Memorandum submitted by Screen Finance
British film producers have made some of the
greatest films in cinema history, from The Third Man through
to The Servant and Trainspotting. The persistence
and relentless ingenuity of British film producers is admired
the world over. Individuals such as Alexander Korda and David
Puttnam rank alongside Irving Thalberg as examples of the greatest
creative movie producers ever, artists who moulded a production
to their vision.
However, a history of British film production
might be titled "From Dreams to Bankruptcy". The endgame
for any producer should to be to build up a library of films that
he owns the rights to, which can then be licensed to television
in the same way that Warner Bros. resells its cartoon library.
However, producers are undercapitalised and are obliged to raise
money for productions on a film-by-film basis.
This project-by-project mentality undermines
every facet of being a film producer.
First, it undermines the producer's negotiating
position, particularly with respect to distributors. As a result,
producers often end up selling off virtually all of the rights
on unfavourable terms just to get the film financed. As a consequence,
those films that are successful primarily benefit distributors
and financiers. The producer is unlikely to see any profit. Not
having a portfolio of rights also means that producers do not
have any collateral to comfort the bank when they want to borrow
money.
Second, project-by-project financing also means
that British producers—unlike the Hollywood majors—are
unable to spread risk across a slate of films in the hope that
one will be a hit and will recoup the losses on the others.
Third, most British producers are cut off from
the mainstream market. Worldwide distribution is controlled for
the most part by the Hollywood majors. In 2001 the US studios
controlled 79% of the UK exhibition market and Hollywood is understandably
keen to release its own films first. British producers have to
fight for the remaining 20% of screens with producers from all
over Europe. This also means that most producers have to find
a new sales agent for each film rather than rely on quick access
to screens in order to recoup quickly. Sales agents then spend
months finding distributors in each territory. Film is time sensitive.
Waiting too long to release a film can lose the audience for it.
WHAT THE
GOVERNMENT HAS
DONE SO
FAR
Back in 1996 the Department of National Heritage's
Advisory Committee on Film Finance—the so-called Middleton
Committee—considered recommending that £100 million
lottery cash should be used to set up a £300 million distribution-led
studio.
Instead, the Producers' Alliance for Cinema
and Television (PACT) successfully argued that the £100 million
of lottery money should be diluted into three separate "film
franchises".
The following year £92 million of lottery
money was awarded to three different companies—The Film
Consortium, Pathé and DNA Films. Despite releasing some
individually strong films, none of the franchises have done much
to improve the infrastructure of the British film industry.
My feeling is that the British film industry
took a wrong turn back in 1996 allowing the lottery cash to be
split three ways.
(Ironically, the same people who argued that
the £100 million should be used to set up three mini-studios
are now installed at the Film Council. Today the mantra is "distribution,
distribution, distribution"—putting distance between
the Film Council and the questionable franchise experiment.)
Meanwhile, during the early 1990s the industry
argued that it would get a huge shot in the arm if the existing
three-year tax write-off on film production and acquisition were
accelerated to a 100-per-cent first-year tax break. Industry lobbying
was rewarded in July 1997 when the Government introduced Section
48 relief for films budgeted below £15 million. As lobbyists
predicted, investment in British production has increased—from
£341 million in 1997 to £456 million in 2001.
However, the existing 100% accelerated tax write-off
for film production and acquisition is due to expire on 1 July
2005.
Now, just as Section 48 is finally being used
as it was intended, Film Council chairman Alan Parker has called
for the tax break to be taken away from production in favour of
distribution.
"Now is the time, once and for all, to
recognise that our industry's obsession with public funding for
production is taking us nowhere . . . we need a fiscal policy
which stimulates market investment rather than one that primarily
serves `producer interests'," said Parker last November.
However, the more you push your finger into
it, the less thought-through Parker's argument appears to be.
After all, the risk with the film industry is
in the development and production stage, not distribution. Film
distributors know what they are dealing with, unlike writers and
producers.
Creating a tax break for distribution is, on
the face of it, nonsensical.
(However, squaring the difficult circle between
what producers want and what the Film Council wants might be to
create a tax break for "minimum guarantees"—the
money which a sales agent/distributor invests to get a movie into
production.)
Separately, there has been talk of getting rid
of Section 48 altogether and replacing it with a Canadian-style
labour-based tax credit. Partly this has come about because of
resentment about the amount of money creamed off by Section 48
middlemen. Investor magazine Tax Efficient Review has calculated
that promoters running film partnerships strip out on average
26% of cash raised.
However, labour-based tax credits are effectively
a government grant and could therefore be cut each year. Furthermore,
at least Section 48 is linked to the market and gets producers
out of a form-filling mentality.
BROADCASTER INVOLVEMENT
French broadcasters account for half of the
money that is invested each year in national film production.
All broadcasters are made to recycle 5.5% of their turnover into
film production.
Similarly, Spanish television broadcasters must
recycle 5% of their turnover into domestic film production.
German broadcasters make voluntary contributions
to various regional and national funds.
Only in the UK are broadcasters allowed to piggyback
on a national film industry without putting much back in. After
all, a film's cinema release effectively acts as a free marketing
campaign for when the movie is shown on television.
UK broadcasters' lack of involvement with the
film industry is seen as a disgrace elsewhere in Europe and shows
contempt for the spirit of EU legislation.
In 1998, consultancy London Economics calculated
that British pay-television companies earned £67.4 million
from UK films of which £21.1 million was profit. In total
the pay-television sector made a £204.8 million profit through
movies.
Free-television broadcasters generated £72.9
million through UK films of which £31.9 million was profit.
In total free-television broadcasters made £238.6 million
profit through movies (calculated as a mixture of the licence
fee and advertising).
But today only the BBC has an active film production
unit. Channel 4 has dramatically cut back its FilmFour subsidiary.
ITV's one commitment to film production is Granada Film, which
all but closed down last year. BSkyB shut down its Sky Pictures
production arm in June 2001. Channel 5 has no involvement with
the film industry despite movies being the central plank of its
schedule.
It would be naive to think that the government
has the guts to force broadcasters to recycle their turnover into
domestic film production.
But a start would be for broadcasters to pay
more for British films. Broadcasters benefit the most and contribute
the least to the British film industry. Yet, according to Stewart
Till, former deputy managing director of BSkyB, the pay-television
operator buys UK hits for less than half the price it pays for
Hollywood flops.
IMPROVED ACCESS
Hollywood enjoys an 80% market share in the
UK, leaving British producers fighting over the rest of the market.
One way round this difficulty would be to encourage the US majors
to establish more co-production ventures in the UK. Fragile Films
recently co-produced High Heels and Low Lifes with Buena
Vista. Fox Searchlight is in talks with lottery franchise DNA
to co-produce 12 movies over a five-year period. Sony Pictures
Entertainment has been circling the UK looking for a partner.
It already has joint ventures in Germany, Hong Kong, Latin America
and Hong Kong. Elsewhere, Warner Bros. co-produces mainstream
hits such as Le Boulet in France. The beauty of this is that films
co-produced with the majors have access to the global distribution
pipeline.
It could be argued that the Eady Levy, a tax
on cinema ticket prices, remains the most successful government
intervention in the British industry to date. By the 1960s Britain
had become "Hollywood-on-the-Thames" co-producing a
series of hit films with the majors including The Italian Job,
who were partly attracted by the levy. It is estimated that the
United Artists co-production Thunderball swallowed up nearly 15%
of the levy in 1965. The question is what can be done to sweeten
the pill to encourage more co-production with Britain?
One answer would be to modify the £15 million
cap above which films do not qualify for 100% production/acquisition
expenditure relief. At present the US majors can only write-off
the cost of making British-qualifying films budgeted at more than
£15 million over a three-year period. Allowing productions
budgeted at more than £15 million to write off their cost
over two years would attract a lot of inward investment. Qualifying
for 50/50 relief could depend on co-producing with a British production
company. An approved list of co-production partners—ie producers
with previous experience—could then be issued to the majors,
as is the case in Luxembourg.
CONCLUSION
Nick Schenck, president and chief executive
Loew's Inc, owner of MGM in the 1930s, once said there was nothing
wrong with the movie business that good pictures cannot cure.
This may be true when you control 80% of the market as Hollywood
does. But British producers are struggling for breath with a 13%
market share. Hollywood received considerable public support from
the US Government in the 1970s when it was in difficulty. The
same kind of lifeline that was given to Hollywood should be thrown
to British producers today.
7 May 2003
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