Is Bigger Better?

April 2007

The big guns in the
kids’ business certainly have the financial and distribution prowess to launch
successful brands, but some of the most popular shows come from smaller
companies.

By Bill Dunlap

It seems fitting
somehow that there is a bit of a Goldilocks and the Three Bears scenario in the
kids’ TV business these days. The biggest of the bears in the children’s
entertainment arena are in something of a world of their own, supporting
multiple brands that fill their own global distribution
pipelines—channels like Nickelodeon, Cartoon Network and Disney.

At the other
extreme, the baby bears, boutique companies with one or two successful kids’
shows, are producing some of the most popular programs, but lack the
infrastructure to fully exploit their brands and must outsource many of those
functions. Most of the baby bears are happy to be where they are now, but they
aspire to join the middle level of independent producers that are able to
develop, produce, distribute and fully exploit a few kids’ brands.

The question for
many players, though, is, What is the optimum size? Not too little to take full
advantage of successes. Not so big that administration and management start to
drive the company at the expense of the creative people who come up with the
ideas that captivate children. But just right, small enough to allow the
creatives to maintain control of the company and its output yet big enough to
make the most out of its brands.

“I don’t think you
have to be big,” says Nancy Fowler, the head of global sales for DIC
Entertainment, who considers DIC “relatively small” when compared with the big
bears. “But obviously there are advantages to size. We [acquired the
entertainment rights to] Strawberry Shortcake and right now at retail it’s
[generated] more than $1.7 billion since 2003. Because of that success, we have
established great relationships with retailers, with licensees, with
promotional partners, so when we have our next property, we’ve cleared the way,
we have those relationships. We understand the challenges of the business, we
have a leg up, versus the smaller producer that hasn’t had a big hit like that
and doesn’t know how to manage a business of that size. It’s tougher for them
to get that meeting at Wal-Mart or Hasbro. They probably need to outsource that
expertise.”

Last year, DIC
acquired the privately owned, pan-European licensing agency Copyright
Promotions (CPLG), which extended DIC’s reach into the European marketplace. 
“We
used to call ourselves a television producer,” Fowler says, “and now we call
ourselves a global brand-management company. You have to have the resources to
handle all aspects—online, TV, home entertainment, consumer products and
publishing. To really manage a brand you have to have expertise in all those
areas. You can outsource certain areas, but it helps to have everyone working
as one team and focused on what you’re doing in all those areas in all those
territories.”

With a staff of
about 100 at DIC (and 70 more at CPLG), Fowler says DIC could be called a
boutique with the output of a major—a “mini-major,” as she puts it.

Paul Taylor, the
CEO of Jetix Europe, makes the case even more strongly: “When it comes down to
exploitation, there is no debate that the bigger companies win out massively.
Look at what our parent company, Disney, has done with High School Musical, a fantastic concept and show, but the reality is
it would never have become a global franchise success if it hadn’t been for the
machinery of The Walt Disney Company. There’s a long list of shows that
wouldn’t be as big as they are now if it hadn’t been for the distribution and
marketing capabilities of the majors.”

ONE PLUS ONE
EQUALS THREE

A clear example of
how much size matters was the acquisition of the New York-based Classic Media
by the London-based Entertainment Rights not long ago. Each was a midsize
player in its own region, but together they are bigger both in North America
and in Europe.

“We are a company that derives [the vast majority] of its revenues
outside of America,” Entertainment Rights’ CEO, Michael Heap, explains, “and
Classic is a company that’s got [the vast majority] of its revenues in America.
It’s an unprecedented opportunity to create one of the strongest portfolios of
children’s brands anywhere in the world.”

The deal marries
Classic Media titles like VeggieTales and Casper with ER’s
international distribution machine, Heap explains. “Content is king, and I
obviously agree with that,” he says. “There is no point having a load of
content without the distribution. But there is definitely no point in having
distribution without content.”

Similarly, about a
year and a half ago, the French animation house MoonScoop acquired a majority
stake in Mike Young Productions to increase its presence in the U.S. market.
The combined catalogue is represented by Taffy Entertainment.

At the time of the
merger announcement, Benoît di Sabatino and Christophe di Sabatino,
copresidents of MoonScoop, said, “There is a great synergy between the two
companies. This transaction will allow us to further our presence in the
competitive U.S. market across all our key business areas: production,
distribution and licensing.”

These three
businesses are at the heart of any children’s television company, and Cookie
Jar’s president and COO, Toper Taylor, believes that size makes all the
difference. “It’s critical, absolutely critical,” he says. “And people don’t
understand that. We’re out of the business of just selling TV shows. Even
Nickelodeon is out of the business of just putting a TV show on the air. They
have magazines, websites, they advertise on other networks and in magazines
they don’t own. All of us in kids’ entertainment have to do so much today to
market our properties. In order to do that effectively you have to have a
certain size, you have to spend money. So you have to be well capitalized; you
have to know what you’re doing; you have to be efficient. Just like Wal-Mart,
if a product’s not selling on its shelf, off it goes. If the television series
goes on the air and the ratings aren’t there, off it goes. Broadcasters need to
sell advertising and keep their ratings at a certain level. The stakes have
gotten extremely high. So, as I look out into the world marketplace, we’re
probably one of a handful of independent producers that can compete with the
major studios.”

MIDDLE OF THE
ROAD

HIT Entertainment
is considered a “mini-major” with such preschool hits as Thomas &
Friends, Bob the Builder and Barney. The CEO, Bruce Steinberg, points out that reaching a certain scale
is imperative in order for an independent to control distribution of its
product. “An indie production company has a very difficult time because we are
always selling to ­broadcasters and they are the gatekeepers,” he explains. “It
will always be difficult for indies; we choose our path. That’s why HIT has
decided to build out an international channel as well as our relationship with
PBS KIDS Sprout in the U.S. And over time, those channels will help us drive
our business. But since we don’t have those channels yet, we are looking for
acquisitions, whether individual property acquisitions, or larger acquisitions,
such as companies or libraries that can give us more scale, given that we don’t
have that vertical integration that Nickelodeon, Disney and Cartoon Network
have, where they control their destiny because they are channels. They
co-produce with themselves, they own all the rights and they are able to drive
the promotion of those programs ad infinitum on their platforms. Having been a
broadcaster all my life, I realize the importance of that promotion, which is
absolutely huge.”

Indeed, mid-level
companies need to find whatever edge they can to compete in today’s crowded
children’s TV landscape. Being based in Australia, Southern Star is able to
take advantage of government subsidies to help raise financing, but Cathy
Payne, the chief executive of Southern Star International, says it takes
distribution clout to get projects off the ground. “You always start out with
the vision of creating something that entertains the audience,” she says, “but
if you don’t look at the commercial ramifications, you just wouldn’t be in the
children’s business, because TV fees alone will not support it.”

Southern Star
typically acquires four children’s series a year for worldwide distribution and
produces two to three series a year. “We’re a specialized TV distributor who
knows how to get things to market,” Payne says. “It’s critically important to
have all the right channels, so you have to have the relationships. You won’t
have a strong ancillary campaign if you don’t have strong broadcasters to start
with, so you’ve got to make sure the program has the best positioning it can
obtain.”

At MIPTV, the company
is launching Sea Princesses,
based on a book from Brazil. “That was started off by sales, which thought it
would work and then fed it into our production cycle,” Payne says. “We liked
it, we did a deal and developed it, and got it financed and in production.”

SIZE MATTERS

Brian Lacey, the
executive VP of international for 4Kids Entertainment, goes along with those
assessments, but says size isn’t everything. “The landscape is certainly more
difficult to navigate today,” he says, “and the cards are stacked in favor of
those who have the muscle behind them—some size, some depth—but I
still think that there’s room for smaller players, because it’s still a
business of content, and you never know where that content is going to come
from. The bigger the company, chances are that they’ve got better ways to
distribute it, but at the end of the day, it is about content, and what matters
isn’t how something is distributed, but what is distributed. Smaller companies
still can compete. It is harder, but not impossible.”

In the same vein,
Marc du Pontavice, the chairman of the board and CEO of the Paris-based Xilam
Animation, puts it succinctly: “I definitely think when it comes to
distribution, big is better; when it comes to production, small is better.”

Du Pontavice, who
founded Xilam in 1999 after running Gaumont Multimédia, says production
companies that try to grow too big always slip in quality. “There is no
exception to this,” he says. “If you have more than four shows in production,
even in various stages, I don’t think you can properly focus and guarantee the
same quality all over.”

SMALL(ER)
WONDERS

Indeed, smaller
companies in the kids’ business are proud that it is often the boutiques with
the creative talent at the helm that are able to turn out the most innovative
products. They take pride first in the shows and brands they develop, but they
recognize the trade-offs of getting bigger.

Five-year-old Nerd
Corps Entertainment in Canada has already achieved mid-level status in terms of
staff, but CEO and founder Asaph “Ace” Fipke wants to keep things simple for
now. “I call us a small company even though we’re breaking 120 people in size,”
he says. “We can deliver between 39 and 52 episodes a year. It’s all in-house.
Our business plan is to create extremely high-quality [product], make a small
margin on the production with the hope that the quality and ancillary rights
that surround the [intellectual property] we’ve created bring back the bigger
profits. If you get too big it’s hard to monitor that. It’s a business that
requires constant maintenance and a love for it right from the top down. It
requires a tremendous amount of care from everybody to ensure that it does turn
out to be a success in all those different things.”

Fipke, who worked
for the Vancouver-based CGI animation house Mainframe Entertainment before
founding Nerd Corps in 2002, took lessons from that experience. “I saw how a
public company has to operate,” he says. “I realized the need not to go down
that path if you wanted to make something cutting edge or interesting. It’s
much harder in a publicly held company, especially a small to midsized one.
They want to play it safe. They want to see results on a quarterly basis. TV
doesn’t work that way.”

Nerd Corps
currently has a 52-episode order for its series Storm Hawks from YTV in Canada and Cartoon Network in the U.S.
and has sold the series globally. “We do major territories ourselves,” Fipke
says. “Then we use a sub-distributor to do other countries. One or two people
can handle that type of distribution. I don’t want to have an army of
distribution people.” MGM is handling distribution outside of North America and
Western Europe, and MGM Consumer Products is the North American licensing
agent.

“We definitely have
to partner with others,” Fipke says. “It comes at a cost to us, but the cost is
worth it. For me as CEO, I don’t want to manage a bunch of consumer-products
people. What you have as a small business is the ability to pick and choose who
you want to work with. If you make a good quality product, you get to pick and
choose.”

Fipke has little
interest in growing through merger or acquisition. “Bigger doesn’t make better
when it comes to entertainment creation,” he says. “Our endeavor was to create
and finance our own stuff, and we’ve done that on the back of Storm Hawks. For us, that is the perfect business plan. We own
the series 100 percent. We’re not at the mercy of some bigger corporation. We
know that our financing is ­solid, banked for the next two to three years.”

BOUTIQUE
BENEFITS

Aardman Animations
of Bristol, England, has ridden the success of its BAFTA- and Oscar-winning
claymation characters Wallace and Gromit to mid-level status today. “We were a
boutique,” says Miles Bullough, the studio’s head of broadcast and development.
“We’ve had an absolutely massive ­global brand in Wallace & Gromit. We’re currently in production with four different
series, three of which are children’s series. It makes us one of the biggest
children’s producers in the U.K.” In addition to feature films, Aardman does 50
to 60 commercials a year, providing more infrastructure to support its kids’ TV
business, and allowing it to bring more of its business in-house.

“We’ve recently
taken some video distribution in-house and we have our own licensing group in-house,”
Bullough says. “We’ve always had a pretty strong control over the destiny of
our own brands. That just increases as we have more and more scale. We think
it’s important to get enough ­critical mass to bring that stuff in-house.”

For now, Bullough says,
the company’s size is just about right, with a core staff of about 120. “We
feel comfortable with the level of production we have on the TV side at the
moment,” he says. “We might try to add one or two more series, but I don’t
think we’d ever do more than six at any one time. We feel we’re about right at
the moment and we want to concentrate on making the shows to the highest
possible standard.”

Xilam’s du
Pontavice is also where he wants to be, with three series and a feature film in
production. “That’s pretty much the maximum we can do at one time,” he says.
“Right now we have 150 people, including freelancers; the most we’ve ever had.
I’m happy the way I am. Xilam is very good when it comes to creating,
producing, delivering and distributing television.”

But he still would
like to improve revenues. “I don’t think we make enough money out of our shows.
It’s difficult. We’re too small to have the marketing resources to milk the
cow. I’m sure some big companies have the expertise to make it more profitable.
We’re very profitable now, we just had a good year in 2006. But I think we
could go much bigger than that.”

A disadvantage to
outsourcing licensing to agents, as ­Xilam does, is one of timing merchandise
rollouts. “The success will be dependent upon the ratings as opposed to
preparing this in advance and having everything ready when you launch the
show,” he says. “You have to rely on the fact that your show is going to
deliver some significant ratings and then, if you have the proper network of
agents, it’s going to happen. It’s not something you can prepare in advance.”

MAKING MOVES

Smaller companies,
true boutiques, are following various strategies to get to the next level.

Last year, the
principals of Halifax Film Company in Nova Scotia and DECODE Entertainment of
Toronto formed DHX Media as a publicly traded holding company for both firms,
and as a vehicle for acquiring others. “The idea was to ­create a holding
company that included both companies but avoided the mistakes of some other
integrations of the past where they just tried to glom two companies together,”
says DECODE’s president, Neil Court, who is also a DHX director and one of six
controlling shareholders. “DECODE can do what it does, autonomously, and
Halifax Film does what it does, autonomously, but they’re connected at the hip
in distribution.”

While Halifax is
more of a pure boutique producer, DECODE’s specialty is its distribution and
familiarity with the market for kids’ programs. “Very little is dreamed up
internally at DECODE,” Court says. “We had grown DECODE organically over the
last nine or ten years, but then one of the frustrations was that as a
bootstrap business we couldn’t really grow by acquisition. If we were going to
become a bigger player, we needed capital. Raising some money on the stock
market gave us that capital. We wanted to grow faster, and when you don’t have
access to big pools of cash you’re pretty restricted.”

Typically, DECODE
would bring in creative talent to develop kids’ shows or option properties from
books and seek ­co-production deals. Halifax had previously outsourced its
distribution to Alliance Atlantis. The combined libraries of both companies
exceed 1,150 half-hours. “There’s a real efficiency for us doing the
distribution for Halifax,” Court says. “The DHX model allows us to acquire more
companies, and that can mean acquiring a licensing company or really smart
boutique production companies that have no distribution where we can come in as
executive producers, ­co-producers, distributors. The idea behind it is to have
a very user-friendly corporate environment, to aid and abet the companies that
we acquire rather than give them a lot more paperwork and things to worry
about. It’s only been six months, but that model seems to work.”

The French boutique
Moi J’aime la télévision (MJTV), used a partnership with the British indie
boutique Helion Pictures to get Genie in the House, a live-action series for teens, into production.

Phil Ox, a
producer/director and MJTV’s founder, prefers working with other boutiques
rather than larger companies. “It’s very difficult to strike a good deal with a
big company,” he says. “Helion Pictures is practically a one-man show with
Steven Bawol, an American executive producer. Steven has produced for
Nickelodeon previously and for us it was a way to work with someone who knows
Nickelodeon and understands how to produce a comedy, a sitcom. You want to get
the creative side right and be able to strike a deal that is good for both
companies. The big companies come with a deal that is good for them. They don’t
understand what you need to make sure it’s a good deal for you as well.”

Genie in the
House went on the air a year ago
on Nickelodeon U.K. and Canal J in France. “The guy behind the project was
[director of programming] Pierre Belaïsch at Canal J,” Ox says. “He was looking
for comedy, in between Two of a Kind and Sabrina, that
would appeal to 8- to 12-year-olds. The idea was to do a show with American
production values but European content. I went to London and pitched it and
Nickelodeon came on board immediately. It’s the number one comedy show on
Nickelodeon. It’s very successful in France as well, and now it’s in Spain on
Nickelodeon Spain, the Middle East, Russia. We did 26 half-hours and now we’re
doing a second season.”

Ox’s hope is to
grow methodically along with Helion and Bawol. “We probably can do two or three
shows a year,” he says. “That’s the goal. Between the two of us we want to
produce two shows in the next three years and three shows every year after
that. It’s a long-term relationship. Because you are a small company, you want
long-term relationships. You can’t explore all avenues at the same time. You
want to find the right partner and work on the long term.”

In the final
analysis, the question of how big is big enough has no definitive answer. Nerd
Corps may think it’s big enough now while the folks at Disney don’t see more
growth as stifling creativity.

Paul Taylor
believes Jetix and Disney are the creative equals of the boutiques despite
their size. “The key thing is creating an environment in which these creative
people can thrive, an environment in which they don’t have to worry too much
about the business side of things,” he says. “You want an atmosphere where the
creatives can do what they’re being paid to do, which is to come up with great
ideas, develop great ideas and produce great ideas. In a way, that’s about
taking away the fear of failure. If everyone is frightened of failing, then you
wind up with creative mediocrity. It’s people who are prepared to take risks
and step outside what’s been done before who really benefit.”

Fipke says there is a
message inherent in the Nerd Corps name and it is: “‘Make cartoons, not war.’
We’re having a little fun with it. We love comic books and toys and the ­nerdy
things in life. At the end of the day, the little guy has to work a bit harder
to get heard. When you’re without any cushion, the human effort is realized in
a more concentrated fashion. It can be very groundbreaking. You can make
riskier decisions that other companies can’t, and that’s my summary of why I
like being our size. We’re enjoying the hell out of this ride.”