THE fate of staid old radio, whose epitaph had been prematurely written a few years ago, is once again reviving, with the government coming out with a new policy to roll-out FM services across the heartland of small-town India.

Last week, the government unveiled phase III expansion plan for FM radio, extending these services to 227 new cities through 839 new FM radio channels. Investors responded positively to the news as the shares of companies operating FM services shot up on the bourses.

India's radio segment was dominated for decades by state-owned All India Radio (or Akashwani), which played both film music and traditional Indian classical on its channels. AIR, which was controlled by bureaucrats answerable to politicians, was a grooming ground for several musicians, but it lacked vibrancy.

Consequently, foreign radio stations such as Radio Ceylon – which ran the hugely popular Binaca Geet Mala, a weekly countdown of top Bollywood songs, for more than four decades from 1952 – offered stiff competition to AIR. And in terms of news, BBC was more popular than the state-owned station even in remote parts of India.

While AIR introduced FM broadcasting at its Madras (now Chennai) station in the 1970s, frequency modulation became widespread only about two decades later when the government allowed private players to set up channels in the four metros of Delhi, Mumbai, Kolkata and Chennai.

Initially, two-hour airtime blocks were sold to private operators on AIR's FM channels, but in 2001 the government invited bids for FM frequencies. In the first flush of this opening up, private players bid heavily, but could not keep up their commitments; of the over 100 licences that were issued, just a little over a fifth of networks became operational in a dozen cities.

Five years later, the government came out with a one-time entry fee (the licence was valid for 10 years), plus a four per cent revenue-share model. Foreign investors were also allowed to invest up to 20 per cent in a radio station. The first two phases saw the government earn about Rs17.3 billion (nearly $400 million) from the license fees.

About 240 FM stations became operational in about 90 cities in the second phase of the expansion, which also saw the entry of big players including the Anil Dhirubhai Ambani Group (ADAG) and HT Media, publishers of Hindustan Times. The Bennett Coleman group (publishers of Times of India) had launched its Radio Mirchi in the first phase itself.

Both ADAG and Bennett Coleman launched overseas forays, hoping to expand their presence globally. While Big FM, the ADAG brand, joined hands with Singapore's state-owned Media Corp to launch Big Bollywood 96.3 FM, Bennett Coleman acquired Virgin Radio Holdings from the Scottish Media Group for more than $100 million in 2008.

However, the Indian group is now planning to sell the loss-making radio station, probably to Richard Branson, the original owner.

THE phase III FM expansion envisages the roll-out of the services to 227 new cities. The government, which plans to go in for an e-auction for sale of licences, hopes to earn at least Rs17.33 billion from the sale.

According to Ambika Soni, the information and broadcasting minister, all Indian cities with a population of 100,000-plus will be covered through FM broadcasting, once the licences are issued. The licences will also be valid for 15 years, as against 10 at present. The government also decided to raise the foreign direct investment (FDI) limit from 20 per cent to 26 per cent.

Private FM channels have in the past been critical of the government's policy of not allowing them to broadcast news. In many parts of the world, FM stations offer timely warnings about floods and other natural disasters, as they broadcast news. But in India, the government has been wary of allowing private players to carry news, fearing that it could exacerbate the situation in case of an emergency, if some stations were to carry rumours.

Private television networks have been accused of passing off rumours as news at times, often causing chaos in cities. But the government has decided to relax the norms relating to news, initially allowing private FM channels to source their news from AIR.“When greater liberalisation takes place in time to come, we may consider allowing broadcasters to source from newswires,” says Soni. “Gradually, we may open up the segment.”

The government has also allowed non-news broadcasts relating to sports, traffic and weather, cultural events, exam results, admissions, career counseling and employment opportunities.

But private radio players are wary about the e-auctioning process, fearing that the licence will come at a high cost. According to Anuradha Prasad, president, Association of Radio Operators for India, the bidders will end up paying a high price for the new licences. Prasad warns that the auctioning should not be done on the lines of the 3G auction (for third generation telecom licenses), as high fees could result in operators losing money.

Unlike telecom users, radio listeners do not pay for the content, depriving the industry of revenue. FM radio is completely dependent on advertising revenue.

The government will appoint an agency to conduct an ascending e-auction, enabling players to raise the ante during the process. In manual bids, operators have to physically send in their bids, resulting in delays and allegations of favouritism.

While the auctioning of 2G telecom licenses has resulted in a massive scam in India – with several politicians, including a former telecom minister, and bureaucrats in jail – the e-auctioning of 3G and broadband licences went off smoothly.

ADVERTISING is the primary source of revenue for FM operators in India. According to a recent report by international consultancy PricewaterhouseCooper (PwC), radio advertising — along with print, TV and internet — will grow explosively over the next five years.

The Indian media and entertainment industry is expected to grow at double the global industry rate — at 12 per cent — over the next five years, to reach Rs1.45 trillion (from Rs800 billion last year). The radio segment is expected to earn revenues of Rs18 billion by 2015 (over $400 million). This is more than double the 2009 revenues of $170 million.

Of course, radio in India is overly dependent on music, an industry which despite rapid growth is experiencing a crisis. According to the PwC report, the Indian music industry is expected to grow at a compound annual growth rate (CAGR) of 28.6 per cent between 2010 and 2014, reaching nearly $570 million in three years.

The music and FM radio segments are closely associated, though relations between the two have been tepid in recent years. This follows the demand from the music industry for royalty payments, which the FM sector claims are steep. In the metros, an average FM station ends up paying 15 to 20 per cent of its revenue as royalty fees, while in the smaller cities the rates could be as high as 70 to 100 per cent.

The music industry has seen a dramatic shift in audience tastes. Sales of albums and CDs has fallen by more than half over the past five years, as consumers (mostly illegally) download songs from the net or on their cell phones. Initially, the music companies tried to fight those downloading songs, but now it has reconciled itself to the growing popularity of digital music and has joined hands with cellphone operators and websites.

According to a report by international consultancy KPMG, on behalf of the Federation of Indian Chambers of Commerce and Industry, digital music sales soared to Rs4.2 billion last year, nearly 25 per cent more than the sale of CDs, cassettes, etc.

Buoyancy in the FM sector would surely lead to more legal downloads of digital music, and the music industry will have to cooperate with the private operators to ensure continued growth for both sectors.