More than a year after buying a 27% stake in Scottish Radio Holdings (SRH) for 拢91m, Emap, the UK's second-biggest radio broadcaster finally secured complete control last week in a deal valuing the company at about 拢391m.
Emap gets 22 radio stations, including leading Scottish and Irish brands Clyde, Forth, Tay, Downtown and Today. It now controls 24% of the UK radio advertising market and has a dominant commercial position in analogue radio north of the Midlands, not to mention a foothold in London via Magic 105.4 and Kiss FM. SRH also provides a digital platform to roll out Emap brands such as Kerrang! and The Hits.
The deal is good for Emap, according to Numis Securities media analyst Richard Hitchcock. 'There is an excellent geographic and cultural fit between the two, and both have a quality portfolio with strong heritage brands in big cities.'
Emap claims there are benefits for advertisers, too. 'Agencies can come to us and get a one-stop solution as local or national as they need,' says Emap Advertising broadcast sales director Karen Stacey. 'We can also take costs out of the backroom and put money into strong programming and brands that will help us win share from the BBC.'
But there is a prospect of too much power in too few hands. After the formation of GCap Media in 2004, following the merger of Capital Radio and GWR, more than 60% of the UK ad market is now controlled by just two players. Chrysalis and Guardian Media Group (GMG) have also explored a merger, meaning there could be three groups controlling 80% of the ad business.
Balance of power
It seems unlikely, however, that the radio barons will start flexing their muscles. 'For most clients, radio is not a must-have medium like TV, where consolidation gave advertisers genuine cause for concern,' says ZenithOptimedia head of radio Mike Buckley. 'GCap and Emap don't have the clout to push up airtime prices without a good reason.'
Chrysalis Radio chief executive Phil Riley agrees. 'None of the ad agencies will be quaking. Even if there were only one radio company, we would still be a small part of the ad market,' he says.
The radio industry's bargaining clout is weakened by the fact that ad revenues are soft. Last week, GCap reported that revenues for May 2005 were down 14% year on year, with 'difficult market conditions set to continue into June and July'. With clients such as BT, Sainsbury's and the COI cutting spend, media owners are not well-placed to take a hard stance.
Buckley says they need to view consolidation as a chance to be more inventive or risk losing clients to outdoor, iTV, the web and magazines.
Carat media director Gareth Jones also wants change. 'The radio trading system needs overhauling if it is to handle the shift to digital. For many clients, radio will become interesting when the digital offering is expanded to encompass platforms such as mobile.'
Media owners, too, view consolidation as a force for good. For some time, the Radio Advertising Bureau (RAB) has argued that consolidation increases listener choice, because it prevents rival media groups from congregating station offerings around the most commercially attractive audiences.
The RAB also points to the BBC's relative success as a rationale for consolidation. In the past year, commercial radio's share of national station listeners fell from 45.5% to 43.8%, while the BBC's rose from 52.6% to 54.2%. 'A real benefit of consolidation is to be able to compete with the BBC,' says RAB operations director Michael O'Brien. 'The emphasis is likely to be on media owners co-operating on high-profile network shows.'
Riley says this is already happening. 'We have plans for three network top 40 chart shows - mainstream, urban and adult contemporary - each of which will be networked across similar profile stations belonging to different groups.'
Digital drive
From Emap's perspective, the financial benefits of increased scale are reinforced by cost savings of 拢2m-拢2.5m in the second trading year, and 拢5m in the third. But there is an even more significant dimension to the deal, which Emap chief executive Tom Moloney has been keen to talk up - digital expansion.
'SRH has a strong digital infrastructure, but it has not invested in digital content,' he says. 'At Emap we have strong radio brands. In the future these will be distributed on analogue, DAB, DTT (digital terrestrial television), internet, mobile and so on.'
It is not just the actions of individual companies that matter. With digital radio set penetration at 1.5m, a unified approach to marketing digital is essential if the industry is to hit its target of 8m sets by 2008. 'Consolidation is a way for the industry to turbo-charge performance; freeing up resources so we can invest in programming and digital roll-out,' says Riley.
Advertisers may find consolidation is less of a win-win when non-radio companies enter the fray. For now, US firms such as Clear Channel and Disney are put off by the dollar exchange rate, and TV players, including ITV and BSkyB, by high share prices. But if these companies eventually make a move for GCap, Emap or Chrysalis, consolidation could be far more menacing than in this period of intra-industry musical chairs.