Examination of Witnesses (Question Numbers
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
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
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
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,
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
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
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 presentthere
is just not the transmitter build-out in some of the rural areasor
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 DABit
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 analogueit 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 marketSpotify,
Last.fm, Pandoraavailable 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.