BUSINESS

Exporting entertainment

A host of Canadian companies are making international inroads in a competitive market

BRENDA DALGLISH February 13 1995
BUSINESS

Exporting entertainment

A host of Canadian companies are making international inroads in a competitive market

BRENDA DALGLISH February 13 1995

Exporting entertainment

BUSINESS

A host of Canadian companies are making international inroads in a competitive market

BRENDA DALGLISH

Due South, one of this season’s most popular new television series in the United States, features a polite Mountie policing the mean streets

of Chicago. While busting degenerate crack heads and petty thieves, the stalwart Mountie speaks so correctly that he rarely uses contractions, let alone cuss words. If that seems like an unusual premise for a hit U.S.

series, consider his even more unlikely sidekick—a deaf, lip-reading wolf named Diefenbaker. Although American viewers may not recognize the wolfs name or even realize that they are watching made-inCanada television, they like the series. Due South, which is broadcast on Thursday evenings in competition with NBC’s strong comedy night, including Mad About You and Seinfeld, is the highest-rated new television series on the CBS network this winter. Robert Lantos, whose company, Alliance Communications Corp. of Toronto, produces the show for CBS, says that it is also the highest-rated television series ever made in Canada. “Being a little off-centre is an advantage today,” said Lantos, whose company currently has three other projects in development that feature Mounties. “Whatever Canada has that is differ-

ent—even if it’s nothing more than pure mythology—works in our favor.” In fact, a great deal is now working in favor of the Canadian entertainment industry. In addition to the cultural distinctiveness of dashing Mounties, the industry enjoys such benefits as advanced international sales and distribution systems, skilled artists and technicians and lower production costs that are paid in Canadian dollars, while sales are made in U.S. dollars. And for a business

that was almost non-existent 30 years ago, the Canadian entertainment industry is maturing quickly. Although some insiders wam of accounting problems relating to the way companies are valued— which could stain the short-term reputation of the industry—in the past two years many of the leading entertainment companies in Canada, including Alliance, Cinar Films Inc., Nelvana Ltd., Atlantis Communications Inc. and Live Entertainment Inc., have sold shares to the public. In 1994, provincial film commissions estimate that $1.2 billion was spent producing movie and television programs across Canada. Statistics Canada says that more than 300,000 Canadians now work in the “culture sector,” which ranges from film production to book publish-

ing. “The entertainment industry is an extremely labor-intensive business that spins off good jobs that require creativity and technical skills,” said Micheline Charest, chairman of Cinar Films, a Montreal-based television production company that specializes in animation series for children. “It’s part of the New Economy.

This is an industry of the 21st century.”

The new stock issues have turned in mixed performances since they were sold to the public. While the stock market in general has performed poorly in the past year, analyst Roger Dent, who covers entertainment stocks for Wood Gundy Inc. in Toronto, says that investors have trouble evaluating the new entertainment issues and some of the them have been caught in the general decline of small capitalization stocks. Nelvana’s initial offering, for instance, was made in May,

1994, for $14.25, but it is now trading at $13. Others have fared better. Alliance’s initial offering was priced at $13 in July,

1993; it is now trading at $15.75.

Still, the peculiarities of the entertainment business make investing in it somewhat risky. Tales of Hollywood accounting scams, which include improper cost accounting so that even some wildly successful projects never appear to make money, are wellknown. In Canada, some industry insiders say that the accounting problems in the young industry are even worse. For instance, a large part of the value of most entertainment companies is their libraries—old movies and television series that they have the right to resell. But Canadian accounting rules do not strictly define how those values should be calculated. “Do you write off a project over one year or over 10?” said one industry veteran who asked not to be identified, pointing out the difference such decisions make to a company’s profitability and asset values. “The various public companies all do it differently.

There are no laws in this country yet.” Despite the drawbacks, the entertainment industry has attracted the attention of some serious corporate money in recent years. Pintertainment hardware manufacturer Sony Corp. of Japan owns CBS Inc., and Matsushita Electrical Industrial Co. owns Hollywood movie producer MCA Inc. Even companies in completely unrelated businesses are gravitating to entertainment. Seagram Co. lid. of Montreal spent $2 billion to buy a 15-per-cent stake in Time Warner Inc. last year. Tune Warner is the leading diversified entertainment company in the world, with holdings in such companies as Warner Bros, f'ilms, the cable movie channel HBO, Time Inc. and Atlantic Records. Seagram chairman Edgar Bronfman, summing up his reasons for buying into the entertainment business, said that he is convinced that the standard work week will eventually be shortened leaving people with more leisure time. “It’s the only way we’ll be able to get employment up,” said Bronfman. “And that’s going to be good for the entertainment business.”

A combination of two other factors is greatly increasing the international demand for entertainment products. Lantos says that a technological revolution has broadened the outlets for entertainment: satellite dishes and video rental stores are increasingly competing with traditional television and theatre productions. And if, as experts predict, the 500-channel TV universe is just around the corner, the demand will grow even greater. At the same time, increasing political freedom and rapid economic development in countries like China, Russia and Eastern Europe are multiplying the number of consumers who are able to watch Jurassic Park or Murphy Brown. “The combination of those two events,” said Lantos, “is creating a cornucopia of voracious new mouths which feed on our software.”

But as demand increases so does competition. Few other industries face the kind of competition that entertainment companies experience. “Think of how brutal that zapper at home is,” said Lantos. “It can zap you out of the most emotional close-up in a nanosecond. The consumer is king, no one can tell him what to watch.” As a result, the competition to produce popular products is intense. Lantos says that last year, for instance, NBC paid more than $8 million to buy a four-hour mini-series on the life of fugitive Lawrencia Bembenek—better known as Bambi. The network bought the program sight unseen, based on nothing more than a screenplay, a producer, a director—and the knowledge that Alliance was overseeing the project “They had to rely on us to deliver the finished product on time, so they could play it in the sweeps period,” said Lantos. “And they had to rely on us to supply a product that could compete with everything else on the air.”

As a result of a system in which the U.S. networks spend millions to buy products without preview, established suppliers with a track record of delivering quality entertainment have a considerable advantage. “We have to deliver a product that is of high quality and has a chance of being a hit,” said Lantos. “At the very least, it’s not going to be an embarrassment.”

For that reason, and because of the increasing costs and risks associated with entertainment production, Lantos predicts that companies in the industry will continue to grow larger and to consolidate. They need the broader capital base to produce the high-budget productions that are increasingly popular—and to absorb the costs associated with occasional failures. Lantos said those financial realities are one of the reasons he chose to sell Alliance shares to the public.

But not all Canadian entertainment executives agree with Lantos’s view of the business. Kevin Sullivan and Trudy Grant founded Sullivan Entertainment Inc. of Toronto in 1979 because Sullivan wanted to make films. While he produces projects, Grant, his wife, handles distribution and finance. Sullivan Entertainment is best-known for the Anne

of Green Gables series, the TV version of the Canadian classic, which has been sold to 135 countries around the world. But the company is still privately owned. “We have enough money to do all the projects we want,” said Sullivan. “I couldn’t see any need to go public. This business runs on creativity, not cash.” In fact, Sullivan sees a danger in growing too large. “If you have to be volume driven,” said Grant, “how do you keep the quality?”

Sullivan Entertainment, like almost all of the screen entertainment companies and even livent, impresario Garth Drabinsky’s theatre company, puts a high priority on international

sales. Sullivan says that his projects are never undertaken with an exclusively domestic market in mind. “The Canadian market is not large enough,” said Grant. “You have to sell internationally.” Unlike Lantos and others, who work as partners with other companies that co-sponsor productions, Sullivan says that he retains control of his projects. ‘We insist on absolutely no interference,” he said. Lantos, on the other hand, says that most of Alliance’s productions are done with partners who have a say in everything from the choice of director and stars to the script. “Virtually all decisions are made collectively,” he said.

“This is not a world where there is a single inspired artist who goes away and comes back with his finished art The costs and the risks are far too big for that”

Despite their different views, Sullivan and Lantos, like almost all the senior players in the Canadian entertainment industry, were drawn to it through their fascination with making movies. Using government funding intended primarily to foster the development of Canadian culture, the industry established a foothold. Now, although government money is still available for “Canadian” projects, most of the entertainment companies say that it merely helps a few specific projects; it is no longer necessary to keep the industry alive. Public funding rarely covers more than a small fraction of the overall budget of any of the eligible major projects now.

It has taken a long time for the industry’s commercial potential to be recognized. Even after he had completed several successful film projects, Sullivan said: “My mother was always asking me when I was going to get a real job.”

As a young man fresh out of McGill University in Montreal, Lantos got started in the business as a distributor of erotic films. In 1978, he produced a film adaptation of Stephen Vizinczey’s novel In Praise of Older Women, which got mixed reviews and made money. While Lantos says that he still enjoys the artistic part of the job, he rarely has time now to do more than choose the producer, the director and supervise the first two or three scripts of a new television project

Alliance does more television production, which is less financially risky, because the cost of producing television programs is usually entirely financed before production begins. But Lantos also produces six to 10 movies a year, including ones that are not obvious commercial blockbusters. In 1991, Alliance produced the critically acclaimed film Black Robe. It is based on a bleak story by Canadian writer Brian Moore about a 17th-century Jesuit bringing Christianity to a native community. It cost $14 million to produce and grossed $3 million at the box office. Alliance says that when revenues from all other sales, including sales to television, are totalled the movie more than paid for itself, although Alliance refuses to disclose total revenues. Later this year, Alliance is scheduled to release its biggest budget movie yet, Johnny Mnemonic, a cyberfiction adventure by William Gibson, a Vancouver science fiction writer with a dedicated and growing following. And with a budget of $32 million and the hot Toronto-born Hollywood star Keanu Reeves in the title role, Johnny Mnemonic seems to run contrary to Lantos’s promise that Alliance will not risk head-tohead competition with Hollywood.

Despite their obvious differences, all Canadian entertainment companies—from film producers to animation houses and live theatre companies—share some common ground. For one thing, they all benefit from producing in Canada, where the dollar is rel-

atively low in value, and they sell into international markets for U.S. dollars. Like Canada’s natural resource giants, the low dollar gives them a distinct edge against other international competitors.

Another shared characteristic is that, for profit-motivated businesses, they are all overtly nationalistic. In fact, they seem eager to put a distinctly Canadian stamp on their products. Montreal-based Nelvana, whose animation series include Rupert and Tales of the Crypt Keeper, used to hide a hockey stick in each of their animated projects. And like its peers, Nelvana mixes both Canadian and non-Canadian subjects into its production schedule. For instance, Nelvana is now producing two television series for adolescents based on the Hardy Boys and Nancy Drew mystery books. But it is also working on a TV series called Jake and the Kid, based on stories by Saskatchewan writer W. 0. Mitchell about growing up on the Prairies.

Even Ed Mirvish, who with his son, David, is best-known for splashy Broadway-style megaproductions such as Miss Saigon, a musical about the Vietnam War, and the Gershwin musical Crazy for You, says that he is always on the lookout for a Canadian play that will rival the big Broadway productions. “David goes to nearly all the small Canadian theatres,” said Mirvish. “In the coming years, there will be a great one to come out of Canada.”

But as an investment, Mirvish says that he is cautious about recommending entertainment. Mirvish, whose first business was Honest Ed’s, a discount department store in Toronto, says that he only got into the business because he bought the Royal Alexandra Theatre when it was about to be torn down 32 years ago. And he bought it, he says, only because he thought it was an undervalued real estate investment. “The theatre is a high-risk, unpredictable business,” said Mirvish. “I’d never give up my day job. When you consider the time and energy you put into it, it’s a pretty poor investment.”

Despite his reservations, Mirvish has made money in the theatre and expanded his investment: he bought London’s historic Old Vic theatre in 1982 and in 1992 he built the new Princess of Wales theatre in Toronto. But he warns that entertainment is still a luxury business, governed by rules that are completely different than his retail store, which sells necessities. “In the store, if I want to move something all I have to do is drop the price by 20 cents and by the end of the day it’s gone,” Mirvish said. “In the theatre, if a show isn’t well-received you can’t give the tickets away. If it’s a good show, the first seats to sell are the high-priced ones.” But while Mirvish says that his discount store is a better moneymaker than his theatres, he loves the entertainment business best. “It’s high risk,” he said. “It’s like going to the races when you win. It’s an exciting world.” And as some companies prove that they can also be profitable, the story of Canada’s entertainment industry may be destined for a happy ending. □