Commercial production is currently a buyers’ market for advertisers, a fact that hit home dramatically last month when the Ford Motor Co. spelled out a policy of limiting production company markups on services and taking some items that have traditionally been marked up off the table completely. Under Ford’s proposed cost-cutting guidelines, production company markup could be reduced to as little as 15 percent. Several production companies that have worked with Ford in the past have reportedly passed on boards for Ford products, rather than set the precedent of accepting so low a markup. The issue was recently addressed at a members-only meeting of the Association of Independent Commercial Producers (AICP) West Coast chapter. (Ford was unavailable for comment at press time.)
"The only way a commercial production company makes money is by marking up services," says Gary Rose, partner/executive producer at bicoastal Go Film. "Now, a cost controller starts dissecting your bid and says, ‘Okay, put this below the line, move this over there, take pension and welfare, travel, only mark them up this much, and we’re going to pay for casting.’ When you’re looking to dissect a bid based on a business model that is based strictly on marking up services, it doesn’t make any sense at all to stop marking up services."
Bill Sandwick, executive producer at bicoastal HSI Productions, notes that HSI has tried to work with clients on cost issues whenever possible, "but this thing with Ford has forced us to take a serious look at everything we’ve been giving over the last several years. We can’t afford to give any more," he says.
HSI has turned down jobs that were attractive but didn’t allow the company to realize a profit, according to Sandwick. "We can’t work in a negative situation where we can’t pay our overhead or make any money," he points out. "There is certain work that, if they’re not letting us do it on our terms and make some money on it, we’re not going to be doing that work."
Chuck Sloan, owner/president of Plum Productions, Santa Monica, a company whose client list reads like a Beverly Hills car lot, says he turned down a Jaguar spot late last month because of parent company Ford’s guidelines. "As far as I know, most companies are taking the same position," he relates. "Where we are now is already very tight. If it were to go any tighter you would see an awful lot of companies in serious trouble, especially the larger companies. It’s really difficult to operate like that."
Mark Up
Is Down
A problem for production companies, executives say, is that markups—traditionally around 35 percent, but chipped away to about 28 percent—appear high to advertisers who don’t know the production business. And the current bid form, developed by the AICP years ago, spells out cost estimates for various services and shows exactly how much the company marks up each item.
All that the companies and AICP can do is explain that the markup is not all profit. "Even twenty-eight percent is about the low end of what you can operate on and [still] make a decent profit," Sloan says.
Matt Miller, president/CEO of the AICP, points out that advertisers have many misconceptions about how production companies operate, especially when it comes to markups. Miller and others say that advertisers think too many production items, such as film stock and development, are commodities and shouldn’t be marked up at all.
"These pieces of production that they look at as commodities aren’t—they’re part of a bigger piece of fabric that is an entire production," Miller points out. "You can’t say development of film isn’t important, the type of film isn’t important. It doesn’t work that way. In agency contracts, the first sentence is a guarantee of quality. If you’re not allowed to choose the film and be in charge of processing the film, how are you going to make that call?"
Diane McArter, owner/managing director of Omaha Pictures, Santa Monica, says that advertisers need to make a concerted effort to build an appreciation for the production company’s value. "There is a mistrust and a lack of knowledge about how our business operates," she relates. "That’s a dialogue we need to have. They need to have a real understanding of our value. What is the value of creativity, the value and role of a production company? Agencies need to work with us to defend what our partnership is. If they don’t, they’ll end up with a few companies monopolizing the business, and it will diminish their creative opportunities."
While Omaha has not been directly affected by the Ford guidelines, chief financial officer Kate Frearson notes that most automakers and many other big advertisers have similar, if less draconian, mandates. "They all have certain things you have to take out of the budget and put below the line," she notes.
But what really rankles Frearson is that advertisers don’t seem to see the production company as part of the creative process. "We’ve been told that we have to take some percentage out of the markup if we want a job, but they’re not willing to touch the director’s fee," she relates. "We’ve said, ‘Okay, you value the director in this process, but you don’t value us. Why?’ They don’t have an answer. We’re really dependent on the agency to make the client understand what our value in the process is. It’s not easy for them to come to our defense, but if they don’t find a way to help clients understand the value we bring, we think a lot of production companies are going to go under."
Educating The
Clients
Company execs recognize that agencies are poorly equipped to exert any kind of pressure on clients. Commenting on the Ford guidelines, Sloan says, "If the client says to the agency, ‘Only do work for these particular percentages,’ the agency can’t say no. All they can do is try to facilitate that. Our job as a production company is to try to educate the Ford people as best we can in a cooperative way."
Go Film’s Rose agrees that it is hard for the agency to get involved. "They’re getting mandates from their clients," he says. "As much as they might like to support the production community, they’re not being put into a position where their business is truly going to be affected by it—although potentially, they will lose the opportunity to work with some suppliers they really want to work with."
But agencies can play a role, asserts Sandwick. "It’s better if we educate them as to what our situation is, and work together to fight through this problem."
The appeal to agencies may be that the issue with Ford goes beyond accounting and into the creative process. "Besides the markup problems it creates," Sloan says, "it’s also a creative problem for directors of any stature. They realize that if they’re forced to use one particular type of film, in this case Fuji [which is offering heavy discounts], it could create some problems because Kodak has some film stocks that Fuji doesn’t have. Anybody who gives good quality wants to use the best possible film stock."
Sandwick expands on that notion: "We want to use the right film stock so that we can create a look for their brand. If that creativity goes out of the equation, then the job is less desirable for us anyway."
At the end of day, production company executives would like to see a business environment in which advertisers and agencies come to them with a project and a budget, and ask them to come up with ways to make it happen. With that thought in mind, they say that they would rather look at the bottom line than get caught up in the details of the standardized bid form. "Today that form works against you because naturally a lot of their cost controllers have been able to analyze it and allow clients to nibble at it," Sloan relates. "It would be far more useful if all of us thought about the bottom line—what the commercial is going to cost. If an agency has eight hundred thousand dollars to spend on a job, your job is to get it there for eight hundred thousand dollars. How you get it there doesn’t really matter. The markup is immaterial. There shouldn’t be a mandate as to how you have to operate."
Omaha’s McArter concurs. "We’re of the mind: ‘Give us your overall financial parameters. Don’t tell us how to run our business. Tell us what your dollars are, and let us try to solve your creative challenge,’ " she says. "We know where to apply the resources to achieve the agency’s, the client’s and the director’s visions of a job."
