Canadian Media – The Toughest Decision

We’re talking a bit about some of the challenges facing Canadian media producers today, as interactive producers suddenly find themselves brought into contact with traditional media producers from film, television, and radio. This has been caused by recent changes to Canadian regulations, and the introduction of the Canadian Media Fund, which replaces both the Canadian New Media Fund, and the Canadian Television Fund.

Up to now I’ve talked a lot about the history of traditional media, but for now I’m going to break off to the perspective of the interactive producer, as this is my background. I am one of those guys who slipped sideways into Canadian media by being introduced directly into the “wild west” of unregulated interactive media.

Why would someone like me be interested in traditional film and television? There are several reasons. Firstly, the budgets for those productions are enormous compared to the usual interactive budgets. According to “Bounce Back to Fast Forward”, the report prepared by the Toronto Film Board in 2007, $700 million was spent on traditional productions in Toronto alone in 2006, and this was considered the slowest year since 2000. An average hourly drama episode in 2007 cost about a million dollars to make.

Based on my eight years of experience working on major interactive projects, I have rarely seen a budget allocated that came close to the budget of one such episode. And even recently I’ve seen budgets for CMF funded productions that allocated between 100K and 200K for their interactive efforts. While this is a tiny sum compared to the budget of the traditional portion of the production, it is still quite significant to most interactive companies in Canada. I, and my fellow interactive producers, salivate to think what we could do with those kinds of funds.

But then I ask, what might I be giving up to get those funds?

My world is non-regulated, free of unions, Canadian-content regulations, review boards and such. I am quite aware that my medium requires very different handling from something shown in a theater or on a television screen, and I have plenty of data to back me up on that.

I also worry what might happen if I begin to build government funding into my business model. Up to now, I’ve funded my studio by going out and finding clients who are willing to pay for my expertise in successfully communicating in interactive media. In other words, I’ve earned money by adding value to brands, or building useful things, rather than by qualifying for money through funding.

The Lesson of CORE

Never were the dangers of reliance on government funding more poignantly made aware to me than when I walked through the suddenly vacant space of CORE digital pictures earlier this year. CORE was one of the top animation studios in Canada, yet had folded, citing lack of government funding as the reason. I was there for the auction of their equipment. As I walked past desks I saw unfinished snacks still on tables and realized just how quickly they had shut down. It was a real eye-opener.

Yet the same year, the government provided incentives for both Starz Animation and Ubisoft to set up operation in Toronto. (And according to at least one insider source the owner of CORE was aware that was happening before the official announcement)

Some were upset that the government would assist Ubisoft and Starz over the home-team at CORE. But as I walked through the silent halls that day, I was struck by a serious thought. CORE owned nothing. Despite being full of talented people, they did not have a single intellectual property of their own. In other words, they were heavily reliant on American sources and performed fee-for-service work exclusively. Every time the Canadian dollar rose, their margins dropped, and they had built government assistance into their business model.

Both Ubisoft and Starz own valuable intellectual property. Starz less so, but they received only $25 million in tax incentives compared to the $226 million awarded to the French game company. In both cases, the recipients are required to commit to spending larger amounts than they received in incentives.

The point is well taken that these two companies, owning and developing IPs, look more attractive and are more likely sustainable than a purely fee-for-service model. Check out this statement issued by Nathan Vella of Capybara games, an independent video game company located in Toronto:

“In the early genesis of Capy, every facet of our business was dependent on larger American and European publishers who provided us with contract work almost exclusively for brands like Pirates of the Caribbean and American Idol. We didn’t control the IP, the development, or the business around the games. We were strictly a work-for-hire company, and although we did our best to make great games, the whole process was out of our control and owned by someone else. To make things worse, once a game was done, so was our cash flow until we found another project with yet another publisher who dictated the development.”

I, for one, can assert that Mr. Vella is totally right in painting this picture. It is a very common one, and the very situation that caused CORE to shut down when things got rough.

Capy did get tax credits from both the SR&D fund (scientific research and development) and the OIDMTC (ontario interactive development media tax credit). Neither of these are easy to qualify for, and both of them require that the applicant has already spent the initial funds in Ontario on wages. If you’ve done so and survived, you can get a bit back if you’re willing to wait for it.

It’s what Capybara did with the funds that is most interesting. They used them to create a single IP and distribute it through new digital channels (the App Store) rather than moving along to the next fee-for-service gig. That lead to still more IP development, and they’re now on their way. For them, incentives were a healthy step towards becoming self-sustaining, and did not become a crutch.

So the lesson seems to be that there is a smart way of using that government assistance in Canada, and in general it should go towards getting intellectual properties off the ground. The rule for interactive developers should be that they should NOT be seeking government funding for fee-for-service arrangements, as they can lead to the kind of hubris that results in a company suddenly sinking itself.

What then, does that mean for the arrangement with the CMF?

Make no mistake, the interactive producers are NOT the ones running the show with the CMF. They are the ones being approached to do fee-for-service for producers and directors creating television and film productions using CMF funds (administered by Telefilm). And isn’t that the dangerous position to be in that we just talked about? What is the difference if it is fee-for-service to a Canadian company or an American or European one?

On the surface, it looks like a great opportunity to make some serious coin. And if the interactive producer is disciplined enough to take the money they earn and then apply it to creating unique intellectual properties, they might just be able to sidestep becoming dependant on government funds.

But the reality of things is that it often just doesn’t work that way.

For one, working with traditional producers the interactive producer will spend a lot of time explaining themselves rather than actively building. In an industry where time is money (times one thousand) delays and rewrites can drag out a project enormously. The extra demands of working alongside clients who have little understanding of the success metrics of interactive media can severely cut into the development of your IPs, both in terms of time and focus. It is, as Mr. Vella so well described ‘out of your control and owned by someone else’.

Second, when you take on such co-funded projects, they become part of your business model. You put a lot of time and effort into making them work. You establish communication and project plans and payment structures. When it is all done, it’s hard to toss that away for the IP development model, when chances are you could go to your next fee-for-service funded job. Chances are you staffed up to handle that work, and now you’re reluctant to downsize. So you need another job fast. You may find that each successful project actually takes you further and further away from the independence you set out to achieve.

It’s been said that ‘the work you advertise you get more of’ and that is very true. When your portfolio begins to fill up with fee-for-service work done for others for their properties – well it tends to repeat itself.

So again, we get back to our general rule of thumb – no government cheddar without IP work. Take it only if you’re working on something than you can own. It’s a hard road, a long-haul, and tough to succeed in. But it can be done! And thankfully there are some great new tools and some shining examples to help us along the way. We will look at some of them in the following article.