Money Matters

Mansha Daswani talks to leading producers and distributors about how funding models are evolving.

If you’re an independent producer of children’s content, there is a good chance you spend a lot of time filling out paperwork. There are tax incentives to take advantage of and funds to apply for. And this is not new—kids’ content producers have long been adept at cobbling together financing from multiple sources, an effort that has intensified as both commercial and public-broadcast channels cope with budget pressures. Meanwhile, the government-backed funding systems in many prolific kids’ markets are not offering up as much as they used to.

“In Canada, some of the funding is gone because of the changes to the regulatory system,” says Vince Commisso, co-founding partner, president and CEO of 9 Story Media Group. “And the cost of content has gone way up! But there are many more buyers coming onto the scene, too.”

As for those new buyers, some—notably Netflix—are spending lots of money to fund shows, but that has its own set of implications for your back-end returns.

“The biggest change in the business has been the new financing from the streaming services,” observes Josh Scherba, the president of WildBrain (formerly DHX Media). “We’ve been active with Netflix and Hulu and we’ve recently announced our partnership with Apple on Peanuts content. The streamers offer different models, though, as the rights that are taken are more extensive, with the request generally being for global rights. However, the good news is that they are funding healthier budgets than we’ve ever seen in kids’ content. So they are an effective way to get shows funded but, as a result, there are fewer rights left on the table.”

More on that later. First and foremost is the fact that the traditional models that have sustained kids’ producers for years do still work.

“The traditional routes are still there, including directly through being commissioned,” says Dominic Gardiner, the CEO of independent distributor Jetpack Distribution. “When you’re talking about a full 52×11-minute high-end animation that will go worldwide, financing takes a number of partners to join forces, have a common need and be able to work well together. Those routes have been well-trodden over the last 30, 40 years. There’s a lot of government intervention that is making that a little easier, whether it’s the more traditional markets like France and Canada, and now you have Singapore, Ireland and the U.K. It’s still very difficult, but everybody is trying to work together to get series made.”

Ed Galton, managing director and chief commercial officer at CAKE, notes that “tax-friendly territories,” such as the U.K., Canada, Ireland and Australia, tend to be a good starting point for landing your commissioning broadcaster, followed by doing a round of presales. “Whatever gap is left over, you would either gap-finance in return for an equity position as a minimum guarantee or find a facility that is willing to gap-finance. We’ve done that in the past by working with EIS [Enterprise Investment Scheme] companies out of the U.K. that were willing to gap-finance a small portion, say 15 percent. Or through somebody’s private-equity position as well.”

At Dandelooo in France, the model used to finance the International Emmy Award–winning Treehouse Stories is reflective of how the outfit generally does business. “That’s a commission by Canal+ in France,” says Emmanuèle Pétry Sirvin, partner at the company with Jean Baptiste Wéry. “They finance 25 percent of the budget, another 25 percent is from the CNC, another quarter from local subsidies and tax credits and the last quarter is presales and sales. That is working. It’s not always easy because it is a lot of deals and contracts. That’s the traditional French model.”

Jérôme Alby, managing director at Mediatoon Distribution, also stresses the importance of the French funding system. “We’re French, we’re Belgian and we’re European, so we’re still quite lucky to be able to get between 20 and 40 percent in subsidies,” he explains. “That can be from the state (France, Belgium) or the region, sometimes from cities. We’re still favoring, for the time being, a model in which we have one or two key commissioning channels. Let’s say one free TV and one pay, linear or nonlinear partner. That makes it easier for us to carve out the exclusivities and better optimize the windowing, to make sure we recoup our overall investment.”

Genevieve Dexter has a unique insight into funding models as CEO of both the Eye Present animation studio and the independent distribution outfit Serious Lunch. “If it’s animation, then everything goes through Eye Present, and we structure it as a co-pro, where we jointly invest in the development to get it to market. And if it’s live-action or a project that just needs distribution and a minimum guarantee, then it goes through Serious Lunch,” Dexter explains. “I’ve done lots of different models, which tend to be based on the strength of the property in different territories.”

On Best & Bester, for example, co-produced with Gigglebug Entertainment in Finland, “We are targeting worldwide pay-TV networks first, and then we will put into play a co-pro with Italy to get it over the line, together with our tax credits.” On Flix, meanwhile, which is better suited to public broadcasters, Dexter says, “We are tapping into Irish funding from broadcast [RTÉ], Screen Ireland and BAI [Broadcast Authority of Ireland] through our co-producer Aria Ungerer at Pictor Productions in Cork. We have also applied for Creative Europe MEDIA funding. All of these funds want to support classic European properties.”

Dexter relates that a different model was used for the first two seasons of Messy Goes to Okido, financed via a “special-purpose vehicle that raised EIS funding, a BBC license fee and DHX investment. For season three, we’re looking to swap out the private-venture capital with a Chinese co-production because we want to bring in some new partners who can bring value to the brand. The series has recently been picked up by CCTV and Mango TV, in addition to Tencent, Youku, iQiyi and all the other VOD platforms.”

Co-production remains an essential tool, delivering both financial and creative benefits to a property. At Dandelooo, Pétry Sirvin mentions Billy the Cowboy Hamster, where “70 percent is financed out of France and 30 percent from a Belgian co-production and a German presale.”

A new approach at Dandelooo, Pétry Sirvin says, is co-producing with Eastern Europe. “It started with distribution—we found a few programs from Latvia and the Czech Republic that we are selling into France. Now we’re looking at developing a feature film with Latvia. The nice thing is Creative Europe MEDIA supports them a lot. MEDIA [funding] is difficult to get. It’s a long application process and it’s a lot of work, especially on the distribution side, but when you get it, it comes on top of the local subsidies. In France, we’re capped to 50 percent of public money. MEDIA [funding] comes on top.”

Pétry Sirvin adds, “The thing about the co-production model is we cannot give away more than 30 percent. We have to spend 70 percent in the French territory; otherwise, we lose the tax credit. That is an equilibrium you have to find.”

“Financing means finding a compromise to meet all financers’ needs as far as the editorial part is concerned,” adds Francesco Mozzetti, managing director of For Fun Distribution, the recently formed distribution division of the Italian animation production outfit For Fun Media. “Sometimes you can accept this, sometimes [you can’t] because you risk jeopardizing the deep values the property is based on.”

On the company’s brand-new Topo Gigio, Mozzetti notes, “We have decided to rely less on third-party contributions and keep the full control of a property we believe in. Thus, we presold some rights to cover 30 percent of the budget and took the risk for the rest.”

Topo Gigio is based on a well-known brand. Brian Lacey, the president of Lacey Entertainment, which is working with For Fun on the Topo Gigio rollout, notes that a property’s origins must be considered when determining a financing plan.

“It is important to differentiate content that is fresh and original and content that has already established equity values. A model that we have enjoyed with considerable success is content that brings at least one or two markets with participating broadcast platforms. Typically, this might represent anywhere from 50 to 85 percent of a production budget. The balance is raised through a variety of methods. Third-party investors might include partners with complementary activities, such as publishing, gaming, etc.”

As to the role played by potential L&M revenues in determining financing plans, there is no clear consensus.

“That is the $6 million question,” says Jetpack’s Gardiner. “When you’re trying to finance a series, if you’re thinking, we’ve got half the money, we’ll get the other half from licensing and merchandising—that’s a big target to try to reach. People do take that gamble. If the licensing does pay off, and you’ve produced the show at a reasonable budget and you’ve got good distribution, yes, licensing is still extremely profitable. But it’s a small number of shows that get to that level.”

Galton says that CAKE generally doesn’t factor L&M revenues in financing models. “I’m a firm believer that there is value in the IP you’re creating and the production itself. I think we lost our way in the early 2000s when that model shifted and the toy companies and some of the big entities that had valuable IP felt that television was only a platform and their main source of revenue would be the L&M marketplace. I think we’re bringing it back to some level of normalcy. The emergence of the SVOD universe has put value back into the creation of IP. There are very few IPs that make money in licensing and merchandising. When anyone comes to me and says, We’re going to make all this money on licensing and merchandising as part of the business plan, I treat it cautiously.”

Dandelooo’s Pétry Sirvin agrees, stating, “Nobody can count on merch revenue to make your company big and profitable. You could, but then you’re going downstream on the quality of what you’re doing. You’re just turning things into backpacks and shoes, and that’s not what we want to do.”

Lacey is also of the opinion that generally, you can’t “project meaningful or reasonably accurate estimates for ancillary revenues. It is simply too difficult in most cases to access production funds in advance on projected ancillary revenues, with a notable exception being content that is already well established.”

WildBrain’s Scherba observes that the extent to which L&M revenues factor into financing plans depends in part on your commissioning platform. “If you’re going door-to-door and you’re going to take less money to fund the content, you better have a commercial strategy for how you’re going to make that money back, and that has to be from your consumer-products group.”

Scherba references one of the biggest questions producers and distributors are facing today as global streamers up the ante on content budgets but ask for a lot in return: How do you decide whether to go with a worldwide deal or a country-by-country approach?

“It starts with identifying what your creative aspirations are for the show and what the right budget level is accordingly,” Scherba says. “From there, it’s working through the math—what is the world worth in a market-to-market strategy? We have a pretty good sense of what those numbers are. The layer we throw on top is our international sales team weighing in on whether they think those deals are achievable in each market. You put all of those together and you have a projection. You weigh that versus your budget, and you take an informed view.”

At Mediatoon, the approach has generally been to “maximize visibility and revenue,” says Alby. “We are open to discussions in which someone can buy out the rights of a show. However, the model we’ve favored is one in which we’re sure to keep a very fair part of the rights and also the copyright. This way, after a period of one, two, three or four years, we can start monetizing the rights on a very large scale.”

Opting for a global first window on a streaming platform “can greatly eliminate a number of important revenue streams for producers over a long period of time, most notably exploitation on other broadcast platforms as well as full exploitation of ancillary rights,” Lacey adds.

“In general, we are not ready to live with just the executive producer’s fee—which is basically what you are left with in deals with the SVOD platforms,” says For Fun’s Mozzetti.

Jetpack’s Gardiner likens doing a global exclusive deal with a platform to “selling your house—you don’t get it back! You hand over the keys and that’s it, you move on to the next one. There are some [projects] in which you don’t want to do that. You might have an idea that you think, this is the pension, it’s the one that will be paying me forever.”

Even if all rights aren’t taken at the outset, it can be a challenge to distribute a show that has a streamer attached. “Linear broadcasters are now reliant on on-demand activity to keep their relevance, especially in the kids’ space,” CAKE’s Galton says. “We have lots of rights restrictions when we’re working with Netflix and some of the other platforms. That makes it much more complicated.”

Gardiner references Jetpack’s experience on Kazoops!, an Australian preschool series. “The structure of the financing [came together] before there were a lot of wholly owned series on Netflix. It was a BBC, ABC Australia and Netflix co-production. The rights were coming back [after the Netflix window]. We made lots of sales. But there were certain sales we thought we would get but didn’t because of the Netflix factor.”

Linear channels, Gardiner continues, care much more about on-demand than they used to. Pétry Sirvin at Dandelooo adds that some broadcasters are not just asking for a holdback on SVOD—they want all rights, precluding a run on a dedicated on-demand platform. “My big effort with the team is to try to decrease that. I’m saying, [holdbacks of] 24 months, maybe 18, and please let us do some SVOD deals once you’ve exploited the free-TV window at first. It’s a struggle for each property. Little by little, we’re getting there.”

Jetpack’s Gardiner also sees attitudes changing slightly. “Even some of the big players, who can afford to pay for it all if they wish, recognize that a bit of risk-sharing and collaboration enables everyone to get what they want.”

9 Story’s Commisso reflects a similar view, stating, “There are lots of models where the SVODs are saying, We’re going to pay you a majority of the budget and we want some potential exclusivity for SVOD, but you can have other rights. And we monetize those other rights after that and then it’s a question of what your deficit is or if you de-risk during production.”

The significant investments by SVODs are also creating opportunities for distributors to represent properties that benefited from OTT involvement, as Serious Lunch is doing with The New Legends of Monkey from See-Saw Films. Netflix was among the partners on the show, “but their holdbacks against broadcast and home video are up, so we are taking it to market as a second-window proposition,” Dexter says. “We are hoping that the extremely high quality will outweigh the limitations on VOD rights. In this case, buyers can enjoy VOD rights but with a limit on the number of episodes at any one time. Where a property is really strong, then you can get over some of these barriers.”

With all the shifts taking place in the market, the role of the distributor has also had to evolve.

“The trend I see, given the fact that you have to have different revenue streams and you have to be a real expert when you exploit, is distributors are coming aboard much sooner now,” says Mediatoon’s Alby. “A few years back, the distributor was just a middleman, the broker. Today and tomorrow, he has this growing role. There are fewer government incentives, fewer subsidies. Technical expenses are climbing. Windowing is becoming tougher. And the distributor is sometimes becoming  a very big investor and almost a co-producer, and at the same time, an IP manager.”

Jetpack’s Gardiner says that his company is working with producers “right across the spectrum. For some, the financing is already done, it’s not an issue. Others have private funding. We also work with people who need presales to close gaps. And we help marry broadcasters with producers and finesse the deal with editorial and give feedback and expertise if required.”

At CAKE, the strategy has been to position itself as both “a distribution business and a production business,” says Galton. “We can benefit from being producers, but then we can also benefit from placing content on platforms—linear, digital, wherever—when the opportunity arises. While others may feel exposed, we feel very positive about where we are and our position in today’s marketplace.”

Commisso at 9 Story is feeling equally bullish. “The demand for content, especially kids’ content, is only going to continue to rise. Will the funding from territories like Canada continue to support that demand while it is going up? I think the answer will be yes because there is a net benefit to doing it.”

The question of when, and how, the U.K. will leave the EU has left some uncertainty for British animation producers. “That’s a black cloud on the horizon,” Gardiner says. “Two years ago, people were a bit more panicky than they are today. Everybody has one eye on it. Is the storm going to arrive or pass us by? But you can’t change what you’re doing. You have to keep doing it until the storm happens, and then people will start taking whatever actions are necessary.”

Dexter at Serious Lunch is not worried about Brexit’s impact on her distribution business. She has heard rumblings about what Brexit means for the U.K.’s co-productions with territories like France. The biggest issue she sees is access to Creative Europe MEDIA funding. “I’m hoping there will be some compensatory things happening in the U.K.,” Dexter says. “At the moment, we’re allowed a 20 percent tax credit, which was ratified by the EU. If we exit the EU without any regulations, then it is within the government’s power to increase that tax credit. There’s new funding from the BFI for short-form animation and then we have the Young Audiences Content Fund (YACF), which is for both development and production. So we have some new types of funds here that everybody is adapting their development slates to tap into.”

Adapting is the keyword, Dexter notes. “The kids’ business has always been at the forefront of imaginative fundraising because we haven’t had the luxury of anybody fully funding our programs for a very long time—although Netflix is now doing so. I’m sure we will adapt and prosper.”