In conjunction with this year’s Montreal World Film Festival Symposium, ‘Multimedia ’95, Where in the World Are We Headed?’ Playback spoke to many of the event’s high-profile Canadian and foreign guests to get a sense of where the symposium dialogue is headed.

The following interviews cover a wide range of issues including developments at sodec and Telefilm Canada, Canadian government policy, competition in broadcasting, mega mergers in the u.s. communications industry and their consequences for content providers, and Canadian production finance and tax developments.

Multimedia ’95 is organized by the Media and Communications Law Section of the Canadian Bar Association, the Academy of Canadian Cinema and Television and the WFF Foundation.

The event’s major sponsors are Viacom Canada, Kodak Canada, Comweb Corporation/Moli-Flex White, Playback, Heenan Blaikie, Da Vinci Restaurant and Le Westin Mont-Royal.

Futurescapes

In his book Megamedia Shakeout: The Inside Story of the Leaders and Losers in the Exploding Communications Industry, u.s. journalist Kevin Maney looks at the big picture in the international communications and entertainment industries, the driving motives for integration and the profiles of some 40 of the leading corporations and their strategies, including Disney, at&t, Microsoft, Hewlett-Packard and Viacom in the u.s., and British Telecom, Videotron, Sony and Sega.

Published by John Wiley & Sons, New York, the book charts the accelerated pace of convergence of the American and world communications, entertainment, television and computer industries, says Maney, a financial columnist for USA Today.

‘It’s all becoming one gigantic industry,’ he says. ‘There’s no way to tell them apart anymore.’

In the u.s., Maney says the rush towards vertical integration is based on a high corporate religion ‘that says the Rupert Murdoch model is the way of the future.’

The Murdoch model

In an interview with Maney, John Malone, chief executive officer of u.s. cable giant TCI Tele-Communications Inc., said in no uncertain terms:

‘Murdoch has set the stage. He is the one that everybody is following; that is the model everyone has to have to compete with him.’

The other appealing aspect of the Murdoch model is its international aspect, the ‘geographic integration.’

Maney says the fallout of globalized megamedia conglomerates is a yin and yang existence for producers of content.

He says u.s. content is increasingly export-driven, adding, developments such as Disney’s merger with Capital Cities/ABC will only add to their ability to make an exportable product.

‘I think the rest of the world has to say, `We’re going to be awash in American content, what are we going to do about it?” Maney says.

‘The other side, the yang, to this thing is that as delivery of content goes digital, two things happen.’

‘One is that the number of outlets increases exponentially, the other is a radical drop in production costs.

‘For instance, we had Ed McCracken, chairman of Silicon Graphics in here the other day saying it’s not very far away when sgi computers will be able to create complete (decor) sets behind actors.

‘Actors will act in front of a black wall…and (producers) will never have to build a set in real life. And so you start being able to cut the cost of making a movie by a factor of 10 or more.’

Even as the American tides wash in, Maney says the same digital reality of cheaper production and distribution costs will allow indigenous industries to create more product, and export it.

Maney says Hollywood is learning new ways of extending its empire, namely, by localizing the u.s. version in foreign markets.

In this sense, he says Viacom is a pioneer.

Viacom, the pioneer

‘Look what they’ve done with mtv, taken it around the world and made it a local version with local production, studios and talents,’ Maney says.

‘They recreate that content in every country they go to,’ he says.

‘Your first reaction may be that the big American company is coming in, but when it spends a lot of money to shore up the local entertainment business, then you can’t argue as much.’

‘u.s. companies are driving to go global. They see that as their next thing, and the smart ones are realizing (Viacom’s method) is a good way to do it.’

On the upside, Maney says as u.s. audiences are exposed to more tv channels, they’ll develop an appetite for a more varied program menu.

A case in point, Absolutely Fabulous, the wickedly funny British sitcom that has become the flagship show for the Comedy Central cable channel.

The leaders we deserve?

The current lack of political vision or leadership is compromising the future of Canada’s communications and entertainment industries, according to Astral Communications chairman Harold Greenberg.

The industry veteran, who earlier this month stepped down as ceo of the company he built over 30 years, says disunited, competing ministries at the federal policy level are undermining the production and distribution industries’ ability to compete with globally driven battallions of vertically integrated media giants.

‘I see dark clouds forming because of the lack of knowledge of what the industry creates in terms of employment, in bringing in monies to the country,’ Greenberg says.

‘In the prevailing situation, restrictions (more cuts) should be put aside,’ he says.

‘In the haste of evaluating which (programs should be preserved or cut), things are being done much too fast by ministers who don’t know what they’re talking about and (who) don’t have knowledge of the industry.

‘It is really a concern for the production industry if you have a government and a civil service that do not understand that countries all over the world, other than the United States, have protective measures to help build and secure their cultural industries.’

Competing ministries

Greenberg says when the Conservative government split Communications and Telecommunications into two departments, ‘it set up an internal competing system of ministers, and so you have ministers looking at only his or her part, and not the whole.

‘Heritage Canada and Industry Canada can’t seem to work together to foster a common strategy that would promote both competition and the survival of the Canadian program creation and distribution industry,’ he says.

‘You know that I am an entrepreneur, but you don’t break through barriers and rules if it is to the total detriment of an industry.’

Lip service

Asked about the Viacom and Polygram Film Entertainment entry into Canada, Greenberg’s reply isn’t exactly friendly; he says it shows the present government is ‘paying lip service’ to the past goals of building a strong Canadian program industry.

Says the man who built Astral, a $400 million a year enterprise, the bigger companies will have to undergo vertical integration in order to compete.

‘The maintaining and foundation of our industry is built on the provision of Canadian content distributed on a world basis,’ Greenberg says.

‘Years ago, one very seldom saw a film or tv series playing in both the European and North American market,’ he says.

‘Now we’re seeing more and more programming developed for this marketplace. In the future, Canada will need sizeable resources to compete.’

Greenberg says there’s a ‘new breed’ of entrepreneur in Hollywood.

‘It’s basically about dollars, and how they can expand their export market and have an even bigger share of the world’s programming acquisitions,’ he says.

He says the majors are working out coventure strategies within existing regulations, ‘as opposed to cracking down the door and then everybody just stiffens their back.’

‘We must preserve the coproduction treaties, but this does not stop the Americans from participating as long as they realize that they are better off participating in an overall program than trying to dominate.

‘I think the new breed of executive in Hollywood is a lot different from the old breed; when I started, the prevailing attitude was `We’ve ruled this industry for 50 years, why should we stop now?’ ‘

‘I think the American industry has come to realize that there’s a more positive way to try to achieve their goals,’ he says.

Broadcast ownership

John Riley, vice-president business affairs, Family Channel, says:

‘It is common knowledge that the government is reviewing (foreign) ownership rules in broadcasting with a view to increasing the amount. Some guesses are that it would go to 33%, and some have argued that it should be all the way up to 49%.’

Canada’s entrenched ownership rules historically limited foreign participation at 20%, with ‘objective and effective control tests’ used to ensure Canadian control.

Pointing to the competition introduced in long-distance telephony, and in broadcasting with dth and phone companies getting into the delivery of video, Riley says the call for increased foreign investment is part of a general trend of tearing down barriers ‘as seen in the Free Trade Act or nafta, and in terms of what the crtc is doing.’

‘When you talk about competition, it should mean more than just putting two people in a ring and watching what the outcome is,’ he says. ‘Competition should have some benefit to it. There should be a goal.’

Family Channel and partners Nelvana of Toronto, and Montreal’s Cinar Films are applying to the crtc for a licence to operate a new animation specialty channel in Canada.

‘It has always been our view that Canadians should be given a chance first at licensing new services, because if you don’t, once an American service is in, then it would be difficult, impossible, to bring in a Canadian service after the field has been occupied,’ Riley says.

He says ‘massive amounts of programming’ are controlled and produced by American producers and tv networks, and many Canadian services rely on American programming as a key component to their operations.

‘You can imagine if ytv and Nickelodeon were competing head to head, and ytv is relying in some cases on Nickelodeon programming, then that would immediately dry up,’ Riley says.

‘And if Disney were, all of a sudden, authorized to directly come into Canada, we’re going to lose our Disney programming,’ he says.

Canada’s four major

money variables

Robert Morrice, Royal Bank’s senior manager, entertainment software, says he sees four big issues facing the industry.

The first is the impact of Ontario government cuts to ofdc and ofip, which Morrice says will also have an impact on the infrastructure of interprovincial coproduction.

The second is the Cable Production Fund, which may run out of money.

The third is the loss of the cca and the introduction of the federal investment tax credit (ritc), which will not be bankable, and the fourth, if one is still counting, is the pending disaster of a strike by actra, Canada’s leading performers’ guild.

On the tax credit issue, Morrice says a recent Supreme Court decision says a bank, or any lender, is strictly prohibited from taking security in a tax credit.

‘Our opinion is that it only has value if it is liquid in the hands of the producer, if he or she can quickly turn it into cash,’ Morrice says.

‘The point being, it will not help the producer pay for grip, or crew or catering. And even if it is valid, it could take up to two years for the producer to get any cash out of it.’

The new tax credit program, which generates 12% of the budget to producers, came into existence this spring after the federal government estimated only one-third of the cost of the cancelled cca program, $150 million in ’93/94, was actually hitting the screen, the rest going to intermediaries and investors.

And Morrice says that unlike the cca, government will immediately know how much the new tax system costs.

‘At a time when government is trying to reduce expenditures or tax breaks, the more cynical people might see this as a better structure for them to reduce later on,’ he says.

The library

Morrice says the way film accounting works, few producers are actually taxable.

He says outside of the publicly traded companies, producers or distributors with libraries tend to write down their value.

‘Their accounting statements bear little resemblance to the true worth of the company.

‘The plug is the library. The accounting rules give (producers) a lot of flexibility as to how they can treat the library.’

‘Most privately held companies will write down the library as aggressively as they can – that, of course, reduces income.

‘It is only the public companies that have a duty to their shareholders to try and reflect the value of the company, and write the library down slower to reflect the useful life of the library.

‘Ironically, many of the stock analysts pillory the companies for doing exactly that, trying to show the economics of the library.’

In the high-volume tv domain, Morrice says libraries are a more ‘predictable’ commodity whose value can be set against the growing syndication or strip market in the u.s. and abroad.

Syndication values

Morrice says the value of a stripped series in the u.s. syndication market depends on where the series previously aired, whether it was network tv or cable, and how many runs it’s had, has it been overexposed, and the format, whether it is a one-hour drama or a half-hour comedy.

Dramas are holding their value, says Morrice, especially if it is not ‘a disease-of-the-week’ program.

Assuming a show costs about $1 million an episode to produce, and was broadcast off-network, as most Canadian series are, Morrice says a weekday strip of 65 hours could have a value as high as $20 million.

‘There are a couple of Canadian shows that produced the full 65 episodes, that never really had a regular home in the United States (Atlantis’ Neon Rider and Alliance’s e.n.g., which had a single season on cbs.)

‘It will be interesting to see how much they get for them when they exploit them in the marketplace,’ Morrice says.

Overall, independent production in Canada, excluding production by Canadians outside of Canada and in-house broadcaster production, is pegged at the current level of $1.5 billion.

‘No doubt, there is a lot more financial maturity in the Canadian marketplace than there was even two years ago,’ Morrice says.

‘As we develop new products for our publicly traded clients with solid bases of equity, we’re learning more about how the products work,’ he says.

‘We’re hoping to bring some of those products downmarket to the smaller producer, and even to those involved in one-offs.’

Morrice says new product from the Royal Bank includes an ‘insurance shortfall guarantee’ that lets the producer launch their product before achieving 100% presales.

At this point, he says the bank ‘is not seeing its competitors in the marketplace.’

The Royal Bank is closing, on average, two deals a week, and did $250 million worth of business in the film and tv industry in the first three months of 1995.

‘We are well on track for $500 million this year,’ Morrice says.

Sourcing funds

Against the backdrop of major cuts at most of the country’s film and television funding agencies, and their reduced participation in individual projects, producers in Canada have been bestowed a wide array of new funding sources.

Among them, the Cable Production Fund, a coproduction treaty with Japan, and, in the near future, with South Africa, and a not-yet-full slate of specialty channels such as Showcase, Bravo! and Canal D.

Sam Berliner, a lawyer with Heenan Blaikie, Montreal, says the combination of increased production costs with the decline of traditional funding sources, and the advent of new ones, all points to considerably more legwork for producers as they try to piece together the puzzle of budget structures.

‘Some of these sources such as the Cable Fund and the anticipated federal tax credit will need interim financing because not all the funds (will be) available during the course of the production or post-production, and that is also the case very often with distributors or broadcasters, who will pay only after delivery,’ Berliner says.

‘Many more pieces have to be brought together to complete the package, and a number of those pieces may require interim financing, and, therefore, we need to bring in the bank,’ he says.

‘As such, it’s a complete piece of business these days, especially for larger projects.’

‘For the larger producers with credit lines, they will be able to go to their bankers and borrow against that credit and finance the tax credit. (For) the smaller producers, they may have a difficult time because the tax credit is not assignable to a bank.’

Berliner says it remains uncertain how banks, or new groups of financiers, will react to the interim financing requirements of the smaller production companies.

Cash-flow problems

Berliner says the under-capitalized producer will have to wait until the production is complete, file tax forms and get (the new federal) credit that way.

‘It’s probably a question of having to defer their own fees, or part of their fees, until receipt of those income tax credits,’ he says. ‘So, it will be a cash-flow problem for them, personally.’

Berliner says there are only a few companies in Canada which can afford deficit financing.

As for production costs, Berliner says producers face big hikes when they service major cable and tv networks, which typically demand higher production values.

If actra’s collective agreement demands are met in the current round, then this, too, will add cost for what would otherwise be the same level or quality of program.

Telefilm’s take

Francois Macerola, executive director, Telefilm Canada, says ‘No’ when asked if the federal agency is reducing its investment in projects that have received money from the Cable Production Fund.

‘But it goes without saying that we would like that money,’ Macerola says.

With its own budget on the chopping block, the agency is less than thrilled with the early effects of the cpf’s top-up application for licence fees.

Says Macerola: ‘There is a `lack of harmonization’ between the cpf and Telefilm. On the other hand, sometimes Telefilm is tempted by the possibility of reducing our investment, since our own financial resources have been reduced drastically by government.’

Telefilm’s topper says there should be ‘a more dynamic relationship’ with cpf, which could take the form of ‘a working committee, and include the managers of other private funds.’

The cpf rules were initially developed by the crtc, and although Telefilm was invited to make comments at the time, Macerola believes Telefilm should play a more active role, acting as ‘a kind of consultant to the crtc when defining the rules for the private funds.’

Macerola says the agency and Cable Production Fund executive director Bill Mustos and other private tv fund managers plan to sort out problems at a session during the Toronto International Film Festival.

He says Telefilm would like to see licence fees increased above the 20% average, but another rather sore point is the shabby treatment of feature films.

The forgotten feature

Macerola says broadcast licences for Canadian feature films should be marked up drastically.

‘Now it’s $75,000 or $100,000 for a quality Canadian feature film, and it is very low,’ he says.

There are no broadcaster quotas for Canadian feature films.

‘A year ago, in preparing a presentation to the crtc, I was doing my research when I realized that there were more Canadian films shown in primetime on bbc than on all the private Canadian tv stations together,’ Macerola says. ‘This is a problem.’

Indeed, in less than five years, Macerola says the crtc has asked the industry’s private partners to establish ‘something like 15 or 17 funds,’ from operators as diverse as Cogeco Radio-Television and Maclean Hunter, and the cable industry, but none of the funds are available to feature film producers.

In response, Telefilm is lobbying the new dth services, Power DirecTv and ExpressVu, to ensure that any anticipated dth program fund would be open to features.

As for Telefilm’s budget, the short and midterm outlook is not good.

The agency is looking at ‘hypothetical’ cuts in the order of $25 million over two years: $15 million next year and $10 the following year.

‘Obviously, all the agencies have contingency plans based on a 25% cut over three years to the Heritage Canada budget, a cut in the order of $750 million,’ Macerola says.

Telefilm’s budget this year is $146.4 million, down from $150.8 million in ’94/95.

However, much of this year’s shortfall has been made up by increases in revenues, projected at $30 million in the current year.

Macerola says future funding for the agency may depend on recommendations by the cbc/nfb/tfc Review Committee, presided over by former cbc president Pierre Juneau, and, of course, Finance Minister Paul Martin’s next budget.

‘On the first day he was appointed, (Juneau) said very clearly he was not tied by the budget-cutting objectives of the government,’ Macerola says.

For those of little faith, the worst-case scenario, based on already announced or accumulated cuts to Heritage, would leave Telefilm with a parliamentary appropriation of under $80 million in fiscal `97/98.