The Consolidation Game: How Big Is Big Enough?

January 3, 2011 World Screen

This interview originally appeared in the MIPCOM 2010 issue of TV Formats.

 In recent years, many of the world’s major format companies have been acting as if they’re playing a real-life adaptation of Monopoly in which the various players race around the globe trying to buy up as many local production companies and big formats as possible.

 
Just this summer, Zodiak Entertainment announced it would acquire RDF Media, creating a global powerhouse with production companies in more than 20 territories and annual sales exceeding €500 million ($661 million). And this deal is only the most recent example of rapid consolidation in the format industry, a development that has major implications for the future of the business and the way broadcasters and producers acquire and develop new shows.
 
Only five or six years ago, there were really only three companies—FremantleMedia, Endemol and Sony Pictures Television—that owned local production companies in many of the major North American, European, Asian and Latin American territories. Since then, however, a number of companies—notably Zodiak, Banijay Entertainment, Shine Group, ALL3MEDIA and BBC Worldwide—have built up impressive networks of production outfits, while other companies, such as ITV Studios Global Entertainment, have expanded their international presence with additional offices and operations.
 
The flurry of deals that has reshaped the format business in the last few years is, however, only part of the story, argues Endemol’s chief commercial officer, Tom Toumazis. “On one hand, you see consolidation, but on the other hand, you’re also seeing major companies like Warner Bros. making statements that they want to get into the business,” he says. “A lot of the Hollywood studios are seeing the importance of being in local production. It’s not just consolidation. It’s new entrants as well as consolidation.” Indeed, Warner Bros. announced this summer its acquisition of a majority stake in the U.K.-based Shed Media, producer of hit formats like Who Do You Think You Are?.
 
One major impetus for consolidation has been defensive—the need to lock up a secure flow of new formats. “Consolidation has impacted us in the sense that we can’t represent some of the shows we might have wanted to represent,” because the creators have sold their companies to rival format players, says FremantleMedia Group’s COO, Gary Carter.
 
So far, the impact of these deals has been quite minimal, Carter stresses, thanks to the large supply of ideas that FremantleMedia gets from the production companies it owns in 22 territories and their ongoing success in finding formats from independent producers and broadcasters.
 
Pointing to recent successful formats like Got Talent and Hole in the Wall, as well as the ongoing popularity of formats like Idols, Carter says that “the returns on our investments in the open market on new formats have continued to be very, very strong and we have a very good network that extends into markets like Japan, where we acquired the hit format Hole in the Wall from Fuji.”
 
Still, worries about having a secure supply of ideas from top creative talent were cited by several executives as a major factor in their company’s recent expansion.
 
“Five years ago, there were a lot of people that I was talking to about acquiring formats that I can’t talk to any more because of consolidation,” reports Barnaby Shingleton, the head of light entertainment acquisitions at RDF Rights.
 
This is a particularly acute problem for companies looking to acquire new big prime-time studio formats. “If you are [a broadcaster] looking for one of the big studio-based entertainment shows, you have to go to one of the big companies and you probably have to have one of those companies make it for you as well,” Shingleton adds. For a format company, “it means you have to look a lot more at what is being developed internally because you can’t rely on the external market [for those kinds of formats].”
 
 

FILLING THE GAPS
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The importance of having a network of production companies to develop new hit formats is one of the key rationales for the recent expansion of Banijay Entertainment.

Created in 2008, with the backing of such private investors as the Agnelli family (Fiat), the De Agostini family, Jean-Paul Bize (AMS Industries) and Bernard Arnault (LVMH), the company quickly expanded with a slew of deals, acquiring such companies as Brainpool in Germany, Nordisk in Denmark, Zig Zag Productions in the U.K. and Bunim-Murray in the U.S. and setting up Angel City Factory in the U.S. The company now has almost 20 local production companies in Europe and the U.S.
 
“Some companies like Endemol and FremantleMedia basically established their power in the market because they were smart enough and lucky enough to come up with three or four big, big formats,” says François de Brugada, the executive VP of creative and commercial affairs at Banijay Entertainment. “We are betting on the fact that by accumulating the internal creativity and selecting the right people we will be able to come up with a couple of easy, powerful formats that travel well. If you are able to produce and sell those formats in your companies—that is how you develop your business in a big way.”
 
Having a presence in major territories is not only important for developing new ideas. It is also crucial for the launch of new hit formats because broadcasters are much more likely to acquire formats that have already been successful in a large market such as the U.K. or the U.S.
 
“Once a format has been successful for one broadcaster, it is naturally easier to pitch to international clients, so our focus is to create a U.K. success that can be emulated internationally,” notes Tobi de Graaff, the director of global television distribution at ITV Studios Global Entertainment, which now has several production offices outside the U.K. “And this has a snowball effect—we find that the more local versions we produce, the greater the interest becomes.” Come Dine with Me, for instance, was first broadcast on Channel 4 in the U.K. in 2005 and has since been produced in more than 20 territories.
 
Not surprisingly, the push to fill gaps in a company’s geographical reach has prompted a number of deals, including the recent merger between RDF and Zodiak. Ilan Astrug, the head of format acquisitions at Zodiak Entertainment, notes that in 2007, the Italian publishing company De Agostini began buying media assets, acquiring the Magnolia Group in Italy and Spain, the Marathon Group in France, and then in 2008 snapping up Zodiak Television, which owned a significant format library and had operations and production companies in the Nordic territories, Benelux, Poland, Russia, India and Latin America.
 
“Basically the strategy was to create one of the biggest production groups,” Astrug says.
 
More recently, the acquisition of RDF adds the U.S. and the U.K. to the company’s global reach. Shingleton notes, “What is great about this particular merger is that we fit together so well in so many areas. It gives RDF the international clout we lacked and it filled Zodiak’s lack of having a stronger position in the U.K. and the U.S. It is really a perfect match.”
 
While deep recessions usually slow or stop the pace of deals, a major recession in the television industry has actually seemed to encourage consolidation in the last two years, in part as a way to deal with a difficult broadcast TV business and stagnant programming budgets.
 
“If you bring a show to air in Holland, you have to cover about half the budget and if you bring a show to broadcasters in Sweden, don’t expect them to pay for all of it,” says Karoline Spodsberg, the managing director at Banijay International, the distribution arm of Banijay Entertainment. “The notion [that a broadcaster will pay] 100 percent of a show’s budget is starting to become history.”
 
While this has put pressure on profit margins, it also gives larger format players a significant advantage because their global network allows them to cut costs and develop new sources of revenue, several executives claim.
 
 

ECONOMIES OF SCALE

“Our scale gives us a better chance for investing for the long term,” says Endemol’s Toumazis. “When we look at a format, we don’t just look at recovering our investment [in a program] in one territory."

Endemol, for example, has been championing the use of production hubs and centralized production as a way to cut costs. As part of that strategy it has built a massive studio in Argentina with sets for such formats as 101 Ways to Leave a Gameshow.
 
“By using one production set and flying in people from different countries we can offer economies of scale and make it possible to create a huge show that is more affordable,” Toumazis explains.
 
RDF’s Shingleton believes the current economic climate is making broadcasters more cautious, which plays into the hands of larger companies with large catalogues of proven formats and a reputation for producing high-quality shows. “This climate rewards big companies and penalizes small ones,” he adds.
 
Opinion remains divided on whether the pace of deals will continue, with some companies clearly in the acquisition mode and others taking a wait-and-see attitude.
 
 

THENEXTSTAGE

Banijay’s de Brugada notes that “we are almost at the end of the first step of our expansion, which was to cover Europe and the U.S.” Next year, however, the company will be starting a second phase of expansion, when it will begin to focus on Asia and Latin America. In those markets, however, it may look for strategic alliances with local companies rather than outright acquisitions."

By contrast, FremantleMedia seems more focused on expanding existing operations rather than acquiring more firms to increase its large network of production companies in 22 countries and regional offices in 11 territories.
 
“We are always thinking about the right size of this network and my answer today to that question could change tomorrow with the market conditions,” says FremantleMedia’s Carter. “But for the moment we are not focused on network growth. We have a network with huge assets. The question is really what we do with it.”
 
One important initiative for FremantleMedia and all the big players remains the development of new formats. To encourage creativity, the company has regular meetings between executives at its various local production outfits and hosts an annual conference that brings together all its talent.
 
It has also expanded its development units from two to seven in recent years and it has worked to bring formats to the market faster and more efficiently.
 
Toumazis notes that Endemol has pushed to maximize the potential of its existing network, which includes more than 80 companies in 26 countries, through acquisitions and the launch of new businesses. “Margins are under pressure for everyone and we have to look at every opportunity to see how we can capture as much value as possible,” Toumazis explains.
 
At Banijay, de Brugada stresses the importance of fostering creativity with a decentralized operation that will encourage their local companies to be entrepreneurial and react quickly to local market conditions. On the distribution side of the company, Spodsberg emphasizes the need to attract top-notch independents.
 
“Even after all this consolation there are still very strong creative spirits around the world who are [making] smart formats. Working closely with them is an important part of our future. At the end of the day it is all about that creativity,” Spodsberg says.