2008's Post Survey suggests the editing, finishing and effects sector is a tale of two industries.

On the one hand all seems rosy, with expansion, investment and growth - but on the other, times are tough, budgets are small and rates are falling.

So, who do you believe? Do you believe the numbers? If you do, the post-production sector is in rude health. Some 89% of companies that responded to the survey say that they made a pre-tax profit last year. Turnover for the sector is up by£100m to£570m. And 62% are more confident now than they were at this time in 2007. Or do you trust the anecdotal evidence, which spews up words such as “tough”, “challenging”, “difficult” and “aggressive”? Unfortunately, it is not as simple as either.

The UK post market is maturing, developing and, perhaps more importantly, polarising. Where there were once four tiers of companies - big and all-encompassing, medium and ambitious, small and unique, tiny but happy - we are now getting closer to two: the big boys (those with a total turnover of about£10m and above) and the boutiques (companies that bring in anything up to£4m).

There are 16 companies in that first group, most with subsidiaries, and hundreds in the second. There are still a handful of companies that don't fit into either group. These are those trying to grow big enough to compete with - or get into - the top tier through expansion or sale. Or, if they're not looking at those options, their alternatives would appear to be constant struggle and/or extinction.

At the top end of the table, more companies have become affiliated. In fact, eight of the top 15 have a connection with at least one other post company that isn't listed by name. This means that comparing year-on-year positions on the league table is pretty futile. But while there won't be many companies rising at speed up the chart, it does tell us a lot about the market.

The big companies certainly dominate. By taking just post-production income from television into consideration, the top 10 facilities companies and groups in our table take home the lion's share of the total pot of£292m, chalking up a figure of£167m between them. If you add up the numbers from 2005, the figure is£124m. In 2006 it was£144m.

Where there has been a real shift in recent years is in the medium-sized facilities. These are either buying up competitors, merging with each other to form bigger companies, being bought out or simply disappearing.

In the 2005 Post Survey, for example, VTR, Blue, One Post, TSI, M2, Resolution, Arena P3, Oasis, Sanctuary and St Anne's Post, to name a few, were listed separately. They had their own identity and, importantly for the table on the facing page, their own turnover. Now, in some cases, their figures have been absorbed into their parent companies (Prime Focus, Ascent Media and Lime). In others, they have merged - and some have gone bust.

Oasis was bought by Sanctuary after hitting the rocks, Resolution is currently in administration and TSI closed. The remnants of all are still floating around the market. But the hole they filled for so long - and the service that they provided - is, it would seem, a thing of the past.

Simon Kanjee, managing director and co-owner of Evolutions, a company that has increased its turnover by 120% in two years, thinks that because of the way post clients' businesses - such as super-indies - now operate, consolidation will continue. “Our clients are becoming adult, because of their own ownership structures,” he says. “It is harder for those mid-sized companies. The production industry is looking for companies that react to last-minute requests. There are half a dozen companies without a future.”

The benefit of having lots of companies or departments under one roof goes beyond keeping the client happy, however. It also allows post houses to be more efficient and reduce their overheads. Ascent Media, the company that takes the highest post-production spend from the UK markets, has brought many of its services together in recent times, merging companies, swapping buildings and generally becoming more lean, financially.

“By centralising your kit and spend on your kit, rather than having multiple infrastructures, you can drive efficiencies,” says David Barrett, senior director of business development. “It's not just us. Soho is an expensive place to operate.”

Gaynor Davenport, chief executive of trade body UK Screen, believes that the consolidation is based around a more mature, commercial attitude. She says: “What you see is companies bolting services together, spreading themselves over multiple sectors to become lean and efficient. Everyone now has to run their facilities commercially.”

This new attitude has forced facilities owners to change their priorities. It is still possible to be creative, original and inventive. But not at the expense of the bottom line. Which means that the buzzwords that dominate 2007 are more business-like than creative: consolidation, diversification and reinvention.

2007 - the year that was
So, how was 2007? According to the results of the survey, generally it was pretty good, with 51% saying 2007 was better than 2006. Only 28% say it was worse. But there is a distinct difference in attitude depending on which part of the market a facility is most reliant on. The ones that just do TV, or one type of TV, say things are a struggle. Those that do film or commercials, work on lots of different types of broadcast content or do a mixture of everything seem much more content.

Rushes, a facility that concentrates mainly on the commercials effects market, has had a good year. The company has grown, expanding its graphics department and adding a motion control studio. “It got off to a positive start,” says managing director Joce Capper. “Because we grew we could pitch on larger projects.”
Recent television credits include the BBC Summer of British Film Idents (3D environments, and Combustion work) and CBBC's Angellica: Time Traveller (matte painting, 3D architecture, title design).
Nicky Sargent, chief executive of The Farm Group, insists that this has been the company's best year since launch. “We've got very lucky with some of the productions we've been involved in,” she says. “We don't just work in reality or drama. We are happily involved in a lot of telly.”

The Farm, like other post companies in 2007, was looking to spread its risk. To do this, the company, which celebrates its 10th birthday next year, has done a number of things. It has moved its west London facility Uncle into Soho, taken on Metro Broadcast's hire arm and opened new departments including Family, a talent division, and Corner, an offline facility in Soho. All those moves will have had an element of chance but Sargent is confident they were the right things to do. “Fingers crossed, it's working out,” she says. The Farm's credits this year include full post work on The Mighty Boosh and The X Factor.

Lip Sync Post, which worked on 3 Minute Wonders and Homes and Property, was buoyant in 2007, adding a third grading suite and increasing visual effects capacity to allow the company to quote for up to 200 shots on a production. Head of post Kevin Phelan says the year has been extremely good. “It started slowly but picked up dramatically after the tax issues in the features market were sorted.”

However, not everyone is so bullish. Kanjee at Evolutions Television saw fluctuation: “There was a dearth of business around the middle bit of the year. There were very few commissions in spring and summer. It was much quieter than we expected. But then it all kicked off in autumn. And now we're so busy we're subbing jobs out to other facilities.”

The man at the head of the Ascent Media Creative Services table, senior business development manager David Barrett, reckons 2007 was difficult to stomach. “We've done OK, considering it's been tough,” he says. “Everyone I have spoken to has said the same. There has definitely been a drop in post budgets as everyone wants better, faster and less expensive.”

While the anecdotal evidence points to a variety of opinions, in statistical terms the sector is less confident than it was this time last year. According to the survey 62% ended 2007 feeling more confident about the future of the post-production sector, down 8% on the previous year. And why? Could it be the impending sale of BBC Resources (see box), competition from overseas or is it that old bugbear, rates?

Rates: still the biggest worry
Rates, rate cuts and undercutting are still the biggest concerns for a post facility, with 28% saying it is the biggest threat to the continuing success of their business. 65% say super-indies have forced rates down. And 40% have done a job they made a loss on just to get business in.

Rates struggles are common across the board whether a facility operates in TV, film, commercials or all three. With the huge overheads - technology, rent and staff - associated with running a post house, downward spiralling rates spell trouble. “It is tough,” says Capper. “But rate declines cannot go on forever. Costs are rising and it must come to a point where it cannot go any lower.”

Much of the problem seems to stem from ever tighter programme budgets. But what about the super-indies? Has their increased size and strength given them extra bargaining power? Not according to Kanjee: “Growth of the super-indie has not driven down rates,” he argues. “But eventually it will as each one is going to realise that they're not buying intelligently enough.”

His argument is that rate drops are a result of weaker competitors trying to get a piece of the action, even if means they make a loss. “The people driving the rates down are the smaller owner manager facilities,” says Kanjee. “Fortunately there are now more companies operating under proper business profiles of profit and loss.”

Lesley McMahon-Hathway, director of BBC Post Production, agrees that just because indies are getting bigger does not naturally mean that rates are getting smaller. “Price is always a pressure,” she says. “Therefore that pressure always ends up at the end of the food chain. But it's not [because of] the super-indies that rates have come down.”

Davenport at UK Screen admits there is little that can be done to stop super-indies eventually leveraging their weight to get better deals. But she adds: “It would have been nice to see where the upside is. Will there be any partnerships between indies and facilities? Will there be any rights for post houses? In the film market, for example, facilities take equity stakes.”

There are two possible ways to resolve the problem of price wars - more consolidation and customers seeing the bigger picture. “If we get to a certain point where enough consolidation happens, rates can be hardened,” suggests Kanjee. “Rarely do we get into a rate war with our biggest competitors. The problem is that [the market] is so fragmented.”

Sargent says that customers, to an extent, have a responsibility to look after the service companies, warning that “if producers consistently underpay then companies won't be there any more.” She cites Resolution, which went into administration in November, as an example. But, while rates are a concern, financially, from the outside at least, things are looking good for post houses. According to the information collated from the survey, 27 companies in the top 50 increased their turnover year on year. In that same period five stayed the same and only seven pocketed less cash. The rest cannot be compared year on year as they either didn't exist or their numbers aren't available.

Turnover, sales and growth
Of those that increased revenues, the biggest jumps at the top of the table include The Sanctuary, up 84% thanks, in part, to buying up Oasis; The Farm, which is up 20% (£2.8m); Barcud Derwen, roughly£3m (20%) ahead of the year before; and Input Media, which added£2.3m (40%). The last benefited significantly from the launch of Setanta Sports. While that result is good, the increase is not purely down to post services as the turnover also includes transmission and studios work.

The really interesting increases occur lower down the table. Videosonics, an audio specialist that does commercials and TV, has added£1m to its income - a rise of about 60%. Its audio post credits for 2007 include Daphne, Starting Over and Fonejacker.

Smoke and Mirrors, a highly respected facility that does promos, commercials and 3D, has seen enormous growth in the past three years. In 2005, the company had sales of£3.7m. At the most recent count it had shot up to£6.1m. Partly due to the incorporation of Red Post Production - illustrating that mergers don't just happen at the top of the market - it is also thanks to a serious amount of diversification.

Where the company was once reliant on being a Flame boutique and doing commercials work it now operates in lots of different areas including broadcast. Clients include C4, ITV, Five and Sky. “You cannot be solely reliant on one part of the market,” says chief executive Penny Verbe. “You've got to spread your net far and wide but maintain the same production values.”

But it is not just broadcast work that has prompted the growth. The company now does work on a wide variety of different mediums from digital signage at St Pancras train station to content for mobile phones. “I'm interested in anything with a moving image,” says Verbe. “It's here that we can make a difference.”

Next summer it will extend into the building behind its current Beak Street premises, buy a second telecine, increase the 3D department and add audio. The proven record of increasing turnover is allowing expansion. “You have to try to reinvent yourselves every three years,” says Verbe, “You cannot stand still.”

But that kind of growth is the exception. Using figures from Companies House, information from the Post Survey from the last three years and anecdotal evidence, sales at an average UK post-production facility have increased by just 8%.

Diversifying in spades
So one way of increasing either turnover or profit is to diversify into other disciplines, genres or markets: something many UK facilities have done in spades this year.

Two thirds of companies polled say they have diversified into new areas. Some have moved into new genres of TV; some have gone after new markets, such as film effects; some have gone further into their traditional sectors and others have bought kit that allows them to attract new work.

“Everyone is diversifying,” says Barrett, speaking for Ascent Media. “We're doing similar things. Utilisation is the key ingredient. Working longer hours and billing multiple projects during the day.”

BBC Post Production does pretty much everything possible within the broadcast arena. But even it has tried to market some of its services differently to diversify or expand its client base. “We cover just about everything,” says McMahon-Hathway. “But we're now concentrating on growing new products and services. Post is changing. Everyone is going to have to chase either a greater proportion of the work they do or look for other ways of adapting or reinventing themselves.”

This year BBC Post made a big noise about its consultancy business, offering indie customers, such as Parthenon Entertainment for example, help with setting up their own facilities or on a project-by-project basis. McMahon-Hathway says: “We have always offered support [but we] made a big push in 2007 to get the message out there that the Media Solutions team can offer anything from an MOT of your desktop computer to something quite grand.”

In the advertising world, meanwhile, there are new types of advertising, beyond on-screen commercials. “It's about specialisms,” argues Rushes' Capper. “There are lots of different types of advertising such as branded content or digital signage, and those are growth areas for us.” Rushes is also trying to attract more 3D work.

But it doesn't stop there. Evolutions opened a facility in New York. The Joint started a graphics department, Nuts. The Station and Arc Facilities added audio capabilities. Envy went after drama work and added 3D and sound design. Locomotion London launched a digital media division to include finishing content for delivery across digital platforms. Breathe added HD facilities and now provides full post-production services to factual, drama and features production. The list goes on.

The shape of the post industry, like the work that it does, is changing. The market is polarising thanks to consolidation. Companies are getting bigger and diversifying in order to spread the risk or maintaining boutique status and re-inventing themselves. While the year-on-year shifts are not seismic, they point to a leaner, more streamlined post market. And one that is hopefully a little less schizophrenic.

Top five by revenue
1 Ascent Media Group£61m
2 MPC £46m
3 The Mill £40m
4 BBC Post Production£38m
5 Framestore CFC£34m

Buying other companies
Those who think that the shape of the market is now settled had better think again. More consolidation is on the way. According to the survey, 30% of respondents say they plan to buy or invest in other companies.

Kevin Phelan, head of post at Lip Sync, says an amalgamation with a much smaller company is a possibity for them. “Our eyes and ears are always open,” he says. “It would probably be a much smaller boutique that offered a couple of services. We have been tempted to either build or go into partnership in some sort of film lab. We spend a quarter of a million pounds a year on labs. It's a lot of money to give to companies you don't own.”

Lip Sync is not the only company looking to splash some cash. Evolutions has already bought out Nats and has facilities both north and south of Oxford Street. It has also opened a facility in New York. Next year it may look to expand further still.

“Potentially there is value to be had,” says managing director Simon Kanjee. “We've talked about drama. The key thing is that we want to increase our share of primetime TV. March is full. We're not in the business of staying static.”

But not all facilities see buying companies as the way forward. At The Farm, money will be spent on setting up new departments rather than on buying up companies. Chief executive Nicky Sargent reckons that this offers better value for money. “If you were about to spend£1m, with the cash you can do it yourself,” she says. “You generally only buy if you also need to buy contacts and clients.”

BBC Resources
It's been mooted for some time, and several nervous facilities bosses have debated it. And by March 2008 it will finally happen: The BBC will sell BBC Resources. The impact on the post production sector could be huge.

BBC Post takes home around£38m worth of business, much of which comes from the BBC itself. As an entirely independent entity it could become more commercially minded. As a result, 71% of respondents to the survey think that the sale of BBC Resources will impact on the commercial facilities business.

Nicky Sargent at The Farm can see the potential. “There is actual legislation that prevents BBC Resources from deviating from their pricing structure,” she says. “When it is more competitive that could mean it is able to get more work from the BBC and, possibly, steal work from the independent sector.”

Kevin Phelan, whose Lip Sync company doesn't do a huge amount of work for the BBC, doesn't see it being affected. But he acknowledges the pain that could be in the offing. “We are not unaware of it. [It could cause] a price war.”

The biggest concern is about what is being termed “sweetheart contracts” - work that is guaranteed as a result of the sale. While the technicians and locations are important, the confirmed work is going to be the crucial selling point. As David Barrett at Ascent Media points out: “No one is going to stump up money for it without there being work or contracts with it.”
Lesley McMahon-Hathway, director of post at BBC Resources, is more matter of fact about the sale. “[Independent facilities] have always seen us being in the commercial world as a threat. That's life.”

Some people are positive, like Gaynor Davenport of UK Screen. “To have someone in the market who is truly aggressively commercial and can really maximise what is happening is really interesting,” she says.

Davenport would rather Resources was split into its different constituent parts though. “Our view is that it would be better if BBC Resources is broken up,” she says. “So that you don't have someone that has a dominance.”

Who owns who
Films@59: Pink House
Lime: Lime post, M2, Narduzzo too and brand interactive
Leeds Studios: The Finishing School and Film Lab North
The Prime Focus Group (VTR): Prime Focus London, K Post, Blue, Clarke Associates and Machine Effects*
Ascent Media Group: Ascent Media Wardour St, Ascent Media Hawley Crescent, Todd-AO, Rushes, One Post, Soundelux UK, Soho Images, Stream, Visiontext, St Anne's Post and Ascent Media Network Services
The Farm Group: The Farm, The Shed, Home, Uncle, Uncle Bristol, Corner, Family, Uncle Duplication and Rent
Barcud Derwen: 422 South, Eclipse Creative, Aontel, Men from Mars**, Assembly, Picardy, Arc, Safon, Barcud, S4C International, Awen, The Farm (Dublin), Derwen, Omnitv
The Jungle Group: Zoo, Jungle, Marmalade and Giant
The Sanctuary: The Sanctuary Funktion Design, Arias UK, O2 Duplication, Sanctuary Productions
* Figures for Clarke Assoc and Machine Effects not included in survey results
** Since the research was carried out, Men from Mars has been sold

UK Screen
A trade association representing post-production in the UK has been tried many times before. And it has failed, mainly due to internal fallings out but also because it lacked focus and direction.
The latest attempt is UK Screen. And it is proving to be much more successful than its predecessors. According to the survey, only 11% say UK Screen is not effective. And 65% think it is doing a good job. But if you take out the answers from companies which are not members (38%), the approval rating is above 90%. It must be doing something right.

Gaynor Davenport, the chief executive of UK Screen, is buoyed by the results. Asked how she has got to this point, she says: “The film tax incentive was significant. There was a perception that we were film-oriented but if you look, UK Screen is more biased towards TV. Being able to engage with Ofcom and The BBC Trust and the production manager's review have all helped as well.”

Revenue per employee
With the price of technology falling it's the price of talent that continues to be the most restrictive for post. While many argue that quality comes at a price - hence you pay top dollar for top talent - one interesting measure of a facility's success is the amount of money generated per employee. Clearly a sales person or hero op is going to bring in more money than a runner. But where would that same hero op be if his client didn't get his or her skinny mocha chocca latte?

Using the formula of turnover divided by total number of permanent staff, we can see which firms make the most of their staff's talents - or at the very least keep their overheads low enough to survive boom and bust.

It is not the biggest companies that do best in this area. In our survey the companies that earned most money per employee were HD Heaven, in London, and the Digital Audio Company in Skipton, Yorkshire at a rough£320,000 and£266,000 per employee respectively. Of the big companies, The Mill does the best, bringing in a whopping£124,000 per employee. However, if you add in freelancers, that drops to£95,000. Barcud Derwen is probably the least efficient big player in terms of revenue per employee. It earns just£53,000 for every person that works there.

Fastest growing turnover over£5m
Company Growth
1 The Sanctuary 84%
2 Input Media 40%
3 The Mill 22%
4 Barcud Derwen 20%
4 The Farm 20%

Fastest growing: turnover below£5m
Company Growth
1 HD Heaven 166%
2 Videosonics 60%
3 Studio Alba 44%
4 The Joint 25%
4 Lola 25%

Most admired company votes
1 The Farm Group 8
1 MPC 8
1 Pepper 8
4 Envy 7
5 Framestore CFC 4
6 Sumners 3
6 Videosonics 3