The recent Xconomy piece on Noubar Afeyan’s ideas for a biotech ”innovation supply chain” got me thinking about how other industries strike a reasonable balance between their big distributors and smaller creative types.
I don’t work in the biotech sector but, as a 37-year-old with cystic fibrosis, I am interested in the end-products. I live in the U.K. and used to work in investment banking and private equity but now I have had to step back from full-time work. I try to strike a balance between work and the increasing demands of my disease. I am a director of a couple of companies, do some consultancy and act as a patient advocate trying to improve rare disease drug development and patient access. One of the companies I am involved with is an independent production company making factual entertainment TV shows for viewers in China.
While the capital requirements are quite different, I think the biotech industry is similar to the TV production industry in the sense that both are highly creative and a small number of gorillas control access to the end-customer. Like independent TV producers, biotech companies need to invest a lot of time and money on developing a product before they can ever hope to be rewarded with product revenue.
The U.K. independent production sector was essentially created by the Broadcasting Act of 1990 which introduced independent production quotas forcing broadcasters to commission a certain percentage of their programming from independent production companies. The sector was then transformed by the Communications Act of 2003 which introduced new “Terms of Trade” in 2004 and fundamentally rebalanced the rights ownership position as between broadcaster and independent producer.
The Broadcasting Act of 1990 created a defined and regulated market for independent producers in the U.K., which required that operators of Public Service Broadcasting licences (the BBC, ITV, and Channel 4 at that time) devote not less than 25 percent of the total amount of time allocated to ‘qualifying programs’ to independent productions.
Because of these reforms, the U.K. independent production sector has grown to a position where U.K. companies can be considered as leaders in the global market for television programs and associated intellectual property (IP) with the UK program supply market ranked as the leading net exporter of television formats in the world.
Prior to 2004, the U.K. TV industry was driven by a basic ‘cost-plus’ business model. Typically, producers would agree on program production costs with the commissioning broadcaster and would receive a production fee in the range of 5-15 percent on top of costs. Independent producers were commonly required to assign all their post-broadcast program rights to the commissioning broadcasters and negotiated a share, then typically 20-30 percent, of exploitation (e.g. international sales, DVDs, etc) on a case by case basis. The result was a sector wholly dependent on a few broadcaster relationships for their annual revenue and a set of companies with very little in terms of diversified revenue streams, ability to raise capital or strong incentives to develop program ideas and IP for export. It also meant that IP went under-exploited. The broadcaster owned all the rights but exploiting those rights in international markets was of secondary importance to them and, if they did nothing, the production company had no power to exploit the opportunities themselves.
The Communications Act of 2003 introduced new “Terms of Trade” between the broadcasters and independent producers and a Code of Practice overseen by the media regulator OFCOM. The “Terms of Trade” are the financial and business conditions that broadcasters apply to the contracts they sign with independent producers in relation to broadcast rights and the exploitation of the properties. The Terms of Trade were negotiated by PACT, a trade body representing the U.K. independent production sector, and the individual broadcasters.
There are technically separate Terms of Trade with each broadcaster and they vary according to the actual channel holdings of the particular broadcaster and on issues like new media rights. However, the fundamental commercial position is now the same across the broadcasters and the industry standard is now set.
Under the Terms of Trade, broadcasters who commission new programs get the primary broadcast rights (usually for a fixed period) in return for paying a license fee. The production company retains all distribution and other rights. However, the commissioning broadcaster gets 15 percent of revenues from exploitation (or 20 percent if they fund the pilot).
The broadcaster will usually pay the licence fee in stages based on an agreed budget so it provides cash flow for the production. Since the production company knows it can exploit the property in international markets, it can often pre-sell the international distribution rights and use this money to partially fund production, thus reducing the net cost to the broadcaster, which may make their commissioning decision much easier. This is known as “gap funding”. It has played a big role in the rise of the U.K.’s independent TV production sector.
According to a June 2011 report commissioned by PACT, the U.K. independent production sector had grown into a £2bn industry in 2009/2010 with the U.K. program supply market ranked as the leading net exporter of television formats in the world.
From 1998 to 2003 (immediately prior to the introduction of U.K. terms of trade) the reported revenue derived from U.K. TV exports, according to PACT, grew by 12.6 percent on compound annual growth rate. Following the introduction of terms of trade in 2004, export trade growth increased markedly, expanding by 22.2 percent on this same measure between 2004 and 2008.
In addition to the basic Terms of Trade, broadcasters or major distributors often negotiate “first-look” deals, rights-of-first-refusal or even stronger “off-take” agreements for whole slates. This provides the independent production companies with additional cash flow and allows for effective partnerships where they, as suppliers, can develop a clearer understanding of what broadcasters want and what they are prepared to pay.
The model has worked very well in the U.K. production sector and created a vibrant industry that is seen as world leading in terms of innovation. TV people think of the U.K. as the laboratory of the world – ideas that work well in the U.K. are often taken up by U.S. broadcasters who refine the propositions and take them global. Indies are better at developing new ideas than the broadcasters and it has led to a significant improvement in the quality of output. Clearly, the idea is that independent producers get to keep rights so they have a share in future success and build an asset base. This means they can re-invest in new ideas and not just have to do whatever is necessary to live hand-to-mouth.
I wonder if something similar could be helpful in the world of biotech where Big Pharma would be like the broadcasters (distribution, marketing, regulatory) and biotech the independent producers doing the innovative, creative work.
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