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Challenges FM radio broadcasters face as sector is set for expansion

MUMBAI: Rising cost structures are a source of worry for the private FM radio broadcasters. Companies spent around Rs 10.56 billion to acquire 91 new stations and will spend Rs 39.33 billion as they migrate their existing 243 stations to Phase III.

The radio companies, however, seek comfort from the fact that the industry grew by 15.1% in 2015 to reach revenue of Rs 19.8 billion, according to FICCI-KPMG report. The forecast is that this will grow at a CAGR of 17.1% till 2020 and revenue will more than double to Rs 43.6 billion. Radio’s share of the overall pie is estimated to continue at approximately 4 per cent
.projected size of the radio industry

Still, the sector is hounded by several challenges and the smaller players are under pressure. Consolidation is bound to happen. The acquisitions of Radio City by Jagran Prakashan and ENIL’s acquisition of Oye FM have been at strong valuations, indicating that investors are bullish on the sector.

Need to relax restrictions around the holding structure

On a national level, an entity can hold not more than 15 per cent of all channels allotted in the country, excluding those located in Jammu and Kashmir, the North Eastern states and island territories. Further, operators can run or own not more than 40 per cent of the total channels in a city subject to a minimum of three different operators in the city.

There is also a lock-in period of three years for the largest Indian shareholder. This is detrimental to the prospects of M&A as companies are not allowed to change ownership pattern for the prescribed period.

Measurement system

Measuring the reach of radio stations in the country accurately continues to be a challenge, states the 2016 FICCI KPMG report. This makes it all the more difficult for stations catering to niche audiences to convince advertisers of their reach. Given the huge investments being made by operators in Phase III, there is a need to build a robust mechanism. This is an area where internet radio could be a clear differentiator for advertisers.

Need for a copyright board

Previously radio operators were required to pay a ‘needle hour’ royalty to music companies. Pursuant to the Copyright Amendments of 21 June 2012, the erstwhile Copyright Board was dissolved in order to reconstitute the same as per the amended provisions of the new Copyright Act.

It is unfortunate that almost 3.5 years have elapsed and to date the Copyright Board has not been reconstituted. This delay in the reconstitution of the Copyright Board has led to the unnecessary delay in adjudication of the long-pending issues. The copyright rules envisage publication of tariffs that would be payable by a person for the exploitation of the content.

The landmark judgment dated 25 August 2010 passed by the old Copyright Board specified that the royalty rate be fixed at 1% of the net revenue. However, due to the non-functioning of the Copyright Board, the tariffs have not been published.

The amendments have introduced a new right in favour of broadcasters, i.e. ‘Statutory Licence’, which applies to all broadcasters. However, to date the procedural aspects of availing the benefits of statutory licensing by the radio broadcasters are still not framed. The report, therefore, suggests that the Copyright Board be constituted at the earliest.

Key growth drivers

According to the FICCI-KPMG report, the key drivers of growth are:

  • Increase in the listener base – New stations in existing cities and proliferation of private radio to smaller cities are likely to increase the listener base. The rationale for some players to obtain a second station in the existing cities is to curate new content and attract non-listeners, thereby increasing the current listener base.

Industry pundits are confident that advertisers will soon follow. The current radio listeners in India are estimated at 110 million to 120 million, which is only a fraction of the overall population. In more developed countries like the US and UK, the listener base is significantly high. While socioeconomic trends in India are changing, there is a huge growth opportunity.

  • Increase in inventory – The report expects new stations to be operational by Q3 of 2016. Average inventory utilisation is currently high, indicating that operators can choose advertisers based on ERs. This affects regional advertisers with smaller budgets who move to other local mediums. By creating additional inventory, Phase III is likely to provide an opportunity for local advertisers to reach out to their target audience in a cost-efficient manner. Radio could also compete more effectively with TV and print.
  • Favourable macro-economic conditions – The Union Budget for the fiscal 2016–17 sends out clear indications that India is pacing itself for stronger growth, stability and sustained development. India is projected to achieve a GDP growth rate of 7.75 per cent in FY17, inflation is finally relenting according to the RBI projection of 5 per cent for FY17, and $350 billion of foreign reserves further point to India’s improving fortification against external volatilities. The Finance Minister’s decision to stick to the 3.5 per cent fiscal deficit target could result in lower yields on government bonds, which could in turn lead to a reduction in borrowing costs for businesses, which can make it easier for radio companies to fund their growth.
  • Emergence of new companies and categories – E-commerce has been a key growth driver. As it penetrates to Tier II and III cities, the spend is increasing in these cities. Initiatives by the government such as Make in India and Start-up India can further contribute to growth.

Also expected in 2016 is a revival in auto with the launch of several new models, in telecom with the launch of 4G and continued strength in FMCG. Increasing advertising from government and political parties as they become more sophisticated about communication will also add to growth.

  • Increase in wallet share – With an increase in the depth of penetration in existing cities and the addition of new frequencies, the report sees spends on radio growing from a current wallet share of about 4 per cent to about 6 per cent overall. Today in developed countries such as the US and UK, radio’s wallet share is estimated between 7 per cent to 10 per cent. Spending by government and political parties in India has also been increasing consistently.

The other key drivers that can propel the growth of the industry are the release of spectrum, conducive regulation, increased focus on enhancing engagement and the development of a robust listenership measurement methodology.