Select Committee on Communications Minutes of Evidence


Examination of Witnesses (Questions 2060 - 2079)

WEDNESDAY 27 FEBRUARY 2008

Mr Andrew Harrison, Mr Mark Story and Mr Daniel Bruce

  Q2060  Baroness Bonham-Carter of Yarnsbury: Mr Story, you are Bauer, are you not?

  Mr Story: Yes.

  Q2061  Baroness Bonham-Carter of Yarnsbury: The potential GCap merger means that this would create a company with almost 50% of the market share. Do you feel that is going too far in this consolidation argument?

  Mr Story: Addressing that from a purely business point of view, that may or may not be worthwhile to do because if there is a greater concentration of radio stations in one area you are just taking on new stations in the same area that might or might not be commercially sensible to do. It was great value for us as a company to buy Scottish Radio Holdings so that we could offer all of the north of England and Scotland as one offer to advertisers. The core thing we tried to get across here is that freeing the rules on consolidation would allow the industry a greater flexibility. Interestingly, looking at the last two major takeovers in the industry, one was our own Emap being taken over by Bauer, which was previously not an operater at all in the radio sector in the UK, and the second, the takeover of the Chrysalis Group by Global, a previously unknown company, probably some of the people in it are known, but it was a new company which had come in, there was no further consolidation in those, which have been the biggest purchases in commercial radio history. It is not a foregone conclusion that it will all end up in one place, but I think it needs flexibility so that that could happen. My view is, in terms of giving better content, it often will be the way that it actually will help doing that. At some stage there also has to be a test where you look at each individual case and say is this in the public interest or not. What is difficult about these rules is they are almost impossible to understand and they are absolutely arbitrary.

  Q2062  Baroness Bonham-Carter of Yarnsbury: I understand the argument. I think you are in a way getting to my concern, which is I understand totally the argument about efficiency and, having worked in newsrooms, I completely appreciate that. The problem is diversity. On a trip to America we discovered that that is a real problem in the radio industry there. The consolidation means that locality has gone. How do you make sure that the hubs are not further and further away from where you are actually providing the news?

  Mr Story: We have a huge difference with the United States in culture. I was talking to somebody who makes the jingles that go into the news and they said, "I haven't made one since 1970." Music stations in the US just do not take news. If you want news you go to a news channel. Will that happen here? No, it will never happen here because that is not the mix that people want. They may get stations that do not take news. News is such a key part of the offer that I really do not think that will ever happen. In the United States they consolidated it and had something like 1,500 stations and then they had to move backwards as they needed to have some diversity. It cannot be just send the packet, pour it out, add water and that is a radio station, it has to have some `locality' in it. We passionately believe in `localness' in our stations.

  Q2063  Baroness Bonham-Carter of Yarnsbury: You support greater consolidation, but you would like to see safeguards introduced to encourage diversity.

  Mr Harrison: Perhaps I may just build on the question and Mr Story's answer. I think there are two natural safeguards already in the system. The first is that all stations have a licence from Ofcom and the format of that licence determines the sort of output they need to make, the hours of locally made and produced programming and the hours of "local news". So even if Global were to acquire GCap it cannot change the formats of those licences and in order to be operating within the licence and avoid having the licence revoked it still has to meet those commitments. So those commitments protect the output regardless of ownership. I think our second contention on your slightly earlier question is, if you take that specific merger or acquisition as a possible example, there is a perfectly sound separate process that works across industry in terms of the Competition Commission and competition law and the Secretary of State's right to intervene anyway that should be entirely sufficient. If it were the case that Global were to acquire GCap and that 50% market share—I must remind you, it is a 50% market share of the revenue of the commercial sector, it is a much less than 20% share of listening because of the BBC—were judged to give rise to competition concerns, there is a perfectly normal process available through the competition authorities to address that. What we do not feel we need is the additional burden on top which prevents a lot of this possible consolidation, which we think would be in the interests of listeners, providing better coverage overall, from ever getting off the ground.

  Q2064  Chairman: There is one thing I do not quite understand. You have been making great play of the difficulties of the industry, but we find that Bauer bought Emap's radio stations for £422 million in February 2008 and in January 2008 Global Radio made a hostile takeover bid of £300 million for GCap. That sounds a pretty prosperous industry to me.

  Mr Harrison: On the contrary. The GCap share price three years ago was three times what it is now and the market capitalisation was triple what it is now. The reason it is a hostile bid is the value of the company is way down versus where it was six or seven years ago before the internet revolution and everything else. The market capitalisation of these companies is weak. The fact there is a £300 million bid on the table for GCap, which is far and away the biggest player in the commercial radio sector, gives you a graphic example of the small size of the sector. £300 million is half the turnover of Johnston Press, is way lower than the turnover of Trinity Mirror and way lower than the turnover of Northcliff or DMGT. This is a very small sector.

  Q2065  Baroness Bonham-Carter of Yarnsbury: Mr Story, Bauer is a German media company, is it not? How big is Bauer?

  Mr Story: I think Bauer is the second biggest publisher of magazines in Europe.

  Q2066  Chairman: What is its market capitalisation or its turnover?

  Mr Story: I am not aware.

  Mr Harrison: It is privately held.

  Q2067  Chairman: It is a privately held German company?

  Mr Story: Yes. The reason during the process that Emap sold its magazines and its radio, both bought by Bauer—

  Q2068  Chairman: Were you an Emap man?

  Mr Story: Yes, I was. The reason it attained that figure was entirely down to the multiples. An independent account of this said that Emap radio accounted for something like 80% of the profit in the commercial radio sector. Within our own company there will be small stations where we do not make any profit. To defend us against those who think profit may be negative, for the last 10 years we have won more Sony awards for excellence in broadcasting every year than any other radio group. They paid a price for something that was valuable. That is not necessarily the case for the rest of the commercial radio industry. I think there is real hardship inside the industry.

  Q2069  Chairman: As a matter of interest, you as an old Emap man—or experienced perhaps—did Emap ever think of going to Germany and trying to buy some radio stations there?

  Mr Story: Yes, we did. The German market since the Second World War has been deregulated. It is not possible for it to be regulated centrally. Each radio station is regulated by local media and I think we are beginning to see under the Merkel Government that that is probably going to change. I am only speaking for myself here. I suspect Bauer may be looking at the opportunities that existed in Germany and gathering some expertise.

  Q2070  Chairman: How easy would it be for a British company to take over a German radio station?

  Mr Story: Very easy.

  Q2071  Chairman: No barriers?

  Mr Story: No. It is a good time to buy because they are very cheap.

  Q2072  Chairman: What is the history of Global Radio?

  Mr Harrison: Global Radio is a privately owned company owned by three or four investors.

  Q2073  Chairman: Where is it based?

  Mr Harrison: It is based in the UK but its backers are Irish.

  Q2074  Chairman: It is not an Irish owned company?

  Mr Harrison: It is held in the UK but its backers are Irish businessmen.

  Q2075  Chairman: It is another privately owned company?

  Mr Story: Yes.

  Q2076  Chairman: These two big players are both privately owned?

  Mr Harrison: Both have recently gone from listed companies to being privately held. Correct.

  Q2077  Lord Maxton: Most of what I call local radio is local advertising. The music you play is not local bands or groups. Your play lists are not local. Are you losing that advertising? Everybody is complaining about advertising moving to the Net in particular. Is that happening?

  Mr Story: It is local advertising but in the bigger conurbations it is national advertising being played to people in a local context. There is a value for national advertisers for their national advertising to be heard by people listening to something from their locality rather than listening to something national. It is a technical point but that is what makes it successful. In major conurbations the ratio would probably be about 60 national advertising and 40 local.

  Q2078  Lord Maxton: How local is it? Local restaurants?

  Mr Story: Yes. It depends on how many listeners the radio station has. You have to buy the whole thing. If you buy a 30 second commercial, you will buy a package across a number of stations. For instance, if you are in Manchester, if you are a fairly small restaurant, you could choose a particular station where it would not be wasteful for you to advertise there. You do not want 10,000 people turning up on one night.

  Q2079  Lord Maxton: Are you losing that advertising? Is it more difficult to get?

  Mr Harrison: It is more difficult to get. There is no doubt. If you look at the absolute amount of advertising we had from local sources in 2000 versus today, that is down slightly. The relative amount of advertising bought nationally is a higher percentage than it was. The reason that we are losing that advertising locally is the increased competition from particularly Internet sources. Typically, there are three large categories of local advertising for both local press and local radio: property, recruitment and motors. Those are three categories that have all migrated quite successfully, but not exclusively, towards the web. There is one other structural change that has happened on local advertising which is some of the core local advertisers for commercial radio have historically been things like local car dealers and that sort of thing. As that sector has consolidated, we now have big holding groups like Pendragon or whatever, and those small local deals, local station to local car dealer, have been replaced by regional deals between a regional car dealer and a regional group. There is some structural change in the mix there as well.


 
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