At a pivotal point in the telecommunications industry, film and television production companies are venturing into the broadcasting business. For the most part, new broadcasting projects are costly to start up and initially contribute little to the company’s profit margin. It’s hardly a rosy picture to paint for shareholders, but eyeing potential future opportunities for broadcasting worldwide, production houses are getting into the broadcast sector confident the long-term gains will outweigh the short-term strain.

Major production houses like Alliance Communications and Atlantis Communications expect broadcasting properties to make up 7% to 10% of their revenue base in the short term, most of that through the acquisition of pieces of established broadcasting services.

However, long-range forecasts predict a multibillion dollar future for the telecommunications industry. To date, it’s mostly words. But technology and installation of dvc boxes and fiber-optic cable lines, direct-broadcast satellite currently in transitional stages, virtually guarantees a wider distribution market. Production companies are concluding it makes sense for them to get in on the ground floor.

Says Kevin Shea, president and ceo of Atlantis: ‘National and international networks on satellites are being programmed and packaged by producers. If that’s where it’s going to end up in the years ahead, production companies had better conduct themselves accordingly.’

Over the past year, several of the larger production companies began to do that by applying for specialty service licences from the crtc. With successful applications, Alliance and Atlantis lead the industry’s foray into broadcasting with this year’s start-up of Showcase and Life Network, respectively.

Other production companies anxiously await the second round of specialty hearings, scheduled for early fall. After failing to win a licence in the first round, Cinar Films and Nelvana, along with co-applicant The Family Channel (owned by WIC Western International Communications and Astral), will apply for an animation-based service. Canadian distribution and production giant Malofilm Communications will pitch for a parenting channel

Atlantis and Life will apply as separate applicants for at least one new service each, Shea confirms, while Alliance is waiting for the dust to settle before making a decision.

Consumer appetite for new services is anyone’s guess, given the rocky launch of the first package at the beginning of this year. But difficulty in selling consumers on the need for more channels will only be one of the challenges new service owners face.

Others include a willingness to wait for the product to bring money into the company instead of taking it out. Life, owned 80% by Atlantis, isn’t expected to break even until year three, despite projected revenue this year of $24 million. Showcase, the specialty service owned 55% by Alliance, isn’t expected to break even until its fifth year, after an anticipated capital expenditure of $3.4 million.

Gord Haines, coo at Alliance, won’t reveal projected 1995 revenue figures for Showcase. He will say that Alliance is committed to covering losses incurred at Showcase through the course of its seven-year licence, up to $8 million, and that it is losing a little less money than projected at this point.

At Life, revenue in year seven is expected to reach $36 million, says Shea. Profit at this point is difficult to project, but steep start-up costs and a heavy front-end investment in Canadian programming will have been long recovered by then, paving the way for dividends, he says.

The Interpublic Group of Companies, which owns several advertising agencies and 19.9% of Atlantis’ equity, owns the other 20% of Life.

This year, broadcasting projects will contribute less than one-tenth of Alliance’s and Atlantis’ overall revenue bases. That profit will be owed largely to other investments in established broadcasting services that are expected to turn a profit more quickly.

Atlantis’ $14.8 million investment in ytv is already beginning to pay off, with ytv registering an increase in 1994 advertising revenue to $14.8 million from $12.3 million in 1993. Atlantis owns a 28% share of ytv, which makes up less than 10% of Atlantis’s overall 1994 revenue of about $100 million.

Alliance’s acquisition of 12.4% of Budapest 3, a private broadcasting service in Budapest, will pay off in the short term because of a healthy supply agreement built into the five-year contract, says Haines.

Haines says the return is substantial compared to the size of the investment. The supply agreement will account for about 5% of Alliance’s international sales. International distribution totaled $16.5 million for the 1994 fiscal year.

The acquisition was motivated more by the supply agreement than by a desire to become part of an international broadcasting operation, says Haines. It doesn’t mark a new strategy for Alliance in its approach to international sales, he adds. It was simply a terrific deal, and when a company sees a virtually guaranteed investment, it moves.

Relatively small, short-term investments are attractive but in the long term, access to new distribution networks is what entices some production companies to start up networks. International sales may once have been key to a production company’s success, but now it’s feasible to skip the broadcaster middleman and develop a distribution channel of one’s own.

DBS service

The next logical step is to put Showcase on a dbs service, says Haines. ‘As soon as we find out which one it’s going to be.’

Showcase, a second-window service for Canadian drama productions and a medium for international programming, is owned 55% by Alliance, 20% by the cbc, 17% by Les Productions la Fete, and the balance by a group of independent shareholders that includes Atom Egoyan and Denis Arcand.

While the satellite services battle for position, there’s capital to be gained. Broadcasting is a natural extension of the company’s primary mandates of production and distribution, extending the shelf life of a program and keeping the cash flow moving in-house, says Haines.

For example, Showcase may option the second window of an Alliance production. The licence fee comes back to Alliance and, as majority shareholder, it receives 55% of the revenue Showcase can generate through the program. ‘There’s a synergy there,’ says Haines, adding that a new division of Alliance, Alliance Cable and Broadcasting, is in the formation stages.

So too is it a natural niche for Malofilm Communications, says Steve Harris, president and chief of operations. Hired full-time last October, Harris is a veteran broadcaster credited with launching one of Canada’s first movie network services, Superchannel. He’s been brought on to guide Malofilm’s application for The Parents Channel, scheduled to launch in 1996, depending on the roll-out of fiber-optic cable in the u.s. and Canada.

The Parents Channel is Malofilm’s first broadcasting project. Distribution and production will continue to be its primary sources of revenue, but building the company depends on making more programs and staying close to their distribution rights. A company-owned network achieves all goals and increases revenues in the long run, says Harris.

Similarly, Micheline Charest, chairman and ceo of Cinar, says remaining strong in an international marketplace means owning the programming the company produces, ‘in as many rights and as many territories as we can, for as long as we can.’

Charest says broadcasting is an inevitable path for production companies. The investment is even more necessary in the animation sector because without a Canada-based outlet for Canadian animation product, the sector is in danger of becoming a service industry for u.s. programs. ‘At Cinar, we see ourselves as providers of software, developers of intellectual properties the company owns. We are not a service house,’ Charest concludes.

Investing in a broadcasting service is a camouflaged investment in programming, agrees Malofilm’s Harris. Currently, Malofilm is seeking out partners in the u.s. to take on the business side of The Parents Channel operation, leaving Malofilm free to concentrate on producing programs.

Programming side

‘We want to invest our money on the programming side. What better way to do it than to have a channel on air in the u.s. needing all this programming and allowing us to exploit it worldwide, including a Parents Channel in Canada,’ Harris says.

The Parents Channel will be one of the first fully digitized services. Its launch is dependent on the development and installation of dvc boxes, projected sometime in the next two to three years. Despite the synergy, potential investors in broadcast-related services are looking ahead and musing on the consumer climate in the wake of the uprising against Rogers Communications and the negative-optioning marketing of the six new specialty services in January.

Says Julian Sirkis, president of Atlantis’ Life Network: ‘People would have to give their heads a great big shake before they apply for a channel. You’ve got to be very sure people want this information.’