As the Nova newcomer expands its network, competition in the radio industry has never been tougher.

The battle lines in the radio war have been drawn again. The purchase of FM licences in Sydney and Brisbane in April have finally given the chief executive of DMG Radio Aus-tralia, Paul Thompson, the platform to take his Nova network national. This is a blow to DMG's rivals, including Australian Radio Network (ARN) and the listed radio company Austereo. Nevertheless, the Australian radio industry is booming: Commercial Economic Advisory Service of Australia estimates that the radio advertising market was worth $737 million last year; Thompson says its growth rate is about 10%.

Steve Allen, the managing director of the media agency Fusion Strategy, says the good times will not last and the competition will be intense when DMG's national network and its new Sydney station begin broadcasting. "There is danger in this for all the players in the market. The advertising market will not grow quickly enough to accommodate the two new licences. It can't. No hope." The chief executive of Austereo, Michael Anderson, agrees. "There is no doubt that completing a national network is ... going to make it a very, very competitive and turbulent year for us."

Despite the hype about a bidding war for the licences - especially about the potential for a joint bid by the founder of the Virgin empire, Sir Richard Branson, and Australia's self-anointed larrikin hero and owner of the Macquarie Radio Network, John Singleton - the auctions were unsurprising. On April 15, Thompson secured the Sydney licence for

$106 million (the losing bidder was the Macquarie/Virgin joint venture). A week later, DMG paid $80 million for the Brisbane licence; Singleton and Branson could only manage a bid of $15 million.

DMG has spent $481 million on radio licences in the past four years. It owns Nova stations in Melbourne, Perth and Sydney. A Nova station in Adelaide will start in the second half of this year, and the Brisbane Nova will be on air in early 2005 (DMG also has a 50% stake in Brisbane's 97.3FM, which is operated by its joint-venture partner, ARN).

Did DMG pay too much for its licences? Not according to Thompson, who says the final amounts were at the lower end of pre-auction estimates for each city. Besides, owning a national network under the Nova brand is

crucial for DMG. Austereo's competitive advantage has been that it was the only company

that could offer advertisers the chance to promote their products over a national network. Thompson says Nova has lost advertising dollars because of this. "There is quite a bit of money that goes to the company that provides the buyer with an easy solution."

The Sydney purchase had three aims. First, it gave DMG the base station it needs for a national network. Second, it will help the company defray its operating costs in Sydney (the new DMG station will share costs with Sydney Nova). Third, it prevented a new contender such as Macquarie/Virgin getting a foothold in the industry. Thompson says: "If there was another competitor that was able to build a base for a national network ... then that would be quite damaging to the Nova stations."

Thompson's strategy is sound, but one big question continues to be debated throughout the radio industry: can DMG and its parent company, Britain's Daily Mail & General Trust, get a good return on its huge investment?

Thompson certainly has produced ratings success in just three years. After intense consumer research, Thompson and his team decided on a potentially risky strategy - stations aimed at 18 to 35-year-olds, playing music from every genre and playing only two minutes of advertisements per hour. But the gamble paid off. Nova is now the most popular station in Sydney, with an 11.8% share of the market. In Melbourne, it runs sixth, but it still has an 8.2% share. In Perth, where Nova has been in operation only since December 2002, it runs fourth, with a 10.3% share.

Radio stations live and die on advertising revenue, and DMG has snatched a good share of this pot too: according to accounts lodged with the Australian Securities & Investments Commission, DMG's revenue in the year to September 30, 2003, was $101.7 million, up 13% on the previous year. But those sales have not translated into profit. DMG recorded a loss of $15.32 million in the year to September 2003, after a $24.3-million loss the year before. Thompson is not worried about the loss, saying that the costs associated with amortising the company's radio licences ($24.3 million last year) will drag profits down during its growth stage. Over the longer term, as these amortisation costs remain flat and revenue grows, the company will become profitable.

Thompson says DMG's return on investment is exactly where he wants it to be, and pundits should be careful when comparing the returns from start-ups such as the Nova stations with the returns from established stations. His first target is to get a return on the $155 million paid for the first Sydney licence by about 2006, five years after the Nova station started. "We will certainly reach that within five years." He dismisses suggestions that DMG's parent company might be about to drop its Australian subsidiary. "The company is going so well that they are not likely to be anything other than committed."

No surprise for Austereo

At Austereo, Anderson is unfazed by Thompson's latest purchases. "There was no surprise in that. We knew DMG had to get Brisbane to complete the national network, and we anticipated they would get Sydney. We've been preparing for this since the middle of last year."

Since his appointment in August 2003, Anderson has changed Austereo's strategy, particularly its response to DMG. He says: "We had been on the back foot and defending our turf against the new competitor." Every facet of on-air content was reviewed. "We said to ourselves, 'Forget about next survey and forget about the next 12 months. Is this show a two or three or four-year

asset for us?'" In late 2003 and early 2004, Anderson began a thorough reworking of Austereo's on-air content: programs and announcers have been changed, music formats reworked, and promotions and competitions launched.

Judging by the results of the latest radio ratings survey (for the period from February 1 to March 30), the strategy seems to be working. Austereo retained the position of the best-rating station in Perth, Adelaide and Brisbane. Its FOX station in Melbourne increased its ratings from 10.8% to 12%, making it the best-rating FM station in town. Its Sydney stations, 2DAY and Triple M, gained share.

It remains to be seen whether Austereo can stop the damaging effects that DMG's success has had on its financial reports. When the company floated in March 2001 at $1.85, DMG had only just started its assault on the metropolitan radio markets. Since then, Austereo's revenue has dropped from $269 million in 2001-02 to $256 million in 2002-03 and is expected to fall to $234 million in 2003-04. Over the same period, profit fell from $57 million to $37 million and is tipped to be about $41 million in this financial year. The shares dropped to an all-time low of $1.21 in March 2003, and were at $1.33 on April 30.

There are also questions about Austereo's long-term growth options. It has three choices: exploit the opportunities created by legislative changes (such as changes to cross-media ownership laws or regulations that prevent any company owning more than two stations in one market); move into related media sectors (such as concert promotion, which Austereo has tried unsuccessfully in the past); or expand overseas.

Anderson favors overseas expansion, and says Austereo has performed well in the Malaysian and Greek markets. But the opportunities are rare, mainly because media laws around the world restrict foreign ownership of media institutions. "There's no doubt that we have the ability to format radio in other countries and other cultures and be very

successful. But growth overseas, by its very nature, has to be opportunistic."

Austereo will not chase growth in the short term; instead it will consolidate the on-air changes and fight like hell in a competitive market. "It's a pretty dramatic year," Anderson says. "I think we'd be better served by making sure we bed [our changes] down."

Analysts agree. The media team at stockbroker UBS, led by Nola Hodgson, is tipping a tough period for Austereo. "We expect that this next 18 months will prove to be a difficult period for Austereo, with competition continuing to increase both in terms of the new and existing players. Moreover, during the first round of new licences, we estimate that Austereo reduced its domestic radio operating costs by about 3%, helping to partially offset the impact of the revenue-share losses. We expect that there is very little the group can do in this respect now, and even that costs may further increase as marketing and the group's second-round defence strategy kicks in."

According to UBS, Anderson would not have been sorry to see DMG beat Macquarie and Virgin for the second Sydney licence. Thompson says the exact format of DMG's second Sydney station is still undecided but the industry consensus is that it will be aimed at over-40-year-olds, who are outside the target market of Austereo's Sydney stations, 2DAY and Triple M. The UBS media team wrote in a recent note to clients. "We think a Macquarie/Virgin win would have been expected to target directly the core Nova/Austereo market."

Anderson knows that Austereo will lose market share; the important thing will be not to panic. "We've learnt a lot from new licences in the last few years. It doesn't

matter how strong you are, people will trial the new station. The key is to have a

format that people will come back to." Although DMG has not decided whether to launch its Sydney or Brisbane station first (the stations should be running by early 2005), the biggest battle is likely to be in the radio heartland of Sydney.

Steve Allen says this will also put ARN under some pressure. It is jointly owned by the listed media company APN News & Media and Clear Channel Communications of the United States.

ARN has developed a strong national position by concentrating on the 25-54 age bracket with its classic rock network (which includes WSFM in Sydney and Gold in Melbourne) and its Mix network, which plays adult contemporary music.

The strategy is working; ARN is one of the most profitable radio companies in Australia. According to the financial statements of shareholder APN News & Media, ARN recorded a 13% increase in earnings before interest and tax for calendar 2003, to $56.2 million, on revenue that fell 7.7% to $213.4 million.

ARN looks well placed to enjoy natural organic growth through its strategy of concentrating on older listeners. The chief executive of ARN, Bob Longwell, says: "As the population ages and comes into our target market we will be perfectly placed to enjoy the windfall." The only problem is that Paul Thompson and DMG are probably thinking the same thing. If, as expected, DMG's new Sydney station aims at ARN's target market, Longwell will have a big fight on his hands.

But he does not seem too worried. "We are better prepared for competition than we've ever been," Longwell says. Over the past year, the company has re-jigged its sales force and some of its on-air content to try to stave off any attacks. "The competition has made us more obsessive about owning that 25-54 year age group."

Australia's AM radio powerhouses, Southern Cross (owners of the talk stations 2UE in Sydney and 3AW in Melbourne) and Macquarie Radio (owner of Sydney's 2GB) also lay claim to the over-40s market and can expect to lose some of their audience to DMG's second Sydney station. But the damage should be limited, because AM and FM listeners are considered to be very distinct groups.

According to Steve Allen, there is one other big loser from the increased competition in the radio industry - the advertisers. He reasons that more competition means greater fragmentation of the market, making it more difficult for advertisers to plan effective campaigns. Michael Anderson is also worried. "I think these new licences will fundamentally start to change the nature of the industry," he says. "We have to be very mindful of the fact that clients will need some support and some reasoning about why they should advertise on radio."

The market will only splinter further when another FM licence is auctioned for Melbourne in August. Bob Longwell says: "Enough is enough. I think we are over-radioed." The incumbents, including Aus-tereo, would agree. But for Paul Thompson, each new licence auction is a chance to turn up the heat on his competitors. l