Act requirement that there are at least two local commercial radio owners in each market. This is why some of the large groups will maintain minority shareholders in the smaller companies, not because they seek to exert control, but because the smaller group’s survival guarantees their own compliance with broadcast law. The gulf between the size, turnover and profitability of the largest and the smallest groups will widen, unless the larger groups find they are required by competition law to divest some of their local stations. In the wake of similar radio industry consolidation in the United States, stations that Clear Channel 2005 – The Year Of Radio Mergers ©2005 Grant Goddard page 4
  5. 5. has been forced to sell in order to diminish its market concentration in certain cities have helped smaller radio groups to build substantial portfolios at reasonable purchase prices, helped by laws that financially encourage media ownership by ethnic minorities. How much divestment of stations might be required in the consolidation of the UK industry is one of the unknown factors. The Competition Commission has noted that there are significant barriers to entry for anyone wanting to open a radio station to compete with the existing players, because so few new radio licences are under offer from the regulator. Additionally, new radio delivery technologies such as DAB, cable and broadband are unlikely to impact significantly on existing local markets for several years. The scarcity of new entrants to the radio industry makes it even more imperative that the regulatory bodies – the DTI and Ofcom – act consistently and decisively in the coming months to ensure that consolidation can forge ahead with proper and fair analyses of the relevant competition issues in each of the affected local radio markets. By the end of 2005, the commercial radio landscape is going to look very different from what it does now. Hopefully, the consolidated industry will serve the audience for radio better than the poor performance it has given us in recent years. Back in 1973, the week that Britain’s first commercial radio station opened, Campaign magazine commented: "Commercial radio [is] equated in many minds with staggeringly inane disc jockies, endless hours of top twenty pop music, and a barrage of advertising blending confusingly with the programmes. Clearly, commercial radio in Britain is not going to be that sort of operation.” This biggest fear in the 1970s, that our radio system might resemble American commercial radio, is now closer to reality than ever before. Before long, US giants such as Viacom, Clear Channel or Disney could even own a large chunk of our radio real estate. Make way for the radio revolution. [First published in 'The Radio Magazine', #666, 15 January 2005, pp.26-27] 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 2005 – The Year Of Radio Mergers ©2005 Grant Goddard page 5

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