Bob takes on Mickey

The makers of Britain's most popular children's cartoons are preparing to pile on the misery for Disney. Ed Waller reports

It's like a storyline from some surreal cartoon: after surviving an attack by the evil Cable Giant, in which King Eisner was nearly overthrown, the Magic Kingdom of Disney is busy rebuilding itself. But just as Mickey, Donald and the gang think they've won, the giant returns with a new army of British cartoon characters, made up of Bob The Builder, Thomas the Tank Engine and Noddy, come to lure all the Kingdom's children away.

For Disney, 2004 has been something of an annus horribilis; the top brass only just survived a major shareholder revolt and had to fend off a $66bn hostile takeover bid from America's biggest cable operator, Comcast. For a few months, there was peace. But autumn has brought further bad news for Disney, as the chief executive Michael Eisner has decided to quit. The next threat is that Comcast is poised to unveil an alliance with a British company that will give Mickey and friends something new to worry about.

A deal is being worked out with HIT Entertainment, the owner of characters such as Bob the Builder, Thomas the Tank Engine and Pingu, to launch a pre-school television channel in America that will compete against not only Disney's services, but also those of Nickelodeon's parent Viacom. Sesame Workshop, which makes the US children's classic Sesame Street, is also involved in the deal, as is the stateside public broadcaster PBS, though Comcast will likely be the majority partner. Nobody has officially confirmed anything but the channel, already valued by analysts at £300m, is expected to start piping HIT and Sesame programming to the lion's share of America's 40m-plus digital television subscribers from early 2005.

HIT already has a substantial US business thanks to Bob the Builder and Barney. That the majority of this comes from retail receipts was underscored when the company issued a profits warning in July, after one retailer reduced the shelf space it gave over to DVDs and videos. Furthermore, these retail sales are dependent on the right exposure on television.

HIT's director of investor relations, Simon Forrest, said the company's US ambitions are "all about controlling our distribution better. By remaining a piecemeal supplier of programming to US networks, we don't have any real guarantees about when our shows will air or in which slots." So, launch your own television channel, give your shows the prime slots, control your own retail destiny. For the UK production company, such a channel is "the holy grail", according to Andrew Walsh of media analysts Bridgewell Securities. "At the moment, there is only one stand-alone pre-school channel in the US but a growing digital cable market, so HIT's move is timely and prescient," he says. Particularly since America's analogue switch-off is due in 2006, and US digital homes are forecasted to almost double to 70 million by 2007.

But are HIT's characters strong enough to rival the Disney and Viacom brands on their own turf? The answer is yes, reckons Walsh, particularly given HIT's acquisition of Barney in 2001. "It's all about having the right programming and being able to cross-promote on terrestrial TV," he says, citing CBeebies, the BBC's digital pre-school channel that carries many of HIT's shows here. "It launched two years ago, against those US brands and is now the most watched kids' channel in digital homes." HIT, he says, is learning the lessons of CBeebies and applying them to a more lucrative market - and this time it'll have equity. The foursome behind the upcoming US channel will help. Comcast has long been looking to own more of the content on its 21.5 million-home cable network, the size of which will allow it to leverage the new channel on to other digital platforms. PBS will supply terrestrial cross-promotion and a programming mix of Sesame titles, Bob, Barney and HIT's Jim Henson library.

At the time of the Henson deal in April, which added shows such as Fraggle Rock and The Hoobs to HIT's books, the company's director of corporate development Nigel Birrell said the move was a way of sweetening up HIT's catalogue for American cable and satellite platforms, ahead of the channel launch. "Getting carriage is our key challenge. We had to convince US distributors that the channel will be a valuable addition to their platforms." However, others in the industry see it differently. "Getting US cable carriage is the easiest and cheapest part," warns Neil Court, partner of North American animation studio, Decode Entertainment. With a digital deluge of some 25 channels already aimed at American children, "the real challenge is marketing, turning your channel into a real destination for kids."

Without the off-air promotional power of a Disney or a Viacom, HIT's channel could simply add to the dozens of unwatched channels on the EPG. Furthermore, despite the dream team behind HIT's new channel, all the same benefits of digital switch-over are being explored by the local players. Disney, having cherry-picked all of Henson's Muppet titles, is certain to spin off its own Playhouse pre-school programming strand into a stand-alone channel, with terrestrial cross-promotion galore on ABC. Likewise, Viacom's existing digital pre-school channel, Noggin, already has a 40 million-home headstart on any HIT offering. A worst case scenario might even see HIT's existing US network clients dropping its shows from the schedules now that programme supplier has turned competitor, thus denting those retail revenues even further.

None the less, HIT's Forrest remains bullish about surviving the long-term fight against the Disneys and the Viacoms: "We are very cash-rich and have a robust business that made £40m profit last year." He even talks of a war-chest of cash for the new US front, and a borrowing facility of £200m. "We believe our new channel will be a formidable and unassailable proposition," he says.

He adds that should the US launch go to plan, others will follow. Indeed, it won't be just American children who will be eyeing the new channel with interest, but potential joint-venture partners in all of HIT's other strong markets: Germany, Australia, India...where Disney and Nickelodeon will both be waiting.

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HIT is not alone in its ambition to take on digital America. Another UK animation house - Entertainment Rights, owner of Postman Pat and Basil Brush - is also talking up its US plans, even to the extent of a possible joint-venture channel. Like HIT, the company has been busy buying up spare American cartoons, such as He-Man and Masters of the Universe. Spearheading the company's US invasion plans are a planned American version of Basil Brush and the new spin-off series based on Postman Pat's popular feline friend, Jess.

The BBC, meanwhile, has the joint-venture cable channel BBC Kids up and running in Canada, but has not yet announced any plans to take it south of the border.