Analysis of the potential for further consolidation through mergers and acquisitions of the United Kingdom commercial radio broadcasting industry and the lack of evidential data that previous consolidation produced the promised benefits for owners, listeners or advertisers, written by Grant Goddard for Enders Analysis in September 2007.

1. UNITED KINGDOM COMMERCIAL
RADIO CONSOLIDATION
GRANT GODDARD
September 2007

2. ExecutiveSummary
The commercial radio sector could be braced for a further round of
consolidation now that EMAP is expected to offer its radio assets for sale
following a strategic review started in July 2007, and now that Scottish Media
Group is likely to pursue a trade buyer for Virgin Radio since its planned IPO
was de-railed. At the same time, the radio industry is lobbying for changes in
media ownership legislation that would simplify the existing complex
regulations for radio, and Ofcom has suggested that consolidation of ‘radio
brands’ could help the commercial sector compete more effectively with the
BBC’s increasingly popular national radio networks.
This report examines the prospects for the commercial radio industry with a
further round of consolidation on the horizon. It also looks back at the sector’s
last round of mergers and acquisitions that was precipitated by the 2003
Communications Act and questions to what extent station owners have
achieved their stated objectives since then. It examines the latest industry
proposal to unite similarly targeted or formatted radio stations under common
ownership, and asks whether such policies are likely to produce successful
turnaround strategies.
The report concludes that:
• Considerable scope exists for further sector consolidation without the need
for new legislation
• Competition authorities are more likely to permit further sector
consolidation now than they were four years ago
• Industry consolidation to date has produced substantial cost savings, but
has not led the sector to increase its investment in content, to widen
consumer choice, or to improve its ability to compete with BBC Radio
• The commercial radio sector has proven unable to stem significant losses
of audience and revenues from its local ‘heritage’ stations, which had
traditionally been the ‘cash cow’ of the industry, either before or after the
last round of consolidation
• The reduced revenues and diminished profitability of the sector’s ’heritage’
stations have not generally been reflected in the accounts of these
stations’ owners.
Our opinion is that a new round of consolidation within the commercial radio
sector would certainly reduce further the industry’s costs in the short term, but
that consolidation alone will do nothing to improve the industry’s performance
in ratings or revenues in the long run. Shareholder value will not be unlocked
by merely re-arranging the pieces on the Monopoly™ board. Regardless of
the potential for consolidation, what the commercial radio industry still
desperately requires is a forward-looking strategy for the digital age, based
around investment in content and competitive tactics, rather than market
power. Only this will inspire investors’ optimism to return to the radio sector.

3. Overview
The commercial radio sector is under severe pressure to improve its
performance. Five of the seven largest UK radio operators (who collectively
account for 82% of all commercial radio listening), are public companies
whose shareholders have seen the value of their investments slashed since
the boom years of the 1990s when the radio sector exhibited tremendous
growth. The situation is very different now. Commercial radio revenues fell by
7% in 2005 and then by 8% in 2006 (year-on-year at constant prices), while
profitability has fallen sharply in an industry dominated by fixed costs and
burdened with the expense of maintaining parallel analogue and digital
transmission systems for the foreseeable future.
A burst of acquisition activity took place in the sector following the merger of
the industry’s two biggest players, Capital Radio Group and GWR Group, in
May 2005. Most notably, EMAP acquired all 21 stations from Scottish Radio
Holdings (SRH) in August 2005; Guardian Media Group (GMG) acquired two
regional stations from GCap Media in October 2006, and then all four of the
Saga Group stations in December 2006; and GCap Media acquired all 18
stations owned by UBC Media in May 2007. In July 2007 Chrysalis Radio, the
industry’s third largest player, was sold to privately held Global Radio. In the
same month, the second largest radio owner, EMAP, announced a strategic
review that is likely to result in the disposal of its radio division. Recent
speculation has centred on possible trade buyers for EMAP, precipitating a
further round of industry consolidation. Additionally, Scottish Media Group is
reported to have postponed its planned IPO of Virgin Radio, which could be
sold to a trade buyer instead.
The UK commercial radio industry is already one of the most consolidated in
Europe, a direct result of the mergers and acquisitions that followed the
changes in ownership rules legislated by the 2003 Communications Act
(Table 1). The top two companies now control more than half of the industry;
the top three control two-thirds, and the top four control three-quarters. In
2003, prior to consolidation, as many as seven companies controlled three
quarters of the market.
Table 1
Commercial radio groups ranked by share of commercial radio listening

4. [Source: RAJAR/Ipsos]
These transactions raise several pertinent questions: is further consolidation
possible under existing ownership rules; is further consolidation likely to prove
beneficial for the commercial radio industry; and what benefits have accrued
to the radio sector from consolidation to date?
Competition Issues
On the issue of further transactions, Ofcom noted in April 2007 that “there is
very little evidence that the current ownership rules have held back
consolidation in the industry and there has been very little lobbying for a
change in the rules”. It concluded that “there is still scope for a considerable
amount more [consolidation] without any changes in the rules”.1 A few months
earlier, Ofcom had considered all possible hypothetical mergers between
pairs of the then seven largest radio groups (which have since consolidated to
six) and concluded that only seven of the 21 combinations would necessitate
the divestment of some licences under the existing ownership rules.2
The radio industry reacted to Ofcom’s consultation on the future regulation of
the sector by lobbying for a relaxation of the radio ownership rules. The
industry trade body, RadioCentre, argued that Ofcom’s own proposals for
deregulation of the radio sector “will continue to be subject to far too detailed
sector-specific rules on ownership”.3 RadioCentre CEO Andrew Harrison
demanded “a timetable to secure a relaxation of ownership rules to deliver
more scale without losing plurality”.4 RadioCentre advocated that “radio-
specific rules on concentration of ownership should be removed”, though it
recognised that this would require primary legislation to achieve which could
take “a number of years”.5 Its formal response to Ofcom argued that “the
existing rules are a disincentive to investment in the radio industry” and that
“further consolidation could bring genuine benefits to consumers and the
economy”.6

5. Even without such legislative reform, there is a greater likelihood today that
substantial merger and acquisition activity within the sector will prove possible
without the intervention of either the Office of Fair Trading (OFT) or the
Competition Commission. Four years have elapsed since the Commission
rejected GWR’s proposed acquisition of the West Country Galaxy Radio
station on the grounds that it would have reduced competition in local radio
advertising within the Bristol, Bath, Taunton and Yeovil markets. Since then,
Ofcom argues that “a change in the competitive landscape” has occurred, due
to:7
• Commercial radio’s diminishing share of radio listening, compared to the
BBC
• Commercial radio’s declining advertising revenues
• Increasing development and penetration of DAB digital radio
• The growth of online and outdoor advertising
• Declining newspaper circulations.
In the last four years, the OFT decisions not to refer the merger of Capital
Radio and GWR Group, or the acquisition of SRH by EMAP, to the
Competition Commission were informed by Ofcom’s market research into the
radio advertising markets. Ofcom concluded that local businesses view radio
and press advertising as interchangeable, whilst national advertisers use radio
advertising as part of a media mix that also includes television, press and
online. Effectively, Ofcom will argue to the OFT that any decreased
competition within the radio advertising market as a result of further merger
activity within the sector would be tempered by radio advertising’s
substitutability by other forms of advertising (and Ofcom will highlight the
commercial radio sector’s increasing economic vulnerability).
Impactof Consolidation
Prior to the 2003 Communications Act, the commercial radio industry had
heralded the benefits of consolidation to be:
• Cost savings from common ownership of stations, enabling scarce
resources to be “concentrated on programming or editorial, rather than sales,
administration or engineering”8
• Greater content diversity because an owner of several stations in one
market would create “distinctive choices where once there was common
programming”9
• More effective competition with BBC radio, as larger companies provide
“funding to support innovation in programming”.10
Undoubtedly, substantial cost savings have resulted from industry
consolidation to date. The merger of GWR and Capital Radio has so far
produced savings of £35 million per annum, reducing the cost base of the
combined group by some 20%.11 EMAP anticipated that its acquisition of
Scottish Radio Holdings would result in savings of £5 million per annum by
2008.12 However, in the wake of such transactions, it proves difficult to
separate cost savings resulting from merger and acquisitions activity from cost
savings as a result of rationalisation and closure of radio services. From this

6. perspective, although savings have undoubtedly been made within the
industry, the second anticipated benefit of consolidation – greater content
diversity – does not appear to have accrued to date.
In aggregate, there appears to have been a reduction in the number of
available commercial radio station brands following consolidation, and only a
tiny number of launches to date that have widened the offering to consumers.
In addition to the station closures and openings listed in Table 2, these three
radio owners have also made reductions to their existing stations’ content in
the following ways since consolidation:
Table 2
Radio station brand changes following consolidation
* GCap announced in 2007 that it will “cease investment” in these stations and is
seeking replacement contracted services on its digital multiplexes
[Source: Enders Analysis]
GCap Media
• Xfm stations: daytime presenters replaced by back-to-back music (2007)
• Classic Gold stations: reduction in ‘informational inserts’ during weekends
and non-daytime hours on weekdays (2007).
EMAP
• Magic AM stations: reduction in locally presented content from 7 to 4 hours
per day, replaced by local windows within networked programming (2005)
• Kiss FM London: removal of music genres (house, garage, soul/jazz, rap,
reggae, ragga and swing) from format (2005)
• Magic AM stations: removal of extended local news bulletins for network
alignment (2007)
• ‘Big City’ FM stations: reduction in locally made content to 16 hours per
day to allow networked overnight show (2007)
• Kiss FM London: removal of requirement for hourly local/regional news
outside of breakfast show (2007).
Guardian Media Group
• Smooth FM London: removal of requirement to play ‘soul-based’ music
during daytime (2006)

7. • Smooth stations: reduction in locally made content (2007).
In our opinion, the sum of these changes and the station closures (Table 2)
has collectively reduced the diversity of content offered to listeners by
commercial radio. In its own assessment of the commercial radio sector’s
performance, Ofcom noted that consolidation to date has occurred “with
mixed success” and it concluded that some of the problems faced by the
industry are “due to commercial stations not always having made the most of
the business opportunities they had”.13
Turning to the issue of the third intended benefit of consolidation, there is no
evidence of an improvement in commercial radio’s ability to compete with the
BBC for listeners (Table 3). The commercial radio sector’s listening share has
fallen to 43.5%, which was last reached in 1994, when 143 commercial
stations were licensed, compared to the present existence of more than 300
analogue and 32 digital stations. It appears that neither consolidation, nor a
greater number of stations, have made the commercial sector more
competitive since then. Neither is there evidence to suggest that commercial
radio has increased investment in innovative programming which, it had been
suggested, would enable it to compete more effectively with the BBC. GMG
recently trumpeted a one-off £1 million investment in programming initiatives
across its 11 radio stations as “the biggest single investment in content in
commercial radio” and promised that this would help it “compete against
broadcasters like BBC Radio Two” for programming ideas.14 Whilst such an
initiative is a step in the right direction, it is our opinion that this level of
investment in content will merely scratch the competitive surface, given that
the BBC spends £38.1 million per annum on the programming of market
leader Radio Two alone.15
Table 3
Commercial radio’s share of radio listening (versus the BBC)
[Source: RAJAR/Ipsos]
Addressing the overall lack of achievement demonstrated by the commercial
radio sector following consolidation, the RadioCentre commented that “the
effects of concentrated ownership are perhaps not as well understood as they
could be”.16 In its most recent policy document, advocating the further
relaxation of the ownership rules to allow more industry consolidation, the
commercial radio sector has now focused on three perceived benefits:
• Increased diversity of output from co-owned stations
• Operational efficiencies, enabling increased investment in quality content
• More innovation and risk-taking.
The industry is now suggesting that the acquisitions precipitated by the 2003
Communications Act simply did not go far enough for the effects to be
substantial. “We need more consolidation in the commercial sector,” argued
Phil Riley, former chief executive of Chrysalis Radio. “We need to have
bigger, better resourced players with more powerful radio station brands that

8. are capable of taking on the BBC”.17 According to Mark Storey, managing
director of radio programming at EMAP, “Everybody has got the streets on the
Monopoly board, but now they need to do some trading so they can build
hotels”.18 Ofcom itself has pointed out that “there is scope under the existing
rules for the consolidation of radio brands, particularly specialist music brands,
which would help the industry to compete more effectively than changes in
ownership rules”.19
The notion has developed in recent months that economies of scale can be
reaped from combining sets of similar radio stations under a single brand
name. However, although this would undoubtedly make the sector more
efficient in marketing the radio medium to potential advertisers, an owner is
still lumbered with the costs of maintaining stations in each licensed location
because every analogue licence pertains to a specific locale, whether or not
the station has the same brand name as its other local stations.
Additionally, the sector’s move towards national brands flies in the face of
Ofcom’s market research, which has demonstrated that listeners desire
localness from a local radio station, rather than a national brand with shows
hosted by celebrity presenters. The research found that ‘local news’ and ‘local
weather’ ranked amongst the four most important characteristics of radio,
above national news or a station’s music content. Asked if they wanted more
‘national radio’ or more ‘local radio’, twice as many respondents opted for
local radio, leading Ofcom to conclude that “radio was felt to have an
important role to play in giving local communities a sense of identity”.20 These
results have been corroborated by market research conducted in many local
markets by applicants for newly advertised local radio licences in recent
years.
Despite the increasing enthusiasm for what Ofcom calls “the consolidation of
radio brands”, there is no evidence that such changes succeed in making a
station more popular with audiences, or more profitable. EMAP renamed all its
local AM stations ‘Magic’ in the late 1990s, a decision that was later regretted
by then CEO Tom Moloney: “The AM re-branding was a little bit of an
experiment, and I don’t think it’s had the outcome that we thought it would
have”.21 More recently, in September 2007, GCap announced a re-branding of
the 42 heritage FM stations that form ‘The One Network’ with common logos
and on-air jingles. Networked shows by presenters such as Mylene Klass and
Jeremy Kyle are being introduced, supported by the group’s first national
marketing campaign in seven years. It appears, however, that radio audiences
value the quirkiness of their local station and desire something unique to their
area, rather than something identical to services across the country.
Both Ofcom and the radio industry suggest that consolidating groups of
stations with similar formats or similar audiences (Table 4) would benefit the
industry. Undoubtedly, cost savings would prove possible from such mergers
or acquisitions. However, there is no evidence to demonstrate that, in the long
term, the audiences or revenues of such merged operations would be turned
around or improved as a result of consolidation.

9. Table 4
Analogue radio licences by type
[Source: Enders Analysis]
‘Heritage’ stations, opened in the 1970s, have historically been the most
important source of revenues and profits for the industry as a whole. They
comprise the 13% of commercial radio stations that generate 63% of the
industry’s revenues.22 But their performances in recent years have been
abysmal, both before and after consolidation, regardless of their owner (Table
5). The suggested further consolidation of either all the heritage FM stations
or the heritage AM stations under a single owner would, of itself, do nothing to
improve the revenues or profitability of these flagship stations. With the
honourable exception of GMG, not one radio group, big or small, has
demonstrated an ability to execute a successful turnaround strategy at its
stations in recent years. As a result, shareholder value would be unlikely to be
unlocked merely by a further round of consolidation within the sector. The
players’ present lack of a coherent, competitive strategy would prevail,
whether there were 42 or 62 FM heritage stations under common ownership.
Table 5
Listening data for the largest heritage radio stations

10. [Source: RAJAR/Ipsos]
However, one possible outcome of further consolidation would be an
opportunity for radio groups to camouflage substantial asset write downs
within the re-statement of their accounts. Although the revenues and
profitability of heritage stations have diminished substantially over the last
decade, most radio owners have been remarkably reluctant to reflect the
financial consequences within their accounts. In a period when share prices
and City confidence in the sector continue to diminish on a month-by-month
basis, it is proving challenging for owners to find an ‘appropriate’ moment to
announce substantial impairment charges to their radio licences.
Only the smaller radio groups appear to have adjusted their balance sheets to
reflect the truer value of their licences in today’s declining commercial radio
market. The Local Radio Company included an impairment charge of £16.3
million in the year ended 30 September 2006, substantially reducing the value
of its licences to £19 million. Similarly, UTV (formerly Ulster Television) wrote
down the values of its radio licences by £20.2 million in the year ended 31st
December 2006, reflecting the poor performance of stations it had purchased
from The Wireless Group for £98.2 million in 2005.
The larger groups have proven far more reluctant to ‘bite the bullet’. GCap
only implemented an impairment charge of £11.5 million to its two Century
stations when it sold them for £60 million to GMG in October 2006. The
previous year, it had applied an impairment charge of only £12.8 million to all
its radio licences, a tiny gesture in the context of the company’s valuation of

11. its intangible assets at £407.7 million on 31 March 2007. EMAP has made no
impairment charges to its radio assets in recent years, despite its
acknowledgement that “the radio advertising market and industry are currently
subject to a high degree of uncertainty”.23 Instead, EMAP valued the goodwill
of its radio licences at £278 million on 31 March 2007, no change from a year
earlier. A further round of merger and acquisition activity would provide a
perfect opportunity to quietly adjust many radio licence over-valuations.
[First published by Enders Analysis as report 2007-88.]
© 2007 Grant Goddard
Published by Radio Books
http://www.radiobooks.org
http://www.grantgoddard.co.uk
1 Ofcom, ‘The Future Of Radio’, 17 April 2007.
2 Ofcom, ‘Review Of Media Ownership Rules’, 14 November 2006.
3 RadioCentre, press release, 17 April 2007.
4 RadioCentre, press release, 17 May 2007.
5 RadioCentre, press release, 4 July 2007.
6 RadioCentre, ‘Shaping Commercial Radio’s Future’, 29 June 2007.
7 Ofcom, ‘Radio Advertising Market Research’, 19 October 2006.
8 Lord Gordon, ‘A Good Bill Better?’, Westminster Media Forum, September 2002.
9 Ralph Bernard, ‘A Good Bill Better?’, Westminster Media Forum, September 2002.
10 Indepen, ‘Radio Mergers Are Not Substantial’, February 2004.
11 GCap Media, press release, 26 July 2007.
12 Reuters, 22 June 2005.
13 Ofcom, ‘The Future Of Radio’, 17 April 2007.
14 GMG, press release, 24 July 2007.
15 BBC Annual Report & Accounts 2006/2007.
16 RadioCentre, ‘Shaping Commercial Radio’s Future’, 29 June 2007.
17 Radio 3.0 conference, 17 May 2007.
18 Radio 3.0 conference, 17 May 2007.
19 Ofcom, ‘The Future Of Radio’, 17 April 2007.
20 Ofcom, ‘Radio: Preparing For The Future’, October 2005.
21 EMAP conference call, June 2005.
22 Ofcom, ‘The Communications Market’, February 2006.
23 EMAP, Annual Report & Accounts 2007.