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Phase III auctions may fail, predict FM operators

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Phase III auctions may fail, predict FM operators

Private FM operators are up in arms against the TRAI recommendations on reserve price of new cities under Phase III, with one operator terming it a “rude shock”. Earlier, the radio fraternity had requested TRAI and MIB to relook at the reserve prices, which were deemed too high by the majority of the operators.

Based on discussions and suggestions and its own analysis of the matter, TRAI released a set of recommendations as well as recommended reserve prices last week.

TRAI releases recommendations for Phase III reserve price

However, radio operators believe that the high reserve prices will have an adverse affect on the auctions and will make many of the frequencies an unviable option. The general thought seems to be that the auctions will fail if the pricing is not rationalized keeping in mind the business aspects of the city.

“We were hoping that TRAI would rationalize the Reserve Prices, especially after it itself stated that the Phase-3 formula for setting RPs could jeopardize the auctions. After going through the whole process, TRAI has failed to make any substantial improvement in the scenario. Auctions will still fail in the future. The industry is also upset that TRAI has ignored all the suggestions made by the industry,” said Prashant Panday, MD and CEO of ENIL, which runs Radio Mirchi.

At the core of TRAI’s suggestions is that the reserve price should be 0.8 times the valuation of radio channels in a particular city. According to TRAI, the RPs have been determined as the arithmetic mean and depending on factors like population of the city, per capita gross state domestic product, density of FM radio receivers and per capita gross revenue earned by existing FM radio operators.

However, operators like Tanaya Patnaik, MD of Radio Chocolate, feel that this is unfair and TRAI should give weightage to business potential of a particular city in deciding the reserve price. She cites Radio Chocolate’s existing station in Rourkela as an example of how difficult it is to break even in smaller cities.

“The current projections are way too high. Most cities will become unviable at the current projections specially the C & D category. At the current valuations, at the most, 100-125 frequencies will be taken up. Also, knowing that primary source of revenue for FM Stations is only commercial ads, correct market potential value has to be determined while arriving at the reserve pricing,” said Nisha Narayanan, COO of Red FM.

So what would be the ideal scenario?

Narayanan echoes Patnaik by opining that the “propensity to generate revenue out of selling commercial ad space” should be factored in while calculating the reserve price.  “Many of the cities are too small to generate considerable revenues and break even in a respectable time frame as the reserve price suggested is way too high. In the light of fact that FM is yet to move to digital technology, these prices are definitely on higher side as they would require investments further when digitisation happens,” she said.

The first stage of the Phase III auctions are expected to bring in an estimated revenue of Rs 550 crore to the exchequer, while one radio executive estimates that the completion of Phase III auctions could lead to a turnover of around Rs 3,000 crore for the government. Clearly, there is a lot at stake not only for FM players but even the government and if relooking at the reserve prices will enable the process, then it is something that should be undertaken without delay.

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