Storming the Canadian Animation Scene
A new generation of studios is reshaping the cartoon landscape, and turning heads among private investors
Karen Mazurkewich, Financial Post - March 24, 2007

Vince Commisso, co-founding partner and chief executive of 9 Story Entertainment, watches animator Chris Ramsarran work at the company�s offices in Toronto. Photo by Tyler Anderson

When Canada�s animation industry was going over a cliff, the fearless cofounder of 9 Story Entertainment set up his own studio and engineered a soft landing for his fellow cartoonists. Now, they�re soaring � with award-winning TV series like Peep and the Big Wide World and a bevy of animation characters. The company�s 60 artists are in a frenzy conjuring up four different shows, notably an anime-inspired futuristic cartoon about rebel fighters and a dynamic squirrel-dog duo cast as animation�s Odd Couple. Like his characters, Mr. Commisso is holding on to his hat.

"Animation is better today than it was a decade ago," muses Mr. Commisso, 42. The reason: Production houses like his have mushroomed and continue to grow because they are "small and nimble enough to react to the marketplace." The new generation of animation companies � 9 Story boasts revenue of $10-million and has four more projects in development � is reshaping the cartoon landscape. Until recently, overseas studios in Korea and China did the bulk of the drawing for individual animation cels produced on acetate. Thanks to advances in digital technology � and an entrepreneurial U-turn � much of that work has been repatriated.

Now, Canada�s entertainment industry is riding a new toon boom, and turning heads among private investors.

"It�s the beginning of a new era," says Michael Hirsh, a veteran animation entrepreneur who has watched the industry�s gyrations and now heads the resurgent Cookie Jar Group. Cheap Flash animation technology allowed independent producers to slash their budgets by 20% to 30%, giving the industry a new lease on life. And the promise of new multi-media platforms is giving the business a second wind.

Canadian animators were at the forefront of the animation business in the 1990s, infiltrating all aspects of the industry. They forged some of Disney�s famous sidekick heroes, and helped put the profitable burps and farts into the Nickelodeon network.

Canada was also home to two of the largest service providers, Toronto-based Nelvana Ltd. and Montreal-based Cinar Corp., which held successful public offerings in the 1990s and injected new investment into Canadian television. At the peak of production, the two big studios � operating like factories �churned out 250 episodes a year. At that time, "volume was the name of the game," says Mr. Commisso, who worked as a supervising producer at Nelvana. Then the industry took a nose-dive.

In 2000, Cinar was nailed for falsifying writing credits to gain federal tax credits, and its cofounders were accused of squirreled away US$122-million in a Bahamas investment fund without their board�s knowledge. In the ensuing scandal, the company was delisted and eventually sold. The children�s entertainment industry also went through a down cycle. Deregulation in the U.K. broadcast sector dried up co-production opportunities, and international broadcasters such as the Cartoon Network and Nickelodeon, which started their own in-house production studios, reduced their buys. Even Corus Entertainment, which purchased Nelvana in 2000 for $554-million in cash and stock, took a "haircut," says Neil Court, president of Decode Enterprises Ltd. In July, 2001, Corus�s shares dropped 20% after four analysts cut their ratings when its third-quarter output halved, and, the following year, Corus took a $200-million writedown on its investment in Nelvana.

Given the history, the children�s entertainment industry turned into an investment pariah. But that�s all set to change. In addition to the small animation companies ramping up, some of the industry�s veterans are getting a second look from Bay Street. Michael Hirsh, former co-CEO of Nelvana, and Michael Donovan, former CEO and chairman of Salter Street Films Ltd., are reinventing the animation wheel.

"Generally speaking, Canadian companies are very strong in children�s and animation programming because the programs don�t have the cultural barriers that, say, sitcoms have," says Ben Mogil, analyst for Toronto-based Westwind Partners.

Mr. Hirsh formed Cookie Jar Group with a consortium of investors, including TD Capital Canadian Private Equity Partners and OMERS Merchant Banking Group, to buy Cinar for US$144- million in 2004. One year later, he showed his financial prowess by selling Cinar�s shares to Teletoon network for $96-million. Now, with his cartoony live-action show Doodlebops selling in such territories as Latin America and France, and classics like Arthur and Caillou still in production, Mr. Hirsh is exploring two options: taking the company public or finding additional privateequity players. "We�ve got great ambitious growth plans, and are looking at different ways to finance those," says Mr. Hirsh. In addition to juggling 11 series this year, Cookie Jar�s educational arm is looking to expand.

Steve Boeckler at 9 Story works on a storyboard using a touch-sensitive screen. Photo by Tyler Anderson

Despite the Cinar debacle, investors embraced Mr. Donovan�s lastest venture. Last May, the co-founder of Halifax Film Co. merged his company with Toronto- based Decode Entertainment to create DHX Media Ltd., and raised $20.5-million on the TSX and London�s AIM exchange. Mr. Donovan, who sold his Salter Street Films to Alliance/Atlantis in 2001, had already reinvented himself as a producer of children�s fare before teaming up with Decode, a company with bankable hits in Angela Anaconda and Franny�s Feet, about a little girl with magic shoes that transport her around the world. Undeterred by the slump in the animation business, the group decided to gamble on themarket. "Children�s programming is a great business because the audience regenerates quickly and, if it�s good, can last a very long time," says Mr. Donovan. (The company�s shares, however, have slid 45% from the IPO price of $2.35 a share to $1.30.)

"Now with new technologies, particularly Internet Protocol TV [which offers video-on-demand options] coming on, there is a new cycle of demand that could go on for the next six or seven years," he says. "We are in a period right now where the producer is enpowered." Mr. Donovan is trolling for "various consolidation options." While the company is looking to bulk up its library by purchasing other content, including documentary production houses, one of the highest priorities is new media.

The only possible snag in the latest upsurge is the question of media ownership. Last September, Nelvana Studios was aborbed into the television division of its parent company, Corus Entertainment, which owns children�s specialty channels � YTV and Treehouse TV�as well as 50% of Teletoon network. While the consolidation was a goodmove for Corus, it also forced Scott Dyer, executive vice-president and general manager of the new Corus Kids division, to wear two hats: producer of children�s shows, and one of the country�s top broadcasting programmers. Nelvana�s competitors must come toMr. Dyer to acquire their license fees. Mr. Dyer, however, is confident the reorganization won�t be at the detriment of the independent community: "It�s important that we, as responsible Canadian broadcasters, seek the voice of independents. A lack of diversity will only result in audience depression and [our channels] won�t have the same ratings and popularity." Mr. Dyer says Nelvana�s current output of 100 to 150 episodes a year will not rise.

Broadcasting politics has stopped Asaph (Ace) Fipke from setting up his own shop in Vancouver to pump out kids� toons. "With technology, certain costs have come down," says Mr. Fipke, who reinvested his salary to pitch his series StormHawks, a CGI action- adventure show for boys featuring flying motorcycle squads that must engage in dogfights against villains. Mr. Fipke believes there is room for more independents: "The competitive edge forces [companies] to sharpen their pencils and surround themselves with the best talent in the industry." The buzz about his show, which premieres later this year on YTV and Cartoon Network, is strong, and there is talk of toy deals. But for the young animator, it�s still a gamble. "This time next year, I�ll either be huge or washed up in my Airstream trailer on the beach."

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