New World Order

Following confirmation of the game-changing Shine Group-Endemol merger and the emergence of an increasingly more consolidated TV business landscape, Stewart Clarke and Jesse Whittock speak to influential executives about key changes the industry is undergoing.

Mergers, acquisition and consolidation are not a new phenomenon in the media and entertainment sector. The clue is in the names of some of the biggest players, such as Time Warner and NBCUniversal (since taken over by Comcast). Meanwhile, a look at the structure of the European super-indies provides an M&A timeline stretching back over a decade. However, as Netflix and its counterparts disrupt the value chain, and enormous tech outfits such as Google and Apple make content plays, companies already in production and distribution are readying themselves for this new ultra-competitive environment.

The net effect of the evolution of the media and entertainment sector is a rush to scale – and a new world order is being established in the world of content.

The deal flow has been rapid and is being stoked by the likes of Endemol, Shine, Zodiak, Banijay and FremantleMedia. Broadcasters including ProSiebenSat.1 with its Red Arrow Entertainment subsidiary and ITV with its ITV Studios are also active, as are pay TV channel specialists such as Discovery and Scripps. Pay TV platform operators are making plays and a new consolidated giant is emerging in Sky Europe. Broadcaster/platform operators such as Modern Times Group are also in buying mode, adding production groups and distribution wings to their ranks.

“I don’t think what is taking place is a surprise,” says David Frank, the founder of RDF Media and former CEO of Zodiak Media, who has just launched a new content company, Dial Square 86. “It was predictable that at some point the consolidators would start to consolidate, but what is surprising is the pace at which things are happening.”

The most eye-watering content deal in prospect is the pending merger of Endemol, Shine Group and CORE Media Group. This will bring together 21st Century Fox’s UK-based Shine with a pair of companies owned by the private equity firm Apollo Global Management to create what will be the biggest non-studio content company ever, with former BSkyB boss Sophie Turner Laing at the helm. (Endemol and Shine declined to contribute to this article.)

In the US, Comcast is buying Time Warner Cable in a US$45.2 billion deal, and AT&T has made a US$48.5 billion bid for DirecTV (though both deals are under heavy competition scrutiny). The Hollywood studios, already the big beasts of the content world, are also bulking up at home and abroad with Sony, NBCU and Warner Bros. already having a stable of UK and international prodcos. Warner added the €200 million (US$260 million) Eyeworks to its stable this year and took full control of Shed Media, rebranding it as Warner Bros. Television Productions UK.

The current changes will shake up the established order among the production and distribution groups. “It will change it fundamentally if you rank it by revenue and profit,” says FremantleMedia CEO Cecile Frot-Coutaz. “Once Endemol and Shine merge, FremantleMedia goes from number one to number two.”

However, scale has pros and cons, the FremantleMedia boss adds. “My view is bigger businesses are not always better,” she says. “Scale does allow access to capital, allow you to offset risk and to take more risks, and it gives you a global footprint and access to distribution.”

The flip side, she says, is managing creativity within a large group and retaining talent. “The focus needs to be on people, process and culture, and buying a whole bunch of production companies will not get you there.”

Meanwhile, a scarcity of talent and competition for premium channel-defining content in a cluttered landscape are driving the market activity.

“It all comes out of opportunities on the content side,” says Roma Khanna, president of television at US studio MGM, which recently acquired control of producer Mark Burnett’s content companies, housing them under a new United Artists Media Group banner. “People need the best storytelling possible, and the best pipeline to that storytelling, plus there is now openness to ideas from all over the world.”

Carmi Zlotnik, managing director of US premium cabler Starz and buyer of producer of high-end drama, offers another US perspective. “The business has become more competitive because there are more people in the scripted game – Netflix, Amazon, History – and there is competition for projects, and for writers and for directors,” he says. “There is no lack of good ideas; there is a lack of creative people to execute those ideas.”

What unifies a lot of the deal-making is access to programming, and particularly scripted. It is, after all a ‘Golden Age of TV drama’. With more bases, more creative staff, and more relationships with commissioners and buyers, the consolidators hope the odds of getting the next Duck Dynasty or The Walking Dead are improved.

TV will be a part of the next-generation businesses, but they will look beyond the standard platforms and the standard broadcast model
David Frank, founder, Dial square 86

“The more places you are in, the more access you have to talent and ideas, which is key in content,” says Farah Ramzan Golant, the former All3Media CEO who ran the super-indie while it was on the block, before it was sold to a Discovery and Liberty Global holding company. “The more geographies, more places, more platforms you access, the closer you are to talent and ideas, and the stronger your buying relationships are.” In the case of All3, she says, that has meant establishing footprints in what it considers the top three markets: the UK, US and Germany.

There is scepticism in some quarters about whether producers owned by channels can retain their autonomy. “The producers aligned with the platforms say they will produce for everybody, but there is no guarantee they will be able to do that in the future,” one indie boss says. “When the deals are done they are no longer indies, they are the studio/production arms of big groups.”

Becoming part of its new shareholders’ channels and platform businesses will pose All3 problems in the long run, another top TV executive tells TBI. “When you are a TV production business that is part of a channel group, you are somewhat constrained. Are you going to be able to pitch your best ideas to anybody you want, even if they’re a competitor of your parent shareholder? It will be a challenge for the All3 guys.”

Ramzan Golant counters that the company’s new owners knew what they were buying and why. “The new shareholders bought the company because they can see the strength of All3’s federal model,” she says. “Other potential buyers might not have committed to that. We will need to service [Discovery and Liberty] as well as others.”

She adds that the company’s results will not be consolidated with those of its owners, and that they are in for the long haul. “The new owners are a cable company and a channel operator; they understand how to manage risk and see All3 as a strategic long-term play.”

We won’t get into the rat race just because everyone is doing it. Eighty per cent of M&A fails
Cecile Frot-Coutaz, CEO, FremantleMedia

With a question mark over whether producers aligned with channels will retain the freedom to work with anybody in the long term, the channels that have hitherto not played in the M&A space are forced to take part – or give it serious consideration – for fear that they do not have secure pipelines of content.

Amid the deal frenzy, the fear among channels and other consolidators is that they will be left behind, finding there is nothing left to buy. “It feeds itself, it’s an arms race,” says the boss of one large international content company. “If the next guy is bulking up and everyone else is doing that, the risk is you wake up five years later and you are small. And then the big guy can crush you.”

The latest big asset in play is Endemol co-founder John de Mol’s Talpa Media, with the Dutch TV veteran – the man who sold Endemol twice – brushing off talk of a €600 million deal and expecting something closer to €1 billion. Fox and FremantleMedia are reportedly among the interested buyers, while Shine had a €450 million offer rejected flatly last year.

An unidentified Chinese media group is also being strongly linked to the Netherlands-based producer, distributor and broadcaster, which was revealed during MIPCOM to have taken a 49.9% stake in Germany’s Schwartzkopff TV.

The UK PSBs are adding to the M&A frenzy, with the BBC’s commercial arm, BBC Worldwide, backing prodcos and taking equity stakes. Channel 4 is doing the same.

Speaking to TBI the morning Worldwide’s deal for 35% of drama prodco Lookout Point was announced, BBC Worldwide boss Tim Davie said: “There is absolutely no doubt that the industry is more exciting and competitive than ever before. It’s critical [BBC Worldwide is] clear about where our focus is and where the threats are. We’re focused on high-quality programmes, including British drama, and with Lookout Point we have invested in one of the finest UK companies. But we’re not a VC; we’re not here to just invest in stakes in production companies.”

M&A might be tough on operators’ margins, but consolidation has led to innovation in the past
Sean Cohan, EVP, Int’l, A+E Networks International

The race to buy production assets feeds the M&A cycle, as the people running those businesses often exit when earn-outs have been earned and start over. There is also a layer of seasoned middle managers that see the start-up and buying and selling activity and want to strike out on their own. The bottom line is there will always be new indie players, although increasingly startups are backed by the big players from day one.

Zodiak Media CEO Marc-Antoine d’Halluin notes that management earn-outs, part and parcel of production-company M&A, can be problematic and that these issues are exacerbated in periods of heavy consolidation. “I have a philosophy on earn-outs: I’ve seen them be more destructive than anything else in this industry,” he says. “I understand why we have them, and in some cases they’re the right thing to do, but they normally pull things apart at the time you want to bring them together.”

“In some sectors the race to scale makes more sense than others,” says Sean Cohan, A+E Networks EVP, international. A+E runs channels and a growing distribution business, giving Cohan two perspectives. “On the production side we see these rollups, but how much consolidation can there be of assets based on people and ideas?”

The desire for scale is a consequence of returning confidence in the creative industries
Farah Ramzan Golant, former CEO, All3Media

Steven DeNure, president of DHX Television at DHX Media, says there are challenges when buying ‘people’ businesses, which is one reason it has targeted acquiring catalogues and bulked up its library (mostly, but it has also acquired Degrassi producer Epitome Pictures). A major library deal saw it acquire the assets of Ragdoll Worldwide, handing the Canadian company brands including Teletubbies and In the Night Garden.

If channels are buying content companies, the reverse is also true. DHX’s consolidation activity took a new turn this year when, in August, DHX Television was created following the C$170 million (US$153 million) acquisition by DHX of Family Channel, Disney XD and Disney Junior in Canada. That created a vertically integrated producer-distributor-broadcaster and, along with Canadian counterpart Corus Entertainment, the largest international kids-focused media group outside of the majors.

A key challenge for the consolidators is how you ensure you are getting the most of the scale you have achieved and ensure ideas travel through the group.

We won’t complain if some of our competitors are distracted by this consolidation
Marc-Antoine d’Halluin, CEO, Zodiak Media

At Zodiak, d’Halluin has launched an International Development board under the control of ex-Endemol exec, Grant Ross, and former Zodiak Nordics chief creative officer Joel Karsberg. The unit meets every two months to decide which group formats can be exploited internationally in the best way, and so has far led to Swedish shows Dropped and Trash or Treasure beginning global rollouts.

“This is not meant to develop centrally, but to be a selection process for in-house formats and formats from outside the group, and try to identify those three or four formats that we will systematically push across our network of companies,” he says. “It sounds simple, but it wasn’t really in place before.”

Opinion is divided on whether, amid the rush to scale, bulking up actually offers a better chance of getting a hit programme away. What is clear in the unscripted space is that market conditions are making it tougher to register an international hit.

This consolidation process can be good for medium-sized companies like Banijay
Marco Bassetti, CEO, Banijay

Banijay Group CEO Marco Bassetti says the TV business has not seen a bona-fide hit format since Talpa’s singing show The Voice. “There is an increasing difficulty in launching high-value international formats,” the former Endemol group president observes.

The managing director of Talpa’s international division, Maarten Meijs, adds that “the causal link between size and global hits is relatively weak. It is much more linked to the creative focus of a company and the question of whether one can keep a creative focus when the company has gone through a significant growth phase”.

The challenge of buying and integrating creative companies is one to which the super-indie and consolidated groups have taken different approaches, with some opting for a hands-on form of management and others a looser, federal system.

Ramzan Golant says the All3Media prodcos have powerful “tribal affiliations” that must be respected. “We are a flotilla of SMEs,” she says. “If you squeeze them all together we are a super group, but we are 19 different P+Ls, 19 different tribes, all with their own development slates and own financial directors. It’s a massive challenge and we do duplicate costs, but we think it increases the chances of getting commissions away.”

David Frank, meanwhile, says his new company will run along federal lines, but with hands-on management from him and his team, in the same way, he says, RDF operated.

In terms of the geography of consolidation, well-resourced US companies are driving a lot of the activity, in part because they are increasingly alive to the opportunities the international market offers and in part out of necessity, as the US pay TV market matures and the broadcast networks see audiences decline.

“There is more and more pressure to have exposure to international, and a lot of US companies have woken up to that – and the inability to build from scratch makes them buyers,” says A+E’s Cohan.

Ironically, one of the most acquisitive companies, US-listed Discovery Communications, did build its network of channels from scratch, putting it ahead of any other pay TV company globally. However, it has bought SBS Nordic, for US$1.7 billion, and Eurosport, and the deals mean that its international business now generates more revenue than that of the US. It has also acquired All3, giving it a sizable production and distribution machine to sit next to the one it already has. It has also taken majority control of kids net The Hub, and next in its sights is SBS in the Netherlands.

Another pay-TV-to-free-TV play has been made by Viacom, which has acquired Channel 5 in the UK for £450 million (US$738 million).

Buying into the UK allows acquisitive US companies a window on the English-language world, a development that has not gone unnoticed by the incumbents. In August, David Abraham, the CEO of UK public service broadcaster Channel 4, told delegates at the Edinburgh International TV Festival that 2014 might be “peak year of the gold rush of British television”. “In just a few months,” Abraham said, “we have seen a spate of deals that will reshape our industry and alter where decisions get made and by whom”, noting that Channel 5 “now takes it orders” from Viacom in New York.

Technology and available capital is driving this period of consolidation
Steven DeNure, president, DHX Media

Painting a bleak picture of a consolidated TV market in the UK, he said: “Scale demands an increased focus on cost-cutting and margins,” and also noted that “reformatting ideas is more efficient than the messy business of finding new ones, [therefore] fear of risk overtakes an appetite for it”. The speech came as Channel 4 announced that it was getting into the consolidation game, buying into UK indies 4 Arrow Media, Lightbox, Popkorn and True North.

The UK culture secretary, Sajid Javid, reacted to Abraham’s speech by saying that the US companies desire to buy into UK content businesses was “a massive vote of confidence” in the sector.

As the big companies get bigger, one consequence is that the traditional producer-broadcaster relationship changes. From the perspective of the super-indie, it is a more balanced discussion when the content companies have greater heft. For the broadcaster, it is quite likely it is negotiating with a company that is part of a group larger than it is itself.

“There is a sense of equilibrium in the relationship now, so we can properly negotiate; it’s not a supply chain dominated by the buyer,” Ramzan Golant says. “All3Media wants rights to exploit around the world. When there is downward pressure on the [licence fee paid for the] primary commission, we want to offset that with international rights.”

The next wave of activity will likely see some of the consolidators get consolidated. Shine-Endemol-Core will be a merger of consolidated groups. All3 was a consolidator that got bought, and UK-listed ITV – which has spent millions hoovering up American unscripted prodcos such as Leftfield Entertainment – is itself an acquisition target, with Liberty Global and others circling.

But the consolidation of TV production companies itself is “not going to affect the future of international television that much”, says Talpa International’s Meijs. “There are other forces at hand that will have a much more significant impact on international television. The way entertainment is consumed in general is changing.”

New entrants are also using TV content to drive non-TV businesses, changing the way such content is valued. Amazon’s Prime Instant Video and Japanese e-commerce giant Rakuten’s Wuaki are about getting consumers to interact with services above and beyond their core video offering.

Equally, Microsoft wants to use original content to make its Xbox platform more compelling (despite axing its own Xbox Entertainment Studios business this year). So too Sony with its PlayStation 4.

Seen from inside the TV business, the current consolidation appears to be on a huge, unprecedented scale. However, from a wider business perspective, the resources that many telcos, and the likes of Apple and Google, have at their disposal make the new mega-indies and super-studios appear modest concerns. If they start moving into TV on a large scale, the New World Order will have to be rewritten all over again.