Kate Bulkley, Media Analyst.

What does Desmond want from suppliers?

By Kate Bulkley

Broadcast News

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For Broadcast March 24, 2011

Attempts by Channel 5’s new owner to renegotiate deals with suppliers caused outraged among indies and forced him into an uncharacteristic U-turn. But does he have a point? asks Kate Bulkley.

When Richard Desmond bought Five last year, few could have predicted the extent to which he would attempt to shake up the relationship between independent producers and the broadcasters.

Indies and trade group Pact have fought for decades to improve the terms of trade, yet the newest broadcasting baron has thrown a monkey wrench into the industry’s tortuously hammered out rights situation.

Since buying Five from RTL Group and rechristening it Channel 5, Desmond has taken on Hollywood studios and indies, trying to rewrite existing contracts and introduce new commissioning payment models to bring down the channel’s costs - at the least, attempting to push out payment dates for existing deals.

TV invoices are traditionally due 30 days from invoice date; C5’s owner wants to push this to 90 days, even for current contracts, and one supplier was asked to push its agreed invoice dates out by months.

“I don’t know anybody in today’s environment who is cash-rich and can shoulder that burden, given the state of the advertising market and the DVD business,” said one TV executive who has had dealings with C5. “There aren’t growing alternative revenue streams out there that make up for the deferrals they are looking for.”

One of the first to feel the new wind coming from C5 was Shine Group, whose Don’t Stop Believing was three weeks into its first run when Desmond bought the channel. C5’s new owner wanted not only to push out the invoice date for paying Shine, but the agreed payment of nearly £1m was queried, especially since the show flopped, with ratings initially 1.5 million but soon plummeting to a low of 617,000. C5 also refused to pay for marketing and advertising costs for the show.

Legal threat

After weeks of back and forth, with Desmond’s accountants going through Shine’s budget on the deal line by line, Shine snapped and threatened legal action. Combined with a phone call from Elisabeth Murdoch to Desmond, this seemed to do the trick; Shine got paid and the temperature lowered between the two companies.

Shine, along with a number of other indies, has been in touch with Pact about the situation and the trade body “has a plan”, according to a Shine executive. Pact is looking at codifying more clearly commercial terms and conditions that have been largely understood in the industry, from invoice payment terms to responsibility for programme marketing and advertising, to the idea of a variable tariff where payment is based on a programme’s on-air performance. The last of these is the one that raises the most fear and loathing among indies.

That Desmond took on the daughter of Rupert Murdoch as his first target speaks volumes about his aggressive approach. Legend has it that Endemol’s Tim Hincks also discovered that the usual rules of civility don’t necessarily apply with C5’s new boss - the industry talk is that Hincks’ first meeting with Desmond about the opportunity for resurrecting Big Brother at an early date ended with Desmond, in choice language, telling Hincks that he didn’t need a lesson in how to run his business. The talks continue.

In fact, what seems to have angered C5’s suppliers the most is not that Desmond is looking at tightening up the cost structure of the broadcaster but how he is going about it. Shine stood up to him, as have some of his other big suppliers, but it has not been easy and the threat of legal action seems to be the best way to get Desmond’s attention. “There is nothing collaborative and constructive about the way Desmond and his henchmen do business,” said one supplier. “Their approach is unilateral and without discussion or agreement.”

However, in recent weeks, Channel 5 - which declined to talk to Broadcast for this feature - has stepped back from the aggressive stance signalled by Northern & Shell director Stan Myerson last autumn, which looked to link programme performance to payment. Myerson said then that indies could receive a bonus if shows rated well, but have their payment reduced if they underperformed. “The way the business works is changing and no one is compelled to work with C5 if they don’t like their terms,” he said then.

Collaborative spirit

Last month, the broadcaster’s spokeswoman announced the U-turn. “This is not something that C5 is intending to pursue,” she said. The industry doesn’t yet know the depth of the new warmth emanating from the broadcaster’s new digs on Lower Thames Street, but it could signal a willingness to build more collaborative relationships, something that will elicit a cautious sigh of relief from suppliers.

But the broader question is, has the TV business been a bit cosseted, and is a more aggressive approach to business an overdue wake-up call?

One senior executive at a superindie even admits that the terms of trade are a “bit toppy” in favour of the independents, adding that all indies regardless of their size need to be aware that the terms of trade, no matter how good they are, do not cover everything and “good commercial skills” are also needed, especially as broadcasters feel more financially strapped. But for smaller indies, negotiating leverage is exactly what the terms of trade provide.

“The terms of trade are a fallback that gets you out of the hole when the budgets are under stress,” say Glyn Middleton, chief executive of True North. “Production is tight and people are expecting a lot for less, so what you have in the terms of trade is a default position.”

ITV has been the most vocal about how it believes the terms of trade should be re-evaluated, and new chief executive Adam Crozier is keen to make ITV Studios a bigger supplier of the channel, thus also making it easier to hold on to all intellectual property for exploitation on other platforms.

Channel 4, which is the most dependent on independents because of its charter, is keen to stand out as the best place for indies to do business. “Our terms of trade are no different than the others, but there are tones and there are ways of doing business,” says Martin Baker, head of commercial affairs for Channel 4.

“Running a brilliant business affairs and programme finance function is not going to attract better ideas, but running a bad one can drive people away.”

Baker believes that C4 is learning to manage the secondary market in a way that favours both itself and its suppliers. He cites Peep Show and Shameless as programmes where C4 has “released best value while not materially impacting on the value of the primary licence” by collaborating with All3Media on secondary market exploitation.

“We will have paid around £20m to indies as their share of deals we’ve managed in the UK secondary market in 2010,” says Baker. This comprises payments for VoD, DTO, DVD and secondary TV sales, and compares with £12.5m in 2009. “We think we are the best placed to manage DTO, VoD and linear repeats because working with us, the net effect is a bigger punch than if the producers did it on their own.”

As long as C5 is a PSB, Desmond has to work inside the business, including the terms of trade. As for the tariffs, C5 is already at the bottom end, paying £150,000 to £200,000 per hour for drama compared with ITV’s £400,000 to £800,000, and the tariff gap in entertainment programming is even more acute. C5 went through a big budget-cutting exercise under the last regime and some question how much more Desmond can scale back before it’s acutely obvious on screen.

And it’s fair to add that when Dawn Airey was still at the helm, some indies were already complaining that they were having to give up their intellectual property to get a reasonable tariff.

One thing is clear, though. Desmond knows exactly what he is up to with his hardheaded approach. This is not the early teething pain of a novice TV executive learning about a new business; this is business as usual.

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