In an earlier article, we had discussed the growth factors for the radio industry. In this article, we shall outline the risks that could derail the growth of the FM radio industry.
The FM radio industry derives almost all its revenues from advertisement. The radio stations are free to air and do not garner any subscription revenues, thus making them totally dependent on advertisement revenues. Advertising is a discretionary expenditure and is the first one to be pruned in case of an economic slowdown. Thus, the major marketers advertising on radio may cut their ad budgets in case of an economic downturn. This would adversely affect the radio industry.
Little differentiation between different FM radio stations
The content played on different FM radio stations is very similar in nature. Most of them play popular film and pop music and very few cater to the niche audience such as English rock music lovers or Indian classical music lovers. This is happening because one player is allowed to own only one station in every city. Thus the FM radio operators are not willing to take a risk by not catering to the mass segment. This is hurting the growth of the FM radio industry as people who prefer niche music genres are not tuning into FM radio. Besides this, people frequently switch between stations leading to listenership fragmentation.
Competition from satellite radio
Many of the restrictions that apply to FM radio broadcasters do not apply to satellite radio broadcasters. At present, multiple channel ownership by a FM broadcaster in the same city is not permitted; however, the current satellite broadcaster in India is offering multiple channels. FM broadcasters cannot broadcast news and current affairs 24 hrs a day whereas satellite broadcasters can do so through a dedicated station. FM radio is limited to a small range around the transmission site while the satellite signals cover the entire country. Satellite radio broadcasters do not have to pay any license fee whereas FM radio broadcasters have to pay 4% of their gross revenues as license fees. This favorable treatment meted out to satellite broadcasters may adversely affect the growth of the FM radio industry. However, the satellite radio broadcaster WorldSpace operating in India has not been able to meet with much success. Infact, in India, WorldSpace lost 8,713 net subscribers during 3QFY07, ending the period with 164,902 subscribers. Besides this, satellite radio has high subscription charges whereas FM radio is free to air.
High music royalties
FM radio broadcasters have to pay high royalties to the music companies for the music content procured from them. However the broadcasters can enter into a voluntary agreement with Phonographic Performance Limited and The Indian Performance Right Society Limited at high rates or under the rates determined by the courts of law to minimize their expenses.
Threat from digital technologies
Digital broadcasting technologies like Satellite/Digital Audio Broadcast (DAB) using the FM band and Digital Radio Mondial (DRM) using the AM band are becoming popular worldwide. There is efficient utilization of spectrum in case of digital broadcasting, enabling the broadcast of multiple radio stations. The quality of digital broadcast is better than analog transmission. However, digital receivers are more expensive than analog receivers. In Western Europe, a few countries are looking at a total switch off of analog broadcasting (FM/AM) by 2020 or so. Norway is the only country that has formally announced a cut off date. But with analog TV likely to be switched off in India in the next 5-7 years, radio's turn could come in the next 10-15 years.
There is intense competition between the FM radio operators operating in the same city. All of them are clamoring for the same advertisers, listeners and need to procure similar content. The number of FM radio stations has increased dramatically leading to a proportionate increase in the demand for trained personnel. Due to this attrition and poaching have become wide spread.
Thus, there are many risks that could derail the growth of the FM radio industry. We feel that the major risks are a potential slowdown in the economy, little differentiation between the FM radio stations and intense competition.