Death of Propaganda doesn't bode well for production firms

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Last month's demise of Propagan-da Films, once America's largest and most famous commercials-production company, is sending shock waves across the production community. The effects may have a significant impact on advertising creativity in 2002 and beyond, on the future structure of the commercials industry and on how that industry does business with agencies and marketers.

This is not just about another highflying company being laid low by the recession. True, compared to the likes of Enron, Prop- aganda was tiny. It was sold to a private investment company in 1998 for just $10 million. In a cottage industry, it is believed to have billed an impressive $90 mil- lion in 2000. But its cultural influence was enormous.

It was a company that brought us such star directing names as David Fincher, Spike Jones, Michael Bay, David Kellogg and Dominic Sena; that was four times a winner of the Cannes International Advertising Festival's Palme d'Or for best production company in the world; that in an almost machine-like way appeared year after year to vacuum up the best jobs in both commercials and music videos.

How could a company such as Prop-aganda be driven to the wall?

Commercial production is a funny business. In some ways, to describe it as a "business" is a stretch. Many who work in it (mostly directors) do not believe they are employees of companies in the traditional sense, but that the companies are really their agents, existing to make money for them.

This is reflected in the share of the spoils from a major job. A "name" director (not a star such as the venerable Joe Pytka or those listed above, who will make much more) may earn conservatively $10,000 a day for a shoot. This is built into the budget that the client signs off on-even if it is with a wince.

But the premium on hot talent is so great these days that, in addition to the director's day rate, he or she will also take home a big chunk of the profits. Now estimates vary as to how much this can be, but we are looking at 40%, 50% or even more of the percentage that the production company should have built into the budget as its own profit.

This is the price that production companies must pay for keeping star names. This may seem strange given the law of supply and demand. Production-be it in New York, Los Angeles or London-is horrendously overstocked with directors. But the truth is that if there are 1,000 commercials directors in each of these cities, perhaps 10% of them are consistently doing good work-and a tiny fraction of those are up for the hottest jobs internationally.

So the hottest directors can name their own price. And they currently are doing just that.

Speculation has it that Propaganda's star names-Jones, Dante Ariola, and Kuntz & Maguire-have been looking for signing-on fees of anything between $500,000 and $1 million before a frame is shot.

While this all made a warped "sense" in the pre-9/11 environment, the heady boom is over. Margins, which already were being squeezed, are now plunging. There is a litany of failures. Although there are some internationally renowned directors such as Pytka, the Scott brothers (Ridley and Tony) and London's Paul Weiland who are good businessmen, there are many more who are not. Or were not.

Ad agencies and their clients aren't used to feeling sorry for the production-company community. There is jealousy of its perceived glamour and financial rewards, and resentment of a certain arrogance indulged in by a business that had become accustomed to years of plenty. But when institutions such as Propaganda in the U.S. and James Garrett in London go under, it is clear that no op is safe.

We can expect many more proposed mergers, such as the proposed RSA/Anon-ymous Films deal that collapsed in the fall, and it is clear that the many production companies face a fight for survival. For agencies, it should mean that a buyer's market emerges. Or at least should emerge-for if one thing is clear about commercials production, logic counts for very little.

Stefano Hatfield is editorial director of Ad Age Global and Creativity.

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