FremantleMedia Should Focus on Drama and a Successor to 'Idol' (Analysis)

Paul Jolley American Idol Beatles night perf P
Frank Micelotta / FOX

The TV production giant, producer of "American Idol" and "The X Factor," is set for a spending spree this year as parent Bertelsmann chases global growth.

The year 2013 is shaping up to be a major turning-point for FremantleMedia, the London-based production group whose output includes American Idol and The X Factor.

PHOTOS: 'American Idol' Season 12: The Top 10 Finalists

Bertelsmann, the German media giant that owns Fremantle, has pledged to spend as much as $4 billion over the next three years on expansion and acquisitions and Bertelsmann CEO Thomas Rabe has singled out FremantleMedia as one of the conglomerate’s “growth platforms” that it wants to boost through both organic and M&A-driven expansion.

STORY: Simon Cowell's Syco Partners on 'X Factor' Musical in London

Fremantle is facing a watershed in its development. The so-called “shiny floor” formats that have been the engines of its revenue for the past decade – shows such as American Idol and The X Factor – are sputtering. American Idol ratings have dropped to an all-time low and last season's performance of The X Factor in the U.K.  - with 9.3 million viewers tuning into the season finale – was the worst in seven years.

Fremantle's co-production alliance with Simon Cowell's shingle Syco Entertainment – producer of both Britain's Got Talent and The X Factor in the U.K. - could face pressure when the group's three-year deal with commercial network ITV – worth an estimated $75 million annually - comes up for renewal this Fall.

There are similar issues with local versions of the Idol and X Factor formats worldwide, especially in larger territories such as Germany where the shows have been on air for several seasons and are showing signs of audience fatigue.

While revenue at Fremantle last year jumped nearly 20 percent to $2.18 billion (€1.7 billion), operating profits slipped 3.5 percent to $177 million (€138 million) as the company felt the pinch as broadcasters tightened their budgets and squeezed profit margins. William Mairs, a media analyst with the Nomura financial group, has forecast growth from Fremantle's content business slowing to just 3 percent this year.

That won't be enough for Bertelsmann boss Rabe, who has made it clear he will sell off or shut down any operations that don't deliver solid growth. So acquisitions and an internal  strengthening at Fremantle are in order.

On the acquisitions side Rabe, probably sensibly, ruled out a bid for Fremantle's leading competitor Endemol, the world's largest independent TV production company whose show formats include hits such as Big Brother and The Money Drop. Despite its massive debt burden, Endemol is still likely to be warrant a hefty price tag if, as expected, it goes on the auction block later this year. Instead of swallowing a big billion-dollar whale like Endemol,  Bertelsmann is instead to add to Fremantle's portfolio through smaller select buy-outs and targeted investment in programming. 

Two of the company's European competitors could provide models for Fremantle. Red Arrow, the production arm of German-based broadcaster ProSiebenSat.1, has quietly been snapping up boutique production operations with strong track records including L.A.-based Fabrik Entertainment (formerly Fuse), makers of AMC’s The Killing and Burn Notice on USA Network; or USA’s Brit shingle Endor Productions, whose work includes the Bafta award winning miniseries State of Play.

If Fremantle has a gap in its production side, its in high-end drama, a genre that's enjoying a market renaissance as broadcasters worldwide are seeking out critically-acclaimed shows from AMC's The Walking Dead to Danish drama Borgen. ITV cut Fremantle's long-running crime drama The Bill three years ago and the strength of Fremantle's U.S. divisions focus is non-fiction and reality formats. German subsidiary UFA is a drama powerhouse but, with the exception of the hugely successful Scandinavian series Borgen, it is English-language series that remain the must-have for global networks. A high-profile fiction production company – U.K. or American - would be a valuable addition to Fremantle's stable.

The other production model Fremantle would do well to study comes courtesy of John de Mol and his Dutch outfit Talpa Media. With The Voice, Talpa has demonstrated how to tweak an established format – the singing competition show – and create a new global phenomenon, just the sort of revival Fremantle could use as its formats face decline.

Talpa has also cracked China – the crown jewel of global TV – with a local version of The Voice, produced with Star China Media, which was a ratings hit and has already been ordered for a second season. A collaboration with News Corp-backed investment vehicle Puji Star Media will see Talpa further focus on the production of formats for the booming mainland Chinese market.

While Fremantle has had a production operation in Singapore since the early 1990s and is a production giant in India, mainland China remains mostly untapped. A recent deal with Shanghai-based Dragon TV to produce a Chinese version of American Idol is a long-overdue move. How Idol performs in China - the show goes on the air later this month - will be a key indicator as to how good a year 2013 will be for FremantleMedia.