afaqs!

FM Radio - Auction Stations

By Anushree Bhattacharyya , afaqs!, New Delhi | In Media Publishing | July 21, 2011
The approval of the latest policy guidelines has thrown open more doors for private radio stations. Expect the action to hot up in phase III.

It has been a long, hard decade-and-a-half for private FM radio stations as change came about in phases, literally. Phase I in the late '90s helped private stations take their first hesitant steps. Six years ago came phase II, which allowed private FM broadcasters to spread their wings a bit more freely. Now, phase III promises even more freedom.

Judging by the first reactions from the industry, the policy (approved by the Cabinet in the first week of this month) seems to have been well received. The government has introduced several new guidelines (see box) like increasing the reach to interiors and a hike in the foreign direct investment (FDI) limit. Almost everyone believes that the growth story will take a leap. Is phase III actually what it is being made out to be?

The last mile

FM radio has come a long way. It was the metros and the big cities that got to hear it first. But with phase III, the network will reach 227 new cities (with a population of over 1 lakh), in addition to the 86 cities at present. The number of stations will go up to 1,079 from the existing 240 stations, an addition of 839 new stations. Interestingly, around 95 stations did not have any bidder in the Phase II of radio licensing. These stations will also be opened for bidding, this time.

This opportunity for FM stations will also throw open jobs in the hinterland. Says Tarun Katial, chief executive officer, Reliance Broadcast Network, "FM radio reaches 40 million listeners in the four metros and 350 million in 91 cities and towns. Now, with phase III, it will touch 90 per cent of the population making it truly a common man's medium." There is more good news.

Unlike other media like television, print and digital, radio has been fettered when it comes to broadcasting news. Though the government has relented now and allowed private FM channels to broadcast news, it will only be in the form of capsules sourced from All India Radio (AIR). Not everyone in the radio business is happy, but it is a start. Apurva Purohit, chief executive officer, Radio City, says, "We had made it abundantly clear that the news from AIR is not of great value to us both in terms of quality and fitment in our programming. But it is a positive step in the further deregulation of news for FM."

The private players believe that the news feed from AIR may not bring them profitability but it will certainly breathe life into the cash-strapped AIR. However, media analysts have a different opinion on this. AIR will surely charge a reasonable fee for the news feed. But for the 20,000-strong, cash-strapped public broadcaster, which has a turnover of just Rs 250-300 crore, the extra bucks won't make much of a difference.

Safety in numbers

A high reach not only means an increase in revenues for the private operators it also ensures growth of the business and reduces the cost of operations. In what came as a major relief to private stations, the government has allowed channels to broadcast multiple frequencies.

Therefore, in case a city has 10 private frequencies, a private operator can own four frequencies including its existing one. This step will have two-fold effect. Firstly, radio could see an upsurge in specialised channels with their own target audience. For example, a national player in Mumbai can operate up to two or three more frequencies - one for old Hindi songs, English songs or a channel for men - apart from the existing channel. This could also mean new niche advertisers or targetted advertising for brands.

Secondly, the cost of operating a second frequency will be less because many of the current resources can be leveraged better. "The capital expenditure will be less because existing studios can be leveraged. Operating expenses will be low because the same teams can be used for the second frequency as well. We will only need new programming team members," elaborates, Prashant Panday, chief executive officer, Radio Mirchi, Entertainment Network India (ENIL).

However, only large metros can accommodate multiple frequencies from a single player. It wouldn't be a financially viable option for smaller towns. The new policy also permits radio stations to network across the country. Private operators can invest in creating technical support in order to broadcast the same content to other stations (earlier, networking of channels was permitted only in C and D category cities of a region).

This reduces the cost of content to a large extent as it allows FM players to broadcast 80 per cent of content across the country, while limiting the local content to 20 per cent. Katial is of the opinion that this step will benefit FM players with large networks. "We have created a hub-and-spoke model and this will allow us to disseminate programming from a feeder city into multiple cities, which will be low in capital expenditure as well as operational cost," he says.

In the matter of multiple frequencies, private operators can own up to 40 per cent of the total channels in any city, provided there are at least three different operators in that city. Vineet Singh Hukmani, managing director, RadioOne, opines that this step will lead to one or two large players dominating a particular state. It could force small players to sell their stations. This is just one of the minor pinpricks that the new policy brings along with it. At the same time, the government has reduced the lock-in period of owning a station from five years to three. Therefore, a private operator would choose to sell the station after three years, if it doesn't find it financially viable.

Money for everyone...

The six per cent jump in FDI limit (from 20 per cent earlier) may not be much and may not attract many big foreign players, but it will certainly interest strategic investoRs Says Katial, "The incentives offered in phase III guidelines make it very attractive for strategic investors to look at this sector. Growth could gallop in the next three to five yeaRs" What has made private radio operators even happier is that the increase in FDI puts radio at par with print and news channels, for which the FDI is also 26 per cent.

THE HIGHLIGHTS

Some interesting points of phase III:
  • Radio operators have been permitted to carry of news bulletins of All India Radio.
  • Broadcast pertaining to the certain categories like information about to sporting events, traffic and weather, coverage of cultural events, festivals, coverage of topics pertaining to examinations, results, admissions, public announcements pertaining to civic amenities like electricity, water supply, natural calamities, health alerts. as provided by the local administration will be treated as non-news and current affairs broadcast and will therefore be permissible.
  • Private operators have been allowed to own more than one channel but not more than 40 per cent of the total channels in a city subject to a minimum of three different operators in the city.
  • FDI and FII limits in a private FM radio broadcasting company have been increased from 20 per cent to 26 per cent.
  • Networking of channels will be permissible within a private FM broadcaster's own network across the country instead just in C and D category cities of a region.
Even the government is happy. The I&B minister has declared that the auction of licences in phase III will bring in revenues of Rs 1,733 crore. This is as much as the money the government raked in for phase I and II put together (through one-time entry fee, migration and annual fees).

As per the phase I bidding terms, the annual licence was awarded for a 10-year period with a 15 per cent increase in licence-fee paid year-on-year. For example, if in Mumbai, the fee was fixed at Rs 10 crore, the licence-fee would increase by 15 per cent every year. In phase II, private operators had to pay a one-time entry fee for the number of stations grabbed through the auction, and then pay an annual fee of 4 per cent of the gross revenue. This will remain for phase III too, but the bidding process has changed - to e-auctions.

The base price, for existing cities, has been fixed at the highest price bid for a city in phase II. For example, the reserve price for Chandigarh would be the highest bid price that the city attracted in phase II. The government is in the process of fixing the price for new cities and towns.

For private broadcasters, the bidding game will become strategic. Those dominant in one particular region will concentrate on consolidating the channel's presence in that region. Or, a channel that is run by a newspaper group will look to consolidate its presence in all those areas where its publication has a strong presence.

Rana Barua, chief operating officer, Red FM 93.5 Network, has this to say, "Radio networks that do not have a presence in tier I and tier II markets will be eyeing frequencies in these markets and the government is probably hoping to meet a huge chunk of its revenue expectations from the auction of such frequencies. But the industry has to do its homework, analyse market potential, rationalise costs and plot breaks before making bids."

Future gains

At present, the Indian radio industry - which has 36 operators - tots up a turnover of Rs 1,200 crore a year. Private radio stations contribute Rs 850-900 crore while AIR accounts for the rest. Radio's share of the overall advertising spends of Rs 30,000 crore is a little over 4 per cent. With the implementation of phase III, FM radio will cover 90 per cent of the entire country, an opportunity that no advertiser will probably ignore.

According to Barua, in evolved radio markets such as the US or Germany, radio advertising accounts for about 10-12 per cent of the total advertising spends. "With radio audience measurement (RAM) set to expand its services to nine more markets from the existing four - Kolkata, Delhi, Bengaluru and Mumbai - advertisers will also have a more reliable currency," he adds. The amendment in royalty charges too will change the dynamics. The Copyright Board has agreed that radio companies should pay only 2 per cent of their net ad revenues - in-line with global norms - as royalty tax to music companies. Earlier, music royalties in developed markets ranged between 0 and 4 per cent.

Says Purohit, "As their businesses mature, it will be just a matter of time before the newer players also turn profitable." The transformation may not come about overnight, but after the long, hard, decade-and-a-half battle, private radio companies certainly deserve that slice of fortune when it comes their way. Whatever be the outcome, expect some furious bidding once the auctions start.

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