The lowdown on digital channel potential

Dan DiDio, Senior VP of creative affairs at Mainframe Entertainment
October 1, 2001

Dan DiDio, Senior VP of creative affairs at Mainframe Entertainment

At this time, digital channels do not offer a viable business opportunity for the independent production company. Until they become a source of increased revenue for the broadcasters, the additional funds will not be made available to finance new productions. So for the time being, we have to look at digital channels as an outlet for library material and additional broadcasts of existing series.

Competition and diversity are needed to create change. Competition for ratings and advertising dollars creates the desire to acquire new, quality series, and diversity is essential so that programs are unique to channels and are not running concurrently on multiple broadcasters, limiting the available air time.

Ken Faier, VP of television distribution at AAC Kids

When I look at the rash of channels launching, the distributor in me says, ‘This is great–more opportunities for our back catalog.’ The production financing side of me looks at it and says, ‘Wow, it’s going to get even tougher to thread together a funding scenario that makes sense.’ As a general rule, digital channels do not offer enough of a license fee to initiate production. In addition, as more channels launch and everyone tries to create their own unique positioning, it’s becoming more challenging to balance the exclusivity that various channels crave with our need to create multiple windows in certain territories so that financing make sense.

That said, audience fragmentation is not going away, so we are analyzing the new diginets in each territory to try to align our development, production and acquisition strategies so that we can look at packages of broadcasters that seem to have a similar target market and positioning. One key step is to look at the soundness of each diginet’s business plan to assess its chance for long-term success. Nothing is guaranteed, but when you’re receiving a low license fee up front, you are definitely looking for other strategic factors that make doing business with the diginet worthwhile. In order for these digital channels to survive, they must ultimately bring in the viewers, and the only way to do this is with a great mix of programming–at least some of which must be original and exclusive. To get this kind of show, they must be able to pay a reasonable license fee and provide a clear vision for programming that can travel internationally.

Charles Falzon, President of Gullane Entertainment

Digital channels reach a very small universe of viewers right now, creating challenges for advertiser support, which, in turn, impacts the fees these outlets can pay for programming. If you look at each channel individually with a bottom-line mentality, they don’t currently offer producers a viable business opportunity. However, if you add all those digital outlets together, they become very attractive as additional programming windows. In Europe, the potential for distributors has already increased due to digital channels, and the opportunities for production can’t be far behind.

The U.S. will be all-digital by 2004, as mandated by the country’s government, so it’s no longer a question of if or when, but how. Therefore, the most significant factor that will need to change is the traditional commercial broadcast model that we’ve all been working with. We need to address the impact of technology on our industry, from digital channels to video on demand. It’s already happening. Producers, broadcasters, distributors and advertisers are all exploring new business paradigms to address the technological changes in our industry.

David Ferguson, President of Cinar Europe

Initially, the onslaught of digital channels provides more outlets for producers’ catalogs of finished product. However, the reality is that audience fragmentation resulting from the market entry of these channels and the erosion of terrestrial ratings have reduced the terrestrial broadcasters’ ability to finance new programs. Digital channels could also provide an avenue for public broadcasters or broadcasters with public service mandates to simply shift their obligations from mass children’s television onto specialized services. The reduction in audience for the children’s offering, although it creates more targeted results, leads to less financing money for new productions.

One thing needed in the future will be the continued application of national independent production quotas, as well as the European Union’s diligence regarding European content obligations on digital channels.

Further to this, producers will have to increase deficit financing and put more effort and resources into fewer productions. Hopefully, the new digital channels will take a more pan-European or multinational approach than simply buying programming already made. By actually combining financial resources from different regional digital channels with like-minded editorial points of view, these digital broadcasters could partially (and maybe fully) commission independent tailor-made programming to build points of difference from their competitors and provide a marketing, as well as ratings success in each region.

Lastly, if producers are to carry more of the deficit, then they should also expect added license fees or revenue sharing for any interactive or enhanced TV rights that digital broadcasters will inevitably want.

The good news is if we carry more deficit, we have greater upside… Now all we have to do is pick the winners!

Angus Fletcher, President of The Jim Henson Television Group, Europe

The digital discussion concerns itself with two areas of future opportunity. It’s recognized that the world will (at some stage that’s yet to be defined) replace the analog signal with a digital one, and that in response to the opportunity of almost limitless bandwidth, there will likely be many more channels.

It is said that digital represents affordable broadcast, but affordable means profitable, and it is profitable broadcast that offers sustained production opportunity. So, as always, opportunity is linked to viability, which, not surprisingly, is linked to audience appetite. The ground rules haven’t really changed!

Deborah Forte, Executive VP of Scholastic Entertainment

Digital channels offer an excellent opportunity for experimentation with convergence (since none of us work in only one medium any more) and new kinds of partnerships in which producers and distributors work together as programming and marketing partners.

They are going to need highly distinctive programming that can help them build a unique identity with consumers (i.e. Crocodile Hunter = Discovery).

As digital channels are relative newborns in the media world, it will take time before they play a meaningful role in the economics that currently drive the business. At the same time, these channels may pioneer entirely new financial models with the potential to redefine some of the parameters of our current ways of thinking.

Sander Schwartz, President of Warner Bros. Animation

Digital channels do not yet have sufficient penetration, audience or revenues to justify the cost of producing or acquiring new animation. The industry is still young, and it has not matured to the point of being able to underwrite the costs associated with new shows.

In order to get to the point where they can afford to finance production, digital channels will have to mature into mainstream, advertiser- or subscription-supported vehicles. When cable penetration first became widespread 20-some years ago, new production for cable slowly became more and more viable. Look at digital channels today, and they look much like cable channels did at the infancy of the cable business. Sometime in future (whether it’s five, 10 or even 20 years is anybody’s guess), when digital becomes mature, it will look a lot like cable today. Along the way, opportunities for producers to launch new shows will be few and far between.

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