MUMBAI: India’s private FM radio segment is expected to grow and generate revenue of around Rs 14 billion in 2012–13, with 245 private FM stations operating in 86 cities growing at a Compound Annual Growth Rate (CAGR) of 14 per cent annually, according to ‘Poised for Growth: FM radio in India’ latest study by Confederation of Indian Industry and Ernst & Young.

Furthermore, the sector is expected to grow to ?Rs 23 bn at a CAGR of 18 per cent, within three years of the FM Phase III being rolled out. The sector accounts for around 4 per cent of the country’s total advertisement industry. Globally, radio’s average share of the total advertisement industry is between 5– 10 per cent.

According to IRS 2012 Q2 data, radio has an estimated audience of 158 million people (out of which FM radio accounts for 106mn), as compared to 563 mn in the TV segment and 352 mn in the print sector. Advertising revenues comprise more than 85–90 per cent of the total revenue generated by FM radio companies; non-FCT sales can contribute up to 20 per cent of a radio company’s total revenue today.

Ernst & Young partner Ashish Pherwani said, “The report is a compilation of the views of 23 industry stakeholders including radio companies, regulators, music labels and more. It highlights the need for a speedy implementation of Phase III, which can grow the radio industry from Rs14bn to Rs 23bn in three years, subject to enabling networking and cost management, development of a measurement metric which supports the industry and ensuring license fee prices during Phase III auctions are not irrational.  The report also highlights operational, tax and technology implications of the industry.”

According to the report, the current state of the industry is that radio is not considered a primary advertising medium due to its limited number of stations. While larger cities are mostly covered by it, advertisers interested in regional ad campaigns prefer using regional print or TV, which has grown significantly since 2005. However, with the implementation of Phase III, with 839 frequencies being made available for auction, radio is expected to provide advertisers with a much deeper reach.

More than 50 per cent of FM radio consumption is in houses, followed by people listening in transit (on mobile phones and in-car listening) and out-of-home listening at restaurants, offices, shops and more. Around 25 per cent of total radio listenership is now on mobile phones. Some radio companies claimed that mobile phone listenership in metros comprises more than 75 per cent of their total listenership.

The study highlights the fact that the key challenges faced by the industry today include limited inventory, inability to demonstrate ROI and slow recovery of ad effective rates (ERs). Therefore, the need of the hour is for radio industry is to collaborate and implement a measurement system that supports the growth of the industry.

With the upcoming phase III of FM radio licensing, it promises further growth opportunities for the Indian FM radio industry, since it covers 294 cities and 839 licenses.  However, only 52 of these licenses are in high revenue-generating category A+, A and B cities.

The share of local retail advertising is expected to increase from current levels to more than 50 per cent of the total revenues generated in the segment, activations and other below-the-line marketing initiatives to play a more important role in generating revenues. The margins of radio stations are projected to decline in the short run, stabilize in three to five years and then rise. The growth in mobile and internet ad spends could, however, pose a threat to the rise of FM radio.

The advent of phase III is also likely to make the industry more conducive to M&A due to proposals such as reduction of the license lock-in period from 5–3 years, an increase in the license period from 10-15 years, significantly more networking between all the stations to enable cost optimization, ownership of multiple frequencies in a city and an increase in the foreign investment limit to 26 per cent from the current 20 per cent.  The industry needs to push for parity with the FDI norms of other media segments such as broadcast TV.

Confederation of Indian Industry director general Chandrajit Banerjee stated that in the long term, significant growth for the private FM radio industry will only be possible if several thousand stations are made operational, burden of high license fees is removed by increasing the variable component and reducing fixed costs and news dissemination is equated with other media.

The report is the culmination of extensive research involving detailed discussions with the CEOs of radio companies along with marketing agencies, marketers, music owners, regulators, and more from across the country.