It’s not often I take the advice of a three-year old in the course of researching for an interview. But when you have an appointment with Bob the Builder’s finance director, there’s no one better qualified.
‘Who do you prefer,’ I ask my nephew, Max. ‘Bob the Builder or the Tweenies?’.
Max furrows his brow and pauses. ‘The Tweenies,’ he suddenly announces.
I relate this story to Steve Ruffini. The HIT Entertainment FD takes the bad news well. ‘It’s a tough question for a three-year-old,’ he acknowledges graciously.
No doubt Ruffini would go on to point out that the Tweenies are something of a TV phenomenon, creating a heightened sense of awareness among the pre-school generation, while Bob is more of a merchandising success.
But at that point we’re interrupted by a life-size Pingu waddling across the lobby. Ruffini doesn’t look surprised. I am. Presumably it’s a man in a penguin suit but, since I’m sat between a three-foot tall Bob the Builder and a stuffed Barney the Dinosaur, it’s easy to get confused about what’s real and what’s not.
Clearly, this is not going to be a run-of-the-mill interview. But then Ruffini’s employer is no ordinary company.
A leading independent producer, HIT Entertainment distributes high-quality family programming. It was established in 1989 by the former sales team of Henson International Television – the company behind The Muppet Show – and, valued at $29m (£20m), floated on the London Stock Exchange in 1996.
After its £189m purchase 12 months ago of US-based Lyrick Studios (the company that owns ‘pre-school phenomenon’ Barney the dinosaur), the company is now worth more than $600m. As well as Bob and Barney, its roster of characters includes Pingu, Kipper, Angelina Ballerina and Percy the Park Keeper.
The world of children’s characters changes fast – few people outside of HIT had heard of Bob the Builder three years ago – yet last night he performed to a crowd of more than 10,000 screaming children, and their somewhat more reserved parents, at the London Arena. And the business behind the characters has moved just as quickly.
‘Three or four years ago 96% of the revenues for the company was television and distribution fees,’ says Ruffini. That fell to 65% in 2000, to 19% in 2001 and this year will probably be nearer 9%.
‘But HIT decided the real money was in rights ownership. The rights business is intrinsically riskier than the TV distribution feed and at £5m, Bob was one of the initial internal company investments. But this year he will probably generate £40m+ in revenue. He is not only a critically successful television show, but also a commercially successful merchandising property. The TV element is pretty small.
The new economic model is not lost on broadcasters themselves. ‘You can approach a broadcaster and if they like the concept and it’s not already an existing show part of the negotiations for the broadcast license fee – probably the hardest part of the negotiations – is that they want a back-end participation interest,’ says Ruffini. TV is our advertising vehicle: it’s a way of projecting our brand, our property, into the home to our consumer who, for our company, is between the ages of zero and seven. When you’re sitting down with a broadcaster you could get more upfront in a per episode basis but then they would want a bigger participation at the back-end.’
Given the language he uses, it is obvious this is a business Ruffini knows well. Following the Lyrick acquisition, he joined the HIT board as CFO. But he had been with Lyrick since 1993 – first as treasurer, finally as CFO. He joined from Andersen. ‘Barney was one of my clients,’ he says. ‘And I felt the clients were having more fun than I was.’
In keeping with the international nature of the business, Ruffini is a truly global CFO. An American, he divides his time between the States and London.
He’s in the UK for one week out of every month for a board meeting or to announce earnings. The frequent travel means he gets together with his CEO (former HIT FD Rob Lawes) and global sales and marketing president (ex-LWT executive Charlie Caminada) for about two weeks out of every month – one in the UK, one in the US. ‘It would be a problem if you can’t sleep on planes,’ he says. ‘But I guess we’re all good sleepers on planes.’
Despite reports of mergers – particularly transatlantic ones – falling out of fashion, this is one that appears to have bedded down successfully.
‘The fit between Lyrick and HIT has worked well,’ says Ruffini. ‘It’s brought the US and UK together as well as creating a common sales, marketing and distribution platform for TV and merchandising sales.
‘What HIT was acquiring with Lyrick was infrastructure and expertise that it internally didn’t have here in the UK. (The US) is a totally different market. But it allowed it immediately to sell a Bob video for about $2 more than HIT was originally thinking (had it gone via a third party).’
That’s because size matters. Persuading the likes of Walmart to stock your products is tough. ‘It’s kind of a catch-22,’ he says. ‘Unless you do $40m of business they won’t trade with you. But how do you do $40m worth of business with them if they won’t trade?’
The stores’ answer is to go through a third party but HIT does not favour this approach. Often, says Ruffini, they are focused not on the brand but on making a ‘quick buck’. He adds: ‘We are just not interested in doing third party deals any more.’
With its expanded product range, HIT hopes to retain children as customers for several years. At the age of one, the target audience starts watching Kipper. They switch to Barney at about 18 months and graduate to Bob at about three and a half. There they will stay for a couple of years with Angelina Ballerina seeing girls through until the age of seven or so.
The company is now looking to complement these products – by development and by acquisition. Pingu cost HIT #16m but earned product royalties of over £2m in Japan alone last year. Independent focus group testing the brand in the US also indicates ‘high levels of character appeal’. Pingu will cover a broader age range, up to adult in many cases. In the Japanese market the core audience is 18 to 25-year old females.
HIT sees Pingu as under-exploited because of the ‘minefield’ rights arrangements surrounding the character until HIT’s purchase. It took two separate deals and almost three years to secure those rights. ‘It was a smorgsboard of law suits,’ says Ruffini. ‘It’s the first time this property has had one owner. If we can make it a commercial success in the US, it will have been a cheap investment.’
The company is also developing another new show. Featuring characters in a bath that come to life, Rubberdubbers launches on the BBC next March – four years almost to the day after Bob’s debut. ‘We certainly have great expectations for Rubberdubbers,’ says Ruffini. ‘It’s very merchandisable.’
‘Our goal is to have four or five global young children’s brands sold in well over 100 companies and through which we are generating the three main sources of revenue – television, consumer products and video/DVD.’
Valuing those brands – indeed any brands in the entertainment business – is tough, says Ruffini. And while it’s valuable, it’s not as lucrative as what Ruffini describes as the Pokemon market where the age group is higher. ‘You’re not talking millions there, you’re not talking billions,’ he says.
But there are advantages.
‘One of the beauties of the young children’s market is that it has been proven to be recession-proof,’ he says. ‘When you are talking about a two, three or four-year-old, in the normal course of events people will spend £10, £20 or £30. In a recession you cut out the family vacations. You don’t cut out the small purchases.’
It’s a good market to be in in the current climate. And so while FDs in other industries wonder how they can fix it, Ruffini can concentrate on building his business.
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