Capital rules waves after Virgin buyout

Capital Radio claims one of the key reasons behind its purchase of Virgin Radio for a total of 87m (MW May 8) was the guarantee this gave it of a digital broadcast licence next year. Rubbish, say its rivals.

It is true that Capital wants a digital licence and that this deal gives it one – Virgin Radio AM was guaranteed one in the Broadcasting Act 1996 because, as a national network, its main rival is the BBC, which is committed to digital and the enhanced sound it provides.

But Capital’s commercial rivals say the deal has everything to do with the battle for share of the London radio market. And for Virgin it has everything to do with getting a good price at the top of a notoriously cyclical market, clearing the 22m debt its radio business is carrying and taking a stake in the biggest player in London radio.

Clearly, the Capital interpretation is open to the charge of “they would say that, wouldn’t they?” – but the argument stands examination. Digital will be expensive.

“The fact is no one in radio thinks digital will be a success in the next ten years,” says one senior radio source. “It’s an opportunity to get your licence renewed and lose money.”

Capital has knocked out a key London commercial rival at a stroke, while acquiring another FM licence. Audience share for both Capital FM and Gold increased in the first quarter, according to Rajar (Radio Joint Audience Research) figures, and its total share is now 23.2 per cent. This will rise to 26 per cent following the Virgin acquisition, which will require a rubber stamping from the Radio Authority. Capital also has the rights to the Virgin name for the next 25 years and the volume to create its own radio sales house.

“For Capital this is all about the battle for London – its interest is in Virgin FM [the London station] not Virgin AM. I mean, if Virgin only had the AM station it would have gone bust years ago. It’s about FM,” says one media buyer.

It is about FM, at the most basic level, because FM provides the clearest signal for listeners while AM quality is notoriously bad. To quote Richard Branson, speaking in 1994: “Quite seriously, I have given up listening to Virgin Radio in the car. If we are left on AM I don’t know whether Virgin [AM] has a future.”

Virgin FM will relaunch as a rock music station aimed primarily at 25- to 44-year-olds – a positioning which media analyst Panmure Gordon believes is likely to prove profitable – leaving its own Capital FM station to continue taking share from its main rival, BBC Radio 1, which it has been doing successfully.

First quarter Rajar figures show Capital FM has increased its audience listening hours by more than 23 per cent, mainly at the expense of BBC Radio 1 post-Chris Evans’ departure. But other London stations are also doing well. Both Heart FM and Kiss FM performed more than creditably in the first quarter, with the former breaking the 1 million listeners a week barrier.

By contrast, Virgin FM’s first-quarter figures saw its share of listening fall from 3.5 per cent to 2.8 per cent and year on year its share of listening fell from 3.4 per cent to 2.8 per cent. The national station, Virgin AM, had a better time with its share of listening up from 2.4 per cent to 2.6 per cent year on year.

The deal will also allow Capital to create its own sales division, Capital Sales & Marketing, to sell Capital, Virgin and other companies in which it has a shareholding – Birmingham’s BRMB for instance – to advertisers. Its defection from Media Sales & Marketing (MSM) – the radio sales house which, until last week, handled 62 per cent of the national market – could lead to its demise.

MSM still handles 40 per cent of national advertising sales for other local commercial stations across Britain but Capital’s rivals EMAP and GWR Group are both expected to follow its lead and launch their own sales houses. Some media buyers also expect TV sales houses to take a greater interest in radio.

So Capital can cut costs – there are 200 radio sales staff waiting to hear whether they have a job as MW goes to press – while at the same time knocking out a key rival. The deal does not give it a monopoly in London but it significantly strengthens Capital’s position.

It is also a return to acquisition in a market it knows best, after its foray into restaurants in December when it bought the My Kinda Town chain. Capital claims the chain contributed 1.2m to group operating profits of 17.05m in the six months to the end of March.

Analysts also point to the potential for cross-promotional deals involving Virgin cinemas and music interests and Capital’s Internet service – which will be backed by 1m in development money this year alone.

For Virgin, getting rid of a 22m debt and gaining 65m at the same time is a pretty good deal by any standards. Virgin Radio is trading profitably now with pre-tax profits of 1.6m in the year to the end of July, compared with a loss of 3.1m in the previous year. Virgin also becomes the largest single shareholder in Capital with a 14 per cent stake – it has to hold on to at least 90 per cent of it for the next two years – and Richard Branson becomes a non-executive director. He is insistent that the deal does not mean Virgin is pulling out of radio in the UK, though it is hard to see how else to describe it.

Virgin has sold at a good time. Overall growth in radio industry revenues has slowed over the past four years, even though it now accounts for 4.7 per cent of all UK display advertising sold compared with 2.8 per cent in 1992.

Virgin is now planning to move into TV through its newly-formed company Virgin Media and has plans to launch both a travel and a music channel in a move spearheaded by Virgin Radio’s chief executive David Campbell. It has also had talks with BSkyB and cable operators to secure distribution for the channels.

This deal means that if and when digital does come, Capital is in position to take advantage of it. In the meantime it has secured its position in London, much to its rivals’ chagrin – albeit at a high price.

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