COMMENT
Tune In For A Digital Dividend!

By Ed Bowsher (TMFArkle)
December 19, 2005

Digital radio offers lots of advantages to the listener: more stations, better reception and on-screen data. The UK consumer began to wake up to these advantages in 2005, and at least two broadcasters should benefit in the medium term.

If you don't believe that digital radio is finally taking off, consider these stats. By September 2005, 10.5% of homes owned at least one digital radio, up from 4.5% a year earlier. Fourteen million people are listening to digital radio each week.

These numbers are good news for commercial radio companies because digital should help them win market share from the BBC. A bigger market share should lead to greater advertising revenue.

The BBC currently has a 54.6% market share, boosted by four national FM stations. The commercial sector, by contrast, only has one national FM station. That's Classic FM, owned by GCap Media (LSE: GCAP).

As more listeners switch over to digital, the commercial sector will get stronger. Granted, the BBC has launched some new digital stations, but the commercial sector has launched many more, and a fall in the BBC's audience share looks inevitable.

The strongest digital player is GCap Media. Along with Classic FM, it owns three other national digital stations. GCap also owns some data capacity attached to the national stations, and it's hooked up with BT (LSE: BT.A) to exploit that.

The venture is called BT Livetime, and it enables mobile phone users to watch live TV. These TV services are broadcast to the phones via the digital radio network.

The problem with GCap is that some of its analogue stations are having a tough time and the dividend was recently cut. The share price may have further to fall in the short-term, but if you're prepared to be patient, GCap should eventually profit from the digital switchover.

UBC Media (LSE: UBC) is another attractive digital radio play. It's much smaller than GCap with a market cap of just £44m. Like GCap, it has some analogue interests including the Classic Gold network where Tony Blackburn spins the platters that mattered in the 60s and 70s. It also has a growing radio production business.

But how will UBC gain from digital radio? Music downloads have plenty of potential. UBC has developed technology that enables digital radio listeners to download tracks to a radio or phone while they listen. Not only does UBC have the technology, it also has plenty of data capacity across the UK. The service will be launched next year and UBC reckons this market could be worth £14m a year by 2010.

UBC also has a 49% stake in Oneword, a digital speech station. Crucially, Channel Four owns the remaining 51% so there is lots of scope for cross-promotion and growth. On top of that, UBC is supplying the electronic programme guide for BT Livetime.

On the downside, UBC isn't making a profit right now. Seymour Pierce is forecasting a pre-tax loss of £350,000 on turnover of £18.9m in 2006. But the potential of music downloads is very exciting and the core production business is doing nicely.

If you want to invest in digital radio, I think UBC Media is the best bet.

My colleague, Maynard Paton, has commented on GCap Media on the Champion Shares website. Sign up for a FREE 30-day trial to Champion Shares and read Maynard's verdict. You'll also be able to read seven great share tips!