INDIA’S nascent FM Radio business, which is facing problems relating to lack of adequate advertising revenue and soaring costs, is being confronted by another major challenge.

Internet radio is looming on the horizon as a ‘destructive technology’ that will disrupt the business models of FM radio operators, drawing listeners away from these stations. Already, telecommunications service provider Tata Indicom has launched seamless internet radio services, offering its customers access to over 40 international and local radio stations through its application, ‘Brew,’ at an attractive price of Rs25 for a 15-day subscription.

Other telecommunications service providers are also unveiling plans offering access to radio stations across the world through smart phones that are internet-enabled. In fact, many broadband users in India already access international radio stations thanks to excellent connectivity. Theoretically a broadband access entitles the subscriber to listen to innumerable radio stations around the world.

A large chunk of handsets that are sold in India these days have access to FM radio, but listeners complain that more than music they are bombarded by talk shows, irrelevant interviews with other listeners and celebrities, and advertisements. Access to Indian and international radio stations on the PC and the mobile phone would eat into a big chunk of listeners for FM radio operators.

Interestingly, this destructive technology would also make meaningless the government’s senseless ban on private and community FM operators from broadcasting news and analysis of events. Internet radio will provide access not just to entertainment channels, but even to news broadcasts by the likes of BBC.

Though one of the licensing conditions is that an FM operator should not broadcast anything other than music and entertainment programmes (not even cricket scores) most of the radio stations frequently give out information relating to the weather, traffic conditions in cities, and eve news capsules and headlines.

The government has warned many of the operators not to indulge in such violations of the licensing conditions, but with increasing access to global radio stations (including many of the FM stations from India) on the internet, the entire exercise becomes meaningless.

Mobile phone usage is growing rapidly in India, with between five and six million new subscribers being added every month. Smart phones are also increasing their share of the cell phone market, even as prices for these handsets are falling sharply. Internet connectivity costs are also declining, threatening the business model of FM radio operators. Two cellular operators in India have also launched their own radio channels, which are devoid of advertisements, and offer music on the hour, round-the-clock. The cell phone operators can do away with the ads as they earn revenues through the airtime spent by the subscriber while accessing music on the cell phone.

INDIA has been terribly late in opening up radio, a powerful medium, to private sector players. All India Radio, a government owned – and once a monopoly – broadcaster has dominated the medium for years.

While the FM radio business took roots in the west about 40 years ago, India refused to allow private players into the sector. The state-owned giant expectedly failed to innovate and roll out its FM network It was only in the last seven years that private FM stations began sprouting in the metros.

The government made a mess of the licensing regime in the initial years, auctioning licenses to the highest bidders. And as happened in the telecommunications sector, many of the operators raised the ante high (bidding unrealistic amounts) in the auctioning process, hoping to capture a chunk of the market.

But they had failed to take into account revenue streams, which were thinner than the licensing fees that they had to pay to the government. Finally, as happened in the cell phone segment, the government was virtually forced to abandon the stiff licensing fee regime and go in for a revenue share system with the FM radio operators.

Under the fee-based system, the operator’s outgoings to the government went up automatically by 10 per cent every year, irrespective of whether there was a corresponding growth in revenues. Today, the government has a four per cent share in revenues, yet most operators are still not making money.

FM operators are a disgruntled lot today, as they face innumerable channels. There are about 200 FM stations across the country today, and the numbers are likely to grow. In cities like Mumbai, Delhi and Bangalore – each with over a dozen FM stations – competition is intense, and advertising rates are declining.

According to Rana Barua of Radio City 91.1 FM – which plans to add 16 new stations over the next three months – the three cities account for 70 per cent of the Rs6 billion in advertising revenues generated by the FM radio industry. The sector is estimated to be losing about Rs1.2 billion every year. Because of stiff competition in these cities, Radio City is expanding into smaller, tier II cities.

The government is going ahead with the rolling out of the second phase of the expansion plans for FM Radio. Last month, it invited bids for the second phase involving nearly 100 frequencies. The financial bids will be opened only in November, and the third phase is expected to be launched by next year.

Last year FM radio frequencies relating to 91 cities were auctioned, but 50 of them have proved to be unviable because of the negligible potential for ad revenues. Ad rates vary dramatically between the metros and tier II and tier III cities, fluctuated between a high of Rs1,200 for a 10-second spot to a low of Rs50.

BESIDES the threat from internet radio, the FM industry is facing several other challenges. One of the most significant is the dispute with the music industry over the high cost of rights for the music.

Since FM radio stations are forced by law to be entertainment channels, they are overly dependent on the music companies for rights to broadcast songs. According to FM industry sources, the Phonographic Performance Ltd (PPL), which represents many music companies, demands a 20 to 40 per cent share of revenues from the industry.

An FM industry spokesman points out that internationally music companies get just between two and four per cent of an FM station’s revenues for the music rights. The PPL also does not distinguish between the various circles and cities, and charges a uniform rate for Mumbai and even little-known cities, where the advertising potential is negligible.

Talks between the PPL and the Association of Radio Operators of India have been fruitless and the government is also wary of intervening in the dispute.

Another major threat is the lacklustre response of advertisers to the emerging industry. Radio’s share in the total advertising cake is less than three per cent, though the industry had hoped it would be around eight per cent.

Listenership is growing at single-digit levels, between six per cent and eight per cent, even in the top metros, whereas in Kolkata it is stagnating at around one per cent.

There is also an acute shortage of talented radio jockeys, and turnover is high because of the proliferation of radio stations. Salaries are also on the rise, and with declining revenues, it becomes difficult for many of the stations to sustain long-term growth.

The government has been responsive to the industry’s woes and has in the recent past given some concessions. Asha Swarup, secretary, information and broadcasting ministry, points out that in the third phase there might be some more liberalisation, such as allowing broadcasters to have multiple stations in a single city.

It might also scrap the sectoral cap of 15 per cent, which prevents large operators from consolidating their operations. No single operator can own more than 15 per cent of the radio stations in the country.

The woes of the industry are unending and the government has to resolve these issues. Else, growth of the FM radio segment, which took off so promisingly in 2000, will be stunted, even as newer technologies – like internet radio and the growing popularity of iPods and MP3 players – threaten its very existence.