Private punching

The media groups that own regional radio broadcasters are squaring up as they position themselves for growth in the next five years.

There are two key drivers behind this trend: changes in industry regulations and the emergence of conglomerates that see radio as core to their future growth plans.

On the one hand, the Independent Communications Authority of South Africa (Icasa) has submitted its proposals to the Department of Communications for amendments to the legal framework governing the control and ownership of commercial radio broadcasters. If parliament passes Icasa’s recommendations as they stand, it will significantly relax the current legal constraints on media companies’ ownership of radio assets. In terms of the existing legislation, media groups can control a maximum of two FM and two AM licences.

Under the new rules this will increase to a ceiling of 35% of national licences – or five of the existing pool. Omar Essack, executive director of broadcasting at Kagiso Media, points out that with Icasa due to licence another eight greenfields stations this year – including three in the lucrative Johannesburg, Durban and Cape Town markets – this limit will increase to eight stations per media owner in the next five years.

Secondly, both Kagiso Media and Primedia make no secret of their ambitions to grow their radio broadcasting interests – both in profitability and the number of stations owned.

William Kirsh, Primedia’s CEO, views broadcasting as a key part of the group. He says that Primedia now has four “very good” radio stations working synergistically together. “We hope to extend our leadership position as the regulations change, as we now have the right experience and black economic empowerment credentials.”

Radio is already a significant contributor to Primedia’s earnings, with 94.7 Highveld Stereo alone making up 41% of operating profit in the group’s recently released results for the six months to December 2004. Kirsh says that radio will continue to be “significant” in the future – but that the contributions, currently dominated by Highveld, will be more evenly spread. “Kfm has turned around and will become more important,” he says, adding that the music stations will remain a bigger earnings contributor than talk radio.

For Kagiso Media’s part, Essack says that the group has spent the last five years learning how to run radio businesses and now needs to leverage these skills to “increase revenues and profits through scale and working better than we would have done with just a single radio asset”. Kagiso Media’s stated intention is to be a focused radio group and its clear objective is to acquire more radio assets – either new licences or existing formats. Broadcasting is the group’s single largest profit generator, contributing 90% of the group’s headline earnings in the six months to December 2004.

It’s not only the media groups that will benefit from economies of scale in owning more regional stations. Essack points out that with the right geographic dispersion private media groups will be able to give advertisers a single buy to cover the country. Says Essack: “That’s the one single complaint by advertisers: the SABC can give national coverage in one package, but national coverage through the regional players requires at least three different buys that are costed differently. Once you have a bigger group it will be more cost effective, and then we can streamline costs and rates.”

But the question remains as to how these two groups plan to grow their ownership of radio assets.

Both Essack and Kirsh say they will bid for some of the new greenfields licences. In addition, further acquisitions are likely by both groups. But this is where the possibility of a price war raises its ugly head.

Essack concedes that there could be a financial fight for existing formats – but this depends largely on how much competition emerges in the form of new players with large radio ambitions. The new licences will not be directly decided on the basis of financial clout. Each bidder will pay the set licence fee – but it’s the investment behind the bid, in the form of market research and business feasibility studies, that could determine the winners.

Kirsh says that, globally, radio is an industry for big players and he doesn’t believe that South Africa will be any different as “large groups can afford to pay for top assets, attract talent and drive efficiencies”.

Essack believes that South Africa’s radio broadcasting landscape will ultimately be dominated by three players: the SABC and two private sector conglomerates. At this stage, Kagiso Media and Primedia are the leading contenders for these top spots. But, as Essack points out, there could still be room for smaller players. Even in the highly consolidated US market, there are still a handful of financially successful independents.

Kirsh agrees, saying that there is room for two major private sector players in the long term. He doesn’t foresee a future merger between Primedia and Kagiso. In addition, he doesn’t discount the possibility that other players could emerge.

In the long term, the fight for dominance in radio broadcasting is likely to move into new battlefields. The most obvious is digital satellite, which is reasonably imminent as there will be limited analogue spectrum available once Icasa grants the next round of licences. Both Kagiso Media and Primedia have indicated their interest in this field.

Essack points out that new technologies present radio broadcasters with both their biggest challenge and opportunity.

On the one hand, music radio will have to work hard at retaining its relevance in a world of iPod and MP3. But, other developments – such as possible advances in cellphone technologies and online broadcasting – could open up new markets and links with consumers.

All of that, however, is still in the future. For now, both groups will concentrate on building their asset base in conventional analogue radio as they compete nationally against each other and challenge the might of the SABC. The race for assets will – ultimately – be determined by how much of their shareholder’s money each group is prepared to spend on their radio empires.

Ownership of radio assets

Kagiso Media