Memorandum submitted by Mr Michael Kuhn
MARKETING AND
DISTRIBUTION IS
WHAT WE
AIN'T
GOT
1. There is one obstacle preventing the
establishment of a sustainable British Film Industry (such an
industry does not exist currently and has not existed in the past
50 years). That obstacle is our lack of control of the marketing
and distribution of British films throughout the majority of those
15-20 countries which produce in excess of 80% of the industry
revenues.
2. By British Film Industry, I mean an industry
defined as British not so much by the nationality of the films
it makes as by where the heart and mind of the "green lighting"
power resides. If the latter resides in the UK, in due course
films reflecting the culture and identity of the UK will be produced.
Not by legislative decree, copyright law, tax law or similar but
natural consequence of the greenlighter's residence.
3. Alan Parker said that we need "distribution
led companies to carve out a British share of the $60 billion
world market"
It's a sentiment that instinctively one feels
is right but it raises tricky issues when one tries to translate
it into practical application.
THE DISTRIBUTION
SECTOR IN
THE UK
4. While it is true that there are no long
term, very well capitalized British distributors who can rely
on a constant supply of mainstream movies, it is unlikely that
intervention by Government will change this. The reason is:
— Government cannot procure sufficient
capital that is raised to supply mainstream films for distribution
on terms competitive with US studios for UK distributors.
— Almost any UK film with commercial
prospects is already subject to fierce bidding from a multitude
of well-managed UK independent distributors with excellent marketing
prowess (eg Entertainment, Helkon, Momentum, Pathé etc
. . .)
It's difficult to see what could be done in
distribution in the UK that would have a significant impact.
NORTH AMERICA
5. Here I think something could be done.
In simple terms a problem that faces an independent production
of a $10 million British film with commercial aspirations, is
that although a combination of non-US and US values in aggregate
should be sufficient to cover the cost of such a movie, there
is one big obstacle to allow this to happen—the large amount
of P&A required in North America to access the North American
values. Here's what I mean in very simple terms:
| |
| | $million
|
| Negative Cost |
| | (10)
|
| Sale and Leaseback (say, 12%) |
| 1.2 |
|
| Int. Sale Gross | 6.0
| |
|
| Less Sales Fee at 10% | 0.6
| |
|
| Less Market Costs | 0.1
| |
|
| | 5.3
| 5.3 |
|
| |
| 6.5 | 6.5
|
| Banking charges etc for discounting Sales Figures
| |
| (2.0) |
| |
| | (5.5)
|
| North American Value | $million
|
| US Box Office 10m |
| |
(Rentals at 40%—25%
Distribution Fee)
| 3 |
|
| Home Video |
| |
| 100K Unit x $25 net | 1.9
| |
| TV | 1.0 |
|
| | 5.9
| 5.9 |
| Margin excluding P&A |
| 0.4 |
I have assumed for these purposes the P&A would be a
"wash". In any event one can see that from a studio's
point of view there is some availability of distributors margins
to cover the downside risk on the P&A.
However, in general these US values cannot be released to
help secure funding of UK independent production because of a
perceived P&A risk in North America. This is particularly
true with the "Classics" divisions of studios and independent
distribution community.
My proposition is that if there were an ECGD type support
available to British productions at packaging stage, this would
help get movies made at little risk.
COUNTRIES OUTSIDE
NORTH AMERICA
6. This is slightly more complex to explain.
In several major territories (currently Germany, France,
Spain, Italy) there is extreme market "softness". While
the identity of the market changes it is a recurrent problem.
The Studios and their international operations deal with
this situation by a "smoothing process" so that they
either achieve prices they want or bank product until they can
achieve these prices.
7. My suggestion would be that the Film Council set up
an international distribution operation that would have arrangements
with several foreign national distribution companies to support
those national distributors in buying rights from UK producers
for films that they are keen on but can't pay for because of temporary
local softness in the market.
8. This support would vary depending on the market. It
could, for example, be the acquisition of TV rights to build up
a package for future liquidation. It could be a catalyst for joint
buying for video replication in several territories to benefit
the video bottom line.
This would not compete with what British based foreign sales
companies do. It would help UK producers finance their films.
It would build up expertise in the management of this new unit
that would be invaluable. It would begin the process of building
a powerful distribution entity for our filmmakers.
9. This proposal will in due course build continuity
in the production sector and an expertise in the distribution
sector from which it will be possible to grow step by step an
international distribution mechanism which is essential to having
a sustainable UK film industry. Let me give you a small example
of why we cannot hope to attract serious financial investor without
it:
— Take a small film (similar to one I recently produced
called "Wondrous Oblivion") which cost about
£4 million. Let us assume it performs very well in world
markets and takes £50 million at the box office. This would
generate for a studio set up, like a Hollywood one, about £33
million in profit (see Schedule "A" below). The importance
of this result is not so much in its singularity but rather in
the following; let us assume that it is one film in a "slate"
of 10 similar films. Further assume that the other nine films
are failures and lose an average £2 million per picture.
For a studio the slate would still be profitable (to the tune
of £12 million or so). However if funded in typical British
fashion the nine failures would still have lost in excess of £18
million but the successful movie (assuming the producer is accounted
a 25% net profit share) will only make £8.25 million and
the slate will therefore show a loss of £9.75 million (minus
£18 million plus £9.75 million).
This is on the same performance level of the identical slate.
10. To me this has always seemed the simplest notion
to grasp, but I have singularly failed in having people understand
it to the point of action in this country. Distribution margins
are key to establishing a successful sustainable industry and
little serious attention is paid to getting our Film Industry
on that road.
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