Radio is probably not the first medium that springs to mind when people think of advances in techn...
Radio is probably not the first medium that springs to mind when people think of advances in technology. Yet it is well on the way to taking its place alongside the internet, mobile phones, and television in the brave new world of digital.
If the industry is to be believed we are on the verge of the third radio age. But the vast majority of the general public would be hard pressed to realise it. As one media analyst said: "The average punter doesn't even know it exists." As Miranda Acland, head of corporate communications at Capital Radio says: "There is some confusion out there. If you go into a retailer and ask for a digital radio they will give you something with digital written on the front of it and you will end up with a digital tuner, which is not the same thing at all."
Digital radio actually changes the way radio is transmitted. Instead of each station having its own transmitter with its own frequency a number of stations are bundled together on what is called a multiplex and transmitted as a single entity. Digital One, which operates the first commercial national multiplex and is part-owned by GWR, for instance, broadcasts 10 stations. A new receiver is needed and listeners tune in by scrolling through names of stations rather than trying to find the frequency.
What will it all mean?
The industry is keen to stress what it all means for the listener. Likening the change as being akin to the switch from vinyl to CD which audiophiles may like to debate protagonists for digital radio insist that the quality of reception will be clearer and cleaner. It also means that there is no need to retune a major bonus for anyone who listens on long car journeys.
All of the major commercial radio companies GWR, Capital, Chrysalis, SMG, Emap and Jazz FM are involved one way or another in digital, either as multiplex operators or as service providers. And all are keen that digital take-up occurs because of the opportunities the additional data transfer side offers when talking about advertising. Indeed, media analyst at UBS Warburg Simon Mays-Smith says that "the real story with digital radio is not the radio bit of it at all it's the data bit."
As well as audio, digital radio can transmit data and it is this that both the companies and the analysts find exciting. As Quentin Howard, chief executive at Digital One, says: "Digital is an extremely good way of delivering broadcast information whether it is sound, data or multimedia to people in mobile environments and it is all done on the back of radio stations with which they are familiar."
But there is a catch. Howard is keen to talk about the next generation of mobile phones having a digital chip automatically included and Psion is working on the idea but this remains for the moment blue sky technology.
A problem of price
As it is there are only 30,000 digital radio receivers in the country. Howard admits there is a problem and the problem is price. A digital radio receiver will set you back £300. Howard is hopeful that the price will fall to the £99 mark the "magic price point" in 18 months. But as Alex de Groote, media analyst at ING Barings, says: "Most households have two or three radios which cost a tenner each. Until they need to, most people will avoid buying a digital radio set."
Apart from a certain amount of take-up driven by consumer demand for improved quality, the biggest single driver for change will come from government. Unlike with digital television, where the government is committed to pronouncing upon an analogue switch-off date sometime this decade, it is unwilling and unlikely to do the same for radio in the near future.
As Piers Collins, media analyst with Credit Suisse First Boston , says: "Given the amount of analogue radio sets out there [about 200 million] and the relationship that listeners have with radio, it is going to take a very brave political decision to switch off analogue radio until penetration levels are much higher."
This could take some time. Current estimates for digital radio penetration by 2013, for instance, stand at 60%. All of this leaves full digital roll-out some way down the road. But Phil Riley, the chairman of the MXR Consortium that includes Chrysalis and Capital, says he is not worried. "Our plans recognise that this will be three or four years before we start to see significant digital penetration and start to see revenues flowing through strongly. We have all built business plans on that basis and believe there is no other way of doing this. We have been given licences which effectively run for 24 years because everybody realises that it is going to take four years to get this thing up and running."
Riley says that "everybody's got to hold their nerve" and the analysts would seem to agree. As de Groote says: "We like it, it looks good, it sounds good and it is good that the major radio companies are involved in it. Long term this is where they want to be."
But near-term digital radio is simply a cost albeit with the very real short-term incentive that the companies have effectively had their analogue licences rolled over without having to be tendered for. As Collins at CSFB says: "You are going to spend your £3m or whatever it is quite happily. You're not going to complain."
The analysts suggest that as it stands this is all good news for the major digital players. Smaller players such as Forever Broadcasting, though, are hopeful that they can at least be content providers in the local areas where they have an analogue footprint. Forever is part of a consortium that has lost out on regional digital licences recently and has a bid for the North West region being heard by the radio authority this week. Forever is keen on the niche possibilities that digital could offer.
Capital is also keen on the niche possibilities of digital and is using it to build XFM, the company's alternative music station, into a quasi-national network. Capital also believes that through digital it will be able to increase its audience share. As Acland says: "The total number of licences has increased but this means that we can own more."
Digital is the future but radio stocks are having a bad time in the here and now with worries over an advertising slowdown featuring prominently in most appraisals. But the analysts believe, especially with Capital, that the downgrading might have been overdone. De Groote at ING Barings has a buy on Capital, along with Collins at CSFB, but is a seller of GWR, suggesting that Digital One could be a cost for some time.
Recently published radio advertising growth forecasts from Zenith predicted 15% growth in 2001 and 9% for 2002. The Advertising Association, meanwhile, predicts growth in 2001 to come in at 11% though it suggests that the second quarter will be the weakest of the year.
Of the larger players, GWR came in with the best growth figures for the fourth quarter of last year with 12.5%. Capital recorded less than a third of that level. In January, Capital predicted 4% growth in the first half of this year. ING Barings subsequently downgraded its pre-tax profit forecasts to £41.1m from £44.4m for 2001.
ING says that it expects long-term growth potential in the radio market as a whole. In comparison with the US market, the radio advertising sector in the UK is relatively immature. In the US radio commands a 12.5% share of total advertising spend whereas in the UK the figure stands at 5%. Short-term worries over advertising revenues are hurting all the main radio plays but the analysts agree that the long-term picture is much clearer.
Credit Suisse First Boston sees Capital Radio as a long-term winner. Its forecasts project Capital's revenues increasing from £134.9m in 2000 to £174.4m in 2002 and £238.8m in 2005 with pre-tax profits rising to £77.3m in 2005.
Emap Radio produced good first-half figures for this year with sales rising 27% to £52m and operating profits up 62% to £21m. Schroder Salomon Smith Barney forecasts growth in the region of 18% in the second half.
SMG pronounced itself very happy with the performance of Ginger Media after Ginger's Virgin group produced an operating profit of £15m on turnover of £33.6m, a rise of 58% on a like-for-like basis. Advertising revenues were up 22%. SMG acquired a 20% stake in Scottish Radio at the end of last year. It has since increased the stake to 24.8% and is believed to be positioning itself ahead of further consolidation in the industry.
Chrysalis, meanwhile, achieved the securitisation of the group's music catalogue, which has freed up cash for investment.
It's too early to buy for digital radio potential, large though it is. At present stick to companies doing well. Our favourites are Chrysalis (313p) and Jazz FM (168p).