Kristin Brzoznowski checks in with producers and distributors about the state of the kids’ media industry.
While OTT players have been dipping their toes into the children’s content pool for a few years now, there’s good reason to believe that some of the streamers are now ready to dive into the deep end. Making a splash, Netflix recently acquired the rights to adapt the works of Roald Dahl, the author of beloved children’s stories such as Matilda and Charlie and the Chocolate Factory—shelling out a rumored nine-figure sum to do so. In what was billed as a “highly competitive situation,” Apple scored a deal with DHX Media for exclusive new Peanuts content, featuring Snoopy, Charlie Brown and the rest of the gang, as the tech giant builds out its upcoming streaming platform. The market is also bracing for the impact of the forthcoming Disney+, which will feature not only the studio’s venerable animated movie catalog but also a bevy of fresh originals.
Indeed, 2019 is already shaping up to be an interesting year in the kids’ programming landscape, which has been experiencing its fair share of ups and downs as producers and distributors adjust to the new realities of doing business in an increasingly on-demand world.
“We’re transitioning from a world of programming with a finite amount of shelf space, linear, ad-based, to a world that, at least for now, is over-the-top-driven, subscription-based and has an infinite amount of shelf space,” says Vince Commisso, co-founding partner, president and CEO of 9 Story Media Group. “What you put on those infinite number of shelves is a function of what the OTT players find keeps audiences, both in terms of subscriptions and reducing churn. There is no better genre that does that than kids. That makes the overall demand for kids’ [content] robust.”
Andy Heyward, chairman and CEO of Genius Brands International, agrees that, by and large, demand for children’s programming is strong as there’s a plethora of platforms to place it on. “There are endless outlets!” he declares. “The marketplace has lots and lots of opportunities, but they don’t pay as much. You have to be more creative and find ways to use consumer products, and everything else, to make the calculus work. But there are probably 25 or so good outlets today that are all doing kids’ programming.”
“There are certainly enough outlets, but there’s still not enough money for all that content,” echoes Ulli Stoef, CEO of Studio 100 Media and m4e. “Netflix and all these digital players are coming to the market talking about the huge amount of originals they are producing, but the reality is that with Netflix, the majority of it is together with U.S. companies. They are producing some original content in Asia and other markets but not that much in Europe at the moment, especially not on the animation side.”
SHAKING THINGS UP
Allen Bohbot, founder and managing director of 41 Entertainment, has also taken note of how the proliferation of on-demand platforms has shaken up the kids’ content business. “We are now in phase two of this development,” he says, “just like we saw when the U.S. linear players went global. In both cases, phase one was to commission animation from outside groups, independents and studio animation divisions, leading to diversity and much success, followed by a financially-driven desire to convert to 100 percent in-house productions to own all IPs. The U.S. linear networks did that, and there are indications now across the board that they are revisiting that strategy due to steep declines in ratings. The U.S.-based digital groups today have separate strategies, but the financial temptation is to produce in-house so as to own, and, in time, perhaps they will see that historically this has been proven as not the best way to succeed in the kids’ space.”
This has also had implications from a distribution perspective, says Genevieve Dexter, founder and CEO of Serious Lunch. “We have found that there is a drop in the amount of content available to distributors,” she notes. “That does tend to be cyclical. I remember in the ’90s, people were paying big minimum guarantees for kids’ content—though it excluded boutique kids’ startups at that time. When I set up CAKE in 2001, that was no longer the case. We couldn’t find significant minimum guarantees from distributors to close financing but were able to find the gap elsewhere and in so doing, retained the distribution rights—and hence the birth of CAKE Distribution.
“Skip forward ten years and the birth of Serious Lunch coincides with the rise of Netflix and Amazon providing us with large license fees in individual territories,” she continues. “But, skip forward another five years and the same clients are moving to new business models that provide producers with a one-stop shop, and it makes life difficult for a distributor to find new content. That’s a big shift.”
It’s different from a production point of view, adds Dexter, who is also founder and CEO of the animation studio Eye Present. “As a young production company, the SVOD one-stop shop has provided us with a lot of opportunities, so we hope by straddling both production and distribution we can benefit from the cyclical changes in the market.”
The sizable funds that the on-demand players have been putting into their originals have made companies like Cyber Group Studios, which also enjoys a view of the market as both a producer and distributor, up their game. “What’s happening with the big SVOD platforms and their budgets is that there are millions and millions of dollars that did not exist before that are now being poured into productions, and consequently the production quality is increasing massively,” says Pierre Sissmann, Cyber Group’s chairman and CEO.
Remaining competitive, the company has been putting more money toward image quality and technology, Sissmann says. The budget for the first season of Zou, for example, was around €5.5 million to €6 million. The first season of Gigantosaurus, which hits Disney Channel this month, was about €8 million, while the budget of the upcoming Sadie Sparks is in the ballpark of €11 million to €12 million. “The goal is to see this additional money in the final image on the screen,” says Sissmann.
For Guru Studio, focusing on quality (over quantity) has been top of mind, according to Frank Falcone, founder, president and executive creative director. “Because of the volume of content being produced, the point of differentiation now is the depth of engagement—that’s what kids are going to begin looking for more and more. They are looking for things that help them connect in a stronger way.”
The strategy, he says, is to have many touchpoints around a show—“a range of them, if only to discover what the meaningful ones are. I don’t think we can ever be all things to all people, and certainly a show shouldn’t be all things to children, but it can be meaningful in the ways that it provides the most value for them. It’s our job as producers to find out what those touchpoints are and respond to them. We need to listen to our audience insofar as the various platforms allow us to. We’re all aware that the VODs—and, in particular, Netflix—do not share audience insights, and it’s hard to listen to your audience when there’s a filter there. So, it behooves us as producers to reach out to our audience with other touchpoints, if only to understand what they are enjoying about our shows so that we can bring them more of what they like.”
Among those touchpoints, consumer products have become a bit trickier to exploit in this age of on-demand programming.
“The kids’ content business has always attracted many participants because of the revenue upside in licensing and merchandising,” says 41 Entertainment’s Bohbot. “Recently, we have not been able to capitalize as much on the L&M, as we chose digital-first strategies or SVOD originals. We are now looking far more aggressively at linear-first strategies based on the traditional co-production model, although perhaps with new market partners, so as to maximize the L&M potential and then monetize the SVOD rights after—soon thereafter but thereafter nonetheless. Perhaps, in fact, the more things change, the more they stay the same?” he posits.
For the majority of the companies surveyed, linear television remains the bedrock of their sales—at least for now. Mediatoon Distribution, for one, reports that two-thirds of its business is with linear players and one-third is with nonlinear. “The nonlinear side is still growing a lot,” says Jérôme Alby, managing director. “What is not performing well is TVOD. We had thought that DVDs would be progressively replaced by TVOD consumption, but it’s not working that well. We can sometimes see that what we lose with linear we gain on SVOD, but what we lose on DVD and home video we don’t gain on TVOD.”
For Serious Lunch, too, the majority of sales remain with traditional broadcasters. “We tend to deal mostly with pay- and free-TV; we’re not doing so many local SVOD deals at a distribution level much anymore,” says Dexter. “That’s largely driven by a change in the SVODs, in that they used to be happy to pick up individual territories and now that position has changed quite substantially. They are getting much tougher on what they require, and that is often hard to marry with our interest in IP and distribution rights. Multi-territory SVOD commissioning terms now mirror studio deals, and co-commissions require a lot of the finance to come from elsewhere and also to be compatible with your finance plan, which is often hard. As a second-window acquisition, it is a requirement that your show be a number one-rated program in key territories. The vertical integration of the SVOD platforms is already happening with in-house licensing and merchandising teams and homegrown animation studios.”
Dexter adds that although the major SVOD platforms are not picking up second windows for many properties, there is an emergence of new worldwide special-interest channels that are, “often without the requirement to deliver in multiple languages, and those deals have been lucrative for us.”
Rights negotiations with the various nonlinear players add to the complexity of the current deal-making marketplace and can be rather tricky to navigate. “The level of exclusivity and holdbacks required by some partners makes it quite difficult and almost pushes you to try to work in a more traditional way, like first having it on free-to-air television, where the holdbacks and exclusivity restrictions are smoother,” says Mediatoon’s Alby. “Some of the SVOD players, both local and international, are now buying a bit more like how pay-TV broadcasters were buying a couple of years back, with massive holdbacks and exclusivities—that’s tricky. You really have to take a close look at your P&L and make sure that you don’t put all of your eggs in one basket.”
9 Story’s Commisso adds, “The streamers generally want content for worldwide; sometimes you can carve out territories and sometimes you can get holdbacks, but that’s not the way it’s trending. It’s trending toward, you sell this to a big OTT player and that’s it, it’s sold. There is no value to be garnered in the content thereafter. That is changing the paradigm for [producers and distributors] like us. Of course we want to be in that business, but we can’t be in that business with every piece of content. So, we have to look at what is the marketplace when our shows aren’t being commissioned by our good friends and partners in the streaming world, and how is the content construct different, both in terms of format lengths and number of episodes ordered. There is starting to be two sides of that coin; you’re either on one side of it or the other. In our case, we have to be on both.”
THE RIGHTS STUFF
Negotiations also get complicated when everyone is asking for the same set of rights. “The linear broadcasters are now looking for extended catch-up rights, which then cuts into the rights of the streaming services,” says Studio 100 and m4e’s Stoef. “For example, the broadcasters here in Germany—if it’s an acquisition, not a German co-production—are looking for 30 to 60 days, sometimes up to 90 days, of catch-up. That is something that Netflix or Amazon wouldn’t accept. On the other side, a German linear broadcaster, which contributes a good amount of money to a co-production, doesn’t accept that we cut out a long window for a streaming service in the key territories.”
Guru’s Falcone likens the rights situation with the digital and linear platforms today to what was happening in the cable and free-to-air space in the ’90s. “If rights are available after their premiere on the digital platforms, they start to make their way into the channels space. I do think that there’s great value in that,” he says. “The volume of content on the VODs means that some of it does not see the light of day. So, there is value in some of the shows created for the digital platforms that isn’t being properly exploited.” This means there are opportunities for linear broadcasters to give new life to content that hasn’t been fully marketed or may not have found its audience yet.
Looking ahead, he adds that having control of rights, or at least a degree of control, is going to be increasingly difficult as the digital platforms strengthen. “It becomes much harder for independent producers to compete for rights when large international multibillion-dollar-valued companies are also acquiring rights,” Falcone says. “As an independent producer making shows in Canada, it’s definitely a David and Goliath situation. The digital players need to foster creative upstarts and smaller studios that have a different culture than their own. They are aware that everyone has got to play together at some point. It’s increasingly challenging when you’re trying to find content and you know that you’re in competition with Apple, Netflix, Amazon. They are doing the same thing that we are but with far more resources and capital.”
Nathalie Pinguet, deputy managing director of sales and acquisitions at Superights, observes that while production values and budgets are increasing, broadcaster spending is still tight. “In this context, we do need to have more partners than before and also to close presales as soon as possible to help our producers lock their budget,” she notes.
Pinguet says that co-productions remain “an efficient way to combine key partners and countries.”
“Nobody on the independent scene wants to take the risk alone,” says Studio 100 and m4e’s Stoef. “Before you greenlight a show, you need to have your key broadcasters, and then you have at least one or two additional broadcasters with studio services in the region so that they can contribute with tax credits and subsidies to the financing model in order to fill those budgets. The reality is that the price per minute is going up, while the budgets of the key linear broadcasters around the world are not growing. They can spend less money per minute. That requires safer financing and a more diversified co-production portfolio.”
41 Entertainment’s Bohbot says that broadcasters today are as interested in co-producing and co-owning as they are in making straight acquisitions. “We are seeing co-production opportunities in new markets, and this is extremely exciting in our financial model because if a market that historically was valued at 5 percent now can generate 33 percent of the budget as a co-production, that is a huge trend line.”
Sissmann says that Cyber Group is doing more co-pros nowadays than it was before. “There are three reasons why you do a co-production: technical capacity, financial means and creative,” he says. “The first thing that drives me to co-produce is the creative, then it would be technical or financial.”
Serious Lunch’s Dexter, meanwhile, is seeing fewer co-pros in the kids’ landscape these days. “People want to find a way of financing their shows that doesn’t involve official co-production—they seem to be shy of it,” she says. “We’re exploring U.K.-Ireland-France co-production and U.K.-Ireland-Germany co-production. But, generally speaking, there doesn’t seem to be a willingness to go into that scenario.”
“I really enjoy European co-production,” Dexter adds. “It is hard, but the tendency to want to simplify everything and not really integrate with other cultures is quite sad. You can make really good and long-lasting relationships, which can lead to bigger things at a corporate level. If you can do a co-production together, you can pretty much do anything together.”
“There used to be a lot of co-pros that were going on with France and Canada, but candidly, those are not as attractive as they used to be,” says Genius Brands’ Heyward. “The co-productions that are meaningful are the ones that are being done in Asia. If you look at the numbers for ones that have historically been done in France and Canada, the obligations that you have to take on in terms of spending a certain amount of money in those territories and spending a certain amount on local talent offset the benefits that can be garnered from the tax credits or subsidies in those places. We’ve been doing co-productions in Ireland quite a bit in the last couple of years because we’ve been able to take advantage of certain subsidies and tax credits there—but I don’t know if those will continue. So, you’ve got to constantly stay on your toes.”
Heyward says that producers and distributors also need to stay vigilant about maximizing the 360-degree potential of a property in order to get the financial return necessary to compete in today’s marketplace. “Hypothetically, let’s say you have a half-hour program costing $250,000 to $300,000 to produce—who is paying those license fees? There may be one or two broadcasters doing that for an exceptional product, but by and large they are paying less than that. So, is everybody going to go into deficit financing and hope for a hit? There is no syndication after-market anymore. People have to figure out how to pay for this stuff; where does the money come from?”
The bulk of it, he says, is coming from consumer products. “You have to look at it in a holistic way; it’s not just a piece of content anymore,” Heyward adds. “The content is part of an overall business.”
For Mediatoon’s Alby, budgets and rights are two of the key areas he’s keeping a close eye on as the company navigates the challenges facing the kids’ business. “Ten years back, you could have a broadcaster that would finance a very significant part of your show and would get a small level of exclusivity and holdback. Today, we’re in a marketplace where there are lots of different players and in which you have to fight to get exclusivity and holdbacks that are easier to work with and less severe. At the same time, all the prices have gone down. So, you have to sell to a lot more people. You have to really maximize each sale with an augmented number of broadcasters so as to have the same kind of income as ten years ago.”
For now, producers and distributors must continue to ride the highs and lows that come with these waves of change—but shouldn’t lose sight of the traditional businesses that have been delivering all along.
“I think that we are at a point of respecting the growth of SVOD and its financial contribution to our production costs, but that the biggest successes in the kids’ space in the last five years have all had something in common: they have maintained their linear-first strategies, expanded their licensing and merchandising presence all while monetizing their SVOD rights,” says 41 Entertainment’s Bohbot. “We should not forget what attracted so many of us to the animation space in the first place.”
Pictured: Guru Studio’s True and the Rainbow Kingdom.