Companies & Industries

How Halifax’s DHX Media is building a kids’ TV empire for the Netflix generation

From Inspector Gadget to the Degrassi kids, DHX has quickly become a global player

DHX Media executive chairman Michael Donovan surrounded by DHX-owned characters like the Teletubbies and Inspector Gadget

DHX Media executive chairman Michael Donovan is building a kids’ TV empire for the Netflix generation. (Scott Munn; character images courtesy DHX)

No matter which generation you belong to, there’s likely a TV character that fills you with nostalgia. Perhaps Inspector Gadget or Paddington Bear swoops you back to childhood. It might be Snake, Wheels, Joey Jeremiah and the rest of the Degrassi crew.

Regardless of which show you grew up on, there’s a good chance a low-profile Halifax company now owns it—and is resuscitating it for a new generation of kids.

Michael Donovan, the executive chairman of DHX Media, built an empire by capitalizing on kids’ TV characters with evergreen appeal. Degrassi fits perfectly into that model. The teen drama franchise has been produced since 1980 yet its popularity endures. The current series, Degrassi (formerly called Degrassi: The Next Generation) is in its 14th season. The show is licensed in more than 140 countries. So DHX’s announcement on April 3 that it paid $33 million for the Epitome group of companies, the longtime producer of the award-winning series, made sense. “It’s more successful internationally than the average Canadian understands. That’s what we’re interested in. We’re focused on television content that we think is sustainable over time and that is also international in its outlook,” Donovan says.

Fuelled by the acquisition of Epitome, along with rivals such as Ragdoll and Cookie Jar Entertainment—as well as the recent purchase of four children’s TV channels, including Family—DHX’s market cap has ballooned from $131 million to $590 million in just two years.

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According to one analyst, DHX’s library of animated characters now “overshadows” that of Disney. The Mickey Mouse corporation became the biggest brand in family entertainment by taking years to develop new characters and properties, then stoking demand by limiting DVD releases and other access to “the Disney vault.” But in an age of endless cable channels, binge watching and YouTube, this carefully controlled distribution model looks increasingly antiquated. Donovan, who started out in the movie business and won an Oscar in 2003 for producing Michael Moore’s Bowling for Columbine documentary, created a media company for the Netflix era, where once beloved shows are held in massive digital libraries, sold to streaming services, and viewed on demand, often on laptops, tablets and phones. Viewers used to accept their entertainment in morsels; now we want an all-you-can-eat buffet. And DHX has a big enough pantry to satisfy that appetite.

Sixty or so animators sit at desks in an office tower in downtown Halifax. It’s a radiant day outside and the harbour is illuminated with bright December sunlight, but inside DHX’s studio, the dim atmosphere is punctuated only by the glow of computer screens that dot the former call-centre space. The animators, many dressed casually in hoodies and jeans, and some wearing large headphones, are working on various elements of Inspector Gadget, which DHX has owned since 2012, although the series has been around since the 1980s. One animator is fitting Brain, Gadget’s faithful dog, with a life-jacket—part of a scene for an upcoming episode. In a side room, an animator is laying recorded voices over unfinished animation sequences, providing a rough mock-up of a future episode. It’s certainly odd work relative to the building’s other tenants: government workers, multiple floors of lawyers, and other professionals.

At no point did Donovan, a long-time film and television producer, expect to helm a company focused primarily on entertaining children. But the business case is compelling. Kids of a certain age enjoy certain shows. As those kids grow older, they lose interest and move on to new programs. But each departing cohort of kids is replaced with a new group of attentive young eyes. Unlike grown-ups, kids are less attuned to out-of-fashion hairstyles or dated technology, so children’s programming tends to be more enduring than other TV content.

And, increasingly, young viewers are watching TV shows in much the same way the rest of us do—at their (or, more accurately, their parents’) convenience. Cartoons are no longer restricted to Saturday mornings. They’re available for purchase through iTunes and via on-demand providers such as Netflix, which is a major buyer of DHX’s content. In 2013, DHX secured three subscription-based YouTube channels, which, combined with the Family Channel acquisition, provides a pipeline to deliver its massive library to small eyeballs around the world.

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But while his current company is focused on entertainment in the digital age, Donovan’s career started when B movies were still playing in local theatres. Born in Antigonish, N.S., Donovan was raised in Halifax as one of eight children. He earned a law degree from Dalhousie University in 1977 but eventually decided to jump into the film business with his writer-director brother, Paul. In the early 1980s, the brothers—then in their mid-20s—set up in an apartment above a pornography bookstore on Halifax’s Salter Street. Their first production, under the banner Salter Street Films, was South Pacific 1942, an “artistic” bomb made for about $300,000. The brothers’ next B film, Siege, was written in a week, shot in two weeks, and made on an even skimpier budget. Yet it achieved a “degree of commercial success,” says Donovan. “It was sold in almost every country in the world. And the investors got back their money. And we had enough money to live for another day.”

That led to more films, including Def-Con 4, the story of three astronauts who survive World War III in space, before returning to war-ravaged Earth. “To some extent, it was fun making those movies, although it was very, very hard work,” Donovan says. “After all the bills were paid and all the investors were paid, very little was left over—maybe just enough to continue on to the next one. We went from film to film.”

While working on those early projects, Donovan proved adept at producing, managing the money and, when needed, taking on any other tasks required to complete a film.

The brothers eventually turned to what they saw as an untapped opportunity, playing on a strength of the East Coast: comedy. They produced CODCO for CBC in the late ’80s and early ’90s. The Newfoundland comedy troupe featured Cathy Jones and Mary Walsh, both of whom would become key fixtures in Salter Street’s most notable production: This Hour Has 22 Minutes. (DHX now produces 22 Minutes, which is in its 21st season; Donovan has previously said he’d like 22 Minutes to break Front Page Challenge’s on-air record of 37 years.)

Salter Street, which Donovan ran as CEO, also produced Michael Moore’s short-lived TV series The Awful Truth. That affiliation led to Donovan producing Bowling for Columbine, which examined American gun culture and the Columbine High School shooting massacre of 1999. At the 2003 Academy Awards, Bowling for Columbine won the Oscar for best feature documentary. On stage, Moore patted Donovan on the shoulder, introducing his producer as “Michael Donovan—from Canada.” Moore then used his acceptance speech to blast then-president George W. Bush for taking the U.S. to war for “fictitious reasons.” He received a mix of boos and cheers before being drowned out by the orchestra.

“To get a standing ovation and then hear the booing, I just knew the box office was going to go through the roof,” Donovan once said. “It sounds philistine, but I could hear the cash register ringing in my head.”

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He recalls with regret, however, that Salter Street—a publicly traded company—was bought by Alliance Atlantis in 2001 for $84 million, before Bowling for Columbine’s release. In 2003, Alliance Atlantis shuttered Salter Street, leaving Donovan “deeply upset and sad.” And so, at age 51, Donovan formed Halifax Film, kicking off act two of his career. In 2006, he merged that company with Decode Entertainment, a Toronto and U.K.–based company perhaps best known as the maker of the animated hit Angela Anaconda that was co-founded by producer Steven DeNure. The result was DHX—a rough amalgam of Decode (D) and Halifax Film (HX)—which went public in May 2006.

DeNure says each company brought different strengths to the merger. Halifax Film was newer but had a studio, “strong financial backers” and a small library of animation titles. Decode was more established, boasted a vast library of content (shows such as Undergrads, Radio Free Roscoe and Franny’s Feet) and, most important, had an international sales arm. “It was a good combination of assets and opportunity and skill sets,” recalls DeNure, who is now DHX’s president and chief operating officer.

Donovan initially sought organic growth by creating new children’s shows in-house, but his company quickly began gobbling competitors as interesting targets emerged. DHX made its first acquisition in December 2007, buying Vancouver’s Studio B Productions, an animation studio with a meagre library of programs. That was followed by the 2010 purchase of Los Angeles–based WildBrain Entertainment. The $8-million deal gave DHX possession of Yo Gabba Gabba!, a television series that has spawned a popular touring live stage show.

According to DeNure, the purchases of both Studio B and WildBrain were “modest” transactions compared with DHX’s more recent hauls. In August 2012, the company announced its $111-million acquisition of Cookie Jar Entertainment, making DHX Canada’s largest children’s entertainment company and adding significant characters, including Caillou, Inspector Gadget and Johnny Test, to its roster. The deal more than tripled DHX’s library of children’s shows to over 8,550 half-hour episodes—enough to fill six months’ worth of continuous programming.

In September 2013, DHX announced its purchase of Ragdoll Worldwide Ltd. The roughly $30-million deal added 12 more series to the DHX stable, most notably 365 episodes of Teletubbies. The show—with its colourful and bloated main characters—hasn’t been made since 2001, yet remains popular with toddlers. So much so that in June, DHX announced plans to produce 60 new Teletubbies episodes that the company says will have a “refreshed and contemporary look and feel…reinvigorating the show for future generations.”

While Donovan has built a global children’s entertainment empire—boasting offices and studios in Toronto, L.A., Vancouver, Paris, Barcelona, Milan, Munich, Amsterdam and London—he admits he doesn’t entirely understand the never-ending appeal of characters like the Teletubbies. “Things that work tend to always work,” he says. “That’s a basic truth. Things that have worked in the past are more likely, by a significant metric, to work in the future.”

Dev Bhangui, a senior analyst with Byron Capital Markets, argues the DHX library may be more powerful than Disney’s. “Disney has titles and characters that target a narrower audience…very, very small kids,” he says. “DHX has a much broader set of characters that can target children from the ages of two to 17.” Intriguingly, DHX’s acquisition of the Family Channel also included three Disney channels. Upon closure of the deal on July 31, Donovan moved from CEO of DHX to Executive Chairman, declaring a “new and exciting stage of growth” for DHX.

DHX’s swift rise is impressing industry veterans, and not just in Canada. Sander Schwartz, an Emmy-winning producer for The Batman, answers his phone in California. How are things in L.A.? “Beautiful, sunny, very boring. You wouldn’t like it,” he says before laughing.

Schwartz has been in the TV business for three decades, most recently as president of FremantleMedia Kids & Family Entertainment. Before that, he oversaw children’s entertainment production at Sony Pictures and Warner Bros. He’s now setting up his own independent production company.

“In my 30 years in the business, I haven’t seen anyone else accomplish as much as far as building a company in such a short period of time,” he says of DHX.

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Schwartz is bullish on DHX’s future prospects. He says the company has “all the arrows in the quiver” needed to compete with the other “big boys” in the business: Disney, Cartoon Network, Nickelodeon and BBC. “So I think they’re up to the challenge, but it’s going to be a very formidable one,” he says. “To play with the big boys, they need to up their game to the next level.”

Specifically, Schwartz says, DHX must produce a hit to fuel the entire empire. “In the kids’ business, if you get one hit…it will run your network,” he says. “The best example I can give you right now is Nickelodeon, which for the last 10 years has been, to great success, running the sprockets off SpongeBob SquarePants.”

DHX’s library is impressive, but Schwartz argues the company cannot simply rely on perennially popular titles such as Inspector Gadget and Teletubbies. “Those titles are old and generate relatively small sums of revenue. When is the last time you saw Inspector Gadget or Teletubbies in the toy aisles? I can tell you it was a long time ago in both instances,” he says. “In this business, producers struggle to break even on most shows. To make significant profits, one needs to find a hit that can generate substantial revenues from merchandising and licensing.”

But Donovan bristles at talk of the often-elusive hit. “That’s the Los Angeleno reflex…the hit is everything. It’s the Hollywood approach,” he says. “I have very specifically organized my whole world on delivering excellent shows and building a business irrespective of a hit.” He puts special emphasis on the word “irrespective,” to highlight his defiance. “And we will continue to grow, in my opinion, and prosper, irrespective of a hit. This is how we’re different. We grow without.”

They also grow in Halifax, far from L.A., New York and Toronto. “We have a large presence in Toronto, but there’s exactly zero chance of us ever being headquartered there,” he says. The company also has a sizable presence in L.A., where Donovan once lived. “It’s not a bad place, actually. There’s a pull, maybe, to there,” he admits. For now, though, he is content living in the Air Canada lounge as he travels extensively to the company’s various offices. “We will be in Halifax, as far as I can tell, forever.”

But 30-plus years in the business make Donovan less likely to conform for conformance’s sake. “Once you win, show business moves on—there’s no memory,” he says. “The sooner one figures that out in this business, the better.”

Children’s TV characters owned by DHX