Fail safe

Beleaguered European TV programmers are sticking with what works

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BERLIN -- Like a coastal resort hit by a tsunami, the European TV market is struggling to assess the damage of being battered by double-digit drop-offs in advertising revenue. The pillars of Europe's commercial television business -- such channels as Britain's ITV, Germany's RTL and France's TF1 -- have seen profits tumble or dissolve entirely in the first half of this year and no one expects things to get better anytime soon.

It's a sign of how bad things have become that the announcement by RTL Group, Europe's largest broadcaster, that it wouldn't lose money this year was taken as a sign of progress. Never mind that RTL has cut hundreds of millions of dollars from its cost base already, shut down its German in-house drama department and announced plans to fire one of every four people working for its U.K. network Five. It seems these days you're a winner if you just stay afloat.

RTL's misery has plenty of company. In the U.K., ITV and Channel 4 are flailing, massive cost-cutting at pan-European group ProSiebenSat.1 has barely stemmed the slip slide of profit and revenue and even Silvio Berlusconi's cash machine Mediaset has seen profits half so far this year, hit in particular by a 30% drop-off in advertising in the Spanish market, where Mediaset controls commercial broadcaster Telecinco.

In response, channels across the continent are playing the network version of "The Biggest Loser," competing to shed budget fat fast, not least by squeezing the margins of its program suppliers.

"This downturn is broader than previous ones and it is also unusual," says Gary Carter, COO of U.K. production giant FremantleMedia, which counts "X Factor," "Got Talent" and "This Farmer Wants a Wife" among its hit formats. "Traditionally, broadcasters have spent their way out of recessions. This time, they are passing on the pain when it come to budgets and margins."

The penny-pinching is taking different forms from territory to territory. While Germany appears to be shifting cash from local productions to imports, France, the U.K. and Spain are taking the opposite approach -- trimming acquisition budgets to focus more on home-made fare.

But from London to Lisbon, risk is out and security is in. Expect deals at MIPCOM to be of the "go with what you know" model. Formats that are working, or have a proven track record in their home territory will lock up slots. Innovative fare will hear "try again next time."

"We are getting more orders for established shows and are locking in longer runs," says Alex Mahon, group president of U.K. mega indie Shine Group, which counts "Gladiators" and "Masterchef" among its hit titles. "But for new players, for more experimental shows, it can be a difficult sale."

"Everyone is looking for safe bets," agrees David Ellender, CEO of sales group FremantleMedia Enterprises. "Broadcasters are more tentative then they have been in the past, they are looking to the immediate future, they want to stick with what they know."

Ellender says buyers have lined up to secure the upcoming second and third seasons of fantasy series "Merlin," for example, and such go-to entertainment titles as "Got Talent" and "The Apprentice" are having no problem getting renewed.

Even the new projects FME is bringing to market have a strong, safe pedigree, such as "Models of the Runway," a spin-off of reality hit "Project Runway" or "Jamie's American Road Trip," a Channel 4 production featuring superstar TV chef Jamie Oliver trolling through the culinary underbelly of the U.S.

"These are new shows but broadcasters are very comfortable with them because they come from existing brands, existing talent or existing genres that have proved they can deliver an audience," Ellender says.

Ironically, it might be up to Europe's traditionally staid public broadcasters to be the risk-takers in the coming years, as their license fees prove more reliable than commercial nets' ad forecasts. In high-end drama in particular, it will be the BBCs, ZDFs, France 2s, RAIs and SVTs that will be leading the way in Europe while commercial nets fill their schedules with low-cost reality and lifestyle programming.

All this cost-cutting and risk-averse behavior will lead to more consolidation in the European market. The trend toward pan-European production conglomerates -- think Endemol and Fremantle, All3Media, Zodiak, Banijay or Shine -- is set to pick up pace.

"I think there's no question of that. Companies with less than £10 million ($16 million) annual revenue are having a very hard time. There will be more consolidation," Shine's Mahon says.

Perhaps that's why Warner Bros. international television division has picked this moment to announce a global expansion that will see it buy or build local production units across Europe.

Building up a new Pan-European production group in this climate could be tricky, but Warner brings with it the two key advantages of deep pockets and a massive library of "safe bet" titles. These range from such hit dramas as "Without a Trace," "Cold Case" and "The Mentalist" to reality formats like "The Bachelor." The recession could also prove an advantage for ex-Endemol and Talpa Media boss Ronald Goes, who will run the new unit, as he shops for German, Dutch or Swedish companies to buy.

Prices -- for companies or shows -- are likely to stay for awhile. Few are predicting a quick bounce-back for European markets. In a recent market survey, PricewaterhouseCoopers forecast it could be five years before television ad revenue in the Eurozone returned to 2008 levels.

"It looks like this 10%-20% drop in advertising revenue we're seeing will likely be permanent," Mahon says. "That money isn't coming back. This will lead to different kinds of structures, different ways of financing production."

In the coming years, European producers will bear more of the risks in bankrolling productions, and will expect more of the back-end in return.

"You are going to see more innovative deals between producers and broadcaster, like us taking back more of our rights in exchange for a smaller margin," Mahon adds. "Producers are going to be expected to be more involved in bringing in outside advertising to finance a show."

Producers across Europe should be helped in their efforts by a loosening of laws banning onscreen product placement. Most European territories will begin allowing some forms of product placement in the next year or so.

Another trend Mahon sees is a move towards a more "U.S.-style licensing structure" in Europe, marked by longer runs and bigger commissions for primetime shows and far less cash for nonpremium slots.

"In the U.K. we are seeing channels licensing much longer runs -- 13-episode series -- which would have been completely unheard of two years ago," she says.

But while the Euro TV business tries to rebuild and restructure, the next tsunami -- digital fragmentation -- is just over the horizon. As broadcasters struggle to maintain their base, wave after wave of new digital terrestrial channels are splitting audiences. Ad dollars and eyeballs are migrating online and to mobile devices.

"There is no doubt the sands are shifting beneath our feet," says Carter of FremantleMedia. "One of the consequences of this recession I think will be to hasten and deepen the structural changes that are already going on in the industry."

Adds Marcel Fenez of PricewaterhouseCoopers: "In some ways this could be called 'the perfect storm.' Companies who grasp the opportunities and are agile enough to adapt their business models will be able to take full advantage of the new revenue models as they emerge."

Rundown of average license fees per episode (click to enlarge):