If I may understand correctly, the pertinent points raised are :
Sustainability (survivalibilty) ..also means funding.
Programmes, whether it should be a niche channel or a rojak channel
Target listeners... musicians or otherwise, teenagers & young adults
Alternative format..Internet radio
If the company is offering us free and independent use of the channel, our cost will only be that of producing the contents, not that it's going to be a small sum. Why is the co be willing to give free? There must be some form of return on investments.
The funding party, whether it's the govt, a commercial entity, an arts group or a religious group, will want to get ROI on the investments, not necessary in monetary terms, and the ROI must be substantial. This will dictate how the programme mix is going to be, and one has to accept that dissemination of information by the funding party will interject the programme, much like the advertisements over TV & FM radio.
Another point to consider is, listeners now have more choices to music than they can digest by using MP3, so why radio? Is there still relevance to radio in today's world? Maybe yes, insofar as time sensitive information is concern, like traffic conditions, civil or military mobilisation, and strategic advertising.
The target listeners, obviously a radio station won't just be happy with a small group of listeners. They have to enlarge, with new comers as well as poach from other stations. So, while this station missions itself to broadcasting local music (focused genre or otherwise), it has to bend backwards to pull in more listeners by tailoring programmes other than purely local music. Well, it need not have to resort to playing imported music to damage the mission statement. Or why not do away with that label of standing up for local music to avoid embarassment. Just broadcast local music without announcing it to the world. Simply follow your heart.
An easy way out is probably call it a Youth station and devote or divide segments according to age group, interest group, and so forth. Will this sell????