Future for local and regional media - Culture, Media and Sport Committee Contents

Examination of Witnesses (Question Numbers 260-279)


27 OCTOBER 2009

  Q260  Chairman: We now move to the second part of this morning's session. We turn our attention to the commercial radio sector. I welcome Andrew Harrison, the Chief Executive of RadioCentre; Travis Baxter, the Managing Director of Bauer Radio; and Steve Fountain, Head of Radio at KM Group. The committee has already received evidence about the bleak prospects facing the local and regional newspaper industry. We have also had it suggested that if anything the prospects for commercial radio are even more poor. Can you give us your rough take on the current state of the commercial radio sector and the future prospects?

  Mr Harrison: Chairman, the revenues for 2009 are projected to be down 11%; 2008 was down 8%; and indeed we have had six successive quarters of decline since quarter 2 of 2008. That is the state of play at the moment. In terms of our share of the overall advertising market, with our revenues projected to be down 11%, that probably means our share of the overall market is holding up quite well, given that the overall market is probably declining to an even greater extent than that with some of the pressures facing, for example, the regional and national press. Nevertheless, the crucial financial difficulty for the small commercial radio sector is that we are a small sector and the overall turnover of the sector is only £500 million spread over 300 local commercial stations, and so on average most local stations are turning over only £1-£2 million. This is a succession of small businesses. So it is a very fragile infrastructure; it is also a sector with very high fixed costs, partly as a result of some of the regulatory environment in which we operate. Commercial radio is very much fighting for financial survival. The Myers report, which was recently commissioned as part of Lord Carter's Digital Britain Report into local radio identified that seven local radio stations have gone bust so far this year and identified potentially a further 50 were vulnerable. Indeed, Ofcom in its current consultation on the state of local radio has also emphasised that the radio sector is probably facing its most critical financial challenges in its existence.

  Q261  Chairman: There has been quite a significant growth in the last few years of the number of radio stations. Is it possible that there are simply too many for the market to sustain?

  Mr Harrison: Yes, I think there is no doubt that the truth is that the radio sector's share of advertising revenue grew from around 2% at the start of the 1990s through to about 6% through the end of the 1990s. That was partly as a result of new programming, partly as a result of new stations, and so on. Nevertheless, given that the size of the advertising cake for commercial radio is about the same as it was in 2000, the reality is that we are now spreading our revenues across a very broad station base. One of the things that we need to get clarity on as a sector with Ofcom and with Government, partly as referenced in the Digital Britain Report is how we shape the future for an industry that has three tiers of commercial radio, large national stations which are on digital, the larger local and metropolitan stations that are also on digital, and a tier of smaller local stations on FM, each of which are commercially viable as opposed to the current uncertainty and regulatory burden where there is an enormous number of stations fighting for a smaller slice of the advertising pie.

  Q262  Chairman: Do you have an idea about minimum size of area or population which is required to make a radio station viable?

  Mr Harrison: The evidence from the John Myers' report was that over 60% of commercial radio stations serving an area of less than 250,000 were on the borderline of profitability. There is clear evidence from the Myers' report that the broader the target area that each station serves, clearly the more audience they have the opportunity to secure their commercial viability. We absolutely recognise that we want to have stations serving smaller local communities, but it would seem to be the case that any station with a Total Survey Area (TSA), a potential audience, of under about 500,000 is always going to find it very difficult to get to any critical mass to have long-term sustainable viability. My colleagues may have direct operating experience.

  Mr Fountain: We operate seven, small-scale, local radio stations, all of which run at a loss. The largest we have is about 250,000 to 260,000, which is in the Medway towns. Thereafter, they go down to well below 100,000 and the smallest is about 70,000, which is Ashford in Kent. It is particularly tough; it has been tough in the three and a half to four years I have been there, but it clearly has become tougher in the last 12 to 18 months. Had we not been protected to a great degree by a larger parent company, then we almost certainly would have gone out of business.

  Q263  Chairman: How long is your large parent company going to be willing to go on?

  Mr Fountain: We are part of the KM Group. So far as they are telling me, at any rate, they are completely committed to the future of the radio stations.

  Q264  Chairman: Do they think that they can be made profitable?

  Mr Fountain: Yes.

  Mr Baxter: There is only one comment I would make on the point about population size as current: it does self-evidently depend to a degree on the nature of the economy that those radio stations serve. We have amongst our nearly 45 radio stations a radio station called Northsound in Aberdeen which is a population centre from a medium perspective of around 200,000, but it is self-evidently a very prosperous economic centre and is a very profitable business for us. So there is some difference between the markets that any particular population size relates to based on the economic dynamics of the market.

  Q265  Chairman: The Government and Ofcom are keen to encourage the growth of community radio stations. Is that chipping away at the revenue base at the same time as the nationals?

  Mr Harrison: I think under the current regulation in terms of how community radio is funded the smaller commercial radio stations and the community sector can quite happily co-exist. The reality is, though, Chairman, that there are two tensions that are yet to play out. One is that there are an awful lot of community radio stations that have been licensed but are not yet actually operational, so we wait to see whether there will be an impact cumulatively over time. However, amongst the community radio stations that have been licensed, perhaps understandably from that sector, there is already pressure on relaxation in terms of how they are funded. Of course our concern would be that if you end up with effectively another sub-tier of commercial radio, which would be advertiser-funded community radio, alongside advertiser-funded commercial radio, you will inevitably get a squeeze. To be fair, that has not happened quite yet but it is certainly something on which we are keeping a watching brief.

  Q266  Chairman: We were given evidence for instance that up to half of the 1300 local and regional newspaper titles could close in the next five years. Do you have a general view as to how many commercial radio stations there will be in five years' time as compared to today?

  Mr Harrison: The evidence that we submitted to the Myers' review for Digital Britain we support, which is that we estimate up to 50 of what is just over 300 commercial radio stations could go bust in the next year or two without significant regulatory change or intervention. That would be of the order of magnitude of one-sixth or one-seventh of the universe, I guess.

  Q267  Chairman: Did you say 350?

  Mr Harrison: About 340 in total.

  Q268  Chairman: Of those, how many are making a profit at the moment?

  Mr Harrison: Less than 20%.

  Q269  Rosemary McKenna: The commercial value has dropped dramatically of the radio stations. I am thinking about what happened to SMG when it purchased Virgin Radio. They lost a huge amount of money.

  Mr Harrison: In that particular deal, from recollection, SMG paid order of magnitude £200 million in 2000 or so for Virgin Radio. It was acquired recently by Times of India Group for order of magnitude £50 million. So in the course of seven or eight years, the transaction value at least declined four fold.

  Q270  Rosemary McKenna: Would that be typical of the current situation or was that an unusual situation?

  Mr Baxter: I think it was slightly unusual and possibly unusual to the UK market. Some of the radio assets that were traded at he back end of the Nineties were on high profits but there were huge multiples of those profits that were generating the capital value of the assets, and to a degree there may have been bubble being created there through both enthusiasm around the media but also a trend through the Nineties, which was probably a more positive one for commercial radio overall.

  Q271  Rosemary McKenna: Can we move on to another issue and that is the impact of the decline in advertising revenues on the quality of local commercial radio output, in particular the provision of news. Do you feel there has been a decline because of the loss of revenue?

  Mr Harrison: I guess there are two things in tension there. The first is that we would not accept there has been any decline in the provision of news. All of our stations are absolutely committed to local news provision; it is a critical part of our format and our licensing. All the evidence that we have from RadioCentre from all the surveys we have run of our members is that commitment to local news, traffic, travel and information is often what sets us apart from both rival commercial stations but of course from the BBC as well. Ultimately, all stations can play music from the vast music repertoires that are out there. We recognise that local content as critical. The flip side to your question is clearly one of the reasons why we are here giving evidence, which is that we are a small sector and revenues are under pressure and we do have a high fixed cost base. Inevitably, therefore, if you have a high fixed cost base, the pressure is on to make sure that your variable costs are under control. As I mentioned in my introductory response, we have seen about an 11% decline in revenues this year. Broadly speaking, if we take as a simple straight line for the purpose of this exercise that the profit margins of the sector were 11%, that means the sector broadly is trading overall at a loss and we think the whole sector is trading at a loss. Inevitably, to your question, it puts an awful lot of pressure on the creativity and ingenuity of the stations to ensure that the programming costs are as well spent as they can be. However, to be fair, the commitment to news remains one of the cornerstones of our offer.

  Mr Baxter: May I make a brief comment on that? I picked up some data on our business before I left the office yesterday. We produce about 646 bulletins on any given weekday with between eight and 40 local stories being created for each station a given day. That reaches a total of about 4.5 million people a day listening to our bulletins on Bauer Radio radio stations. It is a fundamental part of what we do but, as Andrew said, the commercial challenges of doing that as efficiently as possible are key to us and capturing every possible opportunity to operate using new technological advances to the maximum so that we can retain that quality. Our business won 20 Sony awards for news in the last three years. You know that is the industry standard. That is competing against the BBC. We think we are hitting the quality threshold but when I started in broadcasting 30 years ago, we used reel-to-reel machines; we had to go out, bring them back, edit them with a razor blade. Now it is all electronic. That whole systemic efficiency is to a degree not reflected in the regulatory environment we have to live with, and we would like to change that so that we can capture those efficiencies and keep the front-of-house quality.

  Mr Fountain: Our news requirement comes from a news hub. We simply would not be able to afford to run seven local news services, so we have a team of journalists running out of one hub that supplies news to our seven radio stations. Geographically we are unique; all of our seven radio stations are in east and west Kent, so everything is in the same county. Frankly, if a big story breaks in one part of the county, it is just as important in another part of the county quite often. We are able just to run the one news service on which we run 12 local bulletins a day Monday to Friday and then six on Saturdays and Sundays. We have not suffered, as far as we can tell, looking at our audience numbers, from going down that path.

  Q272  Rosemary McKenna: What about the investment in journalism? Are you still on local radio stations able to invest in bringing in young journalists and training, et cetera?

  Mr Fountain: It is where we begin. In sporting terms, in football terms, we are very much conference league or perhaps third division. Part of our role, as I see it, is that it is our job to bring new talent into the industry, whether it is news or programming talent of another format, and to develop that talent so that they can go on to work for the kinds of stations that Travis mentioned.

  Mr Baxter: We share that view totally. An individual station with us might have between six and nine local journalists based in the radio station, maybe a bit more if we are covering sport with live commentary, which we do for a number of the stations, including our station in Liverpool. We generally take a view that as well as keeping some very experienced editorial skills on the team so that there is good editorial judgment taking place, we want to bring youngsters through, probably people who, being realistic, are not going to spend the majority of their journalistic career within commercial radio, but we give them the great opportunity to work across a broad range of activity very quickly.

  Q273  Rosemary McKenna: You also get their enthusiasm and their freshness?

  Mr Baxter: Absolutely, their creative ideas about both how they deal with content from a creative perspective but also how they deal and migrate it on line and so on. We accept that after a period of time they may well pursue their careers into other avenues, but we capture that and cultivate it and train it while it is with us.

  Q274  Mr Watson: If you do not mind me saying, Travis and Steve, you have the best radio names I have ever seen.

  Mr Baxter: The truth of it is that we were both on the air as well.

  Q275  Mr Watson: Can I ask you about Digital Britain and the Digital Britain Report? Do you think the report gave a good way forward for the commercial sector to journey out of its current troubles?

  Mr Baxter: Perhaps I could ask Andrew to give an overview on that and then maybe we can give our respective views?

  Mr Harrison: To give an overview, I think the short answer to that is "yes". One of the fundamental issues the sector faces right now is the appalling cost of dual transmission. Ultimately, right now, this is a small sector and very many of our stations are simultaneously paying for the cost of analogue and digital transmission. That clearly does not make any financial sense. What we advocated for in Digital Britain was a pathway for all stations to end up with a very clear plan of what is the single transmission platform for them. That led, as I said in my opening remarks, to three very complementary tiers of the commercial radio offer. The first tier is a strong national offer on digital to compete with the BBC, and that is critical for the sector because the truth is that the FM spectrum is full. I am sure all of you will know from some of the other conversations we have had before that the BBC dominates the gift of analogue spectrum. It has four national FM stations; we only have one with Classic FM. For the sector to compete and capture its share of national advertising revenue, the ability to have a national digital platform I think is critical. As we then had the conversations with Digital Britain, I think it became very clear to all of us that you cannot just migrate national stations to digital and leave all of the large metropolitan local stations, like City in Liverpool for example or Metro in Newcastle, all the BBC's local stations, as analogue only. The listeners to those stations will want the functionality, experience and benefits that come with digital. It is then very important that we have a second tier of the large local and regional stations which also migrate to digital. Critically, however, that nevertheless leaves an important third tier, which are the smaller or the rural stations for which either DAB coverage is currently not present—there is just not the transmitter build-out in some of the rural areas—or for which it is likely to be prohibitively expensive going forward. That sector equally needs clarity and that sector being able to stay on FM alongside community radio we feel gives a very balanced ecology where the sector has the most opportunity to compete and the lowest cost base because each station can ultimately choose whether it is on one transmission methodology, i.e. digital, or another, analogue. At the moment, we are in limbo where stations are paying for both but the profitability of the sector is fragile and there is not a plan. So we absolutely welcome the beginnings of that plan, which we recognise is the start of what is going to be a long and difficult journey as stations migrate and decide if their future is on digital only or their future is on analogue. The quicker we can move the industry there, clearly the better for the fragile economics of the sector.

  Mr Baxter: Perhaps I can encapsulate some of the things we sent in to the Carter Review. Our business view generally is that the future is digital. There is hardly the need for me to make that clear to you. Our view has been for the last ten years that we will look at all platforms as we develop our business. We have successful radio stations, primarily operating for example off the audio channels on the freeview digital television system. However, within that we think it is of real value for radio to have a bespoke platform and the one that is available to us that is a bespoke broadcast platform is DAB. It has, however, taken 12 to 13 years of very slow development for that platform to get to its current state. Therefore, our proposition to Carter's Review was: let us get on this horse or get off it. We think we should get on it and put every possible energy we can over the next view years into getting consensus, direction and pace into the whole process of take-up, like there has not been during the last 12 years. If that can be achieved, it will produce a new resonance for commercial radio as a whole, indeed for the whole of radio. It will help position radio more effectively in the fragmenting media landscape we all have to deal with and give us an opportunity, as Andrew said, of clarifying our investment levels around platforms where currently we are having to pay for two when, in a future where either one is successful, we would only have to pay for one, thereby allowing resource to be put into developing content and other things around our business.

  Mr Fountain: KM Group does have a digital platform. It is currently costing us over £100,000 a year and we get absolutely nothing back from it. I think the company at the time, six years ago, took the view that they wanted to be a part of the future. Circumstances since have not really helped them to be able to develop that particular medium. I think we too take the view that we would want to be part of a digital platform going forward, but there are a number of issues that would need to be overcome, not least of all the cost of entry and also in our particular case our DAB coverage and the coverage of our FM stations is not mirrored. We have better coverage right now on our IrFM platforms than we do on our one single DAB coverage. The problem around the coast, if you take that from Medway right the way round perhaps as far down as Rye, around the Kent coast and just touching into Sussex, is such that DAB does not actually reach into large parts of that coastal area.

  Q276  Mr Watson: Would DAB plus?

  Mr Fountain: I could not answer that because I do not actually know.

  Mr Harrison: No, there is no difference in terms of the coverage for DAB or DAB plus. DAB plus is just a different method of compressing the signal so you can actually get more signal down the pipe, if you like; you tend to get more stations, but it does not actually affect the coverage.

  Mr Fountain: You can see that in order for us to extend the coverage of DAB, there is clearly a cost involved, and there is also a conversation to be had between Ofcom and the French communication authorities as well.

  Q277  Mr Watson: Presumably you are all relatively happy with what is quite a demanding timetable outlined in Digital Britain if your view is that we should just get on with it and do it?

  Mr Harrison: I think you have expressed it exactly right. The timetable is demanding. I think it is set deliberately as being demanding. Digital Britain does not set a date for switchover. What it sets are two criteria that it says are axiomatic to be hit before switchover can be contemplated: one on listener levels and one on coverage, both of which we support. The aspiration in Digital Britain is to try and hit those two gates, if you like, by the end of 2013. On what Travis was saying earlier on, we think that is absolutely right, that the industry now works terrifically hard together, alongside the BBC and alongside the Government and the regulator to do our very best to hit those criteria. Once we then hit the criteria, the Digital Britain report identifies that it will probably take a couple of years from the criteria being hit before we could actually contemplate switchover. That is aggressive but we think it is appropriately aggressive against the context of an industry that is clearly struggling financially now, and the vast majority of my members are highlighting the cost of dual transmission as the single biggest cost issue that they face and self-evidently one that could be eliminated the quicker we can get to a decision one way or the other.

  Q278  Mr Watson: May I ask you a bit of a left field question? You are quite confident that we should move to digital radio quite quickly. How confident are you that consumers will want to make that journey and that they will not migrate to internet, radio or choose to listen to livestreaming sites like Spotify?

  Mr Harrison: There are two different points there. We are quite confident, as you say, about the movement to digital, but purely because what the Digital Britain Report sets up are consumer-led criteria to drive that change. The criteria are absolutely that we will not move until coverage is built out to match FM. It would be absolutely suicidal for the industry to switch people off who currently listen and enjoy radio services, so it is axiomatic that we have to build coverage out. Secondly, the criterion is that listenership to digital has to be that the majority of all listening has to be to digital before you would contemplate switchover. We are not going to rush into this without being led by the consumer. What we are trying to do, as Travis said earlier, is inject some pace, momentum and energy into the process. If we wait for the natural replacement of sets and the natural progression of DAB—it has taken a long time to get to the listener levels we have right now, we still have all of the BBC's services for example available on analogue—it is going to be very difficult to kick start the progression. We are very comfortable but we are comfortable because it is led by the consumer. The second part of your question is: are we worried about competing services? We are absolutely. I think there is a whole generation of new entrants into the market—Spotify, Last.fm, Pandora—available on-line, all of which are unregulated and against which we are competing for listeners and for advertising revenue. When you have a small, heavily regulated, constrained local radio sector competing with an unregulated world-wide series of music offerings, that is one of the challenges we have to face. We are, however, absolutely committed to the importance of a broadcast transmission methodology for digital. That is not to say that the internet will not be an important complement to that but our business model is based on a broadcast signal of one signal to a wider audience. There is very little evidence so far that on-line music offerings are in themselves profitable business models. For UK citizens and consumers, for our listeners, we think it is absolutely critical that radio remains free at the point of delivery. That has been one of its great strengths ever since the BBC was founded in the 1920s. Of course at the moment, although as I heard this morning the cost of broadband is potentially down to £6 a month, nevertheless, to access any internet-delivered service, you have to pay an ISP connection. That may change but I suspect we are a long way away from that.

  Q279  Mr Watson: It has been said that pirate radio in Britain was killed off by statutory licensing of the commercial sector. Would you feel threatened by a statutory licensing regime for on-line music streaming?

  Mr Harrison: No. I think we have always advocated, whether it is competing with on-line media or competing with the BBC, that what we want is a level playing field in which to be able to compete. While we have never had any discussion about how that might work in practice, we are more than happy to compete and fight for audience share against all offerings, but we do want the playing field to be level as we do so.

  Mr Baxter: About Spotify and other things, so far the evidence we are collecting seems to suggest that people who are consuming those sorts of music streaming channels are consuming them in addition to what is their traditional amount of total radio listening. I am not suggesting that we should not be conscious that things may change over the next few years but I think that gives some indication of the strength and the value of us investing in content. Therefore, from a commercial perspective, that is something we will choose to do, be it news, quality presentation, entertainment, all of those things that radio is about that makes it close to you and makes it your friend. It is a personality not a utility. Those things drive our commercial agenda. We do not need a regulator to make that happen. My second point is around the bespoke platform. As Andrew has said, we think a bespoke digital platform for radio, DAB is the one, is a good thing for us. If you just took car listening as an example, even with the internet protocols and the various distribution channels that are available to get streamed, live content through those channels to a car listener, which makes up a lot of radio listening, that is still a very hard thing to do. Again, some of radio's benefits are that it is your friend and it is live; it lives the day with you.

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