'Laser Broadcasting Limited: Strategy Document: December 2005' by Grant Goddard


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Strategy document for the corporate development and business plan of a local commercial radio station group in the UK, written by Grant Goddard in December 2005 for the board of Laser Broadcasting Limited.

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'Laser Broadcasting Limited: Strategy Document: December 2005' by Grant Goddard

  1. 1. STRATEGY DOCUMENT SECTION ONE- HOW DID WE GET HERE? The commercial radio industry has grown dramatically since the first station launched in 1973. The history of the industry can usefully be divided into two chapters: 1. 1 1973 – 1990 At the beginning of this period, local commercial radio stations were opened only in the UK’s biggest cities and then, in the 1980s, new stations were launched in smaller cities and in largely rural counties. The regime was characterised by the word “monopoly”, as only one commercial station was licensed in each location (London was the only exception, with two stations licensed with very different formats). Each station broadcast its programmes simultaneously on the AM and FM wavebands, enabling it to reach the maximum possible audience in its coverage area. Each station’s success depended upon its ability to attract listeners away from national and local BBC stations, and its ability to attract advertising to the new radio medium and away from competitors such as the local press and regional television. Listening figures to local commercial stations were generally very high. They were new, exciting and offered something more local and less stuffy than BBC stations. Because each local station was a separate local company, run by a local Board and financed by local shareholders, each station cultivated its “localness” to the maximum in order to attract listeners. London’s Capital Radio was a prime example of the success such a strategy could have. Using the slogan “in tune with London”, every day the station used its converted red double-decker bus to visit a different London location, handing out stickers and leaflets, as well as offering listeners the opportunity to meet presenters and request songs. These “personal contact” strategies paid enormous dividends and generated substantial loyalty between listeners and their local station. By the 1980s, they were supplemented by community outreach projects and charity fundraising marathons. Capital Radio had a job centre branch and a flat share information service in its foyer, which became young Londoners’ first means of finding accommodation in the city. By the end of the 1980s, local commercial radio was a big success with listeners and had developed a loyal following across two generations of listeners, giving it substantial audience figures across a wide variety of ages. Up and down the country were a range of fiercely individualistic, quirky stations, each with their own name, each with their own “star” presenters, and each adopting their own idiosyncratic music format. By now, each had woven itself into the fabric of its community and was as much a part of local life as the town’s football team or the local bakery chain. The one aspect of local commercial radio that proved problematic was stations’ inability to surpass their 2% share of all UK advertising expenditure. This percentage stubbornly refused to grow, even during times of an advertising boom and radio became known within the advertising industry as the “2% medium”. It was viewed as an “extra” to be added to media campaign plans in times of boom, but quickly struck off when the economy was not so good. As a result, advertising revenues fluctuated enormously during downturns in the economic cycle and one local station was even forced into liquidation. 1
  2. 2. Radio’s main problems in attracting national advertising were: • Even all the stations added together did not cover the whole UK; • Because each station was independently owned, buying a campaign on all existing stations was a labour-intensive task; • Station advertising rates and packages varied hugely, more dependent upon stations’ ability to extract such prices from local advertisers than any standard cost per thousand; • Station formats varied as much as their names, so that some stations delivered considerably older or more female-orientated audiences than others. Because national advertising was so problematic, the majority of advertising sold on local commercial stations was derived from local businesses. By the late 1980s, local radio had proved its effectiveness at marketing local products to local listeners, and a bond had been forged between local business owners and the local sales teams of stations that was the economic lifeline of these stations. At the same time, by the late 1980s, complacency started to infiltrate local radio that resulted directly from stations’ lack of competition for listeners and lack of competition for local advertisers. Stations started to work less hard than they used to in order to please both their audience and their local business community. The government’s regulator released stations from having to fulfil many of their community obligations. Instead of seeing that work as an intrinsic part of their loyalty-building strategy, stations such as Capital Radio closed their Community Department overnight. At the same time, stations had their eye on merging with nearby stations to increase profitability or arranging stock market flotations to generate capital for acquisitions. Several stations diversified into all sorts of businesses from theatres to restaurants, seeing themselves as “entertainment” rather than purely “radio” companies. In the 1980s, anything that involved making money seemed a good idea. For the first time in its history, the late 1980s saw Capital Radio suffering declining audiences and, like other local commercial stations, it had no idea what to do about the problem. It had only ever competed against the BBC for audiences and, only then, back in its very early days. Since then, it had always taken its audience for granted and simply presumed that listeners would never turn to any other station. All the local stations still enjoyed a monopoly over commercial radio advertising in their patch. It was something they felt they had a right to. The 1980s economy was booming. Everyone was getting rich quick. 1.2 1990 – now The existing radio stations received their first major shock when the regulator suddenly licensed a range of “incremental” stations in areas that already had existing local stations. This was the first time that the so-called “heritage” stations had ever faced competition from newcomers. For example, in London, Capital Radio lost audience straight away to Melody Radio (targeting older people), Kiss FM (young people), Jazz FM (wealthy middle-aged people) and Choice FM (the Afro-Caribbean community). Suddenly, the audience that Capital had taken for granted for so long was deserting it in droves for stations that sounded new, fresh, innovative and in touch with London, something that Capital had done less and less of in recent years. The second shock came when the regulator licensed three national commercial radio stations, a full thirty years after local commercial stations had been introduced. The industry had been arguing for years that it could never break through the 2% barrier (of all advertising spend) unless businesses and agencies were able to offer clients a proper “national” opportunity to book a single campaign across the whole UK. New national commercial stations could offer such a deal and give the existing local radio stations a chance to share in radio’s enhanced visibility. As a compromise, the new stations were deliberately introduced in such a way so as not to impact local commercial radio 2
  3. 3. audiences too greatly. The national “popular music” station was to be confined to the poor quality AM waveband, while only a minority-interest music station would be allowed the coveted national FM slot. The third shock came when, having seen the success of some achieved by some of the specialist music stations that were part of the “incremental” experiment, the regulator decided to roll out a programme of many more new local stations in more areas with existing “heritage” stations. Thus, the 1990s heralded the biggest and fastest expansion of radio stations the UK had ever seen, immediately after a period of relatively slow industry growth in the 1980s. The shock of moving from a stagnant period of complacency to suddenly being immersed in a highly competitive situation where they had to fight for both listeners and advertisers proved a wake-up call for many local stations. What followed still has a considerable impact on the radio landscape of today. The radio industry underwent a fundamental re-structuring that included: i. The emergence of radio groups A limited amount of consolidation had occurred during the 1980s, largely based on regional geography, whereby groups were formed from the combination of several local stations in a region (i.e.: Midlands Radio Group, Suffolk Group Radio). As early as 1985, GWR started a series of acquisitions based on the simple motivation that “big is better” and the trend continued throughout the 1990s with stations bought and sold for greater and greater sums of money. ii. The entry of media groups Starting in 1990, large cross-media groups such as EMAP, Virgin and Chrysalis bought their way into the radio industry, acquiring a mix of heritage stations and newly launched stations. This substantially increased the sale prices of local stations. iii. National advertising The launch of the three national radio stations had the desired effect of attracting national advertisers and agency media buyers to radio for the first time. With local stations now consolidated into fewer groups, it became easier to buy campaigns through a single selling point to run on stations across a region or regions. Both the national and local stations benefited from the influx of national revenues. iv. Cost cutting In an industry where costs are mostly fixed costs and revenues are almost infinitely variable, the GWR group pioneered the strategy of cutting costs to the bone at the many stations it acquired. According to GWR CEO Ralph Bernard: “It became very evident that if you don’t have size, you don’t have the ability to do things and you are forever trying to find the money to fix leaks, literally.” GWR’s policy of implementing economies of scale across its stations led to the centralisation of many tasks. v. Local advertising As stations became incorporated within larger and groups, national advertising became of more and more importance to their owners. The bedrock of local radio, local advertisers, soon became serviced by regional rather than local sales teams, until eventually they were serviced hardly at all from a national sales office. As a result, local advertising revenues became less and less important to groups that were growing bigger and bigger. vi. London agencies With the rise of youth brands in the marketplace, and the evident success of London youth station Kiss FM in creating a commercial focus for a demographic that had never before been served by commercial radio, London advertising agencies suddenly wanted to buy campaigns on stations that delivered 15 to 34 year olds. Faced with both local and national competition for audiences and revenues for the first time, local heritage stations suddenly started chasing a younger audience. As a result, the middle-aged audience that 3
  4. 4. had been loyal to their local commercial stations for many years started to drift away (mainly to BBC Radio Two), alienated by stations playing too much dance and rap music. vii. BBC Radio One Although the turn of the 1990s had been a scary time for local heritage stations as they suddenly faced competition in their own areas from competing commercial stations for the first time, they were all helped immeasurably by the BBC’s decision to change drastically the programming of its most popular station, Radio One. Until then, this station had a remarkably large audience of diverse ages that overshadowed local commercial stations in most regions of the country. As a direct result of the BBC’s bizarre volte-face, between 1992 and 1994, five million listeners left Radio One and most sought refuge in local commercial radio. These stations’ audiences suddenly boomed and they became the most listened to in their markets, without having to change or do anything different. The BBC had unintentionally saved their backsides. viii. Lack of investment With audiences growing hugely because of the demise of BBC Radio One; with revenues booming because of the ability to sell national advertising on larger and larger groups of stations; and with stock market values of radio groups buoyed by the industry’s breakout from its former position as the “2% medium”, group owners were quick to redistribute their substantial profits to shareholders. After a relatively lean period in the 1980s, “radio” was suddenly riding on a high in the financial community. Ignoring the fact that their product had only become popular as a haven of last resort for listeners fleeing Radio One, group owners invested almost none of their lucky profits back into the development, improvement or update of their product. ix. Networked programmes Instead, station owners sought ways to cut even further the fixed costs of their station operations. Led by GWR, groups persuaded the regulator to let them network some programmes from a central production studio, instead of each of their stations producing all of its own content. In a lengthy process of attrition, bullying a regulatory agency that lacked any long-term strategic plan for the industry, group owners were allowed piece by piece to extract the “localness” from their local stations. Local voices, local station names, local celebrities, local music, local content and local news all became sidetracked or dispensed with by many group-owned stations. x. The rise of brands Led by EMAP, who championed the notion that nationally recognisable brands were preferable to local identities, many local radio stations were stripped of the very characteristics that made them “local” in the first place. In an attempt to make their product controlled, homogenous and universal, the largest radio groups invested considerable sums in state-of-the-art technology that enables stations up and down the country to be playing exactly the same record at exactly the same time, appended at the end of the song by a jingle that says “Coventry” or “Newcastle” as appropriate, depending upon the station’s location. xi. Format convergence Although the listener is now offered a considerably wider choice of commercial radio stations in most local markets than was the case in the 1980s, the industry is plagued with competitors who are all trying to move towards the same middle ground. In yet another process of attrition that the regulator has lost again and again, many stations have stretched the definition of their prescribed programme formats to (and often beyond) their limits. This has created a situation where stations that are (by the regulator’s definition) meant to be complementary are in fact found to be competing for the same audience demographic and for the same advertisers in the very same market, by playing exactly the same music. This leads to substantial market “cannibalisation” whereby competitors merely steal audience from each other, rather than attract listeners from the biggest competitor, BBC. 4
  5. 5. xii. The decline of the music industry Commercial radio in the UK, modelled on BBC Radio One, has always relied upon the universal popularity of “popular music” to be the cornerstone of its programmes’ appeal. Until around 1990, almost everyone in the UK had a common notion of what a “pop hit” was. But from the time that Radio One refused to play the first “house” record that reached Number One in the singles chart, it was obvious that such communal experiences were on their way out. The subsequent rise of “dance” music amongst young people polarised popular music and led to a substantially fractured music market. Now, the market for singles is all but dead, CD sales are at an all-time low, and the cult of “celebrity” has replaced the cult of “pop stars”. Frankly, commercial radio stations have almost no idea any more what music they should play to attract listeners. 5
  6. 6. SECTION TWO- WHERE ARE WE NOW? The “success” of local commercial radio stations in the 1990s had been a direct result of circumstances that were largely outside of the industry’s control (particularly BBC Radio One’s policy changes). That success has been greatly assisted by the relative failure to attract audiences of two of the three national commercial radio stations, which has resulted in these new stations being much less of a threat to local radio audiences than had been anticipated. Instead of having to succeed by fighting against increased competition for audiences and revenues, much of these economic benefits have fallen into the laps of the radio groups. This has only added to the level of complacency that already existed in radio groups and the belief that they are eternally successful by default. Unfortunately, they failed to understand that, just as people’s tastes and interests change as they get older, these groups’ radio stations similarly needed to adapt to changes going on the marketplace. Much of local commercial radio still sounds exactly the same as it did five or even ten years ago. The • • • commercial radio industry has shown tremendous growth since 1990: The number of stations has more than doubled Advertising revenue has quadrupled Audiences have grown in the long run However, in recent years, the industry has shown signs of beginning to stall because of these factors: 2.1 Revenues COMMERCIAL RADIO REVENUES £m VALUE % Local National S&P Total Local National S&P 1992 74.0 67.0 - 141.0 53 48 - 1993 91.0 87.3 - 178.3 51 49 - 1994 103.1 117.1 - 220.1 47 53 - 1995 120.7 150.1 - 270.7 45 55 - 1996 136.4 172.3 - 308.8 44 56 - 1997 151.6 202.5 - 354.1 43 57 - 1998 160.3 257.8 - 418.1 38 62 - 1999 153.9 310.5 - 464.4 33 67 - 2000 145.4 388.4 60.8 594.6 25 65 10 2001 142.5 344.3 62.1 549.0 26 63 11 2002 149.1 342.3 71.3 562.7 27 61 13 2003 168.7 359.3 76.0 604.0 28 60 13 2004 est. 2005 183.1 176.9 364.1 353.4 93.7 93.2 641.0 623.5 29 28 57 57 15 15 source: Radio Advertising Bureau As noted earlier, there has been substantial growth in national advertising revenues over the last fifteen years, though these peaked in 2000. Local advertising revenues have continued to grow, but at nowhere near as spectacular a speed. In 1992, local advertising formed the majority of stations’ incomes. Now it has fallen below 30%. 2005 looks to be a particularly bleak year because both national and local revenues are expected to fall. If this trend continues into 2006, the danger is that the commercial radio industry might have already passed its peak performance [see audience data below]. The Advertising Association published its own revised data in October 2005 that showed radio revenues to have fallen by 1.5% year-on-year in 2004 at current prices. Although it 6
  7. 7. has forecast a 3.4% increase for 2005, that figure is also likely to be revised downwards in the coming months. 2.2 Audiences UK - LISTENING SHARE 60.0 50.0 40.0 30.0 20.0 ALL BBC 10.0 ALL COMMERCIAL 19 93 Q 19 1 93 Q 19 3 94 Q 19 1 94 Q 19 3 95 Q 19 1 95 Q 19 3 96 Q 19 1 96 Q 19 3 97 Q 19 1 97 Q 19 3 98 Q 19 1 98 Q 19 3 99 Q 19 1 99 Q 20 3 00 Q 20 1 00 Q 20 3 01 Q 20 1 01 Q 20 3 02 Q 20 1 02 Q 20 3 03 Q 20 1 03 Q 20 3 04 Q 20 1 04 Q 20 3 05 Q 20 1 05 Q 3 0.0 q uar t er Benefiting enormously in the early 1990s from the changes at BBC Radio One, commercial radio’s share of listening leapt from 37% to a peak of 51% in 1998, but has fallen steadily since then and now stands at 43%. The danger is that commercial radio may soon fall all the way back to its early-1990s level, despite the launch since then of three national commercial radio stations and more than 100 local stations. UK - LISTENING SHARE 50.0 All Local Commercial All National Commercial 40.0 BBC Local/Regional 30.0 All BBC Netw ork Radio 20.0 10.0 19 93 Q 19 1 93 Q 19 3 94 Q 19 1 94 Q 19 3 95 19 Q1 95 Q 19 3 96 Q 19 1 96 Q 19 3 97 19 Q1 97 Q 19 3 98 Q 19 1 98 Q 19 3 99 19 Q1 99 Q 20 3 00 Q 20 1 00 20 Q3 01 Q 20 1 01 Q 20 3 02 Q 20 1 02 20 Q3 03 Q 20 1 03 Q 20 3 04 Q 20 1 04 20 Q3 05 Q 20 1 05 Q 3 0.0 q uar t er Local commercial radio has fared even worse. Its share of listening leapt from 31% to a peak of 41% in 1998, but has subsequently dropped back to 33%. However something can be done about it. See Section 3. 2.3 Digital Radio Although digital radio listening (via new Digital Audio Broadcasting receivers, digital television or the internet) has been touted as the future of the commercial radio industry, its performance at attracting listeners to digital radio has so far been considerably less impressive than that of the BBC. Of the digital-only stations available, the BBC accounts for six of the top eleven stations, ranked by hours listened [World Service and Asian Network are additionally available on AM, but only in small parts of the UK, compared to their national DAB coverage]. 7
  8. 8. DIGITAL RADIO LISTENING digital hours listened (000/wk) owner 7562 BBC 3640 EMAP 3091 BBC 2680 BBC 2207 EMAP 1953 Saga 1820 EMAP 1747 GCap 1640 BBC 1442 BBC 1309 BBC BBC World Service The Hits BBC7 1Xtra from the BBC Smash Hits Radio PrimeTime Radio Q Planet Rock BBC Asian Network UK BBC 6 Music FIVE LIVE SPORTS EXTRA source: RAJAR 2005Q3 The BBC dominates digital radio listening, despite the commercial radio industry having far more stations available in this medium. Several small-scale surveys of DAB radio buyers have found that the most-mentioned station by listeners is BBC7, with a format of comedy and drama drawn from the BBC archives. So far, commercial radio (with the honourable exception of EMAP) has failed to capitalise on the audience’s thirst for stations that offer something different. A good example of this issue is PrimeTime Radio, a digital-only station ranked sixth in the above chart. Its audience far exceeds that of Life, Oneword, Planet Rock and Core, the other national digital-only stations carried on the same multiplex, and it issued a press release headed “The Most Listened To National Commercial DAB Digital Radio Station”. In November 2005, the station’s independent owner announced that it will close shortly because it cannot afford the over priced £1m+ carriage fee it is being charged by GCap Media (owner of the only digital multiplex and three of the other national digital stations). Despite being the only such commercial broadcaster (with its sister station Saga) to target the growing 50+ audience, these listeners will soon be lost and effectively handed back to the BBC. 2.4 Heritage Stations Many local heritage stations deserted their traditional audience of many different ages during the 1990s in pursuit of the 15-34 demographic that London-based advertising agencies were eager to reach with national advertising campaigns. This left local commercial radio’s audience skewed considerably towards younger people. However, in recent years, that same younger audience has been deserting local commercial radio because of its failure to innovate and keep up with the latest trends. As a result, local commercial radio is left with a product that has little appeal to an older audience but, at the same time, is failing to attract the younger audience it was designed for. This is why local commercial radio is currently having such problems with declining ratings. SHARE - LOCAL COMMERCIAL RADIO REACH - LOCAL COMMERCIAL RADIO 60% 90% 1999Q3 1999Q3 80% 2005Q3 2005Q3 50% 70% 40% 60% 50% 30% 40% 20% 30% 20% 10% 10% 0% 0% 15-24 25-34 35-44 45-54 55-64 65+ 15-24 25-34 35-44 45-54 55-64 65+ 8
  9. 9. Because they have painted themselves into a corner by trying to appeal to young people, local commercial stations have lost the loyalty of older people, who now have switched listening to the BBC’s stations. Whereas local commercial radio listening is heavily skewed towards young people, the opposite is true of BBC radio: 80% 70% BBC RADIO - % SHARE OF UK LISTENING BBC LOCAL BBC RADIO 5 BBC RADIO 4 60% BBC RADIO 3 BBC RADIO 2 50% BBC RADIO 1 40% 30% 20% 10% 0% 15-24 25-34 35-44 45-54 55-64 65+ BBC local radio, BBC Radio Two and BBC Radio Four all have audiences that are heavily skewed towards older demographics. With the exception of national commercial station Classic FM and two stations dedicated to the 50+ age group – Primetime and Saga, as mentioned earlier – commercial radio has failed to focus upon the opportunities offered by older audiences. 2.5 Radio Groups Substantial consolidation within the commercial radio industry has meant that the business is now dominated by a small number of companies: % share of commercial radio revenue 2005H1 BIG GROUPS GCap Media EMAP Radio MEDIUM GROUPS Chrysalis Radio Ulster TV Guardian Media Group Scottish Media Group % share of commercial radio listening 40 26 34.5 22.8 11 7 6 3 93 11.0 7.1 6.0 3.8 85 # national licences 1 1 1 # local licences 55 36 8 18 6 1 Each of these groups faces substantial problems with its radio assets, the combined effect of which is dragging down both revenues and audiences for the whole commercial radio industry. GCap Media was formed in 2005 from the merger of GWR Group plc and Capital Radio plc. In November 2005, it announced a major strategic review because of the severe problems faced in all its divisions. For the half-year ended September 2005, revenue was down 11%, operating profit down 27% and pre-tax profit down 28% on a like-for-like year-on-year basis. Hours listened to its Capital FM network are down 39%, its Mix network down 14%, its Capital Gold network 48% and its Classic Gold network down 51% on a like-for-like basis compared to five years ago. 9
  10. 10. EMAP Radio has managed to maintain its revenues better than GCap because it has had considerably more success with its digitally delivered stations. For the half-year ended September 2005, revenues were up 2%, operating margins improved from 19% to 22% and profit increased by £2m on a like-for-like year-on-year basis. However, local advertising revenue was down 9% and audiences for the group’s local stations are falling rapidly. Hours listened to the group’s Big City network of FM stations are down 42%, and to its Magic network down 11% over the last five years. EMAP has only station – London’s Magic FM – that has shown any increase in listening over that period. Of the other groups, Ulster TV this year bought the 17 local radio stations formerly owned by The Wireless Group, which together had lost 30% of hours listened over the last five years. And Scottish Media Group owns the national Virgin Radio station that lost 40% of hours listened over five years. The poor performance of these market leaders has substantially affected the industry as a whole in recent years. These groups have seemed completely unable to implement successful turnaround strategies, mainly because they have never had to compete for audiences in the past. 2.6 Station Licence Values Because of the problems that groups, both large and small, continue to face with declining revenues and declining audiences, a considerable number of local stations have been put on the market this year: The UKRD Group, which controls 10 stations, has publicly stated that its assets are up for sale. Milestone Group plc, which owns four local stations, has recently undertaken a strategic review that has resulted in a policy of asset sales. GCap Media announced in November 2005 that it would be selling nine local stations. As a recently published analyst report commented: “The commercial radio industry has abruptly turned full of sellers rather than buyers” [“UK Commercial Radio”, Enders Analysis 2005-21]. Until now, local radio stations had sold at high prices because of the scarcity value of the licence, the expected revenue and profit growth, and the infrequency with which stations were offered to the market. This sudden surfeit of station sales will reduce the expected prices to more realistic values, tempered further by the discouraging outlook for future revenues and profits. This creates opportunities for selective purchases of local stations at reasonable prices for the first time. 10
  11. 11. SECTION 3- THE LASER STRATEGY This is a very unique time in the commercial radio industry. The current “bear” market provides significant opportunities for those with substantial industry experience and market knowledge to identify radio station properties that have significantly underperformed because of the policies outlined above, and to turnaround those businesses to generate substantial profits. 3.1 Disconnection with local markets The history of local radio is littered with the carcases of owners of local radio stations who tried unsuccessfully to turn their little station into a regional station, a quasi-national station, or something that it was not destined to be. A local radio station licence is just that – a licence to create a local business, with local connections both to businesses and audiences. Some owners believe it is something else. Some very recent examples include: • Lanarkshire station Clan FM was purchased by small radio group Kingdom FM in 2004 and failed when re-launched as “107 The Edge” with both its studio and transmitter moved nearer to Glasgow. It’s newest owner Mark Page explained: “They weren’t running a local station for Lanarkshire. It was an image-station, a brand focused on playing new music for Glasgow, even though the signal didn’t properly cover Glasgow. They made the mistake of trying to take on [Glasgow heritage station Radio] Clyde” [The Scotsman, 27 November 2005]. • The programme contractor of the Classic Gold Network applied to Ofcom in November 2005 to allow its 18 local AM radio stations to broadcast regional programmes rather than local programmes. Although the network has already lost 51% of hours listened over the last five years, as a greater and greater part of its programmes have been networked, the owner continues to take more and more “localness” out of the stations to cut costs even further. • In December 2005, the small Carlisle-based radio group, CN Radio, is to launch a new regional network in the Midlands to replace its existing four stations. During recent years, the stations have already been homogenised to operate with the same music playlist, the same slogan, the same imaging, and now the same name. Programmes are already networked as much as their licences allow. Again, such actions deliberately remove “localness” from these stations. As a recent analyst report commented: “Connection to local audiences was historically the competitive advantage of commercial radio. These connections have however been frayed by growing uniformity of formats and programming fostered by consolidation. Maintaining the enthusiasm of local advertisers is vital to the continued revenue profile of the sector, given the cyclical nature of national advertising” [Enders Analysis 2005-21]. Laser’s prime turnaround strategy is to focus deliberately on re-building those connections with the locality that have always been essential to the success of local commercial radio stations. The empirical evidence is overwhelming that this issue is currently the commercial radio industry’s biggest failing. Not only did heritage stations achieve much more substantial ratings by adopting an active policy of local engagement in the 1970s and 1980s but, today as well, the most successful local stations are those that understand the geographical limitations of the “patch” they are in and choose to “super-serve” it, without ambitions to become a regional or national station. Examples of successful, locally-focused stations are still here today, as the latest RAJAR data shows: 11
  12. 12. LOCAL STATIONS RANKED BY % SHARE station 102.5 FM Radio Pembrokeshire Radio Borders Island FM 104.7 Manx Radio West Sound Channel 103 FM C.F.M.Radio Moray Firth Radio BBC Radio Jersey BBC Radio Guernsey BBC Radio Ulster market market size (000) Pembrokeshire 89 Galashiels 102 Guernsey 50 Isle of Man 64 Ayr 377 Jersey 73 Carlisle 235 Inverness 236 Jersey 73 Guernsey 50 N. Ireland 1363 % share of listening 40.5 39.9 39.7 32.3 31.1 30.1 25.7 25.2 23.4 23.2 22.9 Despite some of these stations being located in very small markets (or perhaps, because of it), they succeed in attracting huge volumes of listening because of the direct connections they have forged with their audiences locally. 3.2 Local advertising revenues As noted already, local advertising revenue has been somewhat neglected by existing group owners who have instead pursued national advertising campaigns sold for them by London-based advertising agencies. This is evident from the relatively low growth of local advertising revenue in recent years, and also from the reluctance expressed by many local businesses about using the local radio medium. As part of its recent radio licence applications, Laser has commissioned market research to determine the opinion of local businesses within each licence area regarding their willingness to use local radio advertising. The results have been consistent across all parts of the UK, and have demonstrated that stations’ youth-targeted formats often do not fit comfortably with the products of local businesses; and that many advertisers’ experiences of radio advertising are that they have been neglected by their local station. In market research in Warwick, one local business said it had advertised on the local heritage station but had found “it was just too expensive”. The manager reported that the product “just didn’t fit” the station and that “the type of music they were playing and the format – our customers wouldn’t have listened and it wouldn’t have hit our clients.” In market research in Shrewsbury, a local business that had used radio advertising said the station was “sloppy – just not professional enough”; another said: “At first we had an excellent rep, then it went downhill”; and another said: “You go and do one ad, then you don’t hear from them again.” Laser’s strategy is to build and develop strong relationships with local businesses, to offer relevant and suitable advertising packages that meet the needs of different types of customer; and to offer clients the means to measure and evaluate the effectiveness of campaigns they book on a local radio station. It is essential that the profile of listeners to a particular station or programme be matched with the customer profile of the advertiser’s product, in order to maximise the impact of radio advertising. This is the only way to build repeat business, as opposed to merely stimulating trial campaigns. The cornerstone of Laser’s commercial strategy is the building of a pro-active sales team at each station that is sufficiently well trained in radio advertising and conversant with campaign strategies to be able to develop custom-made solutions for each and every local business that considers using the radio medium. Only that way will the station develop a loyal clientele of satisfied advertisers who have seen for themselves the success that radio advertising can offer. 12
  13. 13. 3.3 Audiences Whereas heritage commercial radio stations have tended to focus upon the youth demographic, BBC stations derive the majority of their audience from the 50+ age group. This has created a gap in many markets for a locally focused station that appeals to the over 40 audience. 200 DISTRIBUTION OF HOURS LISTENED BY AGE [indexed by population] LOCAL COM M ERCIAL RADIO BBC RADIO 2 150 100 50 0 15-24 25-34 35-44 45-54 55-64 65+ While BBC Radio Two achieves substantial shares of listening with older age groups, conversely it is local commercial radio that succeeds with younger audiences. Laser’s strategy focuses on the market gap that exists in most local markets for a local station that serves the 40+ demographic and is complementary to a national service such as BBC Radio Two. This market is almost completely un-served by existing local commercial radio stations, despite the fact that it fits so perfectly with the customer base of most local advertisers. Again, Laser’s own market research in areas across the UK has identified this gap in the market from consultations with thousands of potential listeners who all tell us the same story – why is there no local commercial station for my age group? 3.4 Localness The notion that a local radio station should, by definition, interact with its own local community is so obvious that it should barely warrant discussion. However, as has been documented, it is the breaking of that sacrosanct bond, that had been so carefully cultured from commercial radio’s beginnings in the 1970s, that has led directly to the commercial radio industry’s existing problems. The problem is so evident that it may seem bizarre that radio group managers are not tackling it with appropriate solutions right now. As has been explained, the current air of complacency that still exists in the industry has stifled any concerted action to improve the performance of stations. As a recent analyst report concerning GCap’s current problems commented: “GWR has succeeded in extracting most of this ‘localness’ out of local radio, and replacing quirky, individualistic, almost parochial local programmes with a predictable, anodyne quality that is technically clever but lacking in ‘soul’” [“GCap Interim Results”, Enders Analysis 2005-23]. Sadly, lacking their own perspective on what makes local radio “local”, several other radio groups have emulated GWR’s lead on this issue and implemented their own similar strategies. The results for them have, in the long run, been just as unsuccessful as they are proving now for GCap. While, in the short term, costs can be substantially reduced, it 13
  14. 14. only leads in the long run to loss of both audiences and local advertisers. Since commercial radio’s existence depends upon its ability to sell audiences to advertisers, the loss of both parts of the equation can spell the end of the business. There is absolutely no ambiguity that “localness” is a key element in the success of radio broadcasting. Even in these times of instant global communication via the internet and mobile communication networks, the radio medium continues to be viewed by consumers as the most important immediate source of information about what is happening in their neighbourhood, their town or their region. Radio’s potential listeners remain very clear about what they want coming out of their radios. It is only the commercial radio stations that seem unclear about what is required. Market research published by Ofcom in November 2005 as part of its radio industry review [“Radio – Preparing For The Future”, Phase 2, Appendix A] confirmed the importance of “localness” to radio audiences: “The research found that local radio in particular plays a role both serving communities and giving communities a sense of identity. In the focus groups, radio was singled out as the medium that communities most strongly identify with. It was seen as more local, and therefore more relevant from a community perspective, than television, yet still a large scale broadcast medium with more perceived impact than local press, for example.” In the research, the word “local” appeared in two of the top four reasons that people listen to the radio (all radio, not just local radio) across the UK. These results were consistent across different regions and amongst different age groups. Ofcom concluded: “Local radio was felt to involve communities in very tangible and positive ways. The visibility of presenters in the community, roadshows, and other ways of supporting local events and causes help to create empathy and trust. Local voices, requests and competitions and more direct community participation help to create a sense of ownership. For many, their local radio service is important and truly valued.” When participants in the market research were offered the option of more local radio stations or more national stations, twice as many opted for “local” over “national”. There was a strong preference for local presenters over national presenters on local radio, and focus group members felt that local accents and genuine knowledge of an area added “authenticity” and “sincerity” to a local station. These results confirm earlier research by Ofcom [“Radio – Preparing For The Future”, Phase 1, Appendix B] that asked people how interested they were in different programme elements on local radio stations. The top scoring items were: o Local news (89% “very interested” or “interested”) o Local weather (77%) o Community issues (76%) o Local travel & traffic information (73%) o Local events (72%) Ofcom’s research also found that listeners actively wanted local radio stations to sound genuinely unique and different: “There is a strong perception, particularly amongst younger respondents, that many local radio stations essentially play the same sort of music constantly, and there is little variety. These participants are, perhaps understandably, less likely to be well- 14
  15. 15. disposed to the idea of local radio – seeing little point in a ‘local’ station indistinguishable from numerous others around the country.” Laser’s strategy is to deliver the “localness” within its radio stations that audiences are demanding so vociferously. These are the very characteristics that still make local radio so unique within the expanding range of media and leisure opportunities that consumers face. Although “localness” is an old-fashioned idea that, as has been explained, was extremely successfully cultivated by local radio stations back in the 1970s and 1980s, all the current research demonstrates that those notions of an audience wanting a station that “belongs” to them are just as alive today as ever. Rather than trying to extract “localism” from its stations as other radio groups have done, Laser’s strategy is to maximize local input, local programme production, and local involvement at every opportunity. In order for a local radio station to become part of the fabric of the community it serves, it is essential that it immerse itself in the interests, issues and agenda that pre-occupy its listeners. The local station should be a mirror that reflects the locality in which it is based, with all the quirks, parochialisms and eccentricities that such a strategy involves. In this way, a local radio station becomes truly unique, and as individual as the population of any city or town sees themselves compared to the rest of the country. 3.5 Laser’s Team To achieve its stated objectives, Laser has assembled a management and adviser team who have the requisite skills to implement the strategies outlined above. Their detailed knowledge of the UK radio industry and their hands-on experience of executing successful launch and turnaround strategies is essential for fulfilling Laser’s prime task of building successful, locally-focused radio stations in markets across the UK. Laser’s senior management team includes: 15
  16. 16. NIGEL REEVE – Chief Executive – 35 years experience in the radio and press industries with board level sales and management experience at some of the UK’s largest commercial radio stations, local and national. Case study – Classic FM Background • The UK’s first national commercial radio station launch Responsibilities • Headhunted for the role of Sales & Marketing Director Actions • Responsible for station’s very successful launch marketing & sales strategy • Sold the biggest sponsorship/airtime package in UK radio history - £3.6m from Nestle for the 3-year Masterclass project Results • Revenues grew to £17.1m by Year Three, the highest of any UK station • The most successful radio station launch of the 1990s • The most successful of the three national commercial stations from Year One • Station sold for £86m in 1996, having been capitalised at £3.6m at launch Case study – Invicta FM Background • Large Home Counties local commercial radio station Responsibilities • Headhunted for the role of Sales Director & Deputy Managing Director • Promoted to Managing Director Actions • Responsible for station’s very successful turnaround strategy • Managed USM floatation in 1989 • Negotiated merger with Southern Radio Results • Weekly reach increased from 9% to 41% within six years • Revenues increased from £250,000 to £4.3m within six years • £180k loss turned to £400k profit after first year • Company valued at £22m on USM flotation 16
  17. 17. STUART LINNELL MBE – Project Director – 35 years experience in the radio industry with board level programming and management experience at some of the UK’s most successful local commercial radio stations. Case study – Mercia FM Background • Large Midlands local commercial radio station Responsibilities • Managing Director, Programme Controller, Sports Editor and daytime presenter during 15 years’ service from station launch • Promoted to Deputy Managing Director & Operations Director of Midlands Radio plc group Actions • Responsible for station’s very successful programming policies • Launched station’s charity fundraising strategy • Negotiated station’s merger with BRMB Birmingham • Managed Midlands station group and Launch Director of new Derby station results • One of the UK’s most consistently successful local radio stations • Multiple Sony Award winner for programming achievements • Awarded MBE for services to broadcasting • Company valued at £15m on sale to GWR Group GRANT GODDARD – Project Director – 25 years experience in the radio and music industries with programming and management experience at senior level in large stations. Case study – Kiss FM Background • Responsibilities • Actions • • • • results • • • • • London-based local commercial radio station General Manager and Programme Director pre- and poststation launch Recruited, trained & mentored 57 inexperienced staff Co-ordinated and wrote station’s winning application for UK radio’s most hotly contested licence Persuaded EMAP to make first major investment in radio Co-ordinated all aspects of station’s high-profile launch, including £1m marketing campaign Achieved Year One target of 1m listeners/week in first six months on-air UK’s first youth-orientated commercial radio station Developed Kiss FM brand to include magazine, record label & promotions Successful & innovative launch campaign won advertising industry awards Station revenues now exceed £13m/year 17
  18. 18. 3.6 Laser Development Laser is now looking at a four-pronged strategy to take full advantage of the opportunities that the industry is resenting. They are: 1. Laser has now identified 5 radio station purchases where there is an opportunity to purchase the stations at a realistic price and turn them into profitable businesses. In each case the stations are being run on a shoestring and are suffering from chronic under investment in the product. One example is a station in the west midlands, broadcasting to a population of 300,000 adults. Its running costs are £250,000 pa. However the sales team and presenters are disillusioned and under motivated. With just £50,000 pa invested in the product and the sales team the station would only have to deliver the industry average revenue for a station of this size to start making profits in excess of £200,000 pa. 2. Laser currently has a 25% stake in Fresh Radio based in the Yorkshire Dales. It believes it could increase this holding to 51% for just £130,000. With the above management policies this station should be delivering a profit of £150,000 pa from income of £450,000 pa giving the station a value of over £1.5. 3. The above purchases would boost Laser’s standing in the radio industry. At the moment the group is outside of the industry trying to get in. In 90% of all Ofcom licence awards the award has gone to a company that already holds radio licences. Laser will continue its policy of growing the company through applying for licences over the next two years and long term looking at digital broadcasting as well as analogue. Laser will continue to develop its licence bids with 22 groups currently active across the UK. 4. Running concurrently to the above Laser wants to look for a floatation either as a new listing or by reversing into a shell company. This will provide the smaller Laser shareholders with an exit route while also enabling the Laser management team to take advantage of the new opportunities that will arise out of the industry consolidation covered in point 3 above. There are many opportunities that Laser would like to consider in the UK radio market, Europe and South Africa. 3.7 Next Stage To purchase the above 5 radio stations and increase the holding in Fresh Radio would cost Laser £3.3 million. Of this £700,000 would be taken as paper in Laser and £1,320,000 committed from current Laser shareholders. Laser needs to raise a further £1,280,000 to complete the purchases. However these purchases will deliver a profit of £800,000 from a turnover of £2.4 million within 18 months of the purchase, rising to £3.2 million and £1.3 million after 3 years. This will value the stations at a conservative £12,000,000 million showing a return of 3.64 on the original investment. The cash flow advantages of the above will supply the funding of Laser licence wins during this period. Laser is currently working with 22 application projects and is budgeting on winning 6 of these projects over the next 3 years. These will require £1.1 million of funding but will show a value of £5.5 million over 3 years. In total Laser is projected to have a value of £17.5 million delivered from investment of £3.875 million including Laser’s current issued shares (£575,000) Laser has appointed Eversheds as its legal advisers handling the investment and the purchase of the radio stations. 18
  19. 19. Once the first stage purchase is in place Laser will complete its ambitions to achieve an AIM listing either through an entry to the market or reversal into an AIM listed shell company. This will enable Laser to develop the next stage of its development. It has identified a further 6 station targets that are likely to come onto the market as part of the sale of stations announced by GCap on 25th November 2005. This will involve the raising of a further £10 million of investment. 19