The litmus test for annual highlights is arguably that they have implications beyond the calendar year in which they occurred. That’s certainly the case for a number of developments that unfolded in ’99.
Clearly, from the standpoint of news made by a single production company, the sale of bicoastal/international Propaganda Films’ commercial, music video and talent management divisions—and the subsequent exodus of key executives—loomed large this year. It could loom even larger in 2000, depending on your crystal ball. Rumors of several top directors leaving the shop have some pundits paralleling the situation to the breakup of AT&T, which spawned the emergence of other smaller, viable companies. Others contend that while some splintering off of talent may occur, Propaganda will remain a preeminent house with leading brands (i.e. Propaganda, Satellite, Propaganda
Independent), a still-formidable core of filmmakers, and some ownership resources that could lend a new dimension to the company—an example being SCP Private Equity Partners, a Wayne, Pa.-based investment fund.
SCP is part of the group that bought Propaganda’s commercial, music video and talent management businesses from Universal Studios earlier this year (SHOOT, 4/16/99, p. 1). Part of the thinking behind the deal was that Propaganda’s content provider prowess complemented SCP’s investments in such arenas as communications information technology and Internet ventures. SCP is a $265 million private equity fund that’s affiliated with Safeguard Securities, which is traded on the New York Stock Exchange. Propaganda has since named key executives, including COO Trevor Macy, president Rick Hess (SHOOT, 10/29/99, p. 1) and GM of commercials and videos Sam Walsh, formerly senior VP/director of broadcast production at Publicis & Hal Riney, San Francisco (SHOOT, 11/12/99, p. 1).
Nonetheless, no matter how 2000 unfolds in terms of Propaganda directorial defections—or the lack thereof—executives who departed the company in ’99 have already made an impact on the marketplace. Steve Dickstein, formerly president of Propaganda’s commercial operation, resurfaced at bicoastal/ international Partizan (SHOOT, 9/10/99, p. 1). Tim Clawson, Propaganda’s longtime head of production, is at the helm of Shooting Gallery Productions, the New York-headquartered commercial/music video shop that represents feature company The Shooting Gallery’s diversification into the ad/clip arena (SHOOT, 10/8/99, p. 1). And Dave Morrison, former head of commercial development at Propaganda, is playing a key role at Culver City, Calif.-based 8Media, the company being assembled by former Propaganda co-founder Steve Golin.
Jeff Armstrong, who exited his executive producer’s post at bicoastal/international Satellite, has plans to develop a venture. Also possibly in launch mode is Susanne Preissler, who left her executive producership at Propaganda Independent. Yet another Propaganda alum, founding member Joni Sighvatsson—who departed the company four-and-a-half years earlier—reemerged in the production company arena (SHOOT, 6/4/99, p. 1), acquiring a majority stake in and becoming chairman/CEO of Los Angeles-based Palomar Pictures.
Dot-com
The aforementioned SCP reference underscores the fact that many commercial production companies continue to contemplate their places in new media such as the Internet. This past year saw some companies positioning themselves to capitalize on the Web, convergent media and interactive television. For example, this past summer, Santa Monica-based broadcast design studio Fuel and its commercial production division were sold to publicly traded international digital design and Internet branding firm Razorfish in a deal valued between $25 million and $35 million (SHOOT, 7/30/99, p. 1).
Meanwhile, Culver City-based production house Random/Order Information and Entertainment entered into strategic partnerships with several new media shops (SHOOT, 8/27/99, p. 1), including Intertainer, a Culver City company that is developing an on-demand interactive programming library as well as delivery systems; Wink, an Alameda, Calif.-based venture that adds e-commerce capabilities to TV commercials; and Foxman Group, a tracking and software company in Norriston, Pa.
According to a recently released communications industry forecast by investment banking firm Veronis, Suhler & Associates, the Internet has become a significant ad medium in its own right, accounting for $1.9 billion in ’98, and projected to reach $8.2 billion by 2003. Moreover, Internet companies became increasingly important advertisers in traditional media this year, as dot-com spots became prevalent on network, local and cable TV. And at last count, more than 20 percent of the ad time for next month’s Super Bowl telecast on ABC had been bought by dot-com companies (SHOOT, 10/1/ 99, p. 1). Veronis, Suhler concluded that over the next four years, new media will help invigorate old media.
HDTV
Speaking of the Super Bowl, ABC and Panasonic announced that January’s Big Game will be telecast in HD, leading to talk of advertisers taking the hi-def plunge on Super Sunday. Though DTV set penetration has fallen short of expectations in the U.S., many expect it to be ultimately embraced by advertisers.
Two major strides were made toward that end in ’99: the ABC/ Panasonic cooperative venture, which resulted in the ’99/’00 ABC Monday Night Football season being broadcast in hi-def, to be culminated by the Super Bowl; and the CBS/Mitsubishi agreement, which resulted in most of that network’s primetime schedule being telecast in HD.
The transition to DTV, including HD, entails megabuck investments for the post community. And that played a part in another continuing—yet larger than ever—trend of facility acquisition, whereby entrepreneurial companies gained deeper pockets in ’99. The term "big" kept getting redefined. For example, in January, investment banking firm Warburg Pincus Equity Partners reached an agreement to acquire 51 percent of Four Media Company (4MC), a Burbank-headquartered, publicly traded (NASDAQ: Four) postproduction holding corporation, in a deal valued at $80 million. 4MC’s holdings include post/visual effects facilities Encore Hollywood and Riot, Santa Monica, POP Studios, Santa Monica, Digital Magic, Santa Monica, Company 3, Santa Monica, Anderson Video, Universal City, Calif., 4MC, Burbank, Calif., and 4MC Asia, Singapore.
Then last month, in a stock and cash transaction worth $250 million, Englewood, Colo.-based cable and communications conglomerate Liberty Media Corporation (NYSE: LMG.A, LMG.B), another public company, entered into a letter of intent to purchase 4MC. This came just four months after Liberty agreed to purchase controlling interests in the Todd-AO Corporation (NASDAQ: TODDA) and Hollywood-headquartered, privately held audio post operation Soundelux Entertainment Group. Todd-AO maintains post shops in Hollywood, Santa Monica, New York, Atlanta and London.
Participants in the Liberty deals noted that having significant financial resources is necessary to help fund such new millennium developments as the globalization of post services, the transition to HD, and re-tooling of facilities to accommodate other emerging media.
Meanwhile, the post/effects facilities not liberated by Liberty collectively sought other means to make the cost of change more manageable. In October, the Association of Imaging Technology and Sound (ITS) sent a delegation to Washington, D.C., to state its case to legislators, asking them to help make the transition to DTV (including HDTV) less economically traumatic for the post community. Lawmakers were presented with an ITS white paper which outlined the postproduction/effects industry and documented the fact that most post/effects facilities, editing and audio houses are smaller to mid-sized entrepreneurial ventures. These companies will play integral roles in DTV, hi-def and other new digital media and technologies—business sectors that figure to be an important part of the global economy.
Several possible measures surfaced during ITS meetings with legislators. Topping the ITS wish list were investment tax credits for facilities as they re-tool themselves for DTV. Congressmen Jerry Weller (R-Ill.) and Mark Foley (R-Fla.) expressed willingness to sponsor an investment tax credit bill, which the ITS currently has in draft form.
However, many believe that the legislative climate isn’t conducive to ultimately gaining passage of investment tax credits. Another option involved accelerating or shortening the depreciation schedule, whereby equipment purchases are amortized. Such an adjustment would help facilities, but requires an amendment to the U.S. tax code. And a third alternative raised by lawmakers was to bring the federal government’s Small Business Administration (SBA) into play. Relatively low interest SBA financing could prove helpful to post/effects facilities in the transition to DTV. SBA involvement might also prompt the banking community to be more accommodating to post houses that are looking to buy DTV equipment. Congressman Danny Davis (D-Ill.), a member of the SBA committee, offered to help the ITS explore possible SBA opportunities.
Runaway Production
While ’99 was marked by gearing up to invest in new business, it was equally marked by the prospects of diminished business, perhaps best embodied in heightened concern over runaway production. The Directors Guild of America (DGA) and the Screen Actors Guild (DGA) jointly commissioned an independent study which found that the U.S. lost $2.8 billion in direct production expenditures due to the flight of feature and TV program filming to other countries in ’98. Using an economic multiplier and factoring in lost jobs and tax revenue, the total economic impact on the U.S. was $10.3 billion last year.
Not taken into account in the report was runaway spot production. However, Association of Independent Commercial Producers (AICP) president Matt Miller noted that the results "would have even been more alarming if they included commercial numbers" (SHOOT, 7/9/99, p. 1).
The DGA and SAG hired lobbyists to gain legislative relief for runaway production. Among the options being explored is some form of tax break to help counteract the package of economic incentives offered in Canada. (A favorable exchange rate is also luring U.S. projects to Canada.) Proposed anti-runaway legislation in California was defeated in ’99, but backers promise that it will be resurrected when both state houses reconvene in Sacramento.
Federally, a group of lawmakers plans on conducting a series of field hearings next year regarding runaway production, the first scheduled for January in Los Angeles. Based on the information and industry input garnered during these public sessions, the contingent of lawmakers—which includes House of Representatives’ Congressmen James Rogan (R-Calif.), Buck McKeon (R-Calif.) and the aforementioned Foley and Weller—will devise possible courses of legislative action.
While supportive of possible legislative relief to encourage production in the U.S., the AICP urged the spot community not to rely solely on state and federal lawmakers to address the runaway production problem. In an open letter to the industry this past summer (SHOOT, 7/23/99, p. 1), the AICP urged different segments of the business to seriously consider what they could do to help the U.S. retain filming that’s been leaving the country.
The AICP letter, which was signed by Miller, pointed out that producers have an obligation to ad agencies and clients "to work as efficiently and effectively as possible," even if that means going outside the U.S. "However, given the choice, we would much rather support local communities and the local economy," the letter continued.
Towards that end, the letter stressed the importance of encouraging film-friendly attitudes in local communities. The AICP noted that "community groups that place strict limits on location production and extract exorbitant location fees or payoffs from production companies drive production out of their cities and country, and take jobs away from their neighbors." The letter also noted that film commissions that act as liaison between the industry and community lack adequate funding.
The AICP also contended that rising labor costs and inflexible work rules need to be examined. Furthermore, the letter suggested a restructuring of "costly residual use fee systems." The letter claimed that "usage fees for onscreen talent serve as strong financial deterrents" to advertisers shooting domestically. While it’s clear in the SAG contract that a signatory cannot leave the country to avoid terms of the agreement, a production house and ad agency can opt for a foreign shoot to save money in production. Once that’s done, some clients are realizing even larger savings via talent buyouts, according to the AICP.
In September, ad residuals were again a topic of discussion. SAG claimed that many spot actors were not being paid the residuals they were entitled to, because the number of times a spot aired, as well as the number of markets in which it ran, were allegedly being underreported in assorted instances.
The residuals issue could represent an interesting subplot as the actors union and the Joint Policy Committee—consisting of representatives from the Association of National Advertisers and the American Association of Advertising Agencies—enter negotiations next year for a new commercials contract.
