Faced with rising costs and revenue shortfalls, Canada’s leading post houses say diversification and finding new efficiencies is the key to maintaining profit margins.

The post industry is coming out of a difficult 2007, during which the U.S. writers strike and the strong Canadian loonie caused a work slowdown.

At the same time, operating costs continue to increase due to technology upgrades required to stay competitive, as well as rising staff costs.

‘Budgets are shrinking, so clients need us to do more with less money,’ says François Deschamps, EVP of Technicolor-Montreal. ‘So we are always looking for efficiencies. It is an ongoing challenge. We are all rethinking the way we offer our services and looking at new ways of doing the work so we keep our profitability.’

According to the latest numbers from Statistics Canada, in 2006 the post-production industry saw operating revenues dip 2% to $822 million. However, this was offset by a drop in operating expenses, which fell 2.6%. As a result, the post sector saw profits totalling $53.1 million in 2006, increasing its profit margin to 6.5% from 5.8%.

Alex Tkach, VP and GM at Vancouver’s Northwest Imaging & FX, says that post revenue continued to slide downward in 2007, in large part due to the American writers strike.

But through diversification, Northwest was better able to weather the storm. In 2007, Northwest expanded into animation, with 13 x 1/2 hours of Jibber Jabber for YTV, which created a critical new revenue stream and helped offset the company’s reduced post-production revenue, which fell 20%.

‘We have to diversify; we have to become bigger, better and faster,’ says Tkach. ‘Budgets are getting tighter. Clients want more on the screen, but they want to pay less for it, so we have to supply more effects for the same amount of money. We are being forced to find efficiencies.’

Furthermore, with the dollar parity, Northwest is doing less finishing work on its American shows.

‘Before 2006, we used to finish here and ship the master to L.A.,’ says Tkach, noting that all of the shop’s current U.S. shows, including the final season of Battlestar Galactica, Eureka and Kyle XY, all finish in L.A. ‘Now, with our costs equal to the U.S., there is no reason to keep a director and post supervisor in a hotel for three weeks when it costs the same amount to finish in L.A. There are no savings here.’

At Technicolor, Deschamps says the post giant’s Toronto and Vancouver shops felt the impact of the writers strike and the Canadian dollar parity, but in Montreal, a busy year of local production kept volume high.

He also notes that expansion into new services is crucial. In 2007, Technicolor Montreal launched a commercial division, which he says is already very busy.

Dan McLellan, EVP post-production at Deluxe Toronto, admits that 2007 was a challenging year, and the company had to lower prices to keep some of its American clientele. So far, 2008 is looking good, barring any more American labor unrest, with actors’ contracts soon to expire.

‘We are booked solid through to the fall in Toronto, and things are starting to pick up in Vancouver,’ he says. ‘We are cautiously optimistic, as our first quarter this year is stronger than we anticipated.’

Deluxe also views diversification as the key to help offset any future bumps in the road.

‘Our strategy is a simple one: once you capture a client you keep them in your facility and don’t let them go to a competitor for any reason,’ says McLellan. ‘That is in large part why we moved into visual effects when we bought CIS Hollywood, and it was a catalyst for us in terms of buying Rainmaker’s visual effects assets in Vancouver. It allows us to attach ourselves to a bigger piece of the pie. That means we can get more aggressive discount-wise.’

McLellan says post houses are looking at using their technology more efficiently in order to retain profitability.

‘We have a fixed capital cost associated with our equipment whether we work it one hour or 23 hours a day, so a big part of our focus is greater utilization,’ he explains. ‘For example, in our media management services for distributors, the client doesn’t have to be in attendance, so we are quite happy to do that work at 3 a.m. if it means the same piece of high-def equipment can be used during the day to master a film. Post companies everywhere are trying to get more out of the gear they purchase.’

Efficiencies can also be found by purchasing technology that makes processes quicker and easier and allows for less experienced staff to do the job.

‘An example of a cost-effective approach is using a $22-an-hour employee to do a specific job instead of the $25-an-hour employee,’ says Tkach. ‘Or because of computer technology, we now have people who aren’t as specialized as they used to be. So you have one person who can do three functions rather than hiring three people.’

New technology is also translating into new services – and sources of revenue – for post houses.

‘Shows are shooting more [footage on] videotape than they did on film, so instead of doing four hours of dailies we are now doing six hours, so that translates into more revenue,’ says Tkach. ‘As well, transferring footage via the Internet to Los Angeles has created a whole new service for us. Data transfer is now representing almost 10 percent of our business.’

At the same time that post budgets are being squeezed and profit margins are tighter, the post houses agree that – contrary to the StatsCan report – operating expenses continue to rise.

Northwest has spent $3.5 million in recent years to construct a high-definition facility, a film lab and to improve its film transfer system.

The only area where Tkach is finding some cost-savings is on certain gear, including computers, software and HD equipment.

‘For example, I could never have expanded into 3D animation 10 years ago with a crew of 35, because each workstation cost $50,000,’ says Tkach. ‘Now each workstation is $6,000, because software prices have dropped dramatically.’

Deluxe Toronto’s capital budget for 2008 exceeds $2 million, and that does not include any major upgrade – only smaller purchases such as additional HD decks and upgrades to mixing consuls.

Deluxe Vancouver, meanwhile, plans to spend several million on the film lab operations, telescene and adding media management services. It will look at putting eFilm digital intermediates services into Vancouver in 2009.

Down the road, McLellan says new technology, such as Red One digital cameras, will likely mean more major upgrades for post houses.

‘There will be some big challenges on the post side,’ he says. ‘I don’t know if people realize that all the savings from these new high-quality, low-cost cameras may be eaten up in post. We will need to make significant purchases on the data storage side to accommodate all the picture information we will be receiving, and manage, edit and color correct it. There will be additional costs.’