Valuing Commercial Radio Licences

Within the EU Regulatory Framework, licensees for commercial radio broadcasting may be charged a fee to ensure optimal allocation of scarce resources but not to maximize public revenues. In this paper, it is described how such a fee can be determined for the purpose of licence renewal or extension. In the case at hand, national and regional Dutch FM licences were valued, taking into account that simulcast broadcasting of digital and analogue radio will be obligatory upon extension.

Licences are valued using Discounted Cash Flow Methodology, whereby the cash flows of an averagely efficient entrant are taken as the benchmark for valuation of each individual licence. Cash flows during the licence period 2011-2017 are forecasted based on Generalized Least Squares (GLS) regressions, using financial variables of Dutch radio stations for the years 2004-2008. Separately, bottom-up cost and investment models are used to calculate analogue and digital distribution costs.

The GLS and distribution cost models per cash flow variable, discounted to 2011, result in a value per licence based on objective licence characteristics. These values can be used to set licence fees if administrative renewal or extension is opted for instead of a new auction or beauty contest. Although such a model-based valuation creates stability for listeners and broadcasters as compared to an auction which has more uncertain market outcomes, it is inevitable that fees based on econometric analysis and market forecasts will be scrutinized by licensees and may be subject to legal procedures.

While radio licence renewal occurs in many EU countries, an objective, model-based approach for setting licence fees has not been used so far. Yet, it is argued that such an approach, taking an averagely efficient entrant as a starting point, is most in line with the EU Regulatory Framework.