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UK COMMERCIAL RADIO MARKET CONTEXT

Grant Goddard
radio specialist
www.grantgoddard.co.uk

April 2007

Grant Goddard

Agenda

radio specialist

        

UK commercial radio revenues UK commercial radio issues UK commercial radio listening UK local commercial radio Digital radio UK radio listening by platform Industry forecasts Issues Endnote

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Grant Goddard

UK commercial radio revenues
800 700 600 500 400 300 200 100 0 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

radio specialist

COMMERCIAL RADIO REVENUES (£m current prices)
Branded Content National Advertisers Local Advertisers

[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]
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Grant Goddard

UK commercial radio advertising forecasts
Radio advertising forecasts

radio specialist

Advertising ZenithOptimedia Association [Dec forecasts [Dec Group M forecasts Opera forecasts RadioCentre 2006] 2006] [Nov 2006] [Nov 2006] [Jan 2007] 2007 2008 2009

-0.8% 7.3% 7.5%

0.9% 1.8% 1.8%

1.1%

-2.0% 2.5% 3.0%

6.4% 6.4% 6.4%

 2006 revenues were £582m  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]
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Grant Goddard

UK commercial radio issues
Advertising agencies have issues with radio

radio specialist

 “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]

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Grant Goddard

Total radio listening
Total hours listened are forecast to continue a slow decline, despite population growth

radio specialist

57

TOTAL RADIO LISTENING (bn hours/year)

56

55

54

53 RAJAR Ofcom forecast 51 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

52

[Source: RAJAR, Ofcom]

 Ofcom forecasts that “radio listening is expected to decline over time, with increasing substitution from noninternet radio to internet radio”

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Grant Goddard

UK commercial radio share of listening
60 55 50 45 40 ALL BBC RADIO 35 30 1992Q4 1993Q3 1994Q2 1995Q1 1995Q4 1996Q3 1997Q2 1998Q1 1998Q4 1999Q3 2000Q2 2001Q1 2001Q4 2002Q3 2003Q2 2004Q1 2004Q4 2005Q3 2006Q2 ALL COMMERCIAL RADIO

radio specialist

SHARE OF RADIO LISTENING (%)

[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  Unprecedented growth in new local commercial stations licensed during 1990s  Launch of the Radio Advertising Bureau in 1992  Early consolidation in commercial radio industry
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Grant Goddard

UK commercial radio listening by demographic
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
[Source: RAJAR/Ipsos Media]

radio specialist

1999Q4 2000Q4 2001Q4 2002Q4 2003Q4 2004Q4 2005Q4 2006Q4 59% 60% 59% 59% 59% 57% 54% 54% 55% 60% 58% 58% 61% 60% 56% 57% 54% 55% 54% 53% 54% 51% 46% 48% 56% 53% 51% 53% 51% 49% 49% 45% 67% 68% 71% 68% 70% 71% 67% 64% 65% 67% 63% 66% 65% 63% 57% 58% 63% 60% 60% 59% 60% 58% 56% 56%

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 squeezed by:  BBC Radio One’s audience becoming older • share amongst 25 to 34 males steady at 24%, whilst share down amongst 15 to 24 males (from 32% to 25% between Q4 1999 and Q4 2006)  BBC Radio Two’s audience becoming younger • increasing popularity amongst 25 to 34s (male and female shares both up from 5% to 10% between Q4 1999 and Q4 2006) • increasing popularity amongst 35 to 44s (male share up from 8% to 18%, female share up from 8% to 13% between Q4 1999 and Q4 2006) Additionally:  Hours listened to all radio (BBC and commercial) by 25 to 34s has fallen by 18% (Q4 1999 to Q4 2006), mostly as a result of population changes
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Grant Goddard

UK commercial radio reach and hours by demographic
Younger demographics drift away from commercial radio
100%

radio specialist

WEEKLY REACH 15-24 year olds (% )
1999Q4 2000Q4 2001Q4 2002Q4 2003Q4 2004Q4 2005Q4 2006Q4

24 22 20 18 16 14 12

AVERAGE HRS. 15-24 yr olds (hr/wk)
1999Q4 2000Q4 2001Q4 2002Q4 2003Q4 2004Q4 2005Q4 2006Q4

95% 90% 85%

15 to 24 year olds:  Reach steady for all radio, but in decline for commercial radio  Hours listened in decline 25 to 34 year olds:  Reach steady for all radio, but in decline for commercial radio  Hours listened in decline

80% 75% 70% 65% 60% 55% 50% ALL RADIO COMMERCIAL RADIO

ALL RADIO

COMMERCIAL RADIO

100% 95% 90% 85% 80% 75% 70% 65% 60% 55% 50%

WEEKLY REACH 25-34 yr olds (% )
1999Q4 2000Q4 2001Q4 2002Q4 2003Q4 2004Q4 2005Q4 2006Q4

24 22 20 18 16 14 12

AVERAGE HRS. 25-34 yr olds (hr/wk)
1999Q4 2000Q4 2001Q4 2002Q4 2003Q4 2004Q4 2005Q4 2006Q4

ALL RADIO

COMMERCIAL RADIO

ALL RADIO

COMMERCIAL RADIO

[Source: RAJAR/Ipsos Media]

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Grant Goddard

UK local commercial radio
Local radio proving uneconomic

radio specialist

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 Q4 1999 and Q4 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 increasingly require impairment adjustments to valuations of 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  UTV wrote down the value of its UK radio licences by £20.2m during year ended 31st December 2006  SMG wrote down the value of Virgin Radio by £58.8m to £105.0m during year ended 31st December 2006 Local radio licences offered by the regulator relatively recently will increasingly be returned, due to unviability:  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

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Grant Goddard

Digital-only radio stations
New digital-only radio stations – driving growth on new platforms
TOP DIGITAL-ONLY RADIO STATIONS
local DAB national DAB Sky Freeview Group Hours per week ('000)

radio specialist

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

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 listening within local TSA; BBC World Service includes AM/SW listening]

Differing strategies for new digital-only stations:  BBC: only six brands, all national on DAB, complementary niche content, all on Freeview, Sky and cable  Commercial radio: 34 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]
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Grant Goddard

UK radio listening by platform
DAB is not the only digital platform
14% 12% 10% 8% 6% 4% 2% 0% 2004Q4 2005Q1 2005Q2 2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4 LISTENING VIA INTERNET LISTENING VIA TV LISTENING VIA DAB

radio specialist

RADIO HOURS LISTENED BY PLATFORM (% )

[Source: RAJAR/Ipsos Media Platform Survey, methodology changed from Q3 2006 forwards]

      

DAB receiver purchase 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
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UK Commercial Radio Market Context © Grant Goddard: April 2007

Grant Goddard

DAB radio receiver sales
DAB radio receiver sales are slowing down
200

radio specialist

YEAR-ON-YEAR CHANGE IN DAB RADIO SALES (%)
12-month moving average

150

100

50

0 Dec-04 Feb-05 Oct-05 Dec-05 Feb-06 Oct-06 Dec-06 Jun-05 Aug-05 Aug-06 Feb-07 Apr-05 Apr-06 Jun-06

[Source: DRDB/GfK]

 DAB receiver sales in 2006 increased 21% year-on-year, compared to 66% a year earlier  DAB receivers comprise only 18% of radio units sold  DAB receivers comprise less than 1% of car radios sold, only 13% of clock radios sold, and only 3% of mp3 player/radio combos sold  “We believe that 2007 is going to be quite a tough year [for DAB sales]” [Colin Crawford, director of marketing, Pure Digital]

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Grant Goddard

Digital radio listening
Ofcom forecasts digital platforms will comprise 50% of radio listening by 2010
100

radio specialist

DIGITAL RADIO LISTENING (% of total listening)

80

60

40

20

RAJAR Platform Survey Ofcom forecast

0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

[Source: RAJAR, Ofcom]

According to Ofcom market research:  84% of the population have never used a DAB radio receiver  65% of the population have never listened to radio via digital TV  83% of the population have never listened to radio via the internet  91% of the population have never listened to radio via their mobile phone  75% of the population said they were ‘unlikely’ to purchase a DAB radio receiver within the next six months  whereas 92% of the population used analogue radio at least once a month
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Grant Goddard

National digital stations vs. national analogue stations

radio specialist

Listening to new digital radio stations remains tiny relative to traditional analogue radio stations
NATIONAL RADIO STATIONS RANKED BY SHARE (%)
national stations
station owner % share all radio listening station

national DAB stations
owner % share all radio listening

Radio 2 Radio 4 Radio 1 Radio 5 Live Classic FM TalkSport Virgin Radio Radio 3

BBC BBC BBC BBC GCap UTV SMG BBC

TOTAL
BBC commercial

share
85% 15%

BBC7 BBC 6 Music Planet Rock Asian Network 1Xtra Five Live Sports Extra OneWord Capital Life Core TheJazz 49.9 TOTAL
42.4 7.5 BBC commercial

15.8 11.1 9.7 4.4 4.2 1.8 1.5 1.4

BBC BBC GCap BBC BBC BBC C4/UBC GCap GCap GCap share
77% 23%

0.33 0.24 0.22 0.22 0.17 0.12 0.04 0.03 0.03 n/a 1.41
1.08 0.33

[Source: RAJAR, 2006Q4]

 National digital stations attract only 1% of all radio listening  BBC dominates listening to national analogue stations (85% to 12%)  BBC dominates listening to national digital stations (77% to 23%)

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Grant Goddard

National and quasi-national digital stations
Commercial radio offers more content on digital than BBC
LISTENING TO NATIONAL + QUASI-NATIONAL DIGITAL RADIO STATIONS
Freeview DAB national DAB local station The Hits BBC7 6 Music Smash Hits Planet Rock Asian Network 1Xtra 5 Live Sports Extra Mojo Virgin Classic Rock Heat The Arrow Chill Q oneword Capital Life 3C Core Capital Disney Virgin Xtreme Virgin Groove Fun TheJazz BBC total commercial total owner EMAP BBC BBC EMAP GCap BBC BBC BBC EMAP SMG EMAP Chrysalis GCap EMAP C4/UBC GCap EMAP GCap GCap SMG SMG GCap GCap year-on-year change in hours listened hrs/wk ('000) 2005 15% 45% 61% -2% 61% -32% 34% 22% -10% 20% 230% 13% 54% 2006 20% 30% 21% 19% 62% 22% 4% 67% 42% -7% 21% -3% -4% -4% -16% 30% 21% -42% Q4 2006 3,810 3,496 2,514 2,453 2,363 2,333 1,804 1,272 939 937 747 744 720 554 458 359 320 271 261 227 170 149 [new] 11,419 15,482

radio specialist

-17% 52%

21% 36%

26% 15%

[Source: RAJAR]

 Commercial radio offers 355 services, 118 brands and 32 digital-only stations on DAB  BBC offers 59 services, 43 brands and 4 digital-only stations on DAB  All BBC digital services showed year-on-year growth in hours listened in 2006, whereas several commercial services suffered falls in hours listened
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Grant Goddard

Radio listening by platform
Commercial radio usage on digital platforms exceeds BBC
% HOURS LISTENED BY PLATFORM
digital analogue quarter total DAB DTV internet ALL RADIO: 2004Q4 94% 6% 2% 2% 1% 2005Q4 89% 11% 6% 3% 2% 2006Q2 86% 14% 7% 4% 2% 2006Q4 88% 12% 7% 4% 2% COMMERCIAL RADIO: 2004Q4 95% 5% 2% 3% 1% 2005Q4 89% 11% 5% 4% 2% 2006Q2 84% 16% 8% 5% 3% 2006Q4 86% 14% 6% 6% 2% BBC RADIO [estimated]: 2004Q4 93% 7% 3% 2% 1% 2005Q4 89% 11% 7% 2% 2% 2006Q2 88% 12% 7% 3% 2% 2006Q4 88% 12% 7% 2% 1% *2006Q4 data not directly comparable as methodology changed [Source: RAJAR, DRDB]

radio specialist

 Analogue radio listening dominates over digital (88% to 12%)  Commercial radio’s greater proportion of digital listening than the BBC is unsurprising, since:  43% of listening to commercial radio is by under-35s  45% of listening to BBC is by over-55s
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Grant Goddard

Mobile phone listening

radio specialist

Radio listening via mobile phones not substantial, despite high penetration and FM presence in handsets for 5-10 years  Radio via IP (ie: Vodafone Radio DJ and Virgin Radio mobile application)  Data charges are expensive for user with pay-per-usage (~1MB per minute)  Radio usage with unlimited data bundles would generate significant network load, and therefore usage of streaming services is often prohibited  DAB/DMB radio (ie: Virgin Lobster handset)  Competition from mobile TV for user’s attention  Greater handset cost and size/weight  Substitution by FM radio which offers more robust reception  FM radio  Widespread incorporation into handsets (ie: 52 of Nokia’s current 86 handsets)  Low adoption (8% of adult population, RAJAR)  Offers music purchase option via Sony Ericsson Track ID  Low promotion as no revenues generated for operators  Radio listening via mobile requires listening via headphones  Competition for on-the-move radio usage from portable mp3 players  Convergence of phone/mp3 functionality positions radio and mp3 listening options side-by-side

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Grant Goddard

Industry forecasts 1
Industry forecasts of DAB receiver sales may prove over-optimistic
DAB RADIO PENETRATION (% )

radio specialist

60 50 40

25

DAB CUMULATIVE SET SALES (millions)

20

15

30 20 10 0 2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3
0 2002 2003 2004 2005 2006 2007 2008 2009 2010 10

RAJAR actual (% adults) DRDB forecast (% households)

5 GfK actual DRDB forecast

[Source: RAJAR, DRDB]

[Source: DRDB]

 The RadioCentre has discussed with the BBC the possibility of analogue switch-off in 2010 or 2015  Multiplex owner Digital One has proposed 2015 as a “logical, achievable and sensible commencement date for switching off the first FM frequencies”  Ofcom predicts only that “at some point over the next 10 to 15 years, there may come a point where the vast majority of radio listening is via digital platforms”

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Grant Goddard

Industry forecasts 2
Commercial radio industry forecasts may prove over-optimistic

radio specialist

In January 2007, the commercial radio industry adopted a year-three plan with forecasts for:  Radio’s share of display advertising  7% by 2009, 8% by 2011 (from 6.0% in 2006)  Commercial radio’s share of listening versus BBC  46% by 2009, 48% by 2011 (from 43.2% in Q4 2006)  Digital radio’s share of all commercial radio listening  30% by 2009, 50% by 2011 (from 14% in Q4 2006)

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Grant Goddard

Issues facing commercial radio stations
 COMPELLING CONTENT  INNOVATION  CREATIVITY  PROGRAMMES, NOT PLAYLISTS  DIALOGUE, NOT MONOLOGUE  ACCESSIBILITY  OUTREACH  TRUSTWORTHY  RELIABILITY  QUALITY OF COMMERCIALS  DIFFERENT FROM COMPETITORS, NOT THE SAME  RELATIONSHIPS  LOCAL ADVERTISING  UNPREDICTABILITY  MISSIONARY ZEAL

radio specialist

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Grant Goddard

What consumers want

radio specialist

Young people want:  Uninterrupted iPod music sometimes for: • Personal choice of music • No ads • No inane chat • Less repetition • Spontaneity of randomised playlists  Radio sometimes for: • Human voices provide entertainment, comfort and a sense of security • An accompaniment to other activities • Mood management (getting you up, chilling you out) • Information (news, traffic, travel, what’s on) [Ofcom, The iPod Generation, 2004] The most important characteristics of radio for people of all ages are (in order):  Stations and services that are easy to receive on the move  Witty and entertaining presenters  Local news bulletins and reports to keep people well informed  Local and national weather reports  National news bulletins and reports to keep people well informed Asked if they want more national radio or more local radio:  Twice as many people opted for local radio over national radio Ofcom concluded that “radio was felt to have an important role to play in giving local communities a sense of identity” [Ofcom, Radio: Preparing For The Future, 2005]
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Grant Goddard

What the advertising community wants

radio specialist

“The biggest problem with radio commercials is commercial radio. People rightly bemoan the state of creativity in radio advertising, but I can’t remember anyone ever bemoaning the lack of creativity in commercial radio itself. When the medium is so format-driven that it’s devoid of any original content or innovation, and stations are so homogeneous as to be anonymous, is it any wonder people don’t get excited about it?” [Jim Thornton, executive creative director, Leo Burnett London] “Commercial radio needs to do a lot of work in order to make it an appealing medium. Nothing is more likely to destroy an audience than a spate of radio commercials across stations with an identical offering.” [Brian Jenkins, head of radio, COI] “There is a crisis in radio creativity within the world of full-service agencies, where there tends to be an inherent snobbery towards the medium. At the most junior level, everyone thinks that they can do radio commercials and, to a large extent, it has become the primary school medium that is given to trainees or juniors. Little wonder then that 90% of radio ads are rubbish.” [Stephen Donovan, managing director, Radioville]

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Grant Goddard

Radio regulation 1
Format regulation has created hundreds of homogenous analogue commercial radio stations:  86% of stations play mainstream popular music, comprising: • 53% play oldies • 20% play current hits • 8% are “full service” stations • 4% play adult contemporary music  5% serve ethnic minorities  3% play rock music  2% play dance music  1% play jazz/soul  1% play easy listening  1% offer news/talk programming  0% play classical music (one station)

radio specialist

Since this survey (June 2006), the situation has worsened, as Jazz FM, Smooth FM and Saga FM stations have adopted oldies formats

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Grant Goddard

Radio regulation 2

radio specialist

 The commercial radio industry will have to reduce its substantial fixed costs by:    renegotiation of its format/content requirements with Ofcom renegotiation of its music royalty payments to PRS and PPL renegotiation of its transmission agreements with Arqiva/NGW

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Grant Goddard

Endnote

radio specialist

“The big boys are simply brands that are having to compete with an ever-increasing number of other brands, which are coming to radio from online, TV and magazines, to name but three. Success will depend less and less on old formats and big names, and more on musical choice, interactivity and availability. The less the established radio stations change, the greater the fragmentation will be” [Mike Hales, music editor, AOL] “The much lauded digital radio revolution has become something of a dead duck, and the blame for this lies squarely with radio companies. After rushing in to grab bandwidth on the digital multiplex, there has been a singular lack of imagination and investment in digital stations’ content and their marketing” [Colin Grimshaw, deputy editor, Media Week] “I’m broadly optimistic about its future [radio], but I think it’s more vulnerable than people realise, particularly among the young generation. If it doesn’t reinvent itself, it will become a diminishing part of the landscape” [Andy Duncan, chief executive, C4]

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