In focus: Poised for growth: FM radio in India
Current state of the industry
India’s private FM radio segment accounts for around 4% of the country’s total ad industry. The sector is expected to
Source: EY estimatesgenerate revenues of around INR14 billion in 2012–13, with 245 private FM stations operating in 86 cities, and has been growing at a CAGR of 14% annually. According to IRS 2012 Q2 data, radio has an estimated audience of 158 million people (out of which FM radio accounts for 106 million), as compared to 563 million in the TV segment and 352 million in the print sector. Advertising revenues comprise more than 85%–90% of the total revenue generated by FM radio companies; non-FCT sales can contribute up to 20% of a radio company’s total revenue today.
Many large companies are now achieving EBIDTA break-even after 50%–60% of their license period has expired. This implies that they have very little time left to recoup their accumulated losses. Given limited inventory and revenue growth opportunities, profitability has been largely achieved by companies by controlling their costs by centralizing their operations, enhancing their employees’ productivity and networking their stations.
Our survey of 23 respondents, including Indian radio companies, advertisers, media agencies and other industry stakeholders, highlighted the fact that the key challenges faced by the industry include limited inventory, inability to demonstrate rate of interest (ROI) and slow recovery of ad effective rates (ERs). Therefore, the need of the hour is for the radio industry to collaborate and implement a measurement system that supports the growth of the industry.
Given that smart phone shipments to India are growing at more than 60% per annum and the cost of broadband is expected to come down to INR250 per user per month, it is clear that it is only a matter of time before internet radio gains significantly in popularity, as audiences move away from mass music channels to genre-specific and niche ones. This could affect the value of FM radio licenses in the middle to long term.
The current rate of payment for music royalties for sound recordings (of 2% of a company’s net revenues) approximates the rates paid by radio companies worldwide. However, unlike radio companies abroad, those in India do not pay royalties for underlying works separately, as ruled by the courts. This situation may however correct itself over time.
Phase III of FM radio licensing promises further growth opportunities for the Indian FM radio industry, since it covers 294 cities and 839 licenses. However, only 52 of these licenses are in high revenue- generating category A+, A and B cities.
Revenue with and without Phase III
Souces: EY estimates
The FM radio sector is expected to grow to INR23 billion, at a CAGR of 18%, within three years of Phase III being rolled out. According to the respondents of the survey, industry growth is likely to slow down to an average of at best 10% over the next three years if Phase III is not initiated. They expect the share of local retail advertising to increase from current levels to more than 50% of the total revenues generated in the segment, and activations and other below-the-line marketing initiatives to play a more important role in generating revenues. The margins of radio stations are projected to decline in the short run, stabilize in three to five years and then rise. The growth in mobile and internet ad spends could, however, pose a threat to the rise of FM radio.
Managing an increased number of stations will require controls — systems, policies, procedures and MIS — to be implemented across different geographies to manage resources efficiently. Expansion into several new cities will necessitate the implementation of robust IT systems and technology will be a major growth driver and enabler.
Phase III will make the industry more conducive to mergers and acquisitions due to proposals such as reduction of the license lock-in period from five to three years, an increase in the license period from 10 to 15 years and in networking between all the stations to enable cost optimization, ownership of multiple frequencies in a city and a rise in the foreign investment limit to 26% from the current 20%. The industry needs to push for parity with the FDI norms for other media segments such as broadcast TV.
There are, however, certain aspects that must be taken into consequence to make Phase III a success. The One Time Entry Fee (OTEF) needs to be low to ensure the viability of stations, and therefore, the reserve price for the auctions cannot be the highest price of similar category stations during Phase II. The closed bid process should be adopted to enable more rational bid values. In key revenue markets (categories A+ and A), at least three to four licenses should be made available for auction, subject to management of certain issues, since renewal of existing licenses at high rates will send the industry into a cost spiral if bidding reaches irrational levels. Removal of branding restrictions will make the segment more attractive for foreign radio, domestic media and other brands. Furthermore, given that the industry is not currently profitable, migration fees need to be reduced or eliminated. Moreover, there needs to be enhanced clarity on renewal of licenses and the rates at which they need to be renewed, to provide a more certain future outlook for radio companies.
In the long term, significant growth can only become a reality if several thousand stations are operationalized, the burden of high license fees is removed by the Government by increasing the variable component and reducing fixed costs and dissemination of news is equated with other media.