Tuesday, 22 January 2019

Radio Wars

How interesting is radio in the UK right now?

Less than 24 hours after Chris Evans launches his new breakfast show on Virgin, another R2 escapee, Simon Mayo, is announced as the lead presenter on another new station, Scala Radio, due to launch in March. More on Scala in a moment, but first an update on my previous blog here on the economics of the Evans move.

I'm sticking to my guns on the cost to Wireless/News UK of Evans move. Despite the claimed creative challenges inspiring him to move, Chris will not have gone without personally matching his peak BBC fees of c £2m. His team will add a few hundred thousand on top. Add in employers NI/pensions etc and you must be looking at a £2.5m-£3m incremental cost. I did predict this would be a five year play, and Chris has already said he will extend his current three year contract to five years.

I did also predict they would need to bolster the team for the rest of the schedule. So far that hasn't happened, but it will be interesting to see if that changes when new listeners do arrive. Will they be happy with the current line-up or might they be expecting a back-up team as good as he had on R2? David Lloyd's first day review of the output augurs well and the link has some telescoped audio from the show if you missed it.

This is probably a secondary point. What is more critical is his decision, I'm sure taken with full board approval and based on solid research, not to run with ads in the show - just a sponsorship deal. as Adam Bowie reflected in his blog yesterday, sponsorships of high profile radio breakfast shows are valuable - and if I had to guess I'd say the Sky deal was worth £1m-£1.5m, although I'd also reckon a biggish chunk of that is in the form of a barter arrangement to run ads for the show on Sky (some of which have already aired). The show is also being promoted, as you would expect, across News UK titles (both a wrap around in The Sun and full page ads in The Times so far this week). Has there been any truly external, 3rd party paid-for advertising so far. A little, I think, on terrestrial TV, but so far not the major, all guns blazing ITV campaign we might have expected.

I still think £10m is the sort of sum required to launch a big, ambitious, popular music national show in the face of fierce competition from both BBC and commercial rivals. I'd regularly spend between £0.5m and £1.5m on station launches (aggregated over a 24-36 month period) in either London or big regions/cities. Grossing that up, and discounting for economies of scale but adding inflation, I think a biggish number is needed to cut through nationally at the level required. Quite possibly the big guns are being saved for later - a strategy I'd support, using the barter and in-house promotion, alongside inevitable launch pr, as a first salvo in the war. But I think they must know this is a "go big or go home" play - especially if they want to get weekly reach into the millions, which they must in order to make a return.

The biggest delta to the original numbers I quoted last year has been the decision to only run sponsorship at breakfast, and not advertising. Although breakfast only counts for 3 out of 24 hours (so around 12.5% of spots available by number), the size of the audience, and its prominence within the output, means weekday breakfast would on most stations generate a good 20%-25% of the total revenue booked across a year. I'd estimated they need £20m in annual revenues by the end of this five year period for the station to be making sufficient profits to be deemed a success. If you are going to block the easiest £5m of that off the bat, it makes the rest of the project that much harder to succeed. In the short term it will undoubtedly make the show more comfortable for new listeners - but in the long term will it fatally undermine the economics? It's all to play for, and the good news for all commercial radio listeners is it will put huge pressure on other stations to limit their own commercial exposure. For too long now operators have overloaded stations, particularly at breakfast time, with too many commercial messages. Chris may well force a rethink, if he succeeds in taking listeners away with a format and music mix closer to his commercial rivals than ever was the case on R2. Heart, Smooth, Magic and Absolute together have a size equivalent to R2, so The Wireless Group programming gurus will be training their guns on them as well as Chris's former BBC home.

On to Scala, a smaller, but no less interesting new play. Simon Mayo is, like Chris, a hugely talented and experienced radio player at the highest level. He doesn't of course have Chris's level of fame, nor the desire to get up at 4am again in order to host the breakfast show on this new station as he is booked in to mid-mornings (as a former R1 breakfast host, he knows the pain). Nevertheless a good six figure annual fee, alongside some other reasonable talents, will mean a programming budget I'd guess at c £1m per annum. Matt Deegan has nicely blogged here about the likely feel to the output. The transmission capacity for Scala is being found on DAB multiplex D2 from other channels being either discontinued or possibly having their bandwidth reduced, so arguably at nil additional cost to Bauer. But, to make a fair comparison, we should budget, say £0.5m per annum as the cost of using this capacity, which could be sold to 3rd parties if Bauer really didn't want or need it. Add in £0.5m for other incremental back-room/admin costs and you have a station which should be able to operate on a £2m per annum budget. Realistically this is not a staton which is going to "go big or go home" on its marketing. Slow burn is the order of the day here I'd guess. Bauer don't have an obvious newspaper or high profile magazine in their stable to use as a promotional vehicle - but I could imagine creative deals where, say, The Guardian could be partnered with to promote the station, in return for exposure for that newspaper across the Bauer Radio portfolio. You are still going to need some hard cash to get your marketing message across - but I could see £2m-£3m over the first couple of years doing a decent job.

So maybe a £2m marketing spend, and a couple of years supporting a £2m per annum cost base. That would suggest in round terms a £5m cash investment. Can that be recouped? Of course neither Bauer or News UK are selling companies, but you do need to crunch numbers as though you are in order to establish value for existing shareholders. My investment rule of thumb is that if you can create value that is 3 x your investment, that represents a decent return. That would imply a £15m value is needed. In turn, using pretty standard value multiples for Scala I'd think an asset value of 10.0x your annual profits is a sensible metric (although I had used a slightly punchier 12.0x for Virgin).  That means the station needs to be making an operating profit of around £1.5m. Assuming royalties, commissions and incremental sales costs (Bauer already has a big national team so these won't be high) take off 20% of any revenue earned, that means they would need annual revenues of £4m-£5m to make a £1.5m profit.

Commercial stations tend to generate roughly £1 of national advertising per year for every weekly hour of listening they achieve (that figure is simply the number of listeners x how long they listen each week). UK radio as a whole generates 470m listening hours each week, and total national advertising and sponsorship (including the rapidly growing pot of digital revenues) ran at a little under £500m in 2018. Some stations will do better than average, some worse, but Scala, backed by Bauer's pretty significant presence in the national marketplace, will trade at par I'd think.

So that implies they need around 4m listening hours per week. Both Radio 3 and Classic FM get around the same time spent listening to them each week (6.5 and 6.8 hours respectively), so there's no reason to suspect Scala won't get 6 average hours if its programming is good. So to get 4m listening hours it will need to reach 650,000 to 700,000 listeners. Classic's weekly audience is 5.2m, although it of course benefits both from a significant heritage, a great UK wide FM network, and a presence on the D1 DAB platform, which has excellent UK coverage. Scala will be DAB only, with no heritage, and will only be on the less extensive D2 platform. Despite this I think 650,000-700,000 listeners is a realistic aim, being just 15% of Classic's current audience, and probably only around 10% of the combined audience of Classic and R3, which I'd guess at between 6m-7m (R3 has 1.9m listeners, but there's only partial sharing of listeners).

So Scala is less risky financially than Virgin, but perhaps not with the overall upside of the Wireless/Evans enterprise. But perhaps that's inevitable, Bauer are the UKs 2nd largest group, behind Global, and their goal must be relatively safe, incremental growth to try and close that gap. Wireless/News UK are some way behind, so the risks, and rewards, need to be higher.

Let battle commence


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  2. A very exciting time for radio, unless you're under 25 in which case a 50 something joining a station you can't receive or an app you don't want, and a classical station launching in 6 weeks might plant the thought in your head that this radio thing maybe isn't for you. Remember when Kiss 100 used to really matter? What's the equivalent now? I can't find one.