Who wants to lose their audience share? Capital's £1m question

Question: why has Capital Radio lost 14 per cent of its audience over the past year? Is the answer:

a) Listeners thought Chris Tarrant was leaving Capital's flagship London show and so lost interest?

b) Rivals such as the BBC, Heart and Kiss are gaining ground?

c) Capital's stations need a new format?

d) Capital hasn't put enough cash into programming and marketing?

"This is the £1m question," says a spokesman for the company. But the answer, as with the hardest questions in Mr Tarrant's TV show, is elusive.

The popular presenter is now signed up for another year at Capital, so if rumours of his departure did play a part in the fall, the London station's figures should soon rebound. But Capital's other stations in the South-east, the North and Scotland are also experiencing a slump in listeners.

On Thursday, when chief executive David Mansfield reports full-year results, he will attempt to explain how he is going to address the problem. As profits are expected to be down 34 per cent to £18.5m, according to investment bank Merrill Lynch, the company needs a convincing plan to boost investors' morale. Merrill analyst Steve Liechti says the recent audience figures were an "absolute disaster" for Capital. He was unsure, though, whether it was being "attacked from every direction" by its competitors, and so heading for further decline, or whether investors could be cheered by its strong presence in London, making it a tempting bid target.

In many ways, Capital is successful. Although it has been hit by the advertising slowdown, along with many companies in the media sector, it is well placed to take advantage of the bleak climate. It has little debt and can therefore ride out the storm if it gets any worse. This also means it has the ability to buy up other radio stations that are in a less secure state, and therefore cheap.

It can also benefit from proposed changes in the law governing regulation of the media sector. The Government is likely to allow non- European companies to buy into British broadcasting and also reduce the impact of the complicated "points system", which restricts the amount of radio stations that one company can own. The Communications Bill, which will be included in the Queen's Speech on Wednesday, will make its way through Parliament this year. Therefore, it won't be long before changes take place.

In the merger and acquisition frenzy that has been predicted, Capital is seen as the jewel in the British radio crown, the company most attractive to predatory American groups, and the most attractive partner for its competitors.

Numerous rumours have circulated as to who will be the winner. A tie-up with GWR has been mooted, while Capital was said to be thinking about buying Virgin from rival SMG. Emap's radio assets were also thought to be in Capital's sights.

But a spokesman says that although management talks to other companies all the time, there is nothing on the cards.

A merger could bring financial growth, and could also bring benefits to the programming and audience figures. But in the meantime, Capital needs to show it can grow its existing businesses.

"It's important that it can grow organically and not just exploit a mon- opoly," says Anthony de Larrinaga, media analyst at SG Securities.

The company will also have to get a better return from its investments so far. Mr de Larrinaga complains that although Capital has spent £160m on its newer radio stations, such as Century, Beat and Xfm, it is only expected to get £18m in revenues from them this year.

That the whole group has room for improvement suggests it was not just the incorrect rumours about Mr Tarrant's departure that turned listeners off. Either the company will have to lure them back, or it could be swallowed by a larger and beefier rival.