Strong Signals: India’s FM Radio Stations Brace for New Competition

When Mumbai residents tune into one of their local FM radio stations, it is understood that the jockey is not going to use his air time to tax them with discussions about the global economic downturn, terrorism or any other weighty matter of the day. Instead, his challenge to listeners is to find the answers to riddles like, “I have eyes, but cannot see; a tongue, but I don’t speak. What am I?” (A shoe, in case you were wondering.)

For many private FM station owners, such light-hearted programming is no laughing matter. Even if they wanted to air current affairs programming, regulations prohibit them from doing so. Broadcasting news, weather bulletins and live sports are all also off limits to these stations. In addition, they can forget about owning multiple licenses in a single city, and one license can only cover a single type of programming — say, contemporary rather than classical music. None of those regulations, however, apply to state-owned and operated All India Radio (AIR), which was established in 1936 and is one of the biggest radio networks in the world with more than 230 broadcasting centers across the country.

FM radio businesses were granted their first licenses in 2001, but ongoing regulatory restrictions are not their only source of concern: The current economic downturn has also taken its toll. Radio in India — like TV, print and online media — has had to work harder than ever to hang on to advertising revenues as corporate clients slash marketing budgets in the wake of the global recession. According to the latest annual analysis of India’s entertainment and media sector from PricewaterhouseCoopers (PwC), radio’s advertising revenues (public and private) in 2008 reached US$170 million, which was higher than the previous year but lower than industry analysts’ expectations.

The good news is that relatively speaking, India’s private FM players will emerge from the current downturn relatively unscathed. “Radio is one of the best options available to advertisers in times of slowdown, given its cost effectiveness, high reach and the ability to get completely local when communicating with potential consumers,” says Tarun Katial, chief operating officer of BIG 92.7 FM, part of the Anil Dhirubhai Ambani Group (ADAG) that has 45 stations across India.

PwC predicts that India’s radio ad revenues will more than double to US$390 million between now and 2013, increasing at an 18% compounded annual growth rate (CAGR). In contrast, it expects the overall entertainment and media sector in India to deliver a 10.7% CAGR on average over the next five years, compared with a global average of 2.7% over the same period.

Even so, radio broadcasters can’t rest easy. As the government prepares to issue a new set of licenses, FM radio bosses are bracing themselves for competition to become fiercer than ever. According to PwC, as many as 600 new licenses could be issued under the next development phase, compared with 245 in the previous one. There are hopes that current regulations restricting the expansion of the incumbents will be relaxed, but the new license auctions — whose timetable has yet to be confirmed — will undoubtedly encourage new investors to crowd into the market. How well the incumbent broadcasters prepare themselves today for the next wave of competition will have a big bearing on the industry’s future viability.

Early Days

The early days of private radio in India were something of a free-for-all. Though AIR began operating in 1936 and the first FM service in India started in 1977, private participation wasn’t allowed until 1993 when the government experimented with a daily, two-hour slot on the FM channels in Delhi and Mumbai. The slots went “phenomenally well”, recalls an industry veteran involved with the Mumbai slot, and the future of private FM radio looked vibrant — as another outlet to attract radio advertisers and offer listeners a wider choice of programming than the AIR monopoly was providing. But then the government swiftly pulled the plug on it in 1999.

Hope was resurrected two years later when the first phase of India’s radio development began and the government conducted open auctions for a few dozen licenses. But with virtually no limits or penalties on speculative bidding, there was nothing to stop every aspiring media mogul from throwing his hat into the ring. With bids often reaching unrealistic levels, many winning bidders ended up paying hugely inflated fees. Of the 108 licenses issued, only 22 became operational in 12 cities. “Nobody made any money,” recalls Apurva Purohit, president of the Association of Radio Operators of India (AROI) and CEO of Radio City, one of the country’s first private FM stations.

The second development phase in 2005, however, was more promising, with 338 slots up for auction. New policies, meanwhile, scrapped the first phase’s annual escalating license fee of 15% — which was bleeding the earlier operators dry — and replaced it with a one-time entry fee in addition to a 4% revenue-sharing agreement. Foreign investors, who were previously barred, were allowed a maximum 20% equity stake in private radio companies. The result: 245 frequencies were taken up and the government earned US$295 million in one-time entry fees.

In a less costly environment, the incumbents became cash-positive and their margins of 20% and higher encouraged new, big players such as ADAG (45 licenses for more than US$25 million) and HT Media (four licenses for US$17 million, under the “Fever” banner) to enter the arena. That said, many stations have been loss-makers, struggling to break even. Today, there are 240 radio stations in 90 cities.

Surfing the Waves

But hurdles remain. For one thing, radio’s share of the overall advertising pie is miniscule, expected to remain at less than 5%, according to PwC. One key way to increase the share of that pie has been for stations to specialize and differentiate themselves from each other in order to target specific groups of audiences, and hence advertisers.That, however, is easier said than done.

Because current regulations prevent private broadcasters from owning more than one frequency, broadcasters have turned their stations into purveyors of all things to all listeners. To do that, many stations broadcast a variety of content throughout the day, attracting as broad a swath of listeners as possible. The result: “They all sound similar,” explains Rahul Gupta, director of Radio Mantra, which has eight stations in northern India’s Hindi-speaking region.

“When everybody sounds the same, it is not easy to find parameters of differentiation,” adds Abraham Koshy, a professor of marketing at the Indian Institute of Management (IIM) in Ahmedabad, who has been a strategy and brand adviser to a radio channel in southern India. “But there can be subtle differentiators: the type of music, when it is played, what the radio jockey says and so on.”

Radio City, for instance, is targeting — in CEO Purohit’s words — a “slightly more premium,” older audience than other stations. In contrast, Red FM, one of the largest operators in Delhi and Mumbai, is chasing a younger, edgier audience. For its part, BIG FM has homed in on running local-language programs on topics with local color — in Bangalore, in fact, it was the first station to go “100% Kannada” (the language of the state of Karnataka).

The big downside for channels that don’t find ways to differentiate themselves is that it’s hard to win customer loyalty. As K. Raman, head of the telecom, media and technology practice at management consultancy Tata Strategic Management Group (TSMG), notes, “Listeners will move en masse at the end of a time slot to another station offering content of their interest and another set of listeners will tune in.” This means radio stations face an uphill task when it comes to building a sustainable, consistent listener base — a prerequisite for advertisers aiming to reach their target markets.

Beyond programming, one way that stations hope to increase audience loyalty is by embracing corporate social responsibility. For example, Red FM launched an AIDS awareness campaign in 2007, providing truckers with information leaflets and condoms. More recently, Radio City launched a “Carpool on Radio” initiative in July this year in Delhi and Mumbai, which connects commuters from the same parts of the city so that they can share rides to work. Similarly, Radio Mirchi joined forces in July with telecom operator Aircel to offer a free taxi service to stranded commuters during the monsoon season in Mumbai. Though no credible market research is able to show whether such activities are indeed increasing audience numbers, they certainly don’t hurt in terms of brand recall and developing a “feel-good factor” that listeners will associate with a station.

But developing audience loyalty is one thing; developing advertiser loyalty is another. To help with the latter, some stations began changing the way they manage their relationships with advertisers a few years ago and set up in-house departments to oversee and customize clients’ radio campaigns. “Larger agencies don’t have the time to plan and execute [radio campaigns] on such a micro-level,” says Abraham Thomas, chief operating officer of Red FM. “We need the advertisements, so we do whatever is required to get them.”

Typically, the in-house creative units will be responsible for an entire campaign, from creating the actual commercial to providing campaign monitoring and other follow-up services. Indeed, an in-house unit’s ability to manage a campaign often means going well beyond the 30-second slot that would be allotted for an ad. For instance, Radio City promoted a Mumbai company’s women-only vacation packages by sending one of its jockeys on one of the trips and then broadcasting her travelogue on its weekly travel program. Similarly, another jockey at the station provided hair-care advice as part of a promotion being run by a hair oil advertiser. “Such value-added services help create a connection between the people who advertise and the audience,” explains Koshy of the IIM.

Along with Internet activities such as website bundling and marketing, radio stations are also offering advertisers peripheral activities and promotions — both on and off the air. One of the most well-known examples was when Red FM partnered with the Mumbai Indians team during the Indian Premier League cricket tournament in 2008, changing its name for one day to Blue FM to match the team’s colors.

But to grow further, FM broadcasters can’t stop there. While regulations might prevent them from pursuing some avenues of growth, they’re learning to push the boundaries of their business in different ways. This is where sales alliances between stations come in. A case in point is Radio Misty, which operates in the eastern cities of Siliguri and Gangtok and has a sales alliance with Radio One, which broadcasts in seven cities. Radio Mirchi has alliances with Radio Chaska in Gwalior, Radio Gupshup in Guwahati and Radio Mantra’s eight stations. Through these alliances, stations have begun cross-selling and offering advertisers larger packages to reach bigger audiences than they could if the stations worked alone. Alliances are also a relatively risk-free opportunity for stations to get to know new markets where they might one day be able to expand.

Some broadcasters have now even begun to set their sights higher, looking outside India for expansion opportunities. In fact, the sector’s first out-bound investment took place in 2008 when Bennett Coleman & Company Ltd. (BCCL) acquired Virgin Radio Holdings from UK-based SMG Plc for US$106 million, rebranding it as Absolute Radio. Meanwhile, ADAG’s BIG FM has gone offshore to join forces with Singapore’s state-owned Media Corp. Radio to launch Big Bollywood 96.3 FM, broadcasting Bollywood music and gossip to the island nation for three hours every evening.

India’s Royalty

But it’s not only the upcoming round of license auctions that is causing a stir among India’s FM broadcasters. Many are hoping that before the auctions go ahead, a messy, bitter dispute over music royalties will be resolved. The dispute — over how much radio stations should pay music companies for playing their songs — has pitted the Indian Performing Rights Society (IPRS), which represents musicians, against the Phonographic Performance Ltd. (PPL), which represents music publishers. The commercial FM stations, via the AROI, pay royalties to both. Now all eyes are on the country’s Copyright Board to settle the dispute about whether the royalties are fair and who should be paying whom. It will resume hearings in late August and a judgment is expected by the end of the year.

Under an agreement from 2002, radio stations currently pay US$13.80 per needle hour (playing the music for 60 minutes), costing 24-hour stations about US$120,000 a year in royalty fees — regardless of the listener base, the size of the operator or even how old the songs are that they play — and potentially the equivalent of as much as 70% of a small station’s revenue, according to the AROI. The PPL wants to increase the rate to US$50 per needle hour or 20% of operators’ revenues, whichever is highest, potentially costing individual stations US$438,000 a year, or US$110 million for the entire network of stations. Add the increased royalty payment the IPRS is demanding (US$20.42 per needle hour, which works out to US$44.7 million for the industry) and the total reaches US$154 million a year in royalties.

Many believe that the success of the third phase of FM radio licensing, which could be under way within weeks, depends on how the royalties issue plays out. “Phase three will make radio a more potent media vehicle and will make it even more mainstream,” says Radio Mantra’s Gupta. “But as phase three brings the radio revolution to many smaller cities, the current cost of music will make operations unfeasible and phase three a massive failure.”

But beyond that bone of contention, there’s reason for optimism. Several important regulatory changes are anticipated this time, notably a relaxation of the rules prohibiting the private broadcasting of news and current affairs. Operators are also hoping to be allowed multiple frequencies in the same city and increased foreign investment limits (49% for non-news channels and 26% for news channels). This next phase is expected to cover 275 cities with up to 800 frequencies. “If these changes come through, operators will see economies of scale playing out in their favor,” predicts Purohit of the AROI. “They can use the same studio for different programming and different stations, for instance. Once the reach extends to cover 75% of the population [from an estimated 15% currently], as is expected, radio’s share of the advertising pie will automatically go up.” That could be music to the ears of many.

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