The Super Indies

This feature originally appeared in the MIPTV 2012 issue of TV Europe.

 

Consolidation is the way of the media sector just as in any other business. Indeed, new technologies aside, perhaps the most obvious trend in television since deregulation really took hold in the 1990s has been big fish swallowing little ones, driven by the logic of vertical integration, cost reduction and the usual motives outlined in business-school textbooks.

 

The European independent production sector has more recently joined this trend with parallel streaks of mergers and acquisitions creating huge groups—such as Zodiak Media, ALL3MEDIA, Banijay and FremantleMedia—that combine companies from multiple genres, many with big hits to their credit. These new conglomerations have come to dominate the program-sales market in hitherto unheard-of fashion. But the logic driving the trend is different from the norm, and so is the nature of the consolidation. These new “super indies” tend to operate less as vertically integrated groups and more like aggregators of creativity. And their business is not only television programs but the more broadly defined area of intellectual property.

 

Super indies are all about harnessing creative energy, but they do not all have the same view of how to best achieve that end.

 

ALL3MEDIA operates what Jane Turton, the company’s COO, calls “a federal model,” offering strategic guidance from the top and group business-affairs support, but allowing creative autonomy to member companies. Founded by Steve Morrison, David Liddiment, Jules Burns and John Pfeil, ALL3MEDIA includes a wide range of companies producing drama, such as Bentley Productions and Company Pictures; factual producers like Maverick and Lion Television and even a sports producer in North One. ALL3MEDIA International represents about 60 producers from both inside and outside the group.

 

“It’s a curious structure,” Turton says. “We are all part of an integrated value chain. ALL3MEDIA asks [questions] like, What’s coming up? Do you need to cover a deficit? What’s the potential for the project? But we don’t avoid overlap. It is a policy not to share information among the companies. They do compete with each other. A certain amount of competitive tension is good as long as it’s not destructive.”

 

At Zodiak, which is about 71-percent owned by the diversified Italian publishing group De Agostini, there is also a “very strong belief in creative autonomy.” CEO David Frank describes the structure as “a collection of creatively autonomous units operating within a strategic framework.” He adds, “We had four groups loosely together. A lot of work has been done to develop a real group structure.” The big U.K. operation is primarily nonfiction, while the Paris-based wing is focused on fiction. The group now includes 45 companies with revenues in excess of €600 million.

 

 “What we can do is make our business more valuable,” adds Frank. “But it’s not a centralized creative effort, which has been Endemol’s approach.”

 

FremantleMedia’s organization tends to be a bit less devolved. There are four creative hubs—in the U.K., North America, Asia Pacific and Europe—and they are all charged with providing programs that could become international formats.

 

“We don’t want overlap,” says Rob Clark, the director of global entertainment development at FremantleMedia and a group board member. “We are very collaborative in the way we work. It is a competitive environment, and we encourage that, but we monitor what’s going on. It’s like a web.”

 

FremantleMedia is owned by RTL Group, Europe’s biggest commercial broadcasting group, and includes such independents as Blu, Blue Circle and Original Productions, as well as Germany’s famous UFA and FremantleMedia-branded subsidiaries in the U.K., Australia, North America, Italy and Spain.

 

Being present in multiple genres makes the business less risky to a certain extent, and it means a wider range of potential brands for a producer to partner with. But above all, it makes the chances greater for coming up with a hit. Being a super indie is like managing an investment portfolio. The more diversified the portfolio, the less risky it is, and the bigger the chance that there will be winners.

 

“Creative capacity in lots of different genres gives us a greater capacity to create hits,” Zodiak’s Frank says. “In our casino we have tables marked ‘kids,’ ‘fiction’ and ‘entertainment,’ and so on. Playing on lots of tables at once means you have more chance of winning.”

 

Banijay has worked to hone its genre specializations. “We don’t want to be a patchwork, but instead a family with coherent values,” says François de Brugada, the executive VP of the Banijay Group, which was created in January 2008 by Stéphane Courbit with the deep-pocketed backing of the Agnelli family (of Fiat), the De Agostini family, Jean-Paul Bize (of AMS Industries) and Bernard Arnault (of LVMH). “It takes some time to achieve that and it’s been one of our key priorities in the last year.”

 

“We consider non-scripted to be our core business, and that covers the whole range of genres within the non-scripted category—game shows, entertainment, reality, factual, talk shows, everything,” de Brugada says. “Our goal is not to be a specialist in any one of these genres but an overall specialist in non-scripted. Therefore, we have been careful to assemble companies that are particularly strong in one or two of them, in order to complement the overall company strength. For example, Bunim/Murray is an undeniable leader in reality, Air Productions is one of France’s top producers of game shows, Brainpool is a specialist in big studio entertainment and comedy, Cuarzo’s strength is in talk shows. The Nordisk companies have a wider spread and that’s the model of the group, to have a broad range of aptitudes across the non-scripted genres.”

Some of the typical advantages of scale apply to super indies just like other groups. “We have central procurement,” says ALL3MEDIA’s Turton. “We can get better bargains, whether it’s for stationery or insurance or cars or post-production. But the real benefit is the value-added upside as opposed to lower cost.”

 

“It’s not absolutely necessary to become the biggest player,” Banijay’s de Brugada says. “What is necessary is to be present in the key territories with the right partners and to ensure that we have access to strong creative content and to expand our creative capabilities. Those are the goals we have in mind when we expand. Ours is a consolidating market, where the key resource is exploitable creativity—content, in a word. So we need to ensure that we are getting our hands on the best content creators out there. At the same time, you need to ensure when you create IP that it too is being exploited, and that you get the revenue from your own IP. So it’s crucially important that, as well as being at the top of their game creatively, our producers are also capable of securing commissions in their territories. Of course these benefits go both ways. For an independent producer, there is less and less good IP available outside of large groups, so being part of a group allows you access to more creativity.”

 

Greg Phillips, the president of Content Television and Digital, agrees that scale brings benefits. “As a medium-sized company I think you get the opportunity to get involved in projects that smaller companies don’t,” he says. “But you have to be very, very careful about it. Scale brings you benefits, just keep your growth goals reasonable and execute your plan carefully and prudently. So don’t fall over before you get there. But there is certainly a need to grow. If you don’t move forward, you have to move backward.”

 

Content Television is part of the U.K.’s Content Media Corporation, which owns a 25-percent stake in Phase 4 Films, a 50-percent stake in the U.S.-based producer Collins Avenue and a 55-percent stake in Spirit Digital Media, a digital production company. The group is listed on the AIM market. “The obvious advantage we have is a massive (over 3,200 hours), evergreen catalogue with reliable, long-running, well-known shows that are the cash cows and help to underpin the growth of the business,” Phillips says. “Scale gives us the opportunity to buy more, become involved in more and better projects and not to be reliant upon the vagaries of single events. It allows you to think medium and long term. It allows us to look 18 to 24 months forward. For example, it allowed us to invest in the digital-programming business as we did about six years ago, with [the idea of], Let’s see how this is going in two or three years’ time and see if there really is a business there. That has paid off immensely for us. So scale allows you to have perspective because your business is underpinned. A smaller company doesn’t have backup resources, doesn’t have the capital.”

 

Zodiak’s geographical and genre spread came about by accident in a way, Frank admits: “We didn’t set out to have a presence in Russia, for example, but we do.” Looking at the directions of future growth, Germany is an area where Zodiak is “light,” he says. “There is a hole in nonfiction in that market. There is a very good chance that we will address that soon. We are also looking at expanding our activity in China and Japan, even within the next 12 months, though not necessarily setting up local production companies.

 

“There are a few really important areas where you need to have a disproportionate scale,” Frank continues. “Those are the countries where the conditions are right to own and exploit IP. The U.K. is the most interesting. Also France, Holland and Belgium and the Nordic countries. But not, for example, Italy. It doesn’t make a lot of sense to invest in development in Italy. We want to direct the resources to areas where new formats are welcome and the chance of owning the rights are high.”

 

Banijay sees the future in two kinds of growth, external and organic. “External growth could be new company acquisitions or partnering with the best creatives, as we’ve done several times, to create something from scratch,” de Brugada says. “Banijay Group is not in the game of planting flags everywhere. Our strategy is to be leaders in the territories where we operate. Having said that, there are one or two regions where we do not currently have any group-owned presence that we think it is important to enter into in the near future. So, we have plans to expand a bit in terms of territory spread, and to increase our size in the areas where we already are.”

 

Organic growth will be about expanding digital opportunities. “Our core business, linear television, has provided us with great ideas and we are now working closely with digital platforms to supply them with content,” de Brugada says. “We also make sure that each of our traditional TV brands is fully exploited on digital platforms. In our view, a show is not a show anymore. It’s a brand that people expect to experience on multiple platforms. At the same time, new players are constantly developing new ways to deliver content, and they are hungry for material. There is a great niche there for us to provide exciting original content developed specifically for those new distribution platforms. We have people dedicated to digital in each of our companies as well as in the central team, and that’s what they are working on now.”

 

Turton puts the U.S. as the top priority for ALL3MEDIA. “Our business is to create a lot of ideas and IP and to exploit it,” she says. “This IP is currently coming out of the U.K. Looking at America, we don’t want it to go to a third party, we want to own it ourselves.”

 

The aim is essentially to replicate the group’s British strength in the U.S., “keeping the good stuff and stripping out cost,” Turton explains. And it’s a faster way to enter the market.

 

Geographically, FremantleMedia is already well down the road to global production. It has three top-rated shows in China, is producing in Indonesia and India, has a company in Brazil and a preferred partner in Russia. “We are very focused on making sure that any format is replicated exactly from market to market,” Clark says. “We are very 360-degree, very joined up, from early development right through the production and distribution. The cultural challenge in a new territory does not impact the formats themselves. The format is not changed, the content is changed. For example, ITV’s version of Take Me Out is quite racy. In Indonesia, the dating young people go out with their parents. The business model is not changed.”

 

Clark does not dismiss the possibility of adding new production outfits. “Would it be good to have even more companies in our group? Possibly,” says Clark. “Having lots of teams around the world would give us more bites of the cherry—as long as there is a central body that filters and coordinates.”

 

Another company that has been looking for growth opportunities is DRG (Digital Rights Group). It came about not from combining a group of production companies, but rather from finding opportunities in international distribution. “When the new Pact [the U.K. trade organization for content producers] agreement came into effect allowing producers to own their rights, production companies became attractive as investment opportunities, and the irony is that many of them are owned by foreign groups,” explains Jeremy Fox, the CEO of DRG. “At the same time, about five years ago, when production was still a cottage industry, distribution was much the same. Our idea went in parallel with the consolidation in production. As it’s turned out, the newly formed production groups have formed their own distribution businesses. We have found that many producers did not want to go to companies that were essentially rivals in order to be distributed. We decided we would be primarily British and we would only sell programs, not produce them. We put together a group of like-minded distributors. We needed companies that had enough volume of product and we wanted to cover a range of genres. We sell to everybody, including Endemol, Shine and FremantleMedia. We say we will find the best partner for your show. The downside is that there is no guaranteed flow of production. We think it’s a risk worth taking. If you buy a creative business, if you can’t keep the creative people happy, they go. Essentially you have to buy the business again. We don’t have that issue.”

 

Like the other super indies, DRG is looking at international expansion. “We are in an acquisitions mode,” says Fox. “Not in the U.K. We are looking in the U.S. all the time. We want to be in America. We do a lot of business in America, representing American producers, in many cases because we had the original format rights. For example, we had the British show The Inbetweeners from Channel 4. It was sold to MTV for an American version, and now we have the international rights to the American version.”

 

In April 2011, ALL3MEDIA appointed UBS to conduct a strategic review of its business with an eye to a possible sale. Last autumn, Morrison had said a flotation is possible instead.

 

Frank, who has been down that route before, is cautious about going to the stock market. He took RDF public in 2005 on the AIM market in London with a market capitalization of about £50 million (€60 million) and after what he describes as a “roller-coaster ride,” took it private again in 2009. The financing for that transaction came from the Dutch venture-capital group Cyrte, and its stake was rolled over into its current minority holding in Zodiak.

 

“I would never go to IPO with a market cap of less than €500 million,” Frank says. “Zodiak would be over that threshold, but lots of things need to be resolved to make it work. Institutions need a better understanding of the nature of the business, particularly that it depends on the capacity to come up with hits.”

 

But he could see it happening. “We are not in a state for an IPO. But I certainly can envision a time when it could happen.” It depends largely on whether De Agostini wants it. Almost invariably the Italian group has gone the IPO route with its ventures. “It is a viable exit but not likely in the short term,” Frank says,

 

However, an “exit” is only for investors, not for the firm that continues to exist, and being on the stock market brings its own challenges that are tied up with the expanding size of companies that has characterized the business of late, according to Content Television’s Phillips. “For shareholders, for employees, for your personal and professional ambitions, you obviously want to expand. But you have to live with the flip side as well, and not succumb to pressure from [the stock market] or investors just to do so on the basis of turnover alone. The key is to expand sensibly. It depends on your ambition and your level of self-confidence and it certainly depends on access to capital and the ability to increase your business through achievement. It should be based on creativity, sound business acumen, hard work. And that is why you need to get bigger, not just for the sake of making announcements, and that applies from a small to medium phase and then from a medium to a larger phase.”

 

Many in the industry believe further consolidation is inevitable. But that does not necessarily mean the current crop of super indies will simply continue to expand.

 

“More consolidation is absolutely on the cards,” says DRG’s Fox. “Look at Downton Abbey,” which is produced by the British firm Carnival, owned by NBCUniversal. “I don’t know whether to laugh or cry. Consolidation will be led by the U.S. studios and U.S. private equity. They will buy companies in the U.K. Meanwhile, European studios and private equity will buy companies in the U.S. But this does not mean everybody will belong to a big group. There will also be new generations of independent producers, and the people who have left the bigger groups, de-consolidating themselves.”

 

“There is likely to be more consolidation,” agrees Zodiak’s Frank. “The market is still very fragmented. The regulatory environment is also very diverse, which makes it easier. But our main preoccupation is not any sort of merger but hits. One or two global hits and we’ll make a lot of money.”