Production comes clean

The lack of clarity surrounding how production companies make their money means agencies view them with suspicion. But are they as shady as they seem? James Hamilton reports.

While you're unlikely to find many top commercials directors or producers signing on at the Job Centre any time soon, most will tell you that theirs isn't the gravy train it used to be.

"I remember scripts clicking through on the fax and the excitement when someone in the office shouted: 'Fuck me, it's a Terminal Four job'," recalls a producer of 20 years experience. "Those were the scripts that started: 'We open on a sun-kissed beach ...'. We don't get many of them any more."

Leaner margins at ad agencies are naturally passed down to suppliers and translate to harder times for production companies. Few report anything more than 5 per cent net profit; many say they earn as little as 3 per cent. "Our margins have shrunk, but all our costs have risen - not just crews, but rent, power, phone bills and IT. If I worked for WPP and made a profit like that, I'd be taken outside and shot," another production company head says. "In fact, if our businesses are so good, why hasn't WPP bought us out?" he wonders, warming to his theme.

This isn't simply the view from the trenches. The TV departments responsible for commissioning production companies are broadly sympathetic to their financial situation.

"All I'm hearing from production company heads is how tight the budgets are and how their margins have been squeezed. They've slimmed down massively over the past ten years. There simply isn't the same money flying around," a head of TV at a large London agency says.

It's against this backdrop that the battle between production companies and Bartle Bogle Hegarty was fought earlier this year.

In a rare display of resistance, the production industry circled its wagons to fight what it felt was an unfair and unwarranted attack on its remuneration set-up and its creative control over production. BBH wanted to impose a system whereby it, not production companies, assumed responsibility for the appointment of editors to commercials projects.

This would have meant directors losing a key creative say in their final product, and their production companies a small, but significant, revenue stream, because editing is one of the areas marked up on the budget.

BBH countered that it was merely responding to mounting calls from its clients to move the entire creative process - including production - from translucency to transparency. It stuck to its guns. As did the producers who, represented by their trade body, the Advertising Producer's Association, steadfastedly argued that they should lose neither creative control nor income when it came to editing.

That it ended up as a high-profile dispute says as much about agencies' misunderstanding of the way production companies earn their living as it does BBH's bowing to client pressure for transparency.

"Production has been attacked for some time. Ten years ago, I'd have said 'fair enough', but the bottom line is I don't think production companies are doing anything wrong now," another London head of TV says.

That view isn't shared in all departments in agencies, though. The managing director of the London office of a large network agency says: "Production companies are not exactly scraping a living. TV departments have got to savvy up - there's still far too much mutual appreciation between them and production companies. TV producers don't push production companies as hard as they could. Most TV departments haven't been trained how to negotiate, and most production companies know how to hide the margin and keep it in."

Senior producers counter that the budgets upon which their payment hinges are as transparent and open as it's possible to get within a system based on mark-up. To suggest otherwise, they say, is grossly unfair.

"The distrust all goes back to the heyday of the 70s, when everyone was caning it and the whole business was larcenous. It's a historical problem," a veteran producer says.

"There was a golden era when the industry was profitable for everyone, but that's no longer the situation. Mark- ups then were as high as 40 per cent. Now they're only 20 per cent," John Hackney, a partner in the production company Home Corp, adds.

Mark-up is a simple equation, often misunderstood by many in agencies. Under the set-up, a production company prepares a budget based upon what it thinks the commercial project will cost to produce. Certain elements of the budget, such as editing fees, crew and equipment hire - are marked up, usually by 20 per cent. But because other costs - the director's fee, travel, subsistence, insurance and accommodation - are not marked up, the overall profit on the job is often as low as 15 per cent. And that's only if the ad comes in on budget. Crucially, the burden of risk lies with the production company, not the agency.

"On the face of it, there's no murk involved in the process," a production company head says. "We provide a fixed-price cost for the job and we shoulder the risk. The producer takes the budget to 'market', as it were and buys labour and equipment accordingly. A good producer should be able to buy better than the budget. To assume that this incremental income above and beyond mark-up is 'bunce' or 'profit' is to lose sight of the potential risks involved in production," he says.

Producers frequently make a loss on jobs, some with the knowledge they will do so before they begin production - their reasoning being the film will help the company or director win more lucrative work later down the line. Others fail to come in on budget when unpleasant or unforeseen events occur on the shoot. And because the production company bears the risk, it has to cover these eventualities.

"In order to make money, you have to be shooting a lot," the Academy managing director, Lizie Gower, says. "It's very hard to be financially viable with two or three directors unless they're huge stars. You need a lot of directors who are all shooting, because a lot of jobs won't make their mark-up. It's rare that we'll make more than the budget and very frequent that we'll make a loss on a production," she says.

One solution might be to move to a cost-plus payment set-up. Under such a system, production companies would receive a set return on whatever the production costs. It stands up to robust examination by cost controllers and doesn't put agencies in the difficult situation of having to explain to clients why production companies are allowed to retain any monies saved by coming in under budget.

"Cost-plus has been discussed with ISBA over the years, but it seems to suit everyone to keep the risk with the production company. Procurement departments are wary of changing the system because cost-plus has been shown to actually cost more in practice," a TV department executive says.

"We've worked every which way with different clients," Gower says. "I've found resistance from them to work 'cost-plus' because it can be inflationary. No-one's really guarding the money as it goes through," she says.

So in the immediate future at least, mark-up looks set to remain. What clouds it as a remuneration system is the now-sizeable number of people who have crossed from agencies to production companies and back again. "These people know very well that successful directors are on a large share of the profit," one producer says.He adds that some top directors will take as much as 40 per cent of the total mark-up on a job, in addition to fees that can be as much as £15,000 per shoot day. On an ad with a budget of £1 million, that means a top director might earn as much as £500,000.

"So agencies then reason 'how come the production company is whingeing about not being able to do the job for the money, or bleating about being able to stay in business, when they are prepared to pay directors whopping slices of the mark-up?'" he says.

The story goes that it was the Viral Factory's "Ravenstoke" viral campaign for Lynx that brought the issue of production budgets to a head at BBH. Why, the agency is understood to have asked, did the film cost so little compared with an ad destined for TV?

For anyone who hasn't seen the film (type "Ravenstoke" into YouTube to rectify that), it documents an experiment in a small Alaskan town to change the woeful female-to-male ratio by spraying the entire place with Lynx.

The Viral Factory worked directly with the Lynx owner, Unilever, on the film. An industry insider estimates that by cutting out Lynx's agency, BBH, the production company could have saved as much as 50 per cent of the production cost. "What's interesting about that ad is that no-one had creative control, bar the producer and the director, and yet it's brilliant," the insider says.

Robert Campbell, the managing director of the production company Outsider and a stakeholder in the Viral Factory, declines to comment on the actual costs of "Ravenstoke", but agrees that removing the long agency approval process from production can dramatically cut costs.

"The process has to change. We're still working in a world where it takes four months to make something, although we can do it in a day. The age of total control has to give."

There are those, though, who think such changes will take a long time to come. "Let's be clear. Agency process is a reason to employ. It's not in any agency's interest to do away with it," a rival producer says.

The ballooning interest in virals has led numerous production companies to look into launching dedicated units and the APA to establish a dedicated branded-content group.

To counter any claims that virals represent the true cost of production, and that TV ads are made at vastly inflated sums, the APA has produced a document explaining the differences. It explains that virals don't need to be produced to the same high production standards as TV ads; that they rarely incur travel costs; that the less complex shoot means crew costs tend to be lower; and that they tend to be simpler in process terms: agencies rarely attend the shoot and exercise creative control.

That said, the production industry shoots itself in the foot when sums such as £10,000 are bandied about for viral films. Yes, they may be cutting huge deals with suppliers and crews in order to tout up-and-coming directors, but such budgets are almost certainly loss-making, unsustainable in the long term and set an unrealistically low bar.

Back in March, when BBH was facing a boycott by APA members, the agency's head of TV, Frances Royle, said production companies would "find it hard to face the fact they too have to change with the times". It was a sentiment echoed by a number of agencies - production is lagging behind and the businesses need to change.

The APA chief executive, Steve Davies, disagrees: "Production companies are small and flexible. They constantly adapt to their clients' needs. Many of them are looking at developing their offering beyond commercials. They see themselves already as producers of moving-image advertising content. TV might remain the main market, but they are not confined to any one medium."

This doesn't just mean internet. Some are looking at producing content directly for mobile phones, a business model that could become very lucrative if they solve the problems of measuring the success of mobile films and negotiating a fee based on it.

Others are moving towards longer- form branded content. Emily Bliss, the managing director of Home Corp, says she is looking at branded content, although she concedes that companies such as hers face stiff competition from TV producers who have been in the long-form market far longer.

"TV companies might have the writers in place, but they need to bring in brand specialists to understand the brief. We have the right kind of directors for that," she says, although she does note that "more money's being spent on branded-content conferences than branded content itself".

"There's a huge scope for partnership with production companies and ad agencies. In the future, we'll sit together at the table with the client," a production company owner says. "We're doing the making, they're doing the strategic thinking and the creative. A lot of the process is about claiming credit as much as it is about accountability to clients. That's an unnecessary overhead that clients don't want to pay for," he warns. "If agencies don't grasp that point, clients are just going to go around them and realise they can cut a huge amount of cost by going direct."