*Radioandmusic.com features and salutes glorious years of Private FM Radio

The early years of Indian FM radio were a big struggle. Many came; many tuned off from the segment, courtesy the static and regulatory noise that made the going difficult. Radio Mirchi was amongst the pioneers. Entertainment Networks India Ltd (ENIL) which runs the brand Radio Mirchi kept broadcasting despite the stormy climate. At its helm has been ENIL executive director and CEO Prashant Panday. He has steered his charge over the past decade, making it one of the most recognized media brands in the country and a front runner in FM radio.

In a conversation with Radioandmusic.com, Panday opens up and talks frankly about the trials and tribulations of Indian FM radio and the rosy future ahead for the medium. Excerpts:-

Evolution of FM radio from phase I to Phase-III…

Well it's been a roller coaster ride. We started off in the year 2000 when the first radio licensing policy (called Phase-I) was announced by the government and the first set of auctions took place. Compared to the sophisticated auction methods we now have, the auctions of that year were very primeval by nature. Prospective bidders knew who all was bidding in each round. A manual system of bidding was followed wherein people raised hands to show their interest. And what looks almost unbelievable today.....winners were allowed to walk away by forfeiting only their earnest money deposits. There were many many problems in Phase-I; most important of them being that the wrong auction methodology cost serious bidders dearly. Those who were not serious just walked away after raising the bids. Those who were serious got stuck behind with high annual licence fees. By design, these were to increase at 15% per annum. In hindsight, it was a terrible policy.

For us, Phase-I was important because our brand was born in this phase. We started with our first station in Indore which launched in October 2001 and the brand established itself as a king in that market in almost no time. By May 2003, we had seven prominent stations all over India with a presence in four major metros – Mumbai, Delhi, Chennai and Kolkata. We also had three of the biggest cities in the West – Ahmedabad, Pune and Indore. Everyone bled including Mirchi, but at least we were able to build our brand in those torrid years of Phase-I. Today, a lot of Mirchi's brand strength can be attributed to that period of time. ENIL lost Rs 1.2 billion in the five years of the Phase-I policy.

Fortunately, the government was keen to develop the industry and took feedback from FICCI and the radio industry and launched Phase-II in July 2005, a vastly improved offering compared to Phase-I. Licence fees were made a lot more reasonable and linked to revenues (4% of gross revenues). Bidding was by a closed tender system. All bids were to be backed up with bank guarantees and advance DDs. Bidding was done confidentially. The telecom-style one time entry fee (OTEF) system was introduced to allocate licences. Phase-II revived the fledgling radio industry. From just 21 operating stations in 12 cities under Phase-I, the number of operating stations has today risen to some 245 odd in some 85 odd towns. The share of radio has also increased significantly from some 1.5% in Phase-I to some 4.5-5%. All in all, Phase-II could be called a success. Of course, ENIL turned profitable from the year 05-06 and has remained profitable ever since. Last year, we reported a top line of Rs 2.8 billion with EBITDA of Rs 9.1 billion...a far cry from the years of massive losses.

The infant industry stage has progressed and revenues have grown gradually…

Well it started from a zero base in the year 2000 and today it's a Rs 12 billion industry. I think it's clearly made a lot of progress on revenues. If in the next five years, it can take its share up to 7-8%, then it would have achieved a more reasonable degree of success. If it feels that radio hasn't achieved its full potential yet, it is only because there hasn't been enough supply of frequencies in this business. Even today, in major markets like Mumbai or Delhi, we have only seven or eight private radio stations. In comparison, there are more than 500 TV stations and at least 12-15 newspaper titles and even more splits. The number of outdoor sites runs into thousands...in an environment like that, radio should also have seen a big increase in its numbers, but that's only starting to happen now.

Challenges faced by radio in the decade…

Several. Mostly cost related! In Phase-I, the government's annual license fees were back-breaking. In both the Phase-I and Phase-II, we suffered a very heavy burden on account of music royalties. The first licence order came from the Copyright Board towards the end of 2002.

That order was supposed to be valid for just two years. In those two years, it was already becoming clear that the order was too high. But before a new order could come out in 2004, the matter had already been buried under several court cases and a new order eventually came out only in Aug 2010. In the meantime, Phase-II happened and radio spread to several small and very small cities. These cities simply could not pay the kind of music royalty that was ordered under the first licence case case. Imagine a city which should have paid Rs 50,000 per annum in royalties was paying Rs 50 lakh per annum. The music industry pocketed hundreds of crores of wrongly determined royalties...only now, the regime has been made rational and reasonable.

Because of high licence fees and music royalty fees in Phase-I and Phase-II, radio broadcasters were forced to cut investments in marketing and brand building. Hence the overall radio category failed to grow as much as it should have. Similarly, because of high cost structures, broadcasters were not willing to experiment with smaller, niche formats of music.

So much time has been spent by broadcasters in lobbying with the government, with FICCI, with regulators...to make the regulatory regime more reasonable. If only all this time had been spent on category building, I am sure everyone would have been happier!

Profitability: where is there any profitability in the sector even today? Most broadcasters make losses at the profit after tax (PAT) level. Some have started breaking even at earnings before interest tax depreciation and amortization. (EBIDTA) level. Now under normal circumstances, an EBITDA breakeven is a good milestone to celebrate, but in radio it's not so. An EBITDA breakeven should come at a point when there is still a lot of growth left in the business.

Unfortunately, in India, most radio broadcasters who are achieving EBITDA breakevens now are saturated. They will now grow at 10-15% per annum. And they are debt-laden. So even if their EBITDA margins improve marginally from here on, they won't be able to achieve PAT breakevens for many more years. And here's the problem – in another five to six years, almost all broadcasters will see their licence periods ending. As a 10-year business, it would have yielded huge negative returns to investors.

Sectoral loss is so huge that investors have stayed away from most radio broadcasters......as a result, even funding basic ops has been a challenge for most of us.

One component that stood as a pride for radio in the decade…

Oh there are many! The most important one is interactivity with listeners. Radio has given brands the first and only opportunity to truly engage with their consumers. When a Pepsi engages its consumers in developing a jingle for itself, it cannot do so on any other medium except radio. When a Hero Honda (now Hero Motor Corp) sponsors Earth Day and wants to urge people to shut off their electricity for an hour, it can only do it on radio (we played live music – had bands performing in our studio – rather than using computer-stored music which consumes electricity!). Today, radio stations have given the common people of our country a voice. They can pick up a phone and talk to millions of their citizenry at will.

The second most important is the role that radio has played during any crisis situation. Most recently, during the serial blasts on 13 July in Mumbai, radio broadcasters were the primary source of information for most people stuck in their offices and in the evening traffic.

Radio has proved its worth so many times…in floods, riots, bomb blasts.

Radio is the logical place to hear music. Just like news is found in newspapers and entertainment on TV….. Information (search), communication (email) and community building (social media) on the Internet  Music is best heard on radio. Radio promotes music and films. Without radio, there would be no promotion of music possible.

The reach of FM radio is some 160 million people (and this is a vastly under-reported number). The tine spent listening (TSL) is some two hours or so. In contrast, the promos that film producers run on TV hardly have any reach and time spent...music is promoted on radio and that's proven amply.

The cabinet's approval on Phase-III, has in a way opened the much awaited gates for private players in terms of reach, advertisers, revenue and given more opportunities for growth of radio industry as a medium…

Radio will now expand nationally. The listenership numbers will increase dramatically. Ad revenues will surely climb. And finally we will be able to compete with regional print editions which have made a good killing recently with all the economic growth there.

Mobility of the medium has increased listenership significantly…

Almost 80-95% of people have access to FM radio on their mobile phones. The mobile phone has become an extremely important device for FM listenership. And also, FM radio is the primary medium available when on the move.

Mirchi's progress over these years…

In financial terms: we are 35% of the industry's revenues, 85% of its EBITDA and more than 100% of its PAT. Our revenues were Rs 2.8 billion

(net) last year...at this level, Mirchi as a single brand is in the top ten electronic media brands in terms of advertising revenues (the other nine being TV brands). In terms of listenership, we are leaders in three of the four RAM markets; and even in the fourth market, we are just a shade behind and are number one many times during the year.

In terms of IRS, we are nearly 42 million listeners...significantly higher than all other brands. In terms of awards and recognition, we are right on the top. We were rated the #1 media brand (ahead of The Times of India and Star Plus) in the Pitch-IMRB survey of 2008. We have been voted the most successful radio channel of the year twice by FICCI. So yes, I can say that Mirchi has progressed quite well.

Hurdles with the roll out of Phase-III…

The main hurdle will be cost management. Firstly, the bids should be reasonable. In smaller towns, where the government is putting up three frequencies on auction, hopefully, the bids will be reasonable. We cannot be sure in the metros where only one or two remnant frequencies of Phase-II are being offered.

Secondly, operating costs have to be kept very low...so we need to have low power transmitters (cut electricity cost), more networking (cut people cost and other operating costs), etc.

Thirdly, we need to keep capex low. If Becil charges us like they did in Phase-II, we are all dead and gone.

And lastly, the project management challenge – rolling out so many stations is surely going to test our nerves.

FM Radio in the next five years…..

I see it growing to 7-8% of a much larger advertising industry. I see radio seeing its best years in the next five to10 years. It's a good time for people interested in radio to join the medium.