Prodcos turn to retailers and toycos to pick up funding slack

Retailers may not have their names on the credit rolls of kids TV shows just yet, but if prodcos have their way, they soon will. With broadcaster license fees falling and traditional funding sources - from government grants and tax credits, to private investment - drying up, studios are increasingly fixing their sights on retailers and toycos to top up production budget shortfall.
January 8, 2003

Retailers may not have their names on the credit rolls of kids TV shows just yet, but if prodcos have their way, they soon will. With broadcaster license fees falling and traditional funding sources – from government grants and tax credits, to private investment – drying up, studios are increasingly fixing their sights on retailers and toycos to top up production budget shortfall.

‘The fact of the matter is that for every production company, financing needs to get more creative [because] it’s getting harder and harder to make the budgets,’ says Julie Fox, director of international distribution and co-productions at Paris, France-based Alphanim. Although she says Alphanim came off one of its strongest years in 2002, notably selling its show Potatoes & Dragons to CiTV, Fox began mailing out packages late last year to a group of retailers with the goal of snaring financial support for the company’s upcoming projects.

The fact that no retailer or toyco has yet hopped into bed with a studio might be a disheartening reality, but that’s only if you ignore recent rumblings from U.S.-based retailer Toys ‘R’ Us. Giving prodcos hope for this potential funding source is Warren Kornblum, chief marketing officer at TRU, who has been very vocal about the potential for retailers co-funding or co-developing kids TV shows. ‘We have had conversations with studios and networks,’ he says. ‘Nothing has come to fruition, but I don’t think it would be unreasonable in the not-too-distant future to look at that kind of business opportunity.’

Kornblum – who attended last October’s MIPCOM for the first time to get an early read on what properties could become hot licenses and who may put in an appearance at NATPE this month – sees a more collaborative retail-studio dynamic as inevitable. ‘There’s absolutely a convergence to what we’re all doing. I’m really looking forward to the day when content developers and our team can sit down and work out what could be the next cool thing for kids.’

While the inherent risks that retailers incur by co-producing a TV show remain steep – namely, losing their entire investment, not to mention lost sales on the shelf space they give up – the upsides are too good to ignore. If they own a piece of a property, retailers theoretically stand to inherit a percentage or even complete ownership of the revenue streams that flow from it (licensing & merchandising, promotions, broadcast sales, etc.). Like many retailers, TRU has already ventured into this area on the product side, snagging exclusive licenses to entertainment properties – including select categories on Liberty’s Kids and E.T. – as a means of differentiating itself from the competition. Currently, licensed exclusives account for 20% of TRU’s revenues, a quadruple increase over 1999, when it started to employ the tactic heavily. Developing exclusive content for its stores is clearly paying off, and it remains a cornerstone strategy for the company.

‘Like all specialty retailers, we’re in the business of purveying commodities,’ says Kornblum. ‘There really isn’t a whole lot of need for them, so we’ve got to be about generating excitement and a different kind of experience, as well as enabling consumers to find things in our stores that they can’t find anywhere else. Otherwise it doesn’t make much sense for us.’ Viewed within this context, taking ownership of a TV or film property is a plausible next step for retailers wanting to gain a competitive edge.

Though it doesn’t guarantee a show will be sold, let alone become a hit, the prospect of having a major retailer like TRU or Wal-Mart attached to a project betters one’s odds immeasurably with broadcasters, says John Bullivant, managing director of U.K.-based prodco Kickback Media. From Bullivant’s point of view, the burning question these days is who holds the power in the kids TV biz – those who put it on the screen or those who sell it at retail? Bullivant believes it’s the latter: ‘Put it this way – do you know of any franchise property that doesn’t appear at retail? Just because it’s on TV, it isn’t necessarily a franchise. It’s only ever a franchise property if it exists at retail, so that’s where the ultimate power is.’

Then why aren’t retailers or toycos partnering with prodcos on their series already? Because there is a hornet’s nest of variables – from creative control, to rights and regulatory issues – that could turn any such union into a marriage from hell. After all, at the end of the day, the two parties want different things from a TV show. ‘We’re coming from two different places,’ says TV-Loonland CEO David Ferguson, who has tried to pitch toycos on funding properties in the past, but to no avail. ‘We want to create a show that people will watch, and they’re coming from a very toy-led position that’s all about play values and what makes a great toy.’

But Kickback’s Bullivant, who is currently shopping some concepts to potential partners including retailers and toycos, feels that the two agendas needn’t be mutually exclusive. ‘How you marry the needs of each requires a new mindset, with both sides learning from each other,’ says Bullivant. ‘But obviously there has to be a fairly good idea in the middle that can be shaped with the interests of both parties in mind.’

However, others on the production side are less hopeful about the creative fruits a partnership involving a retailer or toyco would yield. ‘That’s where we won’t go in our discussions [with retailers and toycos],’ says Tom Lynch, namesake and president of L.A.-based The Tom Lynch Company, which is currently in development with a show based on an as-yet-unnamed, existing Hasbro toy property. ‘Having people influence story lines for the sake of selling [product] is a recipe for failure. The content has to stand on its own, and then we can look at ways to exploit it,’ says Lynch, who adds that the only partners he’ll take notes from on an original property that he has created or co-created are the networks who are airing it.

On matters of content, Warren Kornblum says that Toys ‘R’ Us would willingly defer to a production partner if it were involved in a co-production. ‘I don’t think we would ever enter into a relationship where we have more to say about creative control than they do,’ he says. ‘The last thing we want to do is to cross the line into territory where programs become 90-minute commercials, because that’s not good for anyone – including us.’

No less thorny is the issue of rights. Like any other investor, a retailer like Toys ‘R’ Us would be entitled to the same percentage of revenues that it contributed to the show’s production budget, says Kickback’s Bullivant. Where things get sticky is in the area of merchandising. If TRU invested in a property, it would want to be intimately involved in consumer products, have exclusives on core categories and control how the character or property is exploited promotionally, says Kornblum. The problem is that broadcasters looking to invest in shows often demand points on, if not full ownership of, those same ancillary revenue streams. The situation grows more complex if the prodco already has a merchandising and distribution arm. ‘There’s going to be some serious number-crunching going on in those types of deals,’ says Bullivant.

Kornblum says TRU would be willing to cede ground on the back end, provided that it would be able to participate on revenues gained on the front end, like when the show is sold. ‘The ideal scenario for us would be to sit down with the producer and network and our team and figure out what makes sense,’ he says. ‘In total honesty, if that means certain categories need exposure for the betterment of the brand and didn’t make sense to be exclusive, then I’d hope we’d be first to acknowledge that.’

Even if prodcos and retailers/toycos could reconcile these potential rights and creative conflicts, regulatory hurdles threaten to undermine their best-laid plans. In key co-pro hotspots, including the U.K. and France, the whiff of toyco or retail investment in a kids TV show can get it yanked from the airwaves.

In England, commercial outfits are not permitted to underwrite a kids TV series, either in full or in part, if they are producing toys or other merchandise based on it. The rules, which the Independent Television Commission (ITC) introduced in 1990, are intended to ‘prevent the market of programs, particularly children’s programs, [from being] distorted by advertisers who, if this rule did not exist, might wish to make or fund programs based on existing commercial products. Such products could be offered to broadcasters at a discount, reflecting their undoubted promotional value for the advertiser concerned.’ Nevertheless, producers often don’t find out if their shows violate ITC regulations until the program is near completion.

Such was the case about a decade ago with Nelvana’s Crash Test Dummies. The ITC yanked the show a week before its planned CiTV debut, primarily because it featured ‘undue prominence’ of a toy line, but also because it had been entirely funded by Tyco, which was already using series footage in its TV ads for the toy line (another no-no). ‘We just weren’t aware of the rules,’ says TV-L’s Ferguson, then Nelvana Enterprises’ managing director of international co-productions.

But however circuitous the route may seem, there are ways for property developers to get toyco or retail investment. Kickback’s Bullivant, for example, plans to establish a boy-skewing preschool property as a toy by partnering with either a toyco or retail partner. But before any toy deal is struck, Kickback would first issue the property as a book, even at a loss. That way, as a co-owner of the property, Kickback would be free to develop it as a TV show down the road if that became an option. In any case, given the glutted preschool TV market, Bullivant feels that using retail as the initial entry point will extend the property’s shelf life. ‘If a property has some roots at retail, however small, it’s easier to grow it into something bigger, as opposed to sticking it on TV and saying, ‘okay, now grow some roots at retail.’ The reality is that most things don’t.’

Additionally, in theory, there’s nothing to prevent toycos from developing a series and paying for initial eps up front, as long as they’re not funding production at the same time that they’re producing merchandise. The problem, says TV-L’s Ferguson, is that when you sit down to do your revenue projections, there are no guarantees on the front-end that such efforts will work.

Still, on the upside, Ferguson believes that governing bodies in Europe are beginning to relax their grip on such regulations. To wit: Max Steel airs on Channel 5 in the U.K. Although master toy licensee Mattel doesn’t fund the show, the CG characters closely resemble the toy line. ‘So it would have had an undue prominence issue if the same interpretation of the [ITC regulations] that was used for Crash Test Dummies was used today,’ says Ferguson. And as the U.K. amalgamates its five regulatory bodies into one über-controller called the Office of Communications (OFCOM), Ferguson predicts that the threshold for what is and isn’t considered toyco investment will continue to loosen up.

With the kids TV industry in a state of flux, many believe the market is primed for a new business model, one that will see retailers and toycos playing a more active role. There are, in fact, already some examples of non-traditional partners working in the co-development sphere – Nickelodeon signing a game and property development agreement with gameco THQ last year is just one case in point.

‘It may end in tears,’ says Kickback’s Bullivant, ‘or it may herald a complete change in the way character franchises get launched. Success will come not because you get a retailer to write you a big fat check to fund your show; that will just lead to a failed partnership.

‘Rather, it’s about finding a creative synergy between what works for both. The companies that go into it with that kind of mindset, rather than just saying ‘it’s all about making 26 half hours of animation or live-action,’ are the ones that are going to come out on top.’

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