'UK Commercial Radio Trends: February 2007' by Grant Goddard

1. UK COMMERCIAL RADIO TRENDS Grant Goddard radio specialist www.grantgoddard.co.uk February 2007

2. Grant Goddard Agenda  UK commercial radio revenues  UK commercial radio issues  UK commercial radio listening  UK local commercial radio  Digital-only radio stations  UK radio listening by platform  radio specialist UK commercial radio companies UK Commercial Radio Trends © Grant Goddard: February 2007 2

3. Grant Goddard UK commercial radio revenues radio specialist COMMERCIAL RADIO REVENUES (£m curre nt price s) 800 Branded Content 700 National A dvertisers Local A dvertisers 600 500 400 300 200 100 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 0 [Source: Radio Advertising Bureau] 2005 revenues 2006 revenues Q4 2006 revenues down 4% year-on-year down 5% year-on-year down 10% year-on-year “Radio advertising has stalled, both in absolute terms and as a share of total advertising. We believe this is being partly driven by a process of structural adjustment in favour of new media, a trend we believe will continue, putting huge pressure on the commercial radio sector and, in particular, local stations.” [Peter Davies, Director of Radio & Multimedia, Ofcom, Jan 2007] UK Commercial Radio Trends © Grant Goddard: February 2007 3

4. Grant Goddard UK commercial radio advertising forecasts radio specialist Radio advertising forecasts (%) ZenithOptimedia forecasts Dec 2006 Group M forecasts Nov 2006 Opera forecasts Nov 2006 Radio Centre Jan 2007 2007 0.9 1.1 -2.0 6.4 2008 1.8 2.5 6.4 2009 1.8 3.0 6.4  2006 revenues were £581m (RadioCentre estimate)  OPera forecasts £627m by 2009  RadioCentre forecasts £700m+ by 2009 Ofcom: “Some people may argue that these problems are due to cyclical factors and that the industry will recover in the next advertising upturn. But we believe the changes happening in the radio industry may be more structural and may need to be addressed in the interests of listeners.” [Nov 2006] GCap Media: “Commercial radio revenues have been impacted in recent years both by fluctuating trends in overall spend, as well as the growth of internet advertising. These changes are structural and are likely to continue for the foreseeable future.” [Dec 2006] UK Commercial Radio Trends © Grant Goddard: February 2007 4

5. Grant Goddard UK commercial radio issues radio specialist Advertising agencies have issues with radio  “You can’t assume that, because a certain age group has grown up with commercial radio, it will stick with it. You have to keep your audience by giving them good programming. Younger planner buyers now have a negative perception of radio – how it’s losing listeners and the audience measurement system is inadequate.” [Erica Taylor, Group Buying Director, Starcom]  “It’s a great companion medium. It’s true though that, in that particular context, programming and advertising quality is more important than ever. Without engagement, radio becomes even easier to ignore.” [Al Young, Executive Creative Director, St Luke’s]  “In the last year or so, digital audiences have grown but, as a general rule, sales companies are not pushing the opportunities.” [Howard Bareham, Managing Partner, Mindshare] Similar views from within the radio industry  “Radio has forgotten how to sell itself. Radio has said: ‘Oh my goodness, we have got to be more like the internet and sell ourselves as a commodity.’ How dull is that?” [Fru Hazlitt, former CEO, Virgin Radio]  “Radio needs a new lease of life in the hearts and minds of advertisers.” [Ralph Bernard, CEO, GCap Media]  “I think the way of selling and buying radio advertising needs to change, in the same way that the internet had to change the way it sold and bought its medium. Frankly, I do think it’s archaic. All this nonsense that goes on just to book a radio campaign. It’s a joke. It’s got to be so much easier.” [Fru Hazlitt, former CEO, Virgin Radio] UK Commercial Radio Trends © Grant Goddard: February 2007 5

6. Grant Goddard UK commercial radio share of listening radio specialist SHARE OF RADIO LISTENING (%) 60 55 50 45 40 ALL BBC RADIO 35 ALL COMMERCIAL RADIO 2006Q2 2005Q3 2004Q4 2004Q1 2003Q2 2002Q3 2001Q4 2001Q1 2000Q2 1999Q3 1998Q4 1998Q1 1997Q2 1996Q3 1995Q4 1995Q1 1994Q2 1993Q3 1992Q4 30 [Source: RAJAR/Ipsos Media] Long-term commercial radio audience attrition from the BBC Growth of commercial radio listening (and revenues) during 1990s was due to a fortuitous combination of circumstances, rather than to the implementation of competitive strategies:  The self-destruction of market leader BBC Radio One (share fell from 23% in 1992 to 9% in 1998)  Launch of UK’s first national commercial stations in 1992, 1993 and 1995  Huge growth in new local commercial stations licensed  Launch of the Radio Advertising Bureau in 1992  Early consolidation in commercial radio industry UK Commercial Radio Trends © Grant Goddard: February 2007 6

7. Grant Goddard UK commercial radio listening by demographic radio specialist Commercial radio’s ‘heartland audience’ under pressure COMMERCIAL RADIO - SHARE OF LISTENING BY DEMOGRAPHIC (%) share of listening 15-44 15-24 male 25-34 male 35-44 male 15-24 female 25-34 female 35-44 female 1999Q3 2000Q3 2001Q3 2002Q3 2003Q3 2004Q3 2005Q3 2006Q3 62% 60% 59% 58% 60% 57% 55% 56% 58% 55% 60% 57% 60% 57% 52% 58% 59% 55% 55% 54% 54% 51% 48% 49% 58% 54% 54% 51% 54% 49% 49% 52% 66% 71% 68% 70% 70% 69% 67% 65% 69% 67% 64% 61% 64% 63% 60% 58% 62% 60% 59% 60% 62% 57% 59% 59% [Source: RAJAR/Ipsos Media] The industry defines 15 to 44 year olds as the “heartland audience for the commercial sector”, but this demographic’s share of listening is being eroded by:  BBC Radio One’s increasing popularity amongst 25 to 34s (male share up from 23% to 27%, female share up from 17% to 19% between Q3 1999 and Q3 2006)  BBC Radio Two’s increasing popularity amongst 25 to 34s (male and female shares both up from 4% to 9% between Q3 1999 and Q3 2006)  BBC Radio Two’s increasing popularity amongst 34 to 44s (male and female shares both up from 8% to 15% between Q3 1999 and Q3 2006) Additionally:  Hours listened to all radio (BBC and commercial) by 25 to 34s has fallen by 17% (1999Q3 to 2006Q3) mostly as a result of population changes UK Commercial Radio Trends © Grant Goddard: February 2007 7

8. Grant Goddard UK commercial radio reach and hours by demographic radio specialist Younger demographics drift away from commercial radio WEEKLY REACH 15-24 year olds (% ) 100% 1999Q3 95% 2000Q3 90% 25 to 34 year olds:  Reach steady for all radio, but in decline for commercial radio  Hours listened in decline 2002Q3 80% 2003Q3 75% 2004Q3 70% 2005Q3 65% 1999Q3 2000Q3 22 2001Q3 20 2002Q3 2003Q3 18 2004Q3 2005Q3 16 2006Q3 2006Q3 60% 14 55% 50% 12 A LL RA DIO 100% AVERAGE HRS. 15-24 yr olds (hr/w k) 2001Q3 85% 15 to 24 year olds:  Reach steady for all radio, but in decline for commercial radio  Hours listened in decline 24 COMMERCIA L RA DIO A LL RA DIO WEEKLY REACH 25-34 year olds (% ) 1999Q3 95% 2000Q3 90% 24 COMMERCIA L RA DIO AVERAGE HRS. 25-34 yr olds (hr/w k) 1999Q3 2000Q3 22 2001Q3 85% 2002Q3 80% 2003Q3 75% 2004Q3 70% 2005Q3 65% 2001Q3 20 2002Q3 2003Q3 18 2004Q3 2005Q3 16 2006Q3 2006Q3 60% 14 55% 12 50% A LL RA DIO COMMERCIA L RA DIO A LL RA DIO COMMERCIA L RA DIO [Source: RAJAR/Ipsos Media] UK Commercial Radio Trends © Grant Goddard: February 2007 8

9. Grant Goddard UK local commercial radio radio specialist Local radio proving uneconomic Ofcom: “While local commercial radio may remain popular, the decline in its attractiveness to advertisers may mean that the current business model for commercial radio – particularly for local stations – may not be sustainable.” [Nov 2006] Local radio faces particular challenges:  Local commercial radio’s hours listened fell by 10% between Q3 1999 and Q3 2006  Local advertising revenues fell by 15% between 1999 and 2006 (at current prices)  Half of all local commercial stations lose money or make an annual profit of less than £100,000  Fixed costs represent 70% of total operational costs for local radio Balance sheets will increasingly require impairment adjustments to valuations of local radio licences:  The Local Radio Company wrote down the value of its licences by £16.3m to £19.1m during year ended 30th September 2006  GCap Media wrote down the value of its two remaining Century stations by £7.1m before sale for £60m in October 2006 Local radio licences offered by the regulator relatively recently will increasingly be returned:  Star FM, Stroud (owned by UKRD) opened 1998, closed September 2006  River FM, West Lothian (owned by Kingdom Radio Group) opened 2003, closed January 2007 UK Commercial Radio Trends © Grant Goddard: February 2007 9

10. Grant Goddard Digital-only radio stations radio specialist New digital-only radio stations – driving growth on new platforms TOP DIGITAL-ONLY RADIO STATIONS local DAB national DAB Sky Freeview Group BBC W orld Service The Hits BBC7 BBC 6 Music Smash Hits Radio Planet Rock BBC Asian Network UK 1Xtra from the BBC Five Live Sports Extra Mojo Radio Virgin Radio Classic Rock Heat The Arrow Chill Q BBC EMAP BBC BBC EMAP GCap BBC BBC BBC EMAP SMG EMAP Chrysalis GCap EMAP Hours per week ('000) 6,275 3,810 3,496 2,514 2,453 2,363 2,333 1,804 1,272 939 937 747 744 720 554 [Source: RAJAR/Ipsos Media, Q4 2006, Asian Network excludes local TSA] Differing strategies for new digital-only stations:  BBC: only six brands, all national on DAB, complementary niche content, all on Freeview and Sky  Commercial radio: 39 brands, mix of national/regional/local, mix of platforms Too early to determine which player will benefit most from digital radio uptake: “The BBC has had an unfair share of the analogue spectrum but digital enables the commercial players the space to compete on a much more equal footing.” [Steve Orchard, operations director, GCap Media] “I’m sure digital will be a contributory factor as regards audience share, but it is dependent on programming too.” [Jeremy Found, head of media, COI] UK Commercial Radio Trends © Grant Goddard: February 2007 10

11. Grant Goddard UK radio listening by platform radio specialist DAB is not the only digital platform RADIO LISTENING BY PLATFORM (% hours) 14% LIST EN IN G VIA IN T ER N ET 12% LIST EN IN G VIA T V LIST EN IN G VIA D A B 10% 8% 6% 4% 2% 2006Q2 2006Q1 2005Q4 2005Q3 2005Q2 2005Q1 2004Q4 0% [Source: RAJAR/Ipsos Media Platform Survey]        DAB uptake has been the biggest driver of the migration from analogue to digital listening Digital radio stations available on Freeview (11 BBC, 15 commercial) generate listening equally across all demographics Internet listening driven by higher broadband penetration at home and work Mobile phone listening (via FM and DAB) will increase in importance (8% of population have ever listened to radio via mobile phone) 55% of adult population have ever accessed digital radio at home (including 16% via DAB, 22% via internet, 39% via digital TV) Radio via digital TV has 22% weekly reach Radio via internet has 12% weekly reach UK Commercial Radio Trends © Grant Goddard: February 2007 11

12. Grant Goddard UK commercial radio in numbers radio specialist COMMERCIAL RADIO GROUPS AUDIENCE share of commercial radio listening (%) (2006Q4) GCap Media EMAP Guardian Media Group (+Saga) Chrysalis UTV Scottish Media Group UBC Media The Local Radio Company CN Group UKRD Lincs FM Sunrise Radio      FINANCIALS share of commercial radio radio revenues revenues (%) (£m) (2005) last FY 29% 34% 24% 25% 9% (+2%) 5% (+1%) 11% 12% 7% 4% 4% 2% 2% 5% 2% 3% 1% 2% 1% 2% 1% 1% 1% 1% 210.8 141.0 24.5 65.6 25.1 22.4 4.1 20.2 ANALOGUE DIGITAL stake in regional or local digital multiplex (no.) stake in national analogue: digital national analogue: multiplex radio pre-tax stations local stations digital-only profits (£m) (no.) (no.) stations (no.) (no.) last FY -47.9 33.0 1.0 10.2 4.8 4.9 2.2 1 0 0 0 1 1 0 0 0 0 0 0 55 40 10 (+5) 9 18 0 18 28 8 9 7 8 8 6 1 (+0) 2 0 3 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 0 27 18 5 (+0) 6 7 4 5 0 0 0 0 0 Top four companies control three-quarters of the market Limited profitability within industry (local stations suffer from high fixed costs, while national stations underachieve) GCap Media controls sole national digital multiplex Top seven companies control access to regional and local digital multiplexes Smaller groups have no access to digital multiplexes, and limited opportunities to achieve profitability with analogue licences UK Commercial Radio Trends © Grant Goddard: February 2007 12

13. Grant Goddard GCap Media         radio specialist Main brands: Classic FM, Capital Radio, Xfm, Planet Rock Group revenues for Oct and Nov 2006 down 13% year-on-year like-for-like “The current advertising market remains very difficult and visibility poor. We anticipate tough trading conditions will persist over the next quarter.” [Nov 2006] Launched “TheJazz” national digital station in Dec 2006 Merger of Capital Gold and Capital Life brands and re-launch due in 2007Q1 Creation of new GCap Interactive department in Feb 2007 Beta testing of interactive online station Mi-Xfm in Jan 2007 Appointment of former Virgin Radio CEO Fru Hazlitt to board Audiences:  No sign of recovery at heritage brands Capital Radio (share 4.7% from 11.9% in 1999), Capital Gold AM (share 1.6% from 4.0% in 1999), BRMB Birmingham (share 7.1% from 17.0% in 1999) Revenues:  No indication that reduction of advertising inventory on Capital Radio has increased listening, but has cut revenues by £6.3m in latest half year Profitability:  No sign of recovery, forcing sale of further assets to finance dividends Outlook:  GCap’s poor performance will continue and will drag down the rest of the radio sector UK Commercial Radio Trends © Grant Goddard: February 2007 13

14. Grant Goddard EMAP Radio       radio specialist Main brands: Kiss FM, Magic, Kerrang! Radio revenues for Dec 2006 and Jan 2007 down 10% year-on-year like-for-like “In consumer media, and radio in particular, recent market conditions have been weaker than anticipated. As a result, the outcome for the current financial year is likely to be toward the bottom end of market expectations.” [Feb 2007] “The only thing which is disappointing to me, and a bit of a surprise to the market, is radio. I really thought radio would start to see some sort of recovery.” [Tom Moloney, CEO, Feb 2007] Youth brand Kiss is vulnerable. “Advertising is going online. In 2006, advertisers bought into the lie that kids don't listen to radio anymore. That they’re only listening to iPods and MySpace. That’s not true, but these things are driven by sentiment.” [Tom Moloney, CEO, Feb 2007] Launch of internet music player integrated all EMAP radio brands and makes EMAP the only group to offer on-demand complete shows (with music) from the last 7 days Audiences:  No sign of recovery at heritage brands Big City Network (share 14.2% from 20.2% in 1999), Magic AM Network (share 4.5% from 9.9% in 1999), Key 103 Manchester (share 8.4% from 20.0% in 1999). New digital brands show promising growth. Revenues:  No promise of revenue growth Profitability:  Cuts and redundancies will maintain profitability but possibly damage listener loyalty Outlook:  Until new digital brands become profitable, decline of analogue brands will dominate UK Commercial Radio Trends © Grant Goddard: February 2007 14

15. Grant Goddard Chrysalis Radio       radio specialist Main brands: Heart FM, Galaxy Radio revenues for 2006Q4 down 10% year-on-year Radio revenues for January 2007 up 5% year-on-year “We remain confident that we are well positioned to meet the Board’s expectation of flat year-on-year revenues for Chrysalis Radio in the 2007 financial year as a whole.” [Feb 2007] Youth brand Galaxy is vulnerable to the migration of advertising to the internet Heart FM is now the leading commercial radio station in London (share 7.1%) Audiences:  All Chrysalis analogue stations are FM, rather than AM which has lost considerable listening  Heart FM network up (share 9.5% from 7.4% in 1999), Galaxy FM network static (share 7.7%) Revenues:  Potential growth on the back of Heart FM success in London Profitability:  Cost efficiencies last year put Chrysalis in better position than competitors Outlook:  Radio division could be sold off, with EMAP acquiring Galaxy and GMG acquiring Heart UK Commercial Radio Trends © Grant Goddard: February 2007 15

'UK Commercial Radio Trends: February 2007' by Grant Goddard

'UK Commercial Radio Trends: February 2007' by Grant Goddard

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'UK Commercial Radio Trends: February 2007' by Grant Goddard