Negative equity, the credit crunch and an over-abundance of firms mean the long-expected consolidation of the industry seems to have begun.

The necessary shakeout in Soho's post-production industry has been talked about for years. Now, in the credit crunch era with the threat of recession looming in the UK economy, it may have finally arrived.

At least that's what is suggested by a spate of companies shutting up shop in recent months. The list of casualties began with Resolution in December, followed quickly by Frontier Post, M2, The Sanctuary, Videosonics, Noise London (re-formed as the United Audio Project) and most recently Pepper (now re-formed as Pepper Post 2008 Ltd) and TV Set/Beach74.

Bad as the news is, nobody seems particularly surprised. As Ascent 142 consultant Tom Jones declares: “Consolidation of this sort is inevitable. In the car industry you just wouldn't get 25 different car manufacturers.”

Breathe general manager Dan Gable adds his own shopping analogy: “We'll end up with a few Tescos and a number of delis satisfying niche markets, but the corner shop will have all but disappeared.”

High overheads
There is clearly some common ground between the companies that have suffered most - they have tended to be middle sized, too big to operate cheaply but too small to be able to exploit economies of scale.

In addition, companies that have owned their buildings and used the equity to finance kit and ongoing business concerns have faced huge problems as the properties have dropped in value and banks have demanded back the equity they once provided.

Other difficulties experienced have been many and varied. Some have cited high overheads and low rates for failures, others equipment and staff costs. Problems with extending credit lines and - in the case of Pepper and Videosonics - changes to UK film tax laws (some of the films Pepper had banked on were delayed as a result of changes to UK tax breaks).

If there is one chronic problem faced by all Soho facilities it's oversupply. There are too many players, approximately 100 in Soho alone, and this has contributed to falling rates. Add to this the pressure of more production companies setting up their own in-house facilities and it's easy to see why prices are depressed.

Last man standing
Another problem is that Soho is a very expensive place to be -£45 to£65 per square foot on average, and all but two of the failures (Frontier Post and TV Set, which were based north of Oxford Street), were situated in this famous square mile. According to Ascent 142's Jones, some companies may have faced rent reviews that would have meant them paying as much as 20% more in some instances.

He added: “It is bonkers really, what are we all doing there? No client has ever said to me: ‘We have to be in Soho.' And a number of production companies are based elsewhere. It's just the way it's always been.”

A third factor could be the increase in the size of some companies, which benefit from economies of scale and are able to compete more effectively against rivals.

Breathe's Gable suggests this may be a deliberate tactic on behalf of the bigger players: “It could be ‘a last man standing' approach, deliberately trying to put the smaller, weaker companies out of business. If the weaker companies fail, rates are more likely to firm up, which will benefit everyone [left] in the industry eventually.”

Another contributory factor according to some is that haywire commissioning cycles have added to the problems for struggling post houses. With commissioning editors on a merry-go-round between broadcasters at the beginning of the year, a number of expected shows have not gone ahead.

“Incoming commissioning editors want to make their own mark. This should mean that we'll see a crop of shows in the months to come,” says Clear Cut managing director Horacio Queiro.

If word gets out a company is facing problems, life might be just about to get more difficult still. Banks will reduce overdrafts and are likely to be unwilling to lend to less stable companies, while broadcasters are increasingly reluctant to deal with companies rumoured to be in difficulty.

According to Jones: “The BBC is monitoring its preferred suppliers list more closely than it ever has and the completion bond people in film are adamant that they will only deal with solid companies.”

The lack of credit is perhaps the most cited issue at the moment. Banks used to lend money for “blue skies” business plans, according to Jones, but now they expect plans to be detailed and robust. This has meant that the industry has had to pull its socks up. In addition, the presence of private equity and venture capitalists has made the industry more profit focused.

The worst is not over yet, according to one facility managing director, who expects to see another 10 casualties before the shake-out is complete.

The new toast
So what might a successful company in the shiny new post industry look like? Queiro argues that above all it will need to be efficient: “In times gone by, companies were deliberately inefficient, taking longer over jobs so they could charge more. Now producers are pretty clued up on this, so it has become an outmoded practice.”

In addition, the most successful companies will be run more by financially astute directors and less by creatives, says Jones.

But before customers start worrying about the emergence of a sanitised post-production industry, it should be remembered that the industry is still catering for TV and film people, who like plenty of character, talent and creativity. “The best companies will come up with what I call ‘the new toast',” says Jones.

“At M2 we were the first to serve toast to our clients, it was quirky and made us known in those days. Now, Envy has a private bar and ice lollies in the summer, Queiro has an on-site chef and Casper the spaniel trotting around after him and The Farm has a helicopter landing pad. It's what makes the whole business more fun.”