The Accidental Moguls by Sarah Scott

by Sarah Scott

White stretch limos deliver bulging older men and their twentysomething girlfriends onto a red carpet, where they stroll past flashing cameras and shouting reporters into the opening of a new Canadian movie, Stardom. It's the opening-night gala of the 2000 Toronto International Film Festival, an affair designed to stroke the egos of all concerned – above all, the egos of those who helped the movie's distributor, Alliance Atlantis Communications Inc., become Canada's premier entertainment company.

The firm's 44-year-old chairman and CEO, Michael MacMillan, has made sure that all the players are here tonight at Roy Thomson Hall. Sheila Copps, the federal culture minister, mugs for the camera in her shiny suit. Her government, along with Ontario's, gave Alliance Atlantis and its production partners nearly $100 million last year. And there's Stardom's charming producer, Robert Lantos, with his arm wrapped around his date. Just two years ago, he pocketed close to $60 million when he sold his movie and TV company, Alliance, to MacMillan's Atlantis. Most people on Bay Street think he laughed all the way to the bank.

Way off in the corner is a middle-aged woman in a plain black dress, Phyllis Yaffe. The fans and the cameras ignore her. Yet this onetime librarian from Winnipeg runs the division of Alliance Atlantis – broadcast, operating low-budget, high-profit specialty channels – that matters much more to the company's future than the handful of movies it makes each year. As she pushes her husband's wheelchair into the theatre, one of the stretch white limos nearly runs her over.

Stretch limos are not MacMillan's style. Alliance Atlantis arranged that each of the movie's principals – star, director, producer, distributor – arrived at the premiere in one of a series of primary-colour Volkswagen Beetles. It is a studied moment, to be sure, but not a false one. After all, MacMillan himself drives a VW Cabriolet, not a Porsche or Mercedes as other moguls do. He's not afraid to go against type. This fall, as Canada's media and communications companies paired up in the name of convergence, many analysts, investors and media observers expected Alliance Atlantis to join the dance, lest it wilt like a wallflower. But it abstained. "It's not essential to be owned by a telephone or cable company," MacMillan says.

Common sense, perhaps. That MacMillan said he'd sit out didn't surprise anyone who subscribes to the standard take on his talents: He's a Scot bean counter, he only cares about the numbers. Not like his foil Lantos, the continental who only cares about the art. The caricature is at best only partly true. Michael MacMillan may have abandoned his dream of becoming a movie director, but there's more to his makeup than bean counter. The strategist in him won't rule convergence out: "I never say never to anything."

Atlantis Films, the firm MacMillan founded in 1978 with four Queen's University buddies – of whom only Seaton McLean and Janice Platt stayed on – made small documentaries and dramas that were pure CanCon in a time before there was money in it. When, in 1982, Platt produced Boys and Girls, a half-hour drama for the CBC based on an Alice Munro story, it was a step up from Manitoulin Island: Gateway to the North – but still, the production cost only $156,000. And even that budget almost broke the company. Before shooting began on the show, last in a series of six, MacMillan realized, "We were going to run out of money, and the Royal Bank was going to call our loan. I was dejected; we were all dejected." MacMillan's wife, Cathy, came home late one night to find her sleepless husband reading the want ads in bed.

Royal didn't call the loan. But it was such a close thing that, come the spring of 1984, the MacMillan-McLean-Platt trio had to pinch themselves to believe they were sitting in L.A.'s Dorothy Chandler Pavilion waiting for Michael Caine to reveal the winner of the Oscar for best short drama. When Caine announced the winner – Boys and Girls – "We all jumped out of our seats for about half a second," says MacMillan. "But the time I was up in the air seemed like an eternity. And while I was up there, I can remember thinking, this will keep the Royal Bank quiet for at least a few months."

Not that the movie made much money. At that point, the threesome were paying themselves around $100 a week each. But the Oscar – emblem of world-conquering American dream factory that it may be – would pay off big time shortly, when Ottawa decided that it was time to boost Canada's own film and TV industry. Independent TV producers were to be encouraged to make more Canadian content. In 1983, Ottawa put in place the supports that still buttress the business today. Telefilm Canada, the central support agency, funds up to half of production costs; on top of that, lucrative tax breaks often are available. Ottawa had already obliged Canadian broadcasters to devote part of their prime-time schedule to visibly Canadian fare. In other words, government now provided both market and means.

The Oscar acclaim made Atlantis eligible to become a vehicle of cultural nationalism. But MacMillan recognized opportunity too in another development. Seeing that cable networks were a growing force in the U.S., MacMillan and company started feeding them sci-fi adventures, beginning with Ray Bradbury Theater in 1985. These shows, and their descendants – The Outer Limits, Psi Factor, Earth: Final Conflict – still got tax breaks worth around 8% of the budget. And not only could they be sold in the U.S., where fees are higher than in Canada, but they could also readily be sold around the world.

The company's ambitions didn't sit well with Platt, who leaned more to Canadian stories than American cable fare. "It just wasn't me," she says. "I couldn't see my signature on anything any more." Besides, she yearned for a life in the country. She broke up with her partners during a dinner in 1989 at MacMillan's house. "There were lots of tears," Platt says. "It was a very big deal for all three of us." Platt, who now raises cattle at her farm in Northern Ontario, still likes and admires her former partners. "Michael has the hunger that never ends," she says. "He's like an explorer. There's always something else to be learned."

By the time Atlantis went public in 1993, MacMillan and McLean had new partners: Ted Riley, another pal from Queen's days who had joined the firm in 1984; and Peter Sussman, who became a partner in 1989 after doing legal work for the firm. Together, the four friends, who control almost two-thirds of Alliance Atlantis's voting shares, worked collegially under MacMillan's leadership. "He's the smartest guy I ever met who still continues to listen," says Riley. MacMillan looks at a deal "as if it's in three dimensions, because there's always something you can pull in from out in the ether that gives a new context to a deal, that helps push it forward." MacMillan focuses so intensely on the big picture that he sometimes neglects the little details of life. He once left a car running at the Toronto airport while he ran to catch the plane – and remembered it only when he got back to town.

By 1998, Atlantis was one of Canada's biggest TV producers and distributors. Its main rival, Lantos's Alliance Communications, was close to twice as big, and had cracked the lucrative U.S. prime-time TV market with Due South. Unlike Atlantis, Alliance was also in the film business: It had just garnered a couple of Oscar nominations for The Sweet Hereafter. Between them, the two companies dominated the Canadian TV and film production and distribution market. And they were both in a jam. The expansion of the TV universe that had initially created so much opportunity was now cutting into margins. With far more channels on the air, fewer people were watching each show, which translated into lower revenues per airing. Alliance and Atlantis had both developed distribution arms that could sell and resell their shows to more than 400 buyers around the world, eventually making a profit. But in this ever-more fractured TV world, "eventually" was receding farther into the future. You needed deep pockets to afford to wait that long, especially with drama that could easily cost $1 million an episode, and with customers who kept turning into competitors (big ones), thanks to a wave of TV-industry mergers. Neither company's pockets were deep enough.

Lantos made the first move. In 1997, he recalls, "I called Mike, and I proposed that we buy him. I said, I feel small, so you must feel smaller.

"He said he agreed with me, but he was not selling. I said, well, I don't see how you can buy us. He said, would you consider selling? I said, I'm not married to my job."

Translation: Lantos might sell, at the right price. So began a long dialogue between two unlikely collaborators.

Lantos is a Hungarian-born movie producer, a worldly Lothario who is the closest Canada has come to producing a central-casting film mogul. His purported reason for growing Alliance Communications was to win himself the freedom to pursue his interests – just one of which is making the sort of movies that matter, the stories that are "food for the soul." He parks his topless Mercedes outside a swish fortress of an office that he made a point of building beside his tennis club, which he rarely uses.

MacMillan, on the other hand, runs every morning at 6:30 to blow stray thoughts out of his mind. Born in the anonymous Toronto suburb of Scarborough to parents who worked in insurance and real estate, MacMillan has been together with lawyer Cathy Spoel since university (they married in 1981). Despite his wealth (he now makes $853,000 a year and is worth, as of early November, around $20 million), MacMillan is a very grounded guy – he sends the two youngest of his three daughters to public school, goes home every night to cook dinner for the family. (In his social time, mind you, he's a famously hearty partier.)

MacMillan proved to be a determined suitor. Between January and June of 1998, MacMillan and Lantos talked every other day. Lantos finally told his board what he was up to. They were astonished. "Robert," one director pleaded, "give me a month to talk you out of it." Lantos agreed, and slipped out of touch with his opposite number at Atlantis.

MacMillan, chafing, finally called Lantos and put it on the line: "Either right today right now, let's do this or not. 'Cause we're not going to wait around." So they did it.

Technically, Alliance bought Atlantis; every share of Alliance was worth two shares of Atlantis. But as part of the deal, MacMillan and his management team took over, while Lantos sold all his shares and options at $28 and $29. He netted nearly $60 million, factoring in his severance pay and $5 million toward film development costs – as part of the package, the merged company agreed to finance and distribute up to $100-million worth of Lantos movies. "Robert made off like a bandit," one analyst observes under the cover of anonymity. That was the gossip on the Street: Michael got snookered by a wily old pro.

High hopes and rosy promises for the merged company did not materialize. The stock got hammered. Alliance Atlantis non-voting shares slid from $32.30 in midsummer 1998, right after the deal was announced, to $11.35 at the end of 1999.

"They failed to meet the Street's expectations on TV program delivery and earnings, and management credibility suffered as a result," says analyst Susan Reid at Research Capital Corp. The merged company was making far too much TV drama. Margins in the TV division had sunk to 8%. Yet TV drama had always been Atlantis's core business, the engine of its growth. This despite the fact that MacMillan has never produced a bona fide hit. "The great weakness of this company is that we've never had a hit show," says Peter Sussman, who heads TV production. "I mean like ER, shows that made hundreds of millions. The great strength of this company is that we've never had a hit show. We've had to learn how to make it work, brick by brick."

The company, in fact, has been working on two construction projects – one for Canada, the other for the rest of the world. The Canadiana shows are heavily subsidized and not very profitable. Take Traders, the closest thing to a hit that the Atlantis side of the company has produced for the Canadian market. It's a visibly Canadian show about Bay Street shenanigans. Last year, in its fifth and final season, it picked up 1.3% of the viewing audience in Toronto, compared with 9.3% in the same time slot for ER.

The typical cost of an episode of an American prime-time show is $1.7 million (U.S.). Traders cost about $900,000 (Canadian) per show. Nearly half of that amount, $400,000, was funded by the Canadian government. Broadcaster CanWest Global paid about $200,000 in fees per show, leaving a deficit of $300,000. Atlantis managed to break even by selling Traders to two dozen countries. The U.S. was not one of them, save for one season on one station. Mentions of "Bay Street" and glimpses of multicoloured cash are a big turnoff stateside. Says Sussman: "The lion's share of the U.S. broadcast market has a very narrow view of the world, and they're reluctant to air things that don't feel local for America." Boys and Girls or Traders, CanCon is never going to be the company's ticket to payday.

Indeed, as much as government support is important to Alliance Atlantis, Canadiana is now only a small part of its TV business. By MacMillan's count, 15 of the last 20 series have been predicated on export.

In the 1990s, MacMillan's team redirected its attention in the U.S. from the cable market to the first-run syndicated market – essentially a collection of independent stations that like cheap, sexy no-brainers like Baywatch. "First-run syndication is a business where shows run at times of day where people watch with one eye, not two," says Sussman. "You're busy getting dressed to go out while you're watching." Sussman hoped that Peter Benchley's Amazon – a $1-million (U.S.) per-hour thriller about a bunch of good-looking young people who survive a plane crash in the Amazon – would be low-brow enough to satisfy the one-eye criterion. But it got too plot-heavy, and was cancelled this year after one season. Sussman's conclusion: "A really, really good idea that nobody wants to watch is a shitty idea."

The company is counting so heavily on the U.S. market that it has based Sussman in Los Angeles. About 80 people work in the L.A. office generating ideas, writing scripts, selling product to U.S. buyers and marketing TV and movies. That doesn't sit well with Ian Morrison, president of Friends of Canadian Broadcasting, which lobbies for Canadian programming: "I see a de-emphasis on programs that have a Canadian cultural-flagship objective," he says. "They're milking resources from the federal government for purposes that are distant from the original."

That sort of criticism infuriates Peter Sussman: "The fact that we actually produce more things triggered by U.S. interest than Canadian interest doesn't make us any less Canadian. In fact, it makes us more Canadian. It allows us to take the success of that activity and take it back to Canada, whether it's literally bringing a [made-for-TV] movie like Nuremberg to shoot in Montreal, or whether it's making us a stronger company, giving us the wherewithal to launch Traders."

The truth is, Sussman's side of the company is becoming less important. The centre of gravity is moving toward another front, one also protected by a federal government trying to secure Canadian space in the era of globalized entertainment.

Several years before the merger with Alliance, MacMillan had figured that the splintering of TV audiences offered not only danger (the declining margins in TV drama) but also opportunity (owning a splinter of one's own).

Although they may only capture a small share of the market, specialty channels are lucrative in Canada. Cable companies are obliged by the Canadian Radio-television and Telecommunications Commission to carry them. The resulting steady stream of subscriber fees usually covers most or all of the channel's program costs – a surer and quicker way of making money than TV production. With the cable revenue in your pocket, any ads you can sell may be gravy. Finally, when you do generate your own shows for these sorts of channels, production is cheap. There's no need for egotistical directors or high-priced actors. You can count instead on regular folk who know how to prune a bush or make a soup. "It's hard to spend more than $20,000 on a daily food show," says MacMillan.

He insists that the pursuit of the specialty opportunity is not just about the money. MacMillan has a strategic reason to move into broadcasting. In a world with hundreds of channels, it would be foolhardy to be only a producer of content, he says: "If you're only a producer-creator, and you have no method of packaging it up and presenting it to viewers – you don't own the channel brand – you've got a problem," he says. (MacMillan doesn't mention it, but focusing on specialty channels is also a good hedge against the day the political winds in Ottawa shift away from pouring money into film and TV production.)

MacMillan made his first move into broadcasting in the mid-'90s by bidding for a CRTC licence for Life Network, a mix of travel, cooking, gardening and people stories. There were plenty of contenders for the few choice licences up for grabs. But Atlantis had the edge. It turned out that those Canadiana dramas served their purpose after all: Once again, Atlantis could leverage its cultural brownie points.

After the Life start-up, Atlantis launched another specialty channel, HGTV Canada. Platt returned to lend a hand on both. Actually, HGTV (Home and Garden Television) originates with The E.W. Scripps Company of Cincinnati. But American companies aren't allowed to broadcast in Canada without the CRTC's blessing. A Canadianizing partner makes it culturally acceptable. Hence, HGTV Canada.

The broadcasting division has been growing like crazy. MacMillan acquired two more channels – History and Showcase – in the reverse takeover of Alliance. The CRTC approved his purchase of a 48% stake in Headline Sports in the fall of 1999. Another two channels launched in January, 2000: The French-language Séries+ and Historia are 50% partnerships with Montreal's Astral Communications Inc.

In October, Alliance Atlantis launched a Canadian version of the Food Network, the popular U.S. cable channel covering a topic close to MacMillan's heart. Again, this is a Canadianization of a Scripps channel. For the past three years, Alliance Atlantis has been the Canadian agent for the Food Network, which occupied one of the last analogue – which is to say, widely carried – channels available in Canada. Food Network Canada retains the same spot on cable, but it's 51% owned by Alliance Atlantis and runs Canadian shows half the time.

All told, Alliance Atlantis's band of channels captured 3.6% of the English-language Canadian viewing audience this fall. "And we ain't finished yet," MacMillan says. What's next? The company has its eye on Family Channel and Sportsnet, both of which will come on the market soon to satisfy CRTC rulings. Alliance Atlantis is hoping for green lights from the CRTC in December for The Independent Film and Documentary Channel, The Book Channel, Signature Television (a biography channel), plus Canadian versions of the Scripps channels D.I.Y. and Fine Living, not to mention offerings from new partners: BBC Canada, BBC Kids, National Geographic Channel Canada and The Health Network Canada (a joint venture with Healtheon Web MD and News Corporation).

It was the broadcasting division, not movies or TV, that was the hit of the Alliance Atlantis annual meeting in September. MacMillan rattled off the stats: Specialty channels and pay-TV account for about 42% of Canadian TV viewing, up from 15% five years ago. Broadcasting is still a small fry that generates only 12.1% of the company's revenues. But its expenses are so low that it produces gross margins of 57% and accounts for 30% of gross profits.

Not surprisingly, MacMillan wants to spend more money and time on broadcasting and less on TV production. He's cutting the number of hours of TV drama and boosting lower-cost genres that travel well in time and space: non-fiction (to which end Edmonton producer Great North Communications was acquired earlier this year) and children's programming, especially animated shows.

These moves are supposed to improve the results in TV. In fiscal 2000, TV production and distribution was still the biggest chunk of Alliance Atlantis's business, generating 53.4% of revenues. The division also had the highest direct operating expenses – 84.2% of revenues, leaving 15.8% gross profits.

The movie division MacMillan inherited from Lantos generated nearly 30% of the company's revenues, with 20% gross profits, mostly from distributing movies from the U.S. and abroad. It's been a slow year, says McLean, now the head of movie production. Lantos's departure "was like losing the captain of the ship." Since McLean took over the division in early 2000, he has spent a lot of time wondering why Canada has failed to produce a Full Monty-style low-budget hit. "A whole generation of Canadian filmmakers grew up in a subsidized environment," he says. They were encouraged by the system to make smaller, personal movies. McLean doesn't want to stop making that kind of movie – indeed, it's a company objective, dovetailing with its art-house cinema chain – but he hopes to aim for a wider audience with some pictures. His first big effort is a movie shot in England with a major-league star, Samuel L. Jackson. At $40 million, it's the most expensive Canadian movie ever made. Its title is bound to drive the Canadiana supporters crazy: The 51st State.

Since the merger, MacMillan's moves to slash 164 jobs, cut TV production and reposition the company as a broadcaster have improved the balance sheet. The firm reported $39.1 million in net earnings on $772 million in revenues in 2000, compared with net losses in 1999 of $27.3 million. Susan Reid, the Research Capital analyst who revised her recommendation downward in 1999, says "the company has subsequently delivered on its strategic plan." Other observers are less complimentary: "One-third of the company [the specialty channels] is a good asset, and the rest is crap," says a Bay Street observer. "What is it? Film and TV. Do you know anyone who plans their day around watching an Alliance Atlantis show?"

Investors, still spooked by film accounting, aren't that thrilled about the improved balance sheet. This year they bid up the price of the stock to almost the merger price for an entirely different reason – the frenzy to converge, to own both content and the pipes that shoot it into homes.

"We're not for sale," MacMillan insists. He's received plenty of offers, and is not ruling anything out. Neither MacMillan nor his three partners sound like sellers. And they're not likely to fight over it. They make corporate decisions by consensus, they say; not once has there been a 3-to-1 vote that could isolate or anger one of them.

While everyone else is converging – or wondering how getting together will make them more money than staying apart – MacMillan is testing his own version of the concept on the internet. Although no one has tried anything like it before, MacMillan jumped at the idea the very day the three creators pitched it. That's one advantage of independence, he says. "We can respond and not be afraid of these things. We're willing to take creative chances."

He's investing $10 million in a net TV station, U8TV. It's reality programming: Eight young hipsters live in a loft in downtown Toronto, their every move monitored by cameras. They'll host segments such as Shower Hour and Casting Couch; a half-hour digest will be broadcast on Life Network each day. The rest of the time, you can tune into every second of their unscripted lives on the internet.

It will be intimate, if the September auditions in Toronto are any indication. As the cameras roll, the station's creators pop questions to each of the prospects: What's the wildest thing you ever did? The most embarrassing moment? Thirty seconds on sex? What's the one thing you don't want the camera to see?

The kids are eager to answer. "I love being the centre of attention," says one 20ish woman. "I have a thousand thoughts on my mind and I have to get them out. I believe that watermelon is the only fruit that you can taste its colour."

It's a long way from Alice Munro. But if letting loose a thousand thoughts is where TV is headed, Michael MacMillan will make sure that Alliance Atlantis is there.

THE ALLIANCE ATLANTIS PICTURE

MOVIES

DISTRIBUTION: The vast majority of the movie business at Alliance Atlantis Communications is in distribution of films from studios such as Miramax Films and New Line Cinema – including such hits as Austin Powers: The Spy Who Shagged Me and The Blair Witch Project. Efforts abroad include a bid to gain more of the sizable U.K. market with Momentum Pictures, a joint venture with German distributor Kinowelt Medien AG.

PRODUCTION: Alliance Atlantis's own movie slate emphasizes smaller, art-house films, including recent releases Stardom, Felicia's Journey, Sunshine, New Waterford Girl and The Five Senses.

THEATRES: The Alliance Atlantis theatre chain, jointly owned with Famous Players, has 24 screens in Toronto, Vancouver and Victoria. The company plans to expand the chain to 50 screens over the next two years.

TELEVISION

PRODUCTION: Known for Canadian-themed dramas (Due South, Da Vinci's Inquest, Traders) and science fiction (Outer Limits, Earth: Final Conflict), Alliance Atlantis is moving increasingly into children's shows (I Was a 6th Grade Alien) and non-fiction programming. It's also a leading producer of miniseries such as Nuremberg and Joan of Arc.

DISTRIBUTION: The smaller side of the company's television business includes distribution of the CBS catalogue (Touched by an Angel, 60 Minutes) in Canada and wide-ranging (200 countries) sales abroad.

BROADCAST

SPECIALTY CHANNELS: Alliance Atlantis's fast-growing roster of wholly- or partly-owned specialty channels includes Food Network Canada, Headline Sports, History Television, Showcase, Life Network, HGTV Canada and the French-language Historia and Séries+.

BROADCAST BRINGS IN THE PROFITS

COMPANY REVENUE: $771.6 MILLION
(fiscal 2000)

Television        53%
Motion Picture    30%
Broadcast         12%
Other              5%

COMPANY PROFIT: $179.2 MILLION
(fiscal 2000)

Television        36%
Motion Picture    26%
Broadcast         30%
Other              8% 

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