Calling the Tunes

By HUNTER, Tim

Often seen as television’s ugly sister, radio’s perennial profits will attract some smart money as corporate deals take shape this year for both the big networks.

Tim Hunter reports. MARTIN DEVLIN is a sore point for his employer CanWest. The Radio Live breakfast show presenter has been off air over the holidays and CanWest’s rival across town, The Radio Network (TRN), is telling anyone who will listen that his absence is a bad omen for the fledgling station, launched by CanWest less than two years ago.

CanWest chief executive Brent Impey has no patience for such gossip. Whatever the issue with Devlin – and Impey isn’t talking about it – it says nothing about the prospects for Radio Live.

The talk radio station is a “long-term play” he says, aimed at building a serious rival to TRN’s dominant Newstalk ZB.

The sniping is a surface ripple betraying an undercurrent of serious money. Radio, often seen as TV’s ugly sister in today’s media family, is in fact a more profitable business and it will be involved in some big wheeling and dealing this year.

Both New Zealand’s dominant radio companies – TRN and CanWest’s RadioWorks – are currently the focus of corporate activity.

TRN’s half owner, Texas-based Clear Channel, is offering its stake to its joint venture partner APN News & Media, owner of the New Zealand Herald.

RadioWorks’ 70% owner, Canadian company CanWest, has hired investment bank Citigroup to consider the future of its Australasian assets and is seen as a likely seller this year.

Of the two, a CanWest deal is more highly anticipated because of its potential to change the media landscape in New Zealand.

Most commentary has focused on the future of CanWest’s TV assets – TV3 and C4 – but the smart money will be paying close attention to good, old fashioned radio.

Here’s why.

Advertising Standards Authority figures show that over the last 10 years TV’s share of overall advertising spend has fallen from 36% to 30%. Newspapers’ share has fallen from 40% to 37%. Those declines are matched by gains for internet advertising, billboards and magazines.

Radio, however, has resisted the competition, barely shifting from the 12% share it held 10 years ago. Its resilience has allowed radio to reap the benefit of 7% annual growth in advertising spend over the same period.

Measured by profitability, radio also knocks the socks off its more glamorous cousin.

As a percentage of revenue in 2005, the latest year for which comparable figures are available, both radio networks made more money than their TV counterparts.

Of the two, RadioWorks was more profitable, earning $16.9 million from revenue of $107.9m. TRN made $13.8m from broadcasting revenue of $138m.

TV required more revenue to make less money. TV Works, sister company of Radioworks and owner of TV3 and C4, made $8.2m over the same period from revenue of $142m.

TVNZ required revenue of $436.7m to make a profit of $6.3m.

Another attraction of radio is its stability – its ad revenue is less sensitive to changes in economic growth. About 75% of radio advertising revenue comes direct from small businesses rather than through advertising agencies.

Impey, chief executive of CanWest’s NZ subsidiary MediaWorks, says small advertisers are the backbone of radio. “That means in economic boom times you don’t get the same growth as TV, but when times are tougher radio does better.

“TV has its up years and down years but radio is steady – only one year since 1977 has radio gone down.”

For CanWest, radio is therefore a valuable financial partner for its more volatile and costly TV business.

But there are growth opportunities too. RadioWorks’ big rival has the lion’s share of the Auckland market – by far the most valuable piece of the action. Survey data from Research International suggests TRN stations dominate key categories of the market, with flagship station Newstalk ZB the most dominant of all. ZB’s share of Auckland commercial radio listening was 14% in the 2006 Spring survey, miles ahead of any other.

Classic Hits, a music station targeting the 25-55 age group, polled 9%, while Coast, targeting 40-60 year olds, polled 8%, giving TRN a clean sweep of the top three in the Auckland market.

RadioWorks, strong in the regions, sees growth in chipping away at its rival in Auckland, while TRN sees the city as a fortress it must defend.

A key battleground is talk radio, hence RadioWorks’ launch of Radio Live in 2005. So far its performance has earned an Auckland audience share of less than 3%, according to survey data, but while TRN snipes about Radio Live’s lack of impact, Impey is comfortable with its progress – talk radio needs more investment and more time to develop and shouldn’t be judged by short-term measures.

This is true – stations like Radio Live and ZB are much more expensive than music-based stations. They require skilled presenters to be on air live, all the time, while over on music radio, software allows shows to be programmed and recorded days in advance.

However, TRN has no cause for complacency. RadioWorks’ launch of The Breeze into Auckland last June, taking on Coast, has done better, quickly earning a 4% listener share and helping its owner make some holes in the fortress.

Best of all is The Rock, RadioWorks’ competitor to TRN’s Hauraki, which has carved out a 6% audience share in Auckland, overtaking its rival in the process.

What this adds up to is a competitive duopoly, with strong cash flows, strong brands and stable earnings in a mature market. That’s an attractive combination to private equity funds as well as trade buyers.

Of the potential buyers, Fairfax Media, owner of the Sunday Star- Times, looks a likely candidate. Its name change from John Fairfax Holdings, adopted at the November annual meeting, signals its intention to be a media group rather than primarily a newspaper publisher.

Fairfax New Zealand chief executive Joan Withers knows the radio business well – she is a former chief executive of TRN. Would Fairfax consider buying radio assets? “You’d never say never in that scenario,” she told the Star-Times.

“In New Zealand radio has been incredibly strong… the two majors have become very tightly focused and able to target audiences very cost-effectively. As a component of the media mix, radio has a very valid part to play.”

Some analysts see few synergies in the combination of radio with other media, such as TV or newspapers, but Withers disagrees. Top among the benefits is the ability to offer advertisers the ability to reach their target demographic in several ways.

“If you want (to target) females aged 18-34 we can put together a package that includes the Star-Times, Dominion Post, magazines… If you think about that with other media, could you add that on? Yes, absolutely.”

And while there are cross-promotional benefits and the chance to “re-purpose” editorial content for other outlets, there is another more important factor, Withers said.

“I really believe talent management is going to be a key competency for media owners to have.”

The implication is that media groups will try to develop stars, like John Campbell and Michael Laws, and harness their abilities to as many vehicles as possible.

“If we become good at managing talent that’s something we can capitalise on,” Withers said.

Impey, no slouch at managing talent himself, naturally sees benefits in owning both radio and TV. But ultimately, whether CanWest sells its radio assets separately will come down to which deal delivers the most value.

Could it spin-off radio? “Yes it could,” said Andrew South of Brook Asset Management, a fund manager owning 5.3% of MediaWorks. “These assets all have their price. I don’t think there is much in the way of synergy between TV and radio.”

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(c) 2007 Sunday Star – Times; Wellington, New Zealand. Provided by ProQuest Information and Learning. All rights Reserved.