The government is planning to roll out Phase-III of FM radio, which will begin with auctioning of bids. But first, a clutch of regulatory issues need to be cleared up, including foreign direct investment, multiple licences, allowing news broadcasts and, most important, the revenue sharing over music royalties. The fact that in the last phase, at least 90-odd stations were not picked up in the auctions is making both the government and the Telecom Regulatory Authority of India listen to the problems the radio industry is facing.

?There?s certainly enough interest in the medium as Phase-III is where further deregulation and changes in policy will be allowed by the government,? says Apurva Purohit, CEO, Radio City, and president, AROI (Association of Radio Operators for India). ?In this phase it is expected that multiple frequencies, broadcast of news and current affairs, increased FDI and networking will be allowed to FM stations. Additionally, there are likely to be 700 more frequencies available for bidding, especially in smaller towns,? she adds.

Pointing out that Phase-III is crucial for the business, Tarun Katial, COO, BIG 92.7 FM, explains that a lot of regulatory framework needs to be cleared before the industry enters phase III. ?The Trai recommendations have already been presented and we are optimistic that the government will do the needful,? he says. While tier-III markets pose a huge business potential, all the players agree that there are certain issues, like poor infrastructure and music royalty issues, which need to be addressed.

?The launch of Phase-III is getting delayed because lots of issues were pointed out. The government has to ensure that this phase is viable for operators in smaller towns,? says Smita Jha, associate director, PwC.

In fact, Prashant Panday, CEO, Radio Mirchi, points out that till the music royalty issue gets sorted out, there is virtually no interest in Phase-III auctions. ?There is no viability in the radio sector, thanks to the music royalty regime, and further investments by radio broadcasters are impossible to imagine. However, if the music royalties issue were to get sorted out, interest in the sector will revive.? As of now, FM broadcasters, big and small, pay anything from 15-20% of their revenues on royalty. With other content (read news) not allowed on FM, the players play music all the time, thus increasing costs.

Content owners counter that since music is the most important input for these FM stations, they must bear the input costs. The Copyright Board of India has begun hearing the case of both sides from the last week of July and all the FM players hope a resolution is in sight. Currently, there are 280-odd stations that are operational across the country.

Says Harrish M Bhatia, COO, MY FM 94.3: ?Royalty costs in India are based on the number of songs played rather than revenue potential of radio stations, which is the norm in advanced markets. In India, because of fixed music royalty cost, the percentage of revenues that radio stations have to pay is sometimes as high as 70% to 80%. While in markets like the UK and Canada, royalty costs vary between 2% to 5%.?

To bring down the dependence on music and thus save on costs, FM players have been arguing for the need to allow news broadcasts, even though they agree that safeguards need to be put in place, because of the reach of the medium. The Trai recommendations are with the government, and according to insiders, it is likely to allow news bulletins for short durations sourced from government-authorised agencies.

If content experiments are to be carried out, FM players may also look for the FDI route to boost resources and ideas. As of now, the radio industry is allowed an FDI of 20%. Trai has recommended, according to analysts, that the limit be extended to 24%, but all players have accepted the fact that it is unlikely to be hiked further.

For a radio station to be viable, operational costs need to be brought down further. Says Pandey of Radio Mirchi: ?Most radio broadcasters are bleeding. Most operators have seen no profits from the time they launched and the situation has only become worse with the economic slowdown. So, margins continue to remain negative for most broadcasters?inspite of the drastic cost-cutting measures they have undertaken.? Though MY FM has announced that it has broken even in a little over two years, this is a rarity, not the norm.

According to industry experts, there is huge growth potential in tier-II and tier-III cities, where a large chunk of revenues come from local players. While it is not easy for a national player to sell into a local market, the real money is coming from there and so there?s a need to build a strong network. Katial of BIG FM says approximately 40% of the revenues in smaller towns come from local brands. ?This is a shift, since not too long ago, advertising revenues came in largely from the metros,? he points out. Pandey agrees advertisers love radio.

?Almost all national advertisers are using radio now. The penetration amongst the retail segment also has increased satisfactorily,? he adds. Purohit says advertisers are recognising the potential of radio as the medium is far more cost-effective and has the highest local reach per city when compared to any other local medium.

The size of the advertising pie in the radio industry currently is approximately 4% and growing at 10-12%. With radio channels running into losses, the government is believed to be considering handing out multiple licences to FM stations so that a particular station can more than one channel in a city. ?The government didn?t want to create a monopoly and hence multiple licences weren?t allowed in Phase I and II, but now it?s likely to be allowed though one station is unlikely to get more than two-three channels per city,? explains Jha.

The government is also likely to allow networking?that is, content made for one station may be played in another ? in smaller towns to restrict costs.

So, is 2009 going to be the toughest year for radio? Well, most players see an upswing for the medium as more marketers realise the RoI radio offers. ?It?s a great opportunity for the entire radio industry to reiterate the medium?s effectiveness and high RoI for brands wanting to use localised marketing as a strategy to manage the slowdown,? says Purohit. But she points out that there are pressures of the slowdown and hopes that the policy changes of Phase-III and an early resolution of the royalty issue will give a much-needed boost to the medium.

BIG FM?s Katial is already talking about consolidation: ?Consolidation will happen, sooner than later, especially for smaller/single station players as the larger networks look at growing their footprint.?