Getting the green!

Although the endless merry-go-round of pitching and development gives the impression that children's television is a dynamic, growth business, the harsh reality is that kids specialists are being squeezed - and the volume of shows making it into production has been dramatically reduced.
October 1, 2002

Although the endless merry-go-round of pitching and development gives the impression that children’s television is a dynamic, growth business, the harsh reality is that kids specialists are being squeezed – and the volume of shows making it into production has been dramatically reduced.

The main reason for this is that kids license fees at many leading networks have been slashed. Gone are the days when a U.S. license fee of between US$200,000 and US$300,000 per half hour of animation and an average German fee of roughly US$80,000 would give you the bulk of your budget. Today, you’d be lucky to get half that sum from these traditionally pivotal markets.

For a while, this didn’t matter because stock market investors ploughed millions into production deficits to secure rights for ancillary exploitation. But that well has dried up, leaving producers and distributors with slates that have no hope of seeing the light of day – unless they find a radical solution to this budgetary crisis.

In animation, which generally travels better than live action, the decision to greenlight a show has routinely depended on a producer’s ability to secure network buys from three of the following five key territories: the U.S., Canada, the U.K., Germany and France. Not only have these countries provided the best license fees, but three of them support local production with healthy subsidies.

However, the downturn has been such that even if you secure three co-production or presale partners, there’s still likely to be a budget shortfall of 25% to 30%. On a 26 x half-hour animated series, this could equate to US$2 million, prompting one producer to observe that ‘the problem with getting a commission is that you have to make the show.’

The answer to this funding dilemma used to lie in securing a third-party distribution advance. But these don’t exist anymore, say leading players like Decode partner Neil Court, TV-Loonland COO David Ferguson and HIT senior VP of international TV and home entertainment John Morris. If a company is lucky enough to have cash to invest in production, it will either back its own shows or assume commercial control of all ancillary rights.

This is not necessarily a bad thing, says HIT’s Morris, whose company is one of the few that still has public finance at its disposal. ‘If we invest in a producer’s show, we will take all rights,’ he explains, ‘but the benefit from a producer’s perspective is that we carry the risk and they share in the reward. It’s also our policy to ensure that they are involved in the creative process.’

For producers that don’t want a HIT-style studio to take total control of their property, an alternative is to gap-finance your slate, says Decode’s Court. In essence, gap financing is a bank loan, and the idea, says Court, is to mortgage the slate against future revenues. Typically, securing such an agreement with a bank requires that you have a solid track record and evidence that network funding is in place for new productions.

Although bank loans are regarded by many as expensive money, the alternative for Decode would be to reduce its slate from six shows to one or two. ‘Our view is that networks will need new, quality shows in 12 to 18 months, and we need to provide them,’ says Court. In fact, four shows from Decode’s MIPCOM slate – Boystuff/Girlstuff, King, Blobheads and The Save-Ums!, based on a concept optioned from The Dan Clark Company but owned and controlled by Decode – were gap-financed.

Hammering down the cost of production is another critical issue for the sector to face, says Ferguson. ‘I haven’t seen any way of cutting the cost of 3-D stop-frame animation, but the advent of digital animation techniques like Flash is encouraging for cel animation – as long as it’s married to the right property.’

Another important development has been the use of low-cost Asian studios. Korea, Hong Kong, mainland China and Taiwan have long been a crucial link in the cost control chain, says Court. He adds that India is now another viable option, offering an enticing mix of low-cost labor and Southern India’s built-in expertise in digital media.

Asian facilities are useful, but not an option that can be driven too hard, says Ferguson, whose company has production arms in the U.K. and Germany. ‘The key to survival is quality combined with cost-effectiveness. We do storyboards and key animation frames in Europe so we can keep creative control close to home. We then hire Asian studios to do production work.’

Ferguson’s view is that owning a facility is an asset in a depressed market since the hard cost of production can be absorbed in-house rather than paid to a third party. At some studios, producers claim to go without wages to get a pilot or a first episode made.

However, there are two provisos to the studio-ownership model. First, you need an effective distribution arm in order to drive ROI from post-production sales. Second, the studio infrastructure must not outgrow market demand – as has happened at some Western and Asian studios.

Outside animation, there is the option of keeping budgets within local license fees. If this is possible, international sales are gravy, says Southern Star Sales chief executive Cathy Payne, who singles out live-action preschool format Hi-5 as a prime example. Produced by Kids Like Us for Nine Network Australia, the 45 x half-hour series recouped its per-episode budget of between US$20,000 and US$30,000 with the license free from Nine, according to Payne. Industry sources estimate the fee for this type of show between US$25,000 and US$40,000 per half hour. An additional sale to Channel 5 in the U.K. helped bump the bottom line further into the black.

With so much emphasis on access to cash, Ferguson’s view is that companies like TV-Loonland and Entertainment Rights, which have large distribution catalogs, have an advantage. ‘We have 2,000 half hours of shows, so as long as we can get sensible license fees from networks, that provides us with cash-flow for new production.’ What’s more, it provides leverage with broadcasters. ‘If a network likes a new show but is not able to invest risk financing, it could acquire our library product as an alternative to committing to a presale,’ says Ferguson.

One company that defies convention is TV4C, a joint-venture between Malcolm Heyworth’s distribution outfit Chatsworth, prodco Flicks Films (Mr. Men and Bananaman) and post-production house VTR. At launch, Heyworth said TV4C’s goal was ‘to build an infrastructure not dependent on U.K. broadcasters.’ And so far, that’s how it has worked, with the partners absorbing the production cost in order to reap the benefits of global exploitation.

The most advanced TV4C project is Busy Buses, a preschool series that has sold to Australian channels ABC and Nick, as well as to SBS Korea, SCV Singapore, Hop TV and IETV (both Israel), Living TV (the U.K.) and IBC Iceland. Now going into its second series, the show has made do without any conventional presale targets.

Notwithstanding examples like TV4C, most of the strategies discussed so far assume that producers have secured the optimum three partners. But factors like U.S. studio vertical integration, local content regulations in Canada, production over-capacity in France and advertising recessions in the U.K. and Germany mean getting three is extremely difficult. The question for producers with two partners is whether there are alternative funding sources that can help push a show towards production.

In theory, you could look for co-pro partners in smaller regions beyond the big five. But it’s hard to see any realistic options on this front. In Europe, big territories like Italy and Spain rarely commit to international kids shows upfront, preferring to take the less risky route of post-sales acquisition. Nordic territories are keen buyers, but do not provide the sort of license fees that trigger production.

In Asia-Pacific, the obvious sales targets are Japan, Korea, China and Australia, but these territories also offer a more limited scope for make-or-break buys.

Australia has no meaningful role as an animation co-producer, but it does play a part in live-action joint-ventures – as long as there is some overt local content. In the case of Japan, distributors take a protectionist approach to acquisitions that restricts opportunities. Korea and China are important, but not as conventional financiers. In a climate in which cash is hard to come by but studios have massive over-capacity, a more common model sees a local studio waiving some or all of its production fee in return for Asian exploitation rights. ‘This kind of finance-in-kind can make a big difference to the cost of a show,’ says Decode’s Court.

There are those who argue that focusing exclusively on the TV distribution market is the wrong approach. Richard Morss, who left Pepper’s Ghost to form Banjax, believes ‘the old TV financing model is not working anymore. Banjax is a rights management company looking to capitalize on relationships across a range of media.’

Morss argues that content creators need to introduce new ideas via any medium. Working out of its production headquarters in Belfast, Northern Ireland, Banjax has teamed up with comic book publisher Beckett to explore properties that can debut in TV, publishing or digital new media.

As a corollary, Morss argues that producers need to apply new marketing models to the sale of content. ‘We’re not ignoring TV, but producers need to think like retailers. As broadband develops, properties could be sold direct-to-consumer via the web.’

How quickly this market can develop is a moot point, but there’s no question that the future of kids TV is inextricably linked with ancillary activities for two reasons. First, there is a prevailing view that only shows with merch potential can make money. And second, networks expect cross-media promo support for new shows.

This explains why most kids properties are based on successful books, says Nelvana president of international distribution, marketing and consumer products Toper Taylor, ‘because they provide built-in exposure and reduce risk.’ Taylor also talks up the significance of the U.S. sell-through video market, which sometimes provides an alternative source of funding to U.S. TV license fees. ‘We’ve sold millions of Little Bear and Rolie Polie Olie videos. That’s an important part of the distribution model, though the transition from VHS to DVD is creating some uncertainty in the market.’

Toy companies like Hasbro and Mattel are also key partners, although they rarely provide risk financing upfront unless backing their own properties (Action Man and Barbie, for example). A promising exception to this is Lego Media, whose global controller of programming and strategy Vanessa Chapman has been briefed to find TV concepts with play value from outside the existing Lego range.

Repackaging properties that didn’t quite break through the first time around is also an option. Millimages has acquired global distribution rights to Hilltop Hospital, a well-liked preschool show with play value from Eva Entertainment that originally aired on ITV, ZDF and France 3. It’s now being reformatted for the U.S. market, which means some original content will be made, says Millimages USA CEO Dorian Langdon.

With the PC/on-line gaming industry now rivalling the movie business as a revenue generator, digital animation studios are exploring the opportunity to create shows that can work in this market (or vice versa, like Lara Croft). It’s clearly an important development, but one that comes with a warning from Cosgrove Hall managing director Iain Pelling. ‘Games are an opportunity, but also a threat. The big issue in holding onto my animation talent is not other animation studios, it’s game companies.’

Radical breakthroughs in the cost of production and the growth of broadband outlets both have the potential to ease the burden for producers in the long run. But in the short term, the real keys are for the economy to pick up and kidnets to start spending again: ‘We’re trying to persuade networks that if they want good shows, they have to pay for them,’ says Ferguson. ‘If they don’t, the production market will dry up in a year or two.’

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