Step Lively

After years of languishing in the background while broadcasters danced off with program rights, the U.K.'s independent production community suddenly went from wallflower to belle of the ball this summer. The Cinderella-like transformation can be traced to the U.K. government's endorsement of the long-discussed Communications Bill in July. The new law addresses a number of significant issues for the U.K. media sector, including foreign ownership of British broadcasters and whether industry giants Granada and Carlton should be allowed to merge (both were greenlighted). But for indies, the most relevant portion pertains to the program supply market.
October 1, 2003

After years of languishing in the background while broadcasters danced off with program rights, the U.K.’s independent production community suddenly went from wallflower to belle of the ball this summer. The Cinderella-like transformation can be traced to the U.K. government’s endorsement of the long-discussed Communications Bill in July. The new law addresses a number of significant issues for the U.K. media sector, including foreign ownership of British broadcasters and whether industry giants Granada and Carlton should be allowed to merge (both were greenlighted). But for indies, the most relevant portion pertains to the program supply market.

Each of the terrestrial channels (Five, Channel 4, ITV Network and BBC) has been ordered to come up with a code of practice that defines the value of primary-broadcast rights as separate and distinct from all other rights. To date, few prodcos have managed to retain secondary or international rights in negotiations with U.K. broadcasters that have distribution arms – the BBC and C4, in particular – because the structure of the deals (i.e., a relatively high value on secondary rights and a relatively low value on primary rights) has generally made it difficult for all but the largest indies to do so.

Since channels will now be obliged to unbundle rights, the decision about what to do with shows beyond first window rests in the hands of the producers who make them, rather than with the buyers. In effect, prodcos can finally accumulate assets in the form of program rights.

The courting of indies has already begun. London-based production company Chrysalis Television recently landed a multimillion-dollar venture capital deal, and the optimistic view in the industry is that it represents only one of many to come.

Before the story can reach a happily-ever-after ending, however, a couple of hurdles remain to be cleared. First, the broadcasters’ codes of practice are currently under review by the government regulator (OFCOM) and will not likely be finalized until early next year. Once the terms are definitively laid out, producers will have some of the information needed to decide how to proceed with rights exploitation and company growth. But, what indies won’t know right away is whether the channels will focus increasingly on more U.K.-centric shows (since they won’t necessarily secure international program rights), which could diminish the real value of the assets producers now retain.

Until both aspects of the broadcasters’ actions become clear, the full implications of the Communications Act remain speculative. Still, there’s no question of a seachange in the U.K. industry, and indie producers – and distributors – are currently preparing various strategies to best take advantage of it.

Step up or step back

One of the oft-stated predictions for the post-Communications Act world is that mid-sized prodcos will have to decide to get big or shrink to boutiques in order to stay in the game, because at their current size they benefit from neither the market power of the super-indies nor the low overhead of the Mom-and-Pop shops. Alan Clements, MD of Glasgow-based prodco Wark Clements, is among those who foresee this future. ‘The middle of the market is going to get squeezed, because the bigger companies that control rights and have money they can put upfront to hold onto rights are going to grow,’ he contends. ‘I think that [growing or shrinking] is going to be a very stark choice for a lot of middle-ranking companies.’

Clements puts his own 13-year-old prodco in the mid-range, though in the upper echelons. [Wark Clements turned over £10 million (US$16 million) last year and expects to do about £12.5 million ($20 million) this year; about 30% of its output is non-fiction, such as The First World War and Great Battles.] He has clearly set his sights on bulking up. ‘We’ve already got venture capital funding. If you don’t have funding to take advantage of those rights, you might find it pretty tough,’ he says. ‘I feel it in my water, it’s changing. Channels are going to want to do bigger deals with a smaller number of producers.’

Simon Willock, the London-based group head of factual for Aussie producer/distributor Southern Star, agrees. ‘The opportunity [to grow] will create a lot of entrepreneurial businesses that will swallow up smaller businesses without a global and funding infrastructure. Slightly top-heavy middle-sized companies are either going to have to get very big or very small.’

Like Clements, Willock has decided that the prodco under his authority, Oxford Scientific Films, must grow. ‘OSF is currently a little boutique within Southern Star, which is a big business, but the intention is to attract [production] talent so we can get big.’

Willock, who sits on the council of the Producers Alliance for Cinema and Television (pact), has long seen change coming, and has acted accordingly. A year and a half ago, OSF produced about four hours per year; now, it’s up to 20, he says. The prodco is also branching out to new genres from its traditional beat of science, technology and wildlife. Explains Willock, ‘We need to move into more high-end science, history programming with crossover into the science genre, popular factual, reality formats, [etc.].’

But, not everyone agrees that the companies in the mid-ranks will be pushed to grow or shrink. Observes John McVay, chief executive of pact, ‘The middle sector has had the roughest ride – they tend not to be able to leverage better deals, they often have pretty large overhead percentages compared to large companies, proportionately, and they find it hard to attract capital, because the main asset in the company is normally the key creative person. But with this [law], if they do have something that’s successful, they have some other potential income streams that might help to contribute to their overall capitalization or potential to get investment, which then might allow them to secure other talent to take on the bigger companies.’

Leap into distribution

The question of how to handle the exploitation of rights is another important issue indie producers are facing – whether to tackle the task themselves, use an independent distributor or stick with a broadcaster/distributor. The first option may be tempting to small companies in particular, as a way to keep any and all profits close to the chest. But, it could be a dangerous path, according to Ian Jones, joint chairman of the British Television Distributors’ Association (BTDA) and general manager of Granada International. ‘It won’t benefit the U.K. TV industry if we have a million and one different people trying to sell their rights without any leverage, without any knowledge and in a fragmented marketplace. It’s a recipe for disaster,’ he warns.

Granted, the BTDA has a vested interest in discouraging producers from handling rights exploitation on their own. But, Jones isn’t alone in his thinking. Clements, for one, says he can’t imagine venturing down that path. ‘There are already enough complications in producing without adding the complication of distribution to it… It’s a different skill entirely.’ Wark Clements’ strategy at the moment is to use a variety of distributors, selecting who to go with on a per-project basis. For factual shows, the prodco is currently working with Channel 4 International, Southern Star and Cineflix International.

Producers who have less experience may not have contacts such as these, however, so both the BTDA and pact are working to rectify that. In June, the trade organizations hosted an event at the Royal Society of Arts called ‘Show Me the Money’. Notes Jones, ‘It was basically a high-level day, taking producers and anybody who wanted to attend through the value of the international marketplace, the U.K.’s position in that marketplace, the value of rights within various program genres, and just to get some interaction going in the sector.’

The need for an information session such as ‘Show Me the Money’ illustrates another pivotal factor that will affect how useful the Communications Act will be for indies: their ability to realistically value their program rights. As Jones observes, ‘You might have the best program in the U.K., it might rate hugely well in the U.K., but that doesn’t mean it’ll sell [internationally].’

May I cut in?

Producers aren’t the only ones with decisions to make. Distributors of all sizes will also have to figure out where they fit into the new system. Theoretically, indie distribs are looking at the possibility of a boom in business, if they are able to attract rights-yielding prodcos. Dominic Saville, ceo of London-based 3DD Entertainment, already has a strategy: deficit and/or equity financing.

The nine-year-old boutique operation, which specializes in music programs, concerts, docs and biographies, and has a catalog of 200 to 300 hours, has deficit financed projects in the past. According to Saville, 3DD backs about four docs per year, putting up 10% to 20% of the budget, and expects to do more or possibly even offer equity financing. ‘As people start demanding more of us, we’ll demand a bit more back, and I think there are certain tax funds that require an equity position. From our point of view, we’ll be looking to have more ownership.’

Jones isn’t convinced that many distribs will embrace more deficit financing, however. ‘Over the past few years it’s been a declining trend,’ he notes. ‘Distributors have stepped up to the mark in the past, but it’s getting tougher and tougher for them to do so, and I think it will be tough in the future as well.’ But, equity financing may have broader appeal. Says Jones, ‘It depends on the nature of the project and whether the distributor sees it as having longevity and, in the kids area, commercial, ancillary exploitation potential. I suspect that if you [have that], you’re more likely to get a distributor to consider an equity investment.’

For producer/distributors, attracting indie producers might not even be part of the plan. The essential issue for them is how much to produce in-house versus how much to source externally. According to Willock, Southern Star is leaning heavily towards boosting its own non-fiction output. ‘I am now actively seeking production talent that has credentials with the broadcasters in this country, in order to spend money not on other people’s deficits, but to buy production talent to substantially increase OSF’s own production,’ he says. ‘The ambition is for that to become the main vehicle of supplying distribution rights to our sales company.’

Broadcaster/distributors may not be the most appealing choice to some indie producers at the moment, but they remain an option worth considering. On the plus side, they have the economies of scale to support big marketing pushes; on the downside, their catalogs are often so big – Jones estimates Granada’s collection is close to 17,000 hours, for example – that some shows are bound to get less attention than others. Still, broadcaster/distribs are accustomed to padding their catalogs with content from indies, and they’re not about to sit still while it all slips away. McVay recounts that at a recent BBC Worldwide launch, the sales team actively pitched to the production community. ‘It was a definite wooing,’ he says.

Two to tango

Though the Communications Act aims to boost the clout of the indie production sector, broadcasters are far from powerless. Secondary and international rights aside, it’s the channels that decide which programs to license and how much to license them for. In fact, the latter point – the value of the primary license – is causing some concern among producers. Steve Hewlett, MD of Carlton Productions, explains: ‘They [the broadcasters] may try to reduce license fees on the argument that giving away [secondary and international] rights is costing them money – money they can ill afford… The danger is that broadcasters reduce prices across the board, in many cases for programs they were unable to exploit in secondary terms.’

Even if the channels were to attempt such an action, however, they might not get away with it. Regulator OFCOM’s role is to monitor the act’s implementation and ensure that all parties adhere to both the letter and the spirit of the law, which includes taking at least 25% of programming from the indie sector.

A more serious concern is, perhaps, the possible impact on U.K. shows with international appeal. Comments Willock, ‘If [broadcasters] have to pay more or less the full cost of programming, I suspect there will be a move for a large part of the schedule to be very domestic or parochial, because why worry about whether it’s going to work for an international audience?’

Prodcos capable of turning out big, high-end projects aren’t the ones who will suffer if this is the case, though; in fact, they may even benefit. Notes Andy Zein, MD for London-based Tiger Aspect, ‘The opportunity it gives, hopefully, is one of more transparent and easier to construct coproduction opportunities. Knowing the terms on which broadcasters operate – having them clearly spelled out – will allow better planning and better raising of third-party investment.’

The facts won’t be known until the broadcasters’ codes of practice are revealed, but on balance the indications are more hopeful than not. The channels have each been working closely with pact on the terms, and although none involved would divulge details, McVay expresses faith in the eventual outcome. ‘Five years from now, I hope U.K. independents are far more competitive globally – even stronger in markets outside of their own,’ he concludes. ‘The Brits are coming.’

About The Author
Jonathan Paul is a Toronto-based writer into creativity, content, advertising, tech, comics, video games, film, TV, time and space travel.