MUMBAI: FM radio operators in small towns have their own set of challenges.

In the third phase of FM radio broadcasting in India, the government plans to issue licences for 680 FM radio stations across 237 cities in the country, mostly very small towns like Achalpur, Bettiah and Churu.

Experts have already cast a doubt on the wisdom of this initiative as nearly 80 per cent of the proposed FM stations fall in very small towns where the FM radio business looks non-viable.

While estimates say that nearly 190 of the proposed cities are so small that a FM radio company cannot earn more than Rs 20 lakh per year per city from advertising revenue on an annual expenditure of Rs 50-70 lakh, the current scenario in small towns where FM is already operational is no rosier.

In the earlier format, FM radio broadcasters had to pay an annual license fee of Rs 10 to Rs 110 million, depending on the station, with a built in escalation clause of 15 per cent. In 2005, the system changed - operators now have to pay a one-time entry fee and give the government four per cent of their revenue thereafter. While stations in metros have been able to stay afloat on the changed regulations, players in smaller towns are not being able to generate enough advertising revenue to keep their heads above the water.

Advertising revenue

According to a recent survey conducted among leaders in the radio industry by Ernst & Young (E&Y), 58 per cent of the advertisers are national and corporate advertisers, as compared to 42 per cent local advertisers.

"Advertising revenues in the regional markets is still untapped and the virgin markets will need time to mature," believes S FM project head Nisha Narayanan.

Explains My FM COO Harrish Bhatia, "As radio is a new medium in these unexplored markets, the understanding on the media needs to be developed. The market education on how to best leverage radio for your communication plan needs to be invested into."

The local advertiser seems to be biting the bait in some markets, though Chennai's Aahaa FM Marketing head Balendra Kandivan says, "Our investors consist of 60 per cent of local advertisers and 40 per cent of national ones."

Elucidating the point Kolhapur and Sangli based Tomato FM's CEO Naval Toshniwal says, "It is only now that the revenue has started flowing from advertising and our advertising comprise 80 per cent of local ads and only 20 per cent national ads."

"When it comes to local advertising, the idea is concept selling and not air time selling; 60-65 per cent of our advertising comprise national ads," explains Narayanan.

The paucity of advertising agencies in small towns is another hitch. The Kochi based Club FM's COO George Sebastian explains that due to lack of advertising agencies in small towns, the radio broadcasters have to themselves reach out to the media buyers for selling their air time.

There are instances where stations tie up with major players for sales assistance. Gwalior based Radio Chaska director Tarun Goyal says, "65 per cent of our advertising revenue comes from local Gwalior area and we have tied up with ENIL's Radio Mirchi for sales support from national advertisers."

Obviously, the rates are vastly lower than those charged by metros. Goyal says, "Our advertising per ten second rates fluctuates from Rs. 125-130. There are negotiations in the rates but we do not sell ad space less than Rs. 100 per 10 second."

Kerala based Radio Mango's director of programmes Ravi Nair concurs. "The rates in the metros are usually around Rs. 900 per ten second but our rate varies from Rs.500 in Category C cities to Rs.650 in Category B cities," he avers.

Content

Music royalties, the ever contentious issue for radio companies comprises a significant portion of costs, varying between seven to 43 per cent of a station's total costs excluding the license fees.

Goyal says, “It is difficult to compete with big players in terms of content. Almost 65 per cent of our programming comprises music content and it is not easy to procure content either. To leverage the cost factor, we have tied up with the BBC for content."

Regional content is relatively cheaper for the local players, and available at the rate of Rs. 200-300 per hour as compared to the Rs. 600 per needle hour for Hindi film music, admits SFM's Narayanan. "The problem is however, obtaining the content, as local music industries holding regional music are not organised. The radio broadcasters need to get in touch with individual companies because of lack of licensing bodies. Also, these companies are not ready to give out music considering the risk factor of decline in their physical sales due to FM."

Radio stations that play a mix of regional plus Bollywood shell out around 30-40 per cent of their revenues towards royalties. If only Hindi film music is used, it costs them 40-45 per cent of their total revenues, say stations.

“The high royalties are bleeding the smaller radio stations, claims Narayanan. “After royalty, marketing and other costs, these small town radio stations have to survive on marginal or no profits for the first five years. Big networks can afford to support their category B or C stations on revenues from other stations in Category A?

“Music royalties are too high and that is affecting the growth of radio stations in smaller towns. 30 per cent of our revenues goes towards royalty and a further four per cent towards fess to the government, complains Goyal.

Radio city CEO and AROI President Apurva Purohit had pointed out at the India Radio Forum in May this year, “Music should be rated differently for smaller cities because with the same royalties being paid, the smaller cities are lurching under high costs.

Agrees Bhatia, “Royalties are definitely not in sync with the business model and this needs immediate attention and correction. Steps have to be taken by AROI to help the small town stations survive."

Radio City executive vice president and national sales head Ashit Kukian agrees, “Music royalties are exorbitantly high and erode the profitability of stations other than Category A. A sensible and internationally accepted norm is paying a percentage of revenue as royalty. Today the industry as a whole in India pays 20 per cent as royalty fees, while the international norm in far more mature markets than India is 2-4 per cent."

Defending the claims that royalties are bleeding the radio industry, IPRS CEO Rakesh Nigam says, "Understanding that uniform royalties for radio stations from all categories would be a burden for the small stations, we have slabs of royalties like for A+ category, players are liable to shell out Rs 17,00,000, Rs 12,00,000 for A category, Rs 10,00,000 for B, Rs 7,00,000 for C category and Rs 4,50,000 for D category towns. Further, we have different royalties according to the extent of music played."

Contradicting the royalty slabs, Mango's Nair is of the opinion that not all music content owners are willing to accept different slabs. “The rates irrespective of city categories are still too high. From nothing, owners of music content have suddenly discovered a goose that lays the golden egg. In a lot of the smaller cities and towns, the advent of radio has actually reduced piracy since music is now available free. Fortunately, some of the independent music companies are alive to this fact and are more realistic in their rates."

Mango has tied up with SIMCA, PPL and other independent music companies for music. Much of their Malayalam content is prepared by Malayala Manorama's in-house wing 'Malayalam Music'.

Transmission

One of the crucial problems faced by players in smaller towns is that of transmission. As Nair puts it, “We do face overlapping of signals between Kochi and Thrissur since the aerial distance between the two cities is around 50 km and the fringe areas of both cities have frequency problems?

Similar transmission problems occur when two stations are in close proximity or even with the same transmitting frequency.

Sun Network launched their stations in North east regions of Shillong and their Gangtok and Siliguri stations are slated to come up soon. Narayanan avers, ?“As the north east regions are hilly, we are anticipating some transmission problems. Frequency issues are our priority and we are working to tackle it?

Sebastian supplements, ?“We have to face transmission problems because of same frequency at times. But the government doesn't seem to be looking into the matter too actively?

Strong backing

A radio network comprising only B and C category may not be a viable business option and need metro and A- category stations to remain profitable in the long term, insist most players. This is particularly due to current cost structures and the nascent size of the radio ad sales market.

Small radio stations operated by big players possessing radio stations in metros are able to sustain themselves from the profits of their other counterparts. Like Nair says, "Being part of the Malayalam Manorama group, we have established sales contacts in all the major metros and mini towns."

Sebastian puts in, “It comes as an advantage for the existing media group as they can garner better advertising and have goodwill in the market. As we come from Mathrubhumi Publication, media buyers do no hesitate to invest in our radio and we easily acquire national ads."

Toshniwal agrees that big companies with multi-city presence score over the others. “In case of corporate advertising, big players are at an advantage. Big players have the advantage that they have a bouquet of radio stations to offer across India, but we equipped with only two stations are not in a better bargaining position."

Cost of operation

Cost for setting up stations varies significantly according to individual specifications, but average investment to set up a small radio station is Rs. 15 to 25 million and Rs. 40 to 50 million for a metro station. Apart from the initial costs, other operating costs are a burden for these stations, owing to their marginal profits.

Nair says, “Under phase II all stations have to co-locate, this is a big saving in terms of investing in tower, land lease costs etc. The manpower costs in smaller towns tend to be lower as compared to the metros. Real estate costs are also lower. Further, the Government has permitted networking of cat C cities which can help cut costs."

Toshniwal says, “It can be said that multi tasking exists at smaller town where the programming guys double as technical guys. But they are certainly not undermanned?

Radio consultant Nitin Tiwari is of the opinion that many of the Category C and D from big players are also suffering losses and are at the verge of closure. “Many a times, there are tie ups between two smaller stations for providing technical support leading to undercutting of staff."

“Big stations can afford to hire celebrity jockeys to add the glamour quotient to their station, but smaller stations find it difficult to accommodate these in their small budgets. Having experienced the drawbacks of small town stations in the second phase, the radio broadcasters will think twice before investing in the third phase,? he maintains.

Is survival a question?

Standing out among rivals is important for survival, says Nair. “In smaller markets, it is very important to be number one or at least a respectable number two to be viable in the long run. Also, if they wish to experiment, content differentiation will work more in bigger cities as compared to smaller towns."

Enjoins Ashit Kukian, “Limited market potential, talent sourcing, retention challenges, royalty costs, infrastructure are among some of the key components which affect the profitability of smaller stations."

Kandivan says, “The problem with small town radio stations is that most of the radio regulations are city focused. The regulations must be smaller-city broadcast friendly and must be state based."

It is difficult to source potential talent in small towns apart from lower levels of urbanisation, which calls for different programming strategies, opines Nair.

“Radio stations particularly in small pockets of India are faced with talent challenges especially when it comes to sourcing and retention. Manpower and talent sourcing is a challenge the private FM industry faces across markets," he says.

Big FM COO Tarun Katial ruled out at India Radio Forum 2008 that there is a need for consolidation of three factors- advertising, listenership and multiple licenses to make small radio businesses viable.

Is the radio industry geared to take up the challenge?