In research that supports the ACCC’s approach to redefining media markets, the UK’s regulatory body OfCom, has found that direct radio advertisers perceive radio and press
advertising as interchangeable.

The ‘Radio Advertising Market
Research’ published this week assesses the constraints on the price of direct and indirect radio advertising after recent changes in advertising trends, including:

* a decline in commercial radio advertising revenue;

* the BBC’s increased market share of radio listening;

* the growth in DAB digital radio penetration;

* online and outdoor advertising growth; and

* a decline in press circulation.

The research allows Ofcom to analyse which media appear to impose the
strongest competitive constraint on the pricing of radio advertising. It also
outlines the drivers of demand for radio advertising, the decision-making process for
media purchasing, advertisers’ attitudes towards radio in the context of other media
options, and the impact on the demand for radio advertising following an increase in
the relative price of radio advertising.

While the Australian commercial radio market is much stronger than the UK, and has been around much longer than the UK commercial radio sector, the research is of interest because of the current thinking being articulated by the ACCC’s Graham Samuel when talking about how the competition regulator may define markets for the purpose of assessing media mergers.

Findings from the analysis of direct radio advertising include:

• The pricing of direct radio advertising appears to be constrained by press
advertising. As a result, a hypothetical monopoly supplier of direct radio
advertising would not find it profitable to raise prices by 5-10% for a sustained
period of time. This result appears to be robust to a range of sensitivity analyses.

• Evidence suggests that direct radio advertisers perceive radio and press
advertising as interchangeable.

Findings from the analysis of agency radio advertising (which in the UK they call ‘indirect’ advertising) include:

• Television, online and press advertising pose the strongest competitive
constraints on the pricing of indirect radio advertising.

• An increase in the price of indirect radio advertising would result in media buying
agencies moving budgets away from radio to a range of alternative media. These
alternative media taken together appear to collectively constrain the pricing of
indirect radio advertising. As a result, a hypothetical monopoly supplier of indirect
radio advertising would not find it profitable to raise prices by 5-10% for a
sustained period of time.

• Media buying agencies appear to have a degree of countervailing buyer power,
and therefore, would be likely to try and negotiate down any attempted increase
in the price of indirect radio advertising.

Radio has a share of 3.9% of the UK advertising market (see chart above). In Australia radio’s share is around 9%.

Gcap stations attracted the biggest share of radio advertising in the UK, followed by Emap and Chrysalis.

Ofcom does not regulate the amount of airtime that radio stations can offer to
advertisers. However, standard industry practice involves setting a “ceiling” for the
number of minutes of advertising to be broadcast per hour: 9-12 minutes per hour is
standard across the industry (although recently GCap has reduced the supply of
radio advertising minutage by up to half on its London’s station Capital FM). This
ceiling is driven by listeners’ reluctance to tolerate too much advertising, especially
given the constraint imposed by the BBC which airs no advertising. This ceiling
includes minutes of sponsorship and promotion airtime as well as “traditional”
advertising.

While analogue radio generates the majority of commercial radio advertising
revenues13, the digital radio advertising market is still in its infancy, given the current
relatively low listenership to digital services. However, the industry expects that
revenues from digital services will increase over the coming years once penetration
of digital radio sets and listening to digital services reach higher levels.

The full report is available by clicking below.