FM Radio Biz: Hot & How

New Delhi, June 26: | Updated: Jun 27 2003, 05:30am hrs
Imagine an industry where all players put together report their first net profit of a mere Rs 1.89 crore and that too in only the tenth year of operations. By this time they could have cumulative losses to the tune of Rs 861 crore. Doesnt sound like a good business plan, does it

Tune in to private FM radio industry analysis by the Confederation of Indian Industry (CII):

Combined losses for 2002-03, the first year of operations, have been estimated at Rs 120 crore for the leading FM operators. Times of India group owned Radio Mirchi, with presence in Ahmedabad, Indore, Mumbai, Pune and Delhi, was the biggest loser with Rs 47.9 crore. Star TV groups Radio City, operating in Delhi, Mumbai, Kolkata and Lucknow, was Rs 32.1 crore in the red.

Midday groups Go in Mumbai and India Today groups Red FM in Delhi and Mumbai both lost about Rs 13.5 crore each last year. DSP Merrill Lynchs Win 94.6 with a licence for Mumbai has deferred operations indefinitely after losing Rs 14.3 crore.

While doing the analysis, CII has assumed revenues will rise 25 per cent annually, licence fee will go up by 15 per cent every year but expenses will remain the same through the 10 years. At these rates, revenues and expenditure in year 10 could be Rs 358.41 crore and Rs 356.52 crore respectively, giving a net profit of Rs 1.89 crore.

But the cumulative loss could well be Rs 861.05 crore by then.

The cumulative loss includes an annual outflow of Rs 23.96 crore on account of interest paid at the rate of 16 per cent on capital employed, adding up to Rs 239.6 crore over 10 years.

The operating loss is however seen to be lower at Rs 90 crore for last year, going down to Rs 52 crore in the seventh year with the corner finally being turned in the tenth year with an operating profit of Rs 33 crore.

But why is this bloodbath happening On the expenditure side is the much talked about and controversial issue of licence fee to be paid to the government. In the first year of operations 2002-03, of the total expenditure of Rs 169 crore (including Rs 31.35 crore on account of depreciation and interest loss on capital employed), private radio companies generated revenues of only Rs 48.10 crore leaving a deficit of over Rs 120 crore.

In Mumbai alone, the five private players had a shortfall of Rs 54 crore on expenditure of Rs 80 crore. While licence fee was Rs 48 crore for this city, other major cost was the approximate Rs 660 paid per hour to buy music rights.

The problem has been compounded by low advertising revenues accruing to the channels. The current ad spend on radio accounts for less than one per cent of the countrys total ad pie of Rs 8,600 crore. While the global average is about 4-5 per cent of total advertising going to radio in value terms, it is as high as 20 per cent in countries such as Sri Lanka. Total advertising on over 6000 radio stations in USA added up to $3.2 billion (over Rs 15,000 crore).

While it may seem near-impossible for any industry to sustain such balance sheets, the CII study suggests that there may yet be hope. If the government agrees, either through negotiation or court intervention, to drop the licence fee system and move to a revenue sharing model, FM operators reckon they could break even in about two years. Industry feels this should be allowed as the second round of licence auction would be adopting a revenue sharing model.

The CII study also quotes Madison Media which has estimated a much higher ad spend on radio in the future. It feels advertisers will spend about Rs 500 crore on radio by 2004, which represents four per cent of the enlarged ad pie. In such a scenario, FM operators could start making an operating profit if all estimates of expenses remain the same even with a licence fee regime.

Right now, it is difficult to predict the future of these FM channels, but till they are being broadcast, one might as well tune in to their favourite frequency and enjoy.