VYP: TV Production House Case Study

Team name:

Fortune Writers
Name of participants:

Debojit Saha Naimul Khalid Riaz Rukesh Dutta Md. Mahmudur Rahman

Institute Institute of Business Administration, Dhaka University

To: Steve Voddil and John Young, Joint Managing Directors From: Consultant Date: 31 March 2012
Contents
INTRODUCTION: ................................................................................................................................. 4 2. TERMS OF REFERENCE: ............................................................................................................. 4 3. PRIOTIZATIONS OF ISSUES........................................................................................................ 4 Option 1: ................................................................................................................................................ 5 Option 2: ................................................................................................................................................ 5 Recommendation ................................................................................................................................. 6 3.2. Re-commissioned Drama Series ................................................................................................ 7 Option 1: ................................................................................................................................................ 7 Option 2: ................................................................................................................................................ 7 Option 3: ................................................................................................................................................ 8 Recommendation ................................................................................................................................. 8 3.3. Fee negotiation for new childrens programme ........................................................................ 8 Option 1: ................................................................................................................................................ 9 Option 2: ................................................................................................................................................ 9 Assessment of option 2 ....................................................................................................................... 9 3.4. Proposal to expand into corporate advertising videos ........................................................... 10 Solution: ............................................................................................................................................... 10 3.5. Ethical issue ................................................................................................................................. 10 4. PESTEL analysis ............................................................................................................................ 11 Political ................................................................................................................................................. 11 Economic ............................................................................................................................................. 11 Social.................................................................................................................................................... 12 Legal..................................................................................................................................................... 13 Technological ...................................................................................................................................... 13 Environmental ..................................................................................................................................... 13 Appendix .......................................................................................................................................... 14 Appendix 1 .......................................................................................................................................... 14 Appendix 2 .......................................................................................................................................... 14

1. INTRODUCTION:
V and Y Production Ltd, a UK based independent TV production company, has been producing documentaries, drama serials, scripted comedy programmes and general entertainment programmes for TV broadcast companies like BBC, ITV, channel 4 and channel 5 since 2004. Main focus of VYP is to ensure profit by making successful programmes. The company began its journey with 12 employees but right now it has 60 directly employed people along with other small specialized companies from which VYP is provided with 400 person years of work by outsourcing various tasks. VYP has got an eminent position in making comedy and entertainment programmes. Success of VYP is based on nurturing creativity and solid understanding among key members of staff. At the end of September, 2011 total sales revenue was 28.61 million with a profit of 2.085 million.

2. TERMS OF REFERENCE:
We are the consultants appointed by board of VYP to prepare a report that prioritizes analyses and evaluates the issues facing by the company and make apposite recommendation.

3. PRIOTIZATIONS OF ISSUES
The issues below have been prioritized based on the potentiality of each them to positively affect the earnings and future prospect of VYP 3.1. Having been budgeted to make a healthy margin, VYPs latest documentary is now forecast to make a loss. VYPs latest documentary is now forecast to make a loss. The programme is about financial crisis of 2008. The investigation phase of the programme took longer than

anticipated and involved repeated interviews, as the programme director required further clarification on a large number of inconsistencies in the evidence gathered. Since the number of interviews conducted is about to outnumber the number of interviews planned there is a chance that VYP will make loss in this project. Mr. Vodil ruled out the option of going back to the broadcasting channel and renegotiate for fee. Under the given circumstances the programme producer is suggesting two options:

Option 1:
No more interviews, VYP will produce the programme based on the evidence it has to date.

Assessment of option 1

If this option is followed then the program would not be of high standard and may lack valuable information or evidence which is important for success of the show. But if this option is followed VYP would not suffer loss. VYP will save itself from a loss of 30,000 and reach break even. But if the project is not successful and not up to the mark then there is a chance that VYP will lose its brand value and may get less documentary related projects in future.

Option 2:
Expensive computer graphics interface (CGI) usage will be cut back.

Assessment of option 2:

The documentary related to financial crisis of 2008 is a program which requires detailed analysis of a lot of information and evidences. Since a large volume of data, facts and figures must be exhibited complex CGI must be used to display the analysis in a comprehensive manner. The audience base for the program would

include a large number of people who might not be aware of financial jargons and complex business models so in order to communicate the idea to them CGI is essential. If CGI is not used then many of the audience might fail to understand the whole program and thus the hard work and resource put behind the documentary would be wasted.

Recommendation
The documentary intends to explain why the financial crisis of 2008 happened. But the investigation phase of the program took longer than anticipated and involved repeated interviews, as the program director required further clarification on a large number of inconsistencies in the evidence gathered. This caused VYP to incur cost which was not pre planned. VYP could change their weakness into strength. Although they would make a loss of 30,000 in comparison to a forecast margin of 32,000 on forecast revenue of 290,000 if they went on interviewing more people. But they must complete the project without compromising with the quality. The director of the program sees this work as important and potentially worthy of an award. The thing to remember here is that These program directors are talented, highly paid individuals who are the creative driving force behind the programs that they create. So the directors opinion is very important. The director thinks that the world has the right to know the truth. But again VYP was created with only one aim in mind. That is Making successful programs profitably. Since the program is about financial recession of 2008 the program would have global appeal. So what VYP could attempt right now is it can complete the program maintain the required standard and then it could try to sell the documentary in the international market to reduce the loss or even make a profit from it. The figures are promising because of Tom Harrison, the head of international sales who in the last financial year generated sales of 1.3 million. Revenue from international sales is very promising for VYP and given the topic of the documentary chances are high that it would be received by international TV

Channels. So VYP must not compromise with quality so as to maintain its brand value and later on try to sell it to international channels to minimize loss or make profit.

3.2. Re-commissioned Drama Series

VYP, a TV production company which is highly esteemed in the industry for its quality shows has been re-commissioned for a drama series. But the 10% lower fees offered to VYP is not enough for VYP to make the project financially viable. On the other hand one of the main actors of the program is engaged in a 10 month contract with GGG, another production house. This makes it difficult for VYP to complete the project on due time so that it could be telecast. Under the given circumstance VYP could consider the following solutions:

Option 1:
Accept current fees offered by BBC and focus more on the quality of the show. Instead of getting John Strong, one of the original rowers in the team back to the show they can

find his replacement and focus more on content development for the program rather than emphasizing on the actors.

Option 2:

Negotiate with BBC so as to increase the fee for the re-commissioned program. VYP can explain that one of the main actors is already engaged in a 10 months contract with GGG and GGG must be properly compensated in order to get the actor back in show, otherwise the program wont be complete on due time and telecast of the program would be at stake. Also VYP can highlight the fact that it is difficult for VYP to have cost saving from past experience for this show and at the current offer VYP can make only a maximum of 5% profit whereas it is usual to offer fees with 10% margin. So in order to maintain the standard of the show BBC must pay VYP higher fees.

Option 3:
VYP can negotiate with BBC for fees which would yield 10% margin for VYP. And instead of getting John Strong back in show they can find a replacement for the actor. The

uncertainty whether John Strong would be available or not would make it difficult to develop proper content for the show. VYP can rather concentrate on the content development. In second series VYP may stress more on overall content of the show with the goal to popularize the show with different twist and turns.

Recommendation
VYP might consider option 3 for the re-commissioned drama series. This option would allow VYP to complete the show on a decent margin and since VYP would not have to think of acquiring the actor from another contract they can focus more on the content development and would help them hedge uncertainty regarding presence of the actor. The following steps would follow: Consult BBC and ask for a fees that would yield 10% margin for VYP Aware BBC about the fact that one of the main actors is not available and they would have to replace him Find a suitable replacement for the actor and emphasize heavily on content development of the program

3.3. Fee negotiation for new childrens programme

A UK broadcaster has commissioned VYP for a puppet show based drama series for children. The pilot project for the program has received rave review from children and parents alike and the broadcaster id interested to sponsor 20 programmes for fees of 350,000 per hour. But under the current offer the merchandising rights will remain with the broadcaster.

But VYP wants to do merchandising itself and if they do so they will have to accept lower fees and will have to share merchandising margin with broadcaster in the following ratio VYP (40%) and broadcaster (60%).

Option 1:
VYP can accept the current offer from broadcaster, 20 programs each 350000 per hour. This option possess the minimum risk for VYP under this proposal VYP will have to monitor its cost of making the program in order to realize profit. But if this proposal is accepted then merchandising rights will remain with the broadcaster. Since the pilot project was liked by parents and children alike therefore there is a good prospect for merchandise business and VYP might lose prospective profit if they accept current offer.

Option 2:
VYP has to sacrifice 35% of that allowance that is 122,500 (Appendix 02) in order to be acquiring merchandise rights for the program to. And the margin from merchandising would be shared in the ratio VYP (40%) and broadcaster (60%). So VYP has to acquire a profit of 122,500 in order to ensure break even. To earn that profit VYP has earn total sales revenue of 1,225,000 (Appendix 02).

Assessment of option 2
Given the rave review from the pilot project the prospect of merchandise selling seems to be good. But there are several factors which might affect the business. Merchandising sales will be quite difficult for VYP because it is tough to predict and dependent on the popularity of the programme. Wide exposure is imperative to ensure sales of merchandising. Popularity depends on continue broadcast of the programme. It is also a first experience for VYP. The company has a little experience in merchandising sales which include design, manufacture, sales, marketing and distribution. If required amount of sales revenue is not earned reduced amount of allowance may not be enough to recover all the cost of producing the programme.

3.4. Proposal to expand into corporate advertising videos

Another issue of VYPs concern is the expansion of business into corporate advertisement. VYP has been requested to make an advertising video for Zubinos Cofee Shops Ltd. Despite substantial growth in last decade coffee shop industry is now facing a shortage of margins due to reduction of prices and increasing cost of production. VYP has to produce a corporate advertising video to be telecast in local TV and other internet based media. It is also important to note that production advertising videos is a new genre for VYP.

Solution:
The idea of producing corporate advertising video is quite exiting for VYP as it will be a new wing for the company. The market is promising and if tapped properly might be one of the highest revenue earning sources for VYP. As VYP is facing a decline in overall margins, this can be an opportunity to gear up their total income. According to the offer of Zubinos VYP will make a loss of around 700 but this project will help them gain experience. Also there is a chance of VYP getting exposure if other media channels like facebook or you tube are used. If the project goes well Zubinos coffee Shops Ltd might be interested to future contracts with VYP and VYP will be able to make 15% cost saving from subsequent projects. So the current project can be termed as an exercise drill and the future prospect makes it lucrative venture for VYP.

3.5. Ethical issue

VYP starts building set a significant amount of time prior to shooting. But due to improper planning, a set had to be built at shorter notice which required set builders

to work long time at a stretch. Thus a worker suffered from fatigue and suffered from an accident. According to a producer its ok to make set builders work long hour at a stretch since actors and other expenses are related to set building. It is recommended that VYP take some tough action against the poor planning. Of course the actors are more expensive than set builders but there should be a balance on how much working hour should be allocated for set workers to work. If the situation repeats again in future VYP may have to face serious issues for improper workforce management. So in order to avoid the accident from happening again VYP must be careful in planning when to start set building so as to strike balance between commercial viability and protecting human rights.

4. PESTEL analysis

Political
1. VYP is a private limited company and is not listed on any stock exchange. It has 10 million shares in issue, each of 1 par value. If it could issue general shares and be listed in stock exchange, the funding problem now a days they are facing could have been solved. 2. Sometimes VYP couldnt market merchandise outside the UK due to the IPR policies.

Economic
1. The recommissioned drama series by BBC can earn less than 5% profit. So, cost has to be much cheaper to earn a mentionable profit. This has been a challenge for VYP. 2. There is a 60% chance that actors will take 4800 pounds per video in corporate advertising section. The other 40% chance is only for 2800 pounds. This shows that if the actors really take 4800 pounds per video, the cost becomes huge and it will be difficult to recover through revenues.

3. If VYP has to sell merchandise, they will have to sacrifice 35% of the commission of the new childrens program. It will give them only 40% of the share of merchandise. The rest of it will go to the broadcaster. So, there is a risk associated with it because VYP cant recover it and will face a loss if the program is not recommissioned and not well acclaimed widely. 4. VYP has already encountered a loss of making a documentary. So it is trying to stop interviews and making the documentary based on those interviews till to date. But such compromising with quality can affect the brand image of VYP which can further produce economic losses in fresh new projects. 5. Debt has been used extensively to finance TV programme-making operations as well as to finance the capital expenditure required for the purchase of advanced technology programme-making equipment. But debt finance has been increasingly difficult to raise in the last few years which questions the continuation of ongoing success rate of VYP. 6. Poor control on the forecasting of costs sometimes exceeds budget of VYP.

Social

1. VYP routinely asks the set builders to work long and often anti-social hours. So, an accident occurred to a worker due to the tiredness of him. One of VYPs leading producers says Look, actors are expensive and set builders are cheap. This shows that VYP is not sympathetic to its workers and doesnt care at all about them just because they are cheap. A successful organization with such attitude is not expected by any. 2. Sometimes VYP has to introduce new types of humor in a comedy programme and then has to ensure that the audience will be amused, rather than offended. Because this is a critical issue, if the audience get offended for any sarcastic program, the program will not only be flop but also be controversial which will generate negative brand image for VYP. So its very risky. 3. VYP is spending around 24000 pounds per year on the school children who are interested in movie making and are also very interested. Though its a beneficial task for the society, it costs VYP a bit.

Legal
1. John Strong, one of the original rowers of the drama series, can be hired but due to a preexisting contract with him by GGG, it can be difficult because GGG can sue for breach of contracts. So, proper negotiation is required with both GGG and Strong but it may require a lot of money which threatens the expected profit margin. 2. Using past cost analysis it has been noted that the film crew cost varies in line with the cost of studio hire. For every 1 spent on studio hire the film crew will cost 1.20. It means the higher the studio hire, the higher the crew cost but it actually varies. So, if it becomes more than 1.20 pounds, the cost will be higher and difficult for VYP to recover and make a profit through it. 3. Though international sales of program IPRs generate huge profit margin, it includes legal costs in connection with the contracts for the sales, travel and staff costs which may be high.

Technological
1. Expensive computer graphics interface usage (CGI) makes VYPs program exclusive and successful. But due to the apprehended loss, if VYP is going to cut back expenses on CGI, it will decrease the quality of their program. So, technological tools contributed a lot so far to the success of VYP. 2. VYP uses updated database system for forecasting costs and budget software. This helps VYP maintain several accounts of programs by the producers. The software makes the calculation easy and on the track. Like video making software, these accounting software is also helpful and without the use of it, the business operations may become difficult for them.

Environmental
1. VYP makes documentary programmes concerning natural disasters around the world, as well as documentaries about the plight of child labour. During

the last financial year, VYP donated a total of 128,000. This is included in administration expenses. 2. Due to the recession in the economic environment of the world, the broadcasting organizations are not providing fees in time or not in full amount. The fees are also decreasing in an alarming rate.

Appendix

Appendix 1
Proposal to expand into corporate advertising videos 2011 17000 -5000 -4000 -6000 -1200 -1500 -700 2012 17000 -4250 -3400 -5100 -1020 -1275 1955 2013 17000 -3612.5 -2890 -4335 -867 -1083.75 4211.75

Description Rev Studio Hire Actor Film crew Scripting Music Gross Profit

Appendix 2
Break even for accepting merchandising right

Revenue lost/hour % of margin VYP is eligible to keep Break even sales

122500 10.0% 1225000