Completed acquisition by Scottish Radio Holdings plc of 22.5 per cent shareholding in Kingdom FM Radio Limited

No. ME/1651/01

Report under section 125(4) of the Fair Trading Act 1973 of the Director General's advice, dated 11 March 2002, to the Secretary of State for Trade and Industry under section 76 of the Act

The parties

Scottish Radio Holdings plc (SRH) has media interests in three main areas: it operates 13 local radio stations in Scotland, including Clyde FM and AM in Glasgow and Forth FM and AM in Edinburgh, and one in Northern Ireland; it publishes 43 local newspaper titles in Scotland and Ireland; and it supplies outdoor advertising. In the year to 30 September 2000 it had a turnover of £71.7 million, pre-tax profit of £16.5 million and gross assets of £166.5 million.

Kingdom FM Radio Ltd (Kingdom FM) operates Kingdom FM, a local commercial radio station broadcasting in the Fife area. It started broadcasting in October 1998. No details of its turnover are published in its statutory accounts. Its gross assets are £510,000.

Jurisdiction

The merger meets the share of supply test under section 64(1)(a) and (3) of the Act in respect of the supply of radio advertising in Scotland, a substantial part of the UK. The European Community Merger Regulation does not apply.

SRH has acquired a 22.5 per cent shareholding in Kingdom FM purchased for £1 million from the Wireless Group. SRH currently has no entitlement to appoint a director to the board nor any special voting rights. SRH has stated that it is not involved in the day-to-day running of Kingdom FM and is not currently selling any radio airtime on its behalf. As a result it has argued that this significantly reduces its ability to influence or control Kingdom's radio business.

When seeking to assess whether material influence arises it is necessary to examine the individual circumstances, not only the size of the shareholding and whether a directorship is held, but also the position and diversity of other shareholders, how influential they might be, and where appropriate the voting patterns of the shareholders and company board. In this regard SRH, as a leading radio operator in Scotland, may be well placed through its knowledge and expertise to convince others to follow a certain strategy when voting their shares. It seems unlikely, therefore, that Kingdom FM would conduct business without regard to SRH's views. It is also possible that the parties could become more closely involved in the future through SRH seeking a directorship or Kingdom FM deciding to use SRH's sales house for the sale of airtime. It is appropriate to have due regard to such possibilities.

I have taken account of the above factors and am satisfied that it is more likely than not that the shareholding will give rise to an ability materially to influence the policy of Kingdom FM. Hence the merger does, in my view, qualify for investigation.

ASSESSMENT

Relevant markets

Product markets

The parties overlap in the supply of radio advertising in Scotland and in particular in the Fife area, where SRH's radio Forth broadcasts. Radio advertising is of two broad types: local radio advertising, which is generally sold direct by the local radio stations, and national radio advertising in the UK, which is sold through sales houses where advertisers buy packages of airtime on local and national stations to achieve their required coverage.

Radio and other display advertising has been examined by the Competition Commission (CC) in a number of reports. The CC concluded that different display advertising media constitute separate economic markets (see note 1). This is due to the different characteristics of each medium, which are suitable for advertising different products, reach different target audiences, communicate in different ways and allow differences in creative strategy. Prices were also found to be difficult to compare because of the wide range and disparity in advertising rates that exist across the different types of media.

In its report on Capital Radio/Virgin Radio the CC found that television and press advertising had strengths for developing brand image, whereas radio was used to support and reinforce a television and press campaign. Radio was thus generally regarded as more of a complement than a substitute for television and press advertising. The CC also found that the greater constraint on radio advertising prices in London came from other radio stations rather than other media, such as newspapers. It is possible that the radio advertising market in London and Scotland may operate differently. But we have received no evidence to suggest this.

Geographic market

The distinctions in the sale of local and national radio advertising referred to above indicate that there are separate geographic markets for national and local radio advertising. It is also possible that advertising in Scotland may form a distinct market, particularly if there is a different mix of buying habits in Scotland compared to the rest of the UK, but it is not necessary to reach a conclusion on this point since the principal overlap occurs only in a very local market, which is the broadcast area of Kingdom FM in Fife.

Horizontal issues

SRH is one of the principal operators of local radio stations in Scotland with 13 out of 32 stations (including sister stations that broadcast on FM and AM frequencies). Its stations include two of the largest and best established radio stations which broadcast across Glasgow (Clyde FM/AM) and Edinburgh (Forth AM/FM). These two stations account for nearly 60 per cent of radio advertising in Scotland. In total SRH stations account for 79 per cent of all radio advertising in Scotland (see note 2). SRH's station, Radio Tay, broadcasts from Dundee to the north of Kingdom FM's broadcast area. Radio Tay only has a small overlap with Kingdom and is not considered to have a significant effect on competition in the local Fife area.

Kingdom FM is a local radio station broadcasting in the Fife area. According to its licence format issued by the Radio Authority it is a highly focussed music and information station for Fife and plays music from the 60s onwards, including easy listening and current chart music. Its format does not include any specific target audience. In comparison Forth FM plays chart and contemporary music for the under 40s whereas Forth AM plays classic pop and easy listening for the over 35s.

The broadcast areas of Kingdom FM and SRH's Forth radio stations overlap to a significant degree with Forth covering 85 per cent of Kingdom's broadcast area. Forth, however, broadcasts over a much wider area so that Kingdom only overlaps with 24% of its broadcast area. There is thus a significant difference in the coverage area and the population that each station can reach – about 250,000 in the case of Kingdom FM and 1.1 million for Forth. This difference and its smaller broadcast area may mean that Kingdom FM has greater appeal to local advertisers based in the Fife area, who only wish to advertise on a very localised basis. Two other commercial radio stations, Scot FM and Beat 106, also overlap with Kingdom's broadcast area – both are regional stations broadcasting across the whole of central Scotland. It appears from the above analysis that Forth is Kingdom FM's closest radio competitor.

The geographic area which is directly affected by the merger is relatively small, as is the population in terms of both audience and advertising customers. The local radio advertising market in the Fife area is consequently also relatively small in value terms.

The difference in the profile of customers who use Forth and Kingdom FM to advertise means that over half of Forth's advertising is derived from national advertising whereas Kingdom's advertising is almost wholly local in nature. In the year to September 2001 Kingdom FM had local advertising sales of [ figure excised] and national advertising of [figure excised]. The comparable figures for Forth were [figure excised] and [figure excised] (see note 3).

At a meeting SRH informed the OFT that since Kingdom FM was launched some local advertisers have switched from Forth to Kingdom FM. This suggests that some competition exists between Kingdom FM and Forth. However, for customers seeking to reach an audience in the Fife area Forth is likely to be more expensive due to its wider coverage and audience. It seems unlikely, therefore, that Kingdom FM significantly constrains Forth's prices. Forth, on the other hand may well constrain Kingdom's prices. Were a single company to control both Kingdom FM and Forth it might well find it profitable to raise Kingdom's prices somewhat given that some of the lost revenue caused by Kingdom's customers switching away would be reclaimed by Forth.

However, while it appears more likely than not that SRH will have material influence over Kingdom, it is not clear that that influence is so great as to enable SRH to determine the pricing policy of Kingdom's radio advertising.

Vertical issues

No substantive vertical issues arise as a result of this merger.

Third party views

I have consulted customers and competitors in the usual way. Customers did not raise any substantive concerns. Only one competitor raised issues about SRH's overall position in the radio market in Scotland. These views have been taken into account in the above analysis.

Other issues

This merger involves SRH acquiring material influence over Kingdom FM. A move to de facto or outright control would give rise to a new merger situation which would enable me to look afresh at the merger and assess the competition implications at that time. The Radio Authority would also have powers to conduct a public interest test under the broadcasting legislation given the overlap between Forth and Kingdom should SRH obtain economic control of Kingdom's radio licence (this usually occurs when a shareholding of 30% or more is acquired).

CONCLUSION

While SRH appears to have acquired material influence over Kingdom FM, it is not in a strong position to seek to control or determine the price of Kingdom's radio advertising or its commercial policies. This, together with the relatively small size of the local radio advertising market in the Fife area, lead me to conclude that the effect of this merger is unlikely to result in a substantial lessening of competition.

In the light of the above I conclude and recommend that you should not refer this completed transaction to the Competition Commission for investigation.

NOTES

1. See Capital Radio/Virgin Radio Jan 1998, Carlton/Granada/United Media July 2000, Regional Independent Media and Gannett UK/Johnston Press/Guardian Media November 2000.

2. Figures taken from Radio Authority data.

3. Figures have been omitted at the request of the Radio Authority on grounds of commercial confidentiality.

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