Commercial radio tunes in for new starring role: Gail Counsell on how a Cinderella medium has won millions of fans and the backing of advertisers keen to cash in on bargain prices

VIDEO may have finished off the radio star, but the medium itself is flourishing as never before. Commercial radio, 21 years old in October, seems finally set to come of age.

Two new national stations, Classic FM and Virgin Radio, have begun to raise the profile of commercial radio, long obscured by its flashy ITV sibling.

The success of Classic - which has more sought-after, up-market 'ABC1' listeners than read all the broadsheet newspapers combined - and the razzmatazz of Richard Branson's Virgin station have made an appreciable dent in the traditional image of commercial radio as a dull, local advertising medium.

The new stations have also offered the opportunity to buy nationwide slots at a single stroke, pulling in advertisers that previously steered clear of radio because of the limited nature of each individual station's audience and the difficulty of placing advertisements across the whole network.

The process is set to continue later this year with the addition of a third national station, INR3, the licence for which is already being hotly fought over.

There are those who worry that new stations will threaten the financial stability of old ones. But the indications are that national stations have not taken their advertising from local ones - about 80 per cent of Classic's advertisers have not previously advertised with Capital even though more than half of Capital's advertising is national.

Moreover, while recent Advertising Association/Radio Advertising Bureau estimates show national radio taking a rising proportion of the cake, local radio will continue to take the lion's share. So by 1996 national radio is expected to take an estimated 14 per cent of total 1996 revenues of pounds 210m, compared with about 7.5 per cent of total 1994 revenues of pounds 171m.

The other important development in commercial radio has been the beginning of a consolidation of its piecemeal ownership structure. The highly fragmented nature of radio ownership, which has made it so difficult for it to sell itself as a serious advertising medium, has begun to be addressed.

The 150 or so independent local stations have progressively joined up in bigger groupings. Those in turn have looked to consolidate. Capital Radio's pounds 18m acquisition of Midlands Radio early last year, for instance, was a landmark, further strengthening Capital's position as the giant of the sector.

Large publishing groups such as EMAP and the Daily Mail and General Trust have also become significant investors, helping to dispel the amateurish image that has always attached to commercial radio.

Even television has taken an interest; the Border and Grampian television companies were among successful bidders for new local radio licences at the end of last year.

Nevertheless, the labyrinthine regulations governing the ownership of independent radio are so structured that the maximum rationalisation would be into seven groups. Under the rules an investor can own up to 20 per cent of any number of national or local licences - although some types of owner, such as foreign companies are barred or face additional restrictions. National newspapers, for example, are limited to 20 per cent.

As far as other investors are concerned, once they hold above 20 per cent a complicated points system based on the total 'pool' of radio stations places a limit of around 15 per cent of the sector on individual total ownership - hence the seven grouping maxiumum. The result is to make minority interests and cross-holdings the norm.

Capital Radio, for example, owns 4 per cent of the fast-growing GWR, the Wiltshire-based operator. GWR in its turn has a 17 per cent shareholding in Classic FM.

But there are signs that this complex system may be relaxed before too long. The Government's review of media ownership covers radio as well as television, and many observers believe change is inevitable.

If so, a period of radical consolidation seems inevitable.

The City seems to think change is coming. Radio shares have risen in much the same fashion as television companies. Capital, the most freely traded radio stock, has outperformed the media sector by more than 60 per cent since last November. In the past year, it has outperformed the FT All Share Index by nearly 80 per cent.

A relaxation of the rules can only be in radio's interest. Splintered ownership is probably the main reason why radio has been so unsuccessful at attracting advertisers.

UK radio takes a relatively tiny proportion of the advertising pot, less than 3 per cent. In France, for instance, radio takes 8 per cent or more of all display advertising; in Germany and Spain the figure is around 6 per cent and in Ireland nearly 10 per cent.

With ownership consolidation hampered, radio has recently tried to find alternatives through internal co-operation. The Radio Advertising Bureau was set up with the aim of providing advertisers with properly researched information while the advent of Rajar (Radio Joint Audience Research) has given advertisers accurate measurements of listener numbers and profiles.

Similarly, National Network Radio, which allows advertisers to place slots across almost the entire independent local radio network - so creating a national rather than local sales opportunity - is a big improvement.

The aim is to double radio's share of the advertising cake to about 4.5 per cent by the end of the decade. On that basis revenues could more than double to around pounds 450m in constant prices by 2000.

This would make a dramatic difference to earnings - any increase in revenues has a very sharp impact on profitability. Moreover there may be some scope for increasing prices - radio is cheap at about pounds 1.30 per 1,000 listeners, against pounds 4.05 for television. Food for investor thought indeed.

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