month Entertainment One chief executive Darren Throop was being served cocktails by a vampire. Nearby, a werewolf dressed only in a pair of tattered denim shorts performed an elaborate handstand.
He was celebrating the release of one of the year’s biggest movies, the latest installment of the Twilight Saga, at a lavish party at the Foreign and Commonwealth Office. His firm owns distribution rights to the smash-hit – a major coup for an independent company, albeit the biggest of its kind in the industry.
That Entertainment One can pull in rights for a movie of this financial (if not theatrical) importance, is a statement of intent from a firm that has only recently graduated to the main London Stock Exchange listing.
Throop, energetic and engaging, with a genial Canadian accent, has more than 20 years experience in the entertainment industry, working his way up from owner of an independent music store in Toronto.
Under his leadership, Entertainment One has grown exponentially, bouncing back strongly from the recession. Last year the firm swung to a £6.9m pre-tax profit on revenue of £444.2m after a loss of £31m the year before. A recent trading statement forecast first half revenues will grow by 20 per cent and Throop says the forward momentum looks set to continue.
There are two distinct sides to the company. One is the feature film arm, which is responsible for the distribution and promotion of over 100 movies a year.
The company can collect anywhere between 25 and 40 per cent of revenue from box office and DVD receipts. For a modestly successful movie, such as this year’s An Education, the firm can expect to pull in “a couple of million” after it has recouped its costs. So far this year the firm has released 60 movies and, with the busiest period still ahead, it is on track to top last year’s total of 127. “Did they all work? Of course not. But we have more winners than losers.”
The other side of the business is its TV production arm. This takes advantage of a unique Canadian tax-credits system that allows it to compete with major US production houses for the top slots on the big networks. It has scripted, developed, shot, edited, produced and distributed shows including Rookie Blue (“Grey’s Anatomy for cops – it’s the most successful ABC show in the last six years”), Stephen King adaptation Haven, hit drama Hung and family animation Peppa Pig, the number one rated kids show in the UK.
Throop, 45, says each episode of quality drama costs in the region of $2.5m (£1.6m). Surely this represents a significant risk, especially given the cut-throat US TV culture, where a show can be axed after only a handful of episodes. “Not at all, there is virtually no risk for us,” he says. “Financially we’re completely covered because we don’t green-light anything unless it’s been sold to a network, which pays for about a quarter of the production cost.”
Crucially, after selling to a network, the firm can access the tax credits system which provides it with funding for an additional 50 per cent of the per-episode cost, giving it a massive competitive edge.
The network holds a five year broadcast license but Entertainment One continues to hold DVD and new media rights in the US and broadcast rights to the rest of the world. “And that is where the revenue model is. We use our sales arm to sell it to all the international broadcasters. If a show doesn’t get picked up for a second season there really is no deficit. We’re not losing anything.”
Working out how much the firm stands to make from a series is a tricky question, says Throop, as the profitability of the product changes over time. “The first season is about getting eyeballs on the property,” he says. “The second season makes the first season more valuable and the third makes both the first and second seasons more valuable. Episodic TV margins are huge if it gets to the second and third season, up to 80 or 90 per cent. So things like Hung, which is on its third season, becomes very valuable indeed. All the international broadcasters want it because it has been successful in the US.”
The family entertainment arm works slightly differently, he says. “It’s all about brand. Take Peppa Pig. How much do we get for the show in license fees? Not enough to make it commercially viable. But what you have is merchandising rights.” Last year Peppa Pig sold £100m worth of toys in the UK alone.
But even with this vast production network, the firm has resisted producing feature films in its stable. “Why? Because it’s risky,” he says. “We’re a very risk adverse business. For a commercially viable feature the budget is between $30m and $100m. A lot more fail than they do succeed. As a distributor we are taking very limited risk. If they don’t deliver the master, we don’t pay anything. If their costs go from $10m to $100m, we don’t care.”
As the film and TV industries begin to emerge from the recession, Throop says his focus is on international expansion. “We want to get more co-production deals in the UK so we can use your creative minds, which quite frankly are the best from a TV standpoint. I would like to have a much bigger production base in the UK.”
To achieve this Throop plans to restart the acquisition drive he was forced to abandon during the recession.
“Up until 2008 I don’t think you could have found a more acquisitive company. We were involved in three or four big deals a year. The recession and the impact on equities stopped our acquisitive trajectory. You can expect to see that getting back on course again now debt markets are in good shape and equities have improved. There are a lot of distressed assets on the market right now and some that are not distressed but strategically would make good sense for us. We should be back in business this year.”
This, he says is the main reason behind the firm’s step up to the main London market in July. “When we get acquisitive again we’re going to need access to capital and this will be made easier by a bigger constituency of shareholders. The simple fact is, a lot of institutional investors just won’t invest in AIM listed firms.”
While the recession may have put the brakes on Entertainment One’s shopping spree, Throop says it has had a perversely beneficial effect on the company. A chain of events that was in turns lucky and tactically astute allowed the firm to extinguish a large chunk of its debt. A convertible bond on its balance sheet was sold to a fund that went bust, forcing it to sell it on the cheap. Throop swooped and picked it up for just 35 cents in the dollar.
This is not the only positive effect the recession has had – there are far fewer competitors in the market, which has driven down the cost of bidding for film rights.
“If you look at our territories, we’re the top independent in all of them. This isn’t just because we’re great operators, it’s partly because a lot of our competitors were weakened by the recession and they didn’t have the access to capital or the banking relationship with JP Morgan that we did. We were resilient and now we need to drive home that advantage.”
With dozens of movies due to premier over the next three months, there will be plenty of parties for Throop to attend. With the company performing as it is, there is a lot to celebrate.
CV | DARREN THROOP
1991: Founded an independent record chain in Toronto.
1999: Sold the firm to CDPlus.com, a firm he later joined.
2001: CDPlus.com acquired by Records on Wheels. Throop takes over as chief executive of new entity.
2003: Records on Wheels rebrands as Entertainment One and lists in Toronto.
Hobbies: Ice hockey, music, film, spending time with his wife and two daughters. Lives in Toronto.