Pushing DVD production boundaries East

Managing a DVD compression and authoring business out of the UK sales office – with its production facility based in Bulgaria – comes with a number of challenges. It also brings rewards, says JONATHAN FINNERTY, Managing Director of International Digital Management.

Fifty years of Soviet influence in political life have left the country with the complex task of restoring democratic principles in all walks of public life – and 17 years later there are still echoes of that communist era. So, the first rule of setting up a business in Bulgaria, as in many parts of the world, requires a local partner you can trust.

You need one who has a legitimate pedigree and knows his way through the system. International Digital Management’s (IDM) co-owner was a long-standing business colleague of mine who has his heart – and success – in local film distribution and production.

In its six-year history, IDM has sought to embrace the lower cost advantages of managing its production in Bulgaria while ensuring that it has mitigated the challenges of doing business in the Balkan region – one ravaged in relatively recent times by war in the neighbouring ex-Yugoslavia. Let’s take a closer look at some of these aspects

EDUCATION AND THE WORKFORCE

Initially, one of the most attractive benefits of investment in Bulgaria is the supply of skilled and well-educated workers – about 4.5 million people. However, education in more recent times has been declining due to funding problems largely caused by poor government fiscal disciplines.

Apart from the 41 universities and 45 colleges, extensive foreign language education means English is very widely spoken in Bulgaria. There are at least 30,000 IT professionals in the country with 5,000 IT university students now graduating each year. Bulgaria is estimated to be in third place worldwide for IT certified professionals per capita.

A thriving black economy can distort official wage rate statistical comparisons with Europe. Average gross salaries in Sofia are currently approximately €300 per month. No wonder that studio production crews now seek location and permanent studio sets in a region that also offers such rich technical ability.

The specialist nature of IDM’s compression and authoring business, with its international profile, means wages for this sector are rising significantly above Bulgarian inflation, but are still significantly lower than the European average. An authoring technician might come with a gross salary of €1000 per month which is probably around one third of his counterpart in the UK.

How long this continues is by no means certain particularly given that EU entry is likely to be two years away. This factor alone gives our company a significant competitive advantage in a DVD world that has now matured and commoditised.

A key problem we have experienced has been the lack of experienced authoring technicians. IDM is one of only a tiny handful of high-end C&A facilities across East Europe. An intense training programme for each new recruit is crucial – in the beginning of Standard Definition we had to spend significant resources in order to have all our people trained in the United States at GDMX, IDM’s Affiliation partner.

With stigmas still attached to the Balkan region and with the low salaries it is virtually impossible to attract skilled technicians to locate to Sofia from abroad. In West European C&A businesses the talent pool prospers when there is such fluid mobility (between France, UK and Germany, in particular).

Offering our clients first-class menu designs and concepts they have come to expect from us, has been challenging despite the excellent stock of PC graphics software technicians. Western standard advertising and creative agencies are not that well established in Sofia. IDM has had to recruit from a very limited talent pool.

Despite all of the great possibilities that the region offers in terms of affordable skilled labour, we are not complacent. As the Tiger and Indian sub-continent economies come on line offering similar profiles at even cheaper prices, we might predict that it will only be the cultural similarities that America feels it has with Europe as a whole that keeps it from moving more of its production base further East.
Therefore, we continue to be technically equipped and capable of competing in the rapidly changing media landscape..

RESEARCH AND DEVELOPMENT

With Bulgaria’s rich programming talent, research and development offers IDM great possibilities. IDM has four permanent staff employed in R&D developing iHD (HD DVD) and BDJ (Blu-ray) programming, and to a lesser extent now, UMD.

If there has been a challenge, it is finding programmers who are interested in only using a modest subset of Java and Java Script programming which is required for HD DVD and Blu-ray – although who knows where the boundaries of interactivity may end in the fullness of time.

SETTING UP BUSINESS

Studios understandably feel more comfortable dealing with vendors in territories with a robust legal infrastructure – even if all arbitration in Studio contracts has to be settled in the state of California!

A corrupt and inefficient judiciary is the biggest challenge for Bulgaria even though there is a serious culling of the old guard judiciary now in tow to meet strict European Community accession criteria.

Police say any suspects they manage to arrest simply pay bribes to secure their release. Prosecutors and judges retort that police provide dodgy evidence. The process is snail-like; it can take nine years to get a case to court. IDM took a decision to set up its holding company and sales office in the UK with a wholly-owned Bulgarian subsidiary to reassure our clients.

Raising finance in this part of the world is very different to the rest of Europe where it has a mature banking system. While Western Europe basks in 6% to 7% loan rates, the risk profiling of Bulgaria means no foreign loans except maybe from the European Bank of Reconstruction and Development for much needed infrastructural projects much bigger than ours! So local loans are more in the order of 10% plus.

And then there’s the equivalent of three full-time employees IDM has dealing with the state bureaucracy. Their work includes meeting arcane record-keeping requirements for VAT and fiscal on workers’ pay and corporate profits and getting the right stamps on the right bits of paper for the sleepy customs service.

It normally takes two days or longer to release an incoming shipment. Our full time customs employee has successfully insulated our business many times from customs delays that might have meant missing Studio DLT deadlines.

Circumventing customs delays and providing our clients with a faster and more secure service has driven us to broadband and satellite delivery solutions to and from the client or direct to their replicator.

Early pricing for broadband even eighteen months ago was prohibitive in Bulgaria but our 10Mbps line is absolutely in line with European cost averages. Using this IP in conjuction with military grade 256k encryption via a Digidelivery box with additional options for some studios who prefer satellite (PanamSat and Smartjog), the client is happy. All we have to hope for now is affordable global network capacity in time for HD!

SALES

Domestic DVD demand is relatively limited across the region given the lack of viable indigenous filmed entertainment products. Local perception of DVD in Bulgaria has diminished in very recent times with a feeding frenzy on licensing top notch independent DVDs by the local press – each day one or two free cover mounts across the entire newspaper spectrum.

While international businesses have still not settled in Bulgaria in significant numbers, encouraging the use of DVD as a corporate communication medium has been tough. With local legitimate DVD sell-through consumer prices at €6 with pirate product widely available at €2, there are few local commissions coming to a high-end facility like ours.

So IDM has focused its sights on internationally-graded filmed entertainment product. With the Independents still largely choosing not to centralise their production, this means studio work has been at the thrust of our sales initiatives.

Bulgaria and the Balkan region is still not that well known to corporate America, so being selected some years ago by GDMX (then CVC) as part of their international Affiliation programme was quite a coup.
The cost of entry into this family was substantial given the exclusive Toshiba authoring kit it was necessary to purchase and the training our technicians had to undertake in the US.

Through this Affiliation we have secured close working relationships with Warner Home Video and 20th Century Fox and have, by demonstrating competence there, moved on and secured work with Sony, MGM, Paramount, the BBC and others.

People are not rushing out to come and see you in Bulgaria, so we have had to be creative by having the management directed out of the UK so that there is regular access to the studio’s international offices in London.

Bringing day-to-day production aspects closer to the client has also been achieved by having a joint European GDMX affiliate production manager work inside Warner Home Video’s international offices in London.

PIRACY

If you were to take a look into the www.dvd-intelligence.com site on line section “Fight Against Piracy” I would challenge you to find an article or mention of piracy problems in Bulgaria. Several years ago there were undoubtedly optical disc piracy issues but they have long since been dealt with (factories raided and disbanded) as part of government initiatives to clean up for EU membership.

Yes, Bulgaria like anywhere else these days, has a piracy problem as evidenced by widely available pirate DVDs on the streets at sub €2 prices. The problem is exacerbated further here of course by the high cost of the legitimate alternative relative to disposable income and the still-limited presence of attractively retailed legitimate alternatives.

Legitimacy in other parts of Eastern Europe (Czech Republic, Hungary, Poland) is undoubtedly made easier with more mature and professional retailing – UK’s Tescos and the French mass merchants have driven their enlargement very much in the spirit of the remit given to them by the EU.

There is, according to BulAct, the local MPA anti-piracy office based in Sofia, no pirate replication inside Bulgaria – this is all coming in from the Far East, The Ukraine and Russia. That picture holds for most of Eastern Europe who is keen to be seen to have cleaned up its act for Brussels.

IDM’s brand new production facility in Sofia’s new Business Park has given us a great opportunity to demonstrate how good security and anti-piracy initiatives can get. The company’s architect not only included all the security features required of us by our studio contracts but substantially exceed these in order to demonstrate how seriously we take the global piracy concerns of our clients. This has been further reflected in a glowing MPAA report from its UK-based security expert.

THE FUTURE WITH THE UNION

So, will there be accession into the European Union for Bulgaria (and Romania) in January 2007?

Does Bulgaria meet EU membership criteria? Encouraging signs of economic improvement are visible. Hotels are being built in vast numbers with property speculators buying up swathes of coastal regions – all helping to bring Bulgaria back to where it was before the collapse of Yugoslavia, as a tourist destination. However, the new coalition government acknowledges it still has much more work to do to replace and bring the country’s corrupt judiciary to account.

Even when it qualifies for membership, Bulgaria may not actually want to join the EU. At the moment there is still resounding optimism that membership will answer many of their economic woes. However, we note that the European Constitution is still not in place, budgets have not been agreed and there is still France and Britain bickering over agricultural subsidies and contribution rebates.

Without factoring in the numbers of talented Bulgarians that may leave for shinier prospects elsewhere, there is a significant worker demographic shortfall predicted in Bulgaria with the 7% population decline trend from the last four years, set to continue.

The European Commission will issue its report on Bulgaria and Romania in May; a EU summit will then decide when to admit them. Current predictions are that it is extremely unlikely EU membership will happen for Bulgaria in January 2007 and if it happens at all, it will take another two years for the government to get its house in order.

And what does this mean for an international C&A business operating in Bulgaria?

There are possibilities for well-trained staff to move elsewhere clearly become a reality – there are few professional authoring houses touting for their talents in Eastern Europe.

Salaries in Western Europe are higher but so are living costs and there is still an open question as to whether the net standard of living will be much different for a migrating Bulgarian.

ONWARDS AND EASTWARDS?

The international outlook has been crucial for IDM in the absence of work coming directly from its own regional market. Its presence in Eastern Europe has given it great opportunities to attract a significant amount of studio catalogue reversioning for the 15 territories in its region and from that has come a reputation which has won us new release work for Europe as a whole.

With the major studios now starting to treat ‘outsourcing’ as a commodity where most of what matters is what you get for how much, even Bulgaria is going to have to be lean to be competitive with Asia in the future.

However, IDM’s commitment to be inventive with research and development, creativity and security is what will set it apart from its Eastern neighbours....

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