Examination of Witnesses (Questions 200
- 219)
TUESDAY 13 MAY 2003
MR CHRISTOPHER
P. MARCICH
Q200 Mr Bryant: Sorry to interrupt
you, but if the distributor and the exhibitor and the producer
are inextricably linked, either because they are the same organisation
or because they are bound together, and it is therefore convenient,
as was alleged to us, to make sure that the cost is at the exhibition
end so that there are not additional monies by virtue of the profit
going to actors and so on, then there is a competition problem,
isn't there? Because it is very difficult for new entrants to
come into the market.
Mr Marcich: There are competition
authorities that watch the behaviour of market players and there
could become—I mean if some of what was said during previous
sessions in oral evidence were to be true, the competition authorities
would undoubtedly be concerned, but the sorts of comments that
were made I think are quite exaggerated. There were some comments
suggesting that the exhibition market here was controlled by affiliates
of the major studios. In fact, they account for a minority of
the screens in the UK and if anything—
Q201 Mr Bryant: What percentage?
Do you know?
Mr Marcich: Off hand I do not
know, but I think that it might have been in the order of one
third and I think it is going down. I think these theories, these
conspiracy theories, are not supported by the evidence of reports
in the press in recent weeks that some of the studios are divesting
themselves of theatres. Most recently Warner Village was reported
in Screen Finance. It just does not stack up. I think there is
a tendency to see more there than actually exists. And again,
I think that the relationship between distributors and exhibitors
is one that is watched by competition authorities and it is one
that we, as a trade association, stay away from because it is
not appropriate to be dealt with at that level. It is something
that is to be left to the individual companies to work out on
a case by case basis.
Q202 Chairman: Before I call on Mr
Wyatt, following on your exchange with Mr Bryant, let me put this
to you; the huge power of the Hollywood studio system, as it used
to be, was broken by the Anti-Trust legislation which separated
production from exhibition. The studios that make up the MPA have
got the same names as the old studios, but they are very, very
different indeed. For example, MGM is not even in Culver City
any more but I think it is down in Santa Monica somewhere. It
is an entirely different organisation. But the fact that the power
of what you can call Hollywood is now immense once again is partly
due to that system that was created by Mr Wassingham as described
in the New Yorker two or three weeks ago, but it is also partly
because they have now put it together again, haven't they? They
have now put together a structure of production, distribution
and exhibition and because of that they can decide upon whatever
internal pricing they like and that can be disadvantageous to
those who are trying to use the system, particularly of distribution
and exhibition, who are not part of the MPA. I am not saying that
this is sharp practice or anything, I am suggesting (a) that it
is a fact, and (b) that it accounts for the huge power that now
exists.
Mr Marcich: Well, I would have
a slightly different take on the situation. I think that the involvement
and decision of some of the companies to invest in exhibition
in part was a response to a market failure 20 years ago when many
countries were severely under-screened. In fact, when some very
prominent individuals were predicting the end of the theatrical
business as we knew it then in favour of kind of a showcase screening
stars and then everything would go to video and television, and
so there was 20 years ago a great deal of pessimism about the
future of the exhibition sector and whilst some of the major studios
moved into the exhibition business to make up for what was an
absence of investment and have, by the way, contributed significantly
to a turn around in the fate of the cinema business, I still go
back to the basic point that, if anything, current developments
seem to suggest that the studios are apparently divesting themselves
of their cinema holdings and I do not think that they would be
doing so if your theory were in fact correct. So I will leave
it at that, I think. I really do not have much more I can say
on the subject, but I do not see the evidence as you see it and
I also see that the direction that the industry seems to be going
in right now is one that would speak to a very different—or
suggest a different set of conclusions.
Q203 Derek Wyatt: If I have understood
it correctly, George Lucas' last film he sent digitally from his
San Francisco ranch. Does that change the rules of distribution?
Is that a revolution or would it just have been that you will
all do it digitally in the next three or four years?
Mr Marcich: The digital projection
and digital screenings hold open the prospect for a very significant
change if certain basic conditions are met and one of them that
has yet to be resolved is to agree on a standard for digital cinema
that will provide the consumer with a better quality experience
that will justify the investment of £150,000 or more per
screen that would be required. There is also a very significant
concern about piracy when films, when works, begin to move over
a satellite feed into a cinema theatre diminishing distribution
costs significantly. There is a great risk of digital piracy and
that has to be resolved as well. But yes, digital cinema should
make a big difference. It should facilitate the distribution of
films generally, including riskier films, and should make them
available more readily in more remote areas. So it should produce
benefits right across the board, but I think we are still a little
way away from seeing that developed on a commercial scale. Although
Mr Lucas did make his film available in digital format there are
very few cinemas in fact that are equipped for digital projection
right now.
Q204 Derek Wyatt: But does it change
the power structure or will it change the power structure? Or
will it just mean that the film studios will just buy those digital
transmission rights?
Mr Marcich: I think that it will
make it easier for new market entrants in the distribution field.
I do not think that the studios will change the role they play
now as distributors, but it may make distribution as a business
one that is more approachable for smaller entities.
Q205 Chairman: What Mr Wyatt has
been talking about is something that when we visited Los Angeles
eight years ago we were told was about to happen and was inevitable.
I remember that when we visited Sony in Culver City they showed
us this and they were confident—they were confident—that
almost immediately this is going to be the way of distribution
and exhibition of movies, that all that celluloid will no longer
have to be trundled around, that it would save lots of money,
that it would be quicker, that you would get better images in
the cinema, etc, etc. Why is it that eight years later the only
person who seems to be doing it, in terms of economics and technology
it makes such obvious sense, why is it that it has not happened?
Mr Marcich: Well, I think that
first of all there has been tremendous progress towards the realisation
of the potential of digital in the cinema business. On the production
side you now have digital technologies used rather extensively
and I think eight years ago what the studios were looking at then
was the revolutionary opportunities digital was bringing to the
film making process itself. Digital cinema, to my knowledge, has
been something that, yes, has been worked on for some time but
the technology is only now starting to produce the sorts of results
that are considered to be necessary conditions for the implementation
of digital cinema and there I am really talking about the issue
of quality. There is a feeling that in order to justify the migration
that the investment that will be required to migrate to this new
technology, it has to deliver a better experience to the consumer.
That is a crucial issue. And secondly, the issue of being able
to apply rights management technologies to avoid a disaster in
the form of digital piracy. But we are getting closer now.
Q206 Chairman: Is it because there
was, at that time, over-optimism about the progress of the technology?
I remember when we went there and were shown all these things
and I see from the draft programme that we have for our visit
to Los Angeles next month that we are going to do exactly the
same as we did then. We are going to go to Sony Image Works to
discuss digitalisation and film production. At that time what
we were told was that in terms of watching movies on computers,
for example, and other uses of computers for concerts, public
exhibition, etc, etc, the problem then was what they called the
"herky jerky" images that you got. We are going to be
shown this, but do I take it that in fact that problem has now
been conquered? So that at least the technology can now do faultlessly
what we were told eight years ago was imminent?
Mr Marcich: I believe you will
see tremendous progress, certainly in the application of digital
technology to production and also to its projection or through
making available works on computers or television sets in digital
format. Yes, there has been a tremendous amount of progress and
there is progress being made on the digital cinema front.
Q207 Chairman: The other question
that arises, without an adverse reflection on anybody, is can
it be that people can be wrong that huge experts can turn out
to be wrong? When we went, not eight years ago but somewhat more
recently, to the West Coast, we were told that the efforts that
were being made at that time to advance digital TV in this country
were bound to be fail because it was a cul-de-sac and that
the real issue, the real future, was convergence of computers
and television sets. Now, here in this country Sky is about to
get seven million subscribers for this year for its digital service.
The digital service in many ways is now converged because of all
the interaction that you have got. Nobody is criticising, but
is this not an example of people who eight years ago, four years
ago, thought they knew exactly what the future was going to be
to some extent having been in error? And to what extent, when
we discuss these things with your member organisations, ought
we to be a little cautious about accepting what they say as the
absolute vrais mot?
Mr Marcich: It is possible for
any of us or any of them to be wrong and I think that you will
find many perspectives in Los Angeles on what the future may hold.
There is a lot of experimentation going on now with digital technologies
and I do not know who has "the answer" if there is a
"the answer". But there is much experimentation and
I think you will see evidence of that when you talk to folks in
Los Angeles. You will then be able to make your own choice as
to which one is right and as to the vision of the future.
Q208 Chairman: When we had Working
Title, we talked about the Film Commission and that was one of
the things that our Select Committee looked at last time. Another
thing that we looked at, and there was a very great deal of input
to us from your studios, was the tax regime in this country which
could make filming in this country more hospitable. There was
at that time this huge drive by the Irish which was very successful.
Gordon Brown has changed the tax regime very considerably. In
terms of Hollywood majors coming to this country to make movies,
do you think that the tax regime is now as hospitable as you would
like it to be or are there other changes that you feel could be
made?
Mr Marcich: Our members do feel
that what is provided now with Section 42 and Section 48 is in
fact a very hospitable film financing regime. You will have a
panel shortly talking about financing. There are ways, undoubtedly,
in which the system could be improved, but we consider it to be
one of the pillars of the success in the investment in film in
this country and we certainly would urge that great care be taken
in any changes that might be contemplated. It is not to say that
the system might not be improved, but let us not give up something
that has a track record of success and has worked.
Q209 Mr Doran: I am sorry, I missed
the start of your evidence, Mr Marcich. I was called away and
had to take a phone call. But looking at your evidence, you are
very complimentary about what is available in terms of the British
film industry and what it can offer and the film industry is a
fairly hard nosed business and there are obviously significant
advantages to your member companies. Can you say a little bit
more about what these advantages are to the larger producing companies
from America?
Mr Marcich: In the UK, in addition
to some of the aspects of film financing that I just discussed,
the overall regulatory environment is hospitable, a can-do environment
which encourages investment in production. The skills that are
available here as a result of some of the training programmes
and as a result of some of the ongoing investment in production
are absolutely top of the line. So it is really an entire environment
that makes the UK attractive to our companies and causes them
to re-invest hundreds of millions each year in productions.
Q210 Mr Doran: One of the things
that we are obviously looking at is how we can improve the British
film industry and I am a politician so that makes me a little
bit cynical, but if the American companies find everything here
to their liking in the way in which you have described, then that
may mean that we are not making the best of things. Given your
partiality and obviously the interests that you represent, can
you say a little about areas in which the industry here might
improve which would be to the benefit of your members as well?
Mr Marcich: I have heard and seen
some of the comments on possible areas of improvement. I think
there has been a lot of focus, which we will hear more about this
afternoon, on distribution and promoting distribution. We have
not seen specific proposals on how distribution might be incentivised,
how there might be incentives created on the distribution side,
but that is one area that is being looked at that we would, of
course, look at. I think here in this environment our companies
feel very much a part of the fabric of the industry and are involved
in the consultations that take place on possible changes in the
regime. So I know that that is something that is of great interest
here and it is something that our members will certainly be willing
to take a look at with an open mind and make constructive comments
on if they see that there are ways in which that segment of the
industry could be improved.
Q211 Mr Doran: I think one of the
things we are lacking on this side of the water is a co-ordinated
approach, but let us fantasise for a little and assume that there
was, what would your role be in that? How would you work with
the British industry to constructively take these things forward
if you could? Would you be simply be passing messages forward
or would you be in a negotiating position?
Mr Marcich: Well, in this sort
of an area, when you get into the details of incentives and legislation
that would shape the future of the industry, I think you would
find experts from the individual companies providing their views
and suggestions directly and we would serve a facilitating role,
if such were needed, as a trade association. But you would find
that you have here, in the form of our members, companies that
do feel very much a part of the industry and who will be participating
directly because they have been welcomed to do so in the past.
So I am confident they will again.
Q212 Mr Doran: Because in the course
of inquiry we have heard quite a diversity of evidence. We have
just heard from Working Title, which is clearly a very successful
company which has managed to build a very successful relationship
with one of your member companies and that has opened doors for
it which are not available, are not open, to lots of other British
film makers. The standard story seems to be a focus on one project
which can be all consuming for a number of years while a project
is pieced together and then one of the significant problems that
seems to be met that one of the key areas to raise finance is
by selling distribution rights, for example, in America, which
a lot of the time is selling off future profits because there
is a price which is available to an unknown quantity is a lot
lower to something which comes with a bit of muscle. And it is
the lack of muscle at that stage which is a major concern to the
British film makers who are a level below the Working Titles of
this world. Is that a problem you recognise?
Mr Marcich: I do recognise that
that has been identified as a problem. I recognise that Working
Title has had a particular experience and I think that a number
of other members of the MPA would have welcomed the opportunity
to work with Working Title, which has a successful track record.
So it is not that the companies themselves are not interested.
I think that they are. It is a matter of finding the right partners
and the right conditions for that kind of a working relationship
and it may be that with some of what is contemplated now more
of that sort of success story can be encouraged. And while we
provide our views as a trade association, you must realise that
our individual members have their own minds about many of these
issues and will come in as individual companies as they see fit
as well.
Q213 Mr Doran: I understand that
and one of the difficulties that an organisation like yours suffers
from, I know from my own experience with American oil companies,
that getting a common view on some issues is very difficult so
you tend to get the lowest common denominator. That is not a criticism,
it is just an observation. But the problem on this side is that
we are looking for structural change, but it is very difficult
to see how that can come about in a global industry which is controlled
from the other side of the Atlantic.
Mr Marcich: Was that a question
or a comment?
Q214 Mr Doran: An observation inviting
comment.
Mr Marcich: I think that in the
UK the role of the individual companies that are our members is
slightly different from the sort of conclusion one would take
from your statement, your comment. They regularly re-invest in
this country very significantly and contribute in ways in which
we have tried to illustrate in our written evidence as part of,
as I said before, the fabric of the industry here. Their parent
companies may be in Los Angeles, but they also act as local players
here and I think they are more than willing to look for ways to
improve on that role and on that performance here. So I am not
at all pessimistic and I think that this process and some of the
other discussions that are going on here will produce results.
Q215 Mr Bryant: Just to follow up
another question from earlier about the tax regime. Some people
suggested to us either last week, or the week before that, that
one of the problems about a beneficial tax regime was that you
never knew how long it was going to remain and, of course, you
work across quite a long span, the production process gets to
the final date of the film, is that a problem?
Mr Marcich: Of course it is. Predictability
is very important to investors and it is something that has been
emphasised by others and I also tried to emphasise in my own remarks.
It is why maybe I may have seemed like too much of a defender
of the status quo and too happy with the present situation, but
one of the worst things I can imagine is to create uncertainty
about the environment by de-stabilising some of the elements that
have been very successful without knowing what will be coming
along next. And then there is a learning curve when there is a
change in, say, the financing environment. It takes time for industry
to make the adjustments, whether it is our own member companies
or other companies here. So long lead times are certainly critical
if change there is to be and I think change has to be considered
very carefully before implemented.
Q216 Mr Bryant: And on DVD formats,
obviously part of the selling process, the distribution process
now is how you are going to get out there in the DVD market, a
very important part of people's consumption of movies now. We
have ended up—correct me if I am wrong—with different
regional formats around the world partly for, as I understood
it, for piracy reasons, though it seemed to me that that was a
bit of an excuse for trying to make it more difficult for people
to distribute into an American market.
Mr Marcich: I certainly do not
think it was designed to make it more difficult to distribute
in the American market. I think that some of the underlying thinking
on regional coding had to do more with the different timings of
the sequential release of films around the world. If you think
back to seven or eight years ago when DVD was first being implemented
and deployed, films were not released at the same time around
the world and so you had the possibility of having a film long
out of the movie theatres in one country and moving towards a
DVD release in one country whilst just getting to the movie theatre
stage in another country—
Q217 Mr Bryant: Well, Britain always
seemed to be the last in that. You used to be able to see films
in Argentina and Rome long before you could see them in London.
Mr Marcich: I think the release
patterns are changing and if you look at the comments of many
who are involved in distribution, you see that there is a tendency
towards day and date release and technology is in part driving
that process. But eight years ago that certainly was not the case
and there were countries in which films were released significantly
later than in other countries and with DVD, with multiple language
tracks on DVD, DVD would have cannabalised the theatrical business
had a film been available on DVD at about the same time as it
was being released in a movie theatre. There would be an impact
on the theatrical business.
Mr Bryant: But for a consumer, you go
to Spain or you go to the United States of America and you pick
up a movie and you see it there and then you are not able to take
it home and watch it because it is in a different regional format.
That just seems profoundly unfair.
Chairman: You can have your DVD altered.
It is quite simple.
Mr Bryant: Well, I am even simpler than
the process, so I do not think I would manage it.
Chairman: It costs a little bit of money,
Chris, but it can be done.
Mr Bryant: Well, the Chairman is on your
side, not mine obviously.
Q218 Chairman: Your whole line of
questioning is very important, even though it can be got round,
because my assumption is, perhaps I am over-suspicious, but it
is market rigging, isn't it? And they would do it with compact
discs if they could, namely that, for example, pricing of DVDs
in the United States is much cheaper than it is in this country
because American consumers are much more demanding than British
consumers who will accept anything that is done to them. And that
being so, there would be a huge tendency of British consumers
to order DVDs from the American zone, say over Amazon.com, if
they could actually play them on their DVDs here without spending
extra on having their DVD players doctored. Isn't it all due to
market rigging, the zoning of DVDs, rather than anything else?
Mr Marcich: No, it is not. There
is a crucial issue with respect to sequential release. One of
the greatest factors in price differentials that I can see between
Europe and the United States has to do with VAT rates. If you
put a 22%, or 21%, or 19% VAT at the retail level on DVD or music
CDs you have a higher cost factor and that VAT is probably the
most significant, in my estimation, from my perspective as a consumer,
I think that that probably is the single greatest contributor
and, in fact, there are many in the industry now in Europe who
are campaigning to make video and music eligible for what is called
the cultural rate of VAT. So eligibility for lower VAT treatment
under European directives is an idea worth considering indeed.
And then some of the sorts of concerns you have been expressing
would be addressed through the appropriate vehicle.
Q219 Chairman: Only because we are
a minute off your allotted time, I will leave you with the last
word on this. Thank you very much indeed, much appreciated.
Mr Marcich: Thank you very much.
Chairman: The fact is that a standard
DVD in this country with VAT removed is more expensive than a
DVD in New York with sales tax added.
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