Oral evidence

Taken before the Culture, Media and Sport Committee on Tuesday 17 June 2003

Members present:

Mr Gerald Kaufman, in the Chair
Mr Chris Bryant
Mr Frank Doran
Michael Fabricant
Mr Adrian Flook
Alan Keen
Rosemary McKenna
John Thurso
Derek Wyatt

__________

Memorandum submitted by Mr Alexander Walker

Examination of Witness

Witness: MR ALEXANDER WALKER, Film critic and author, examined

Chairman: We welcome you this afternoon and thank you for the way that you have written about this inquiry. I do not know if I have got the job you wanted but, as you very well know, you have got the job I wanted. I will call Mr Fabricant first to ask questions.

Q439  Michael Fabricant: Firstly, may I say now nice it is to see you again because I well remember when you came before the Committee eight years ago and gave evidence before us. Mr Walker, one of the issues that came up in our visit to the United States, and indeed in taking evidence here too, is that possibly we are too concerned with making films that are arty and not commercial. One of the views that was expressed by some of the people in the United States is that "Look, we are in the entertainment industry. We are here to make money". Would you agree with that, that British films are not commercial enough?

Mr Alexander: Mr Fabricant, you start off with an advantage over me because you know the difference between an art film and a commercial film. There are quite a few commercial films that I see, week in and week out, that do not make as much as an art film and quite a few art films that, to everyone's surprise, cross over and become mainline movies and entertainment in the multiplexes. I think this is a false distinction; that if one pursues it, one really gets nowhere. But I think it is based upon the reaction that Hollywood would have to other industries that are not structured like theirs. Their great strength has been, from the very beginning, to make what are called genre films that fit into categories and this gives a confidence because it is not a creative industry that they run there, it is an imitative industry in which what is imitated is the last man's success with variations until it proves the next man's failure and then the particular powers that be switch to a new kind of genre, be it a western, a musical, a crime, a cops and robbers, a shoot them up, a horror flick. Our industry and most of the industries in Western Europe are not structured like that. They are structured around specific stories, individual aspects of life, that appeal in those countries and consequently accept and have to accept, reluctantly though, the application that they have when they wish to make money in a huge market like the United States. I think we make as many commercial films as it is possible for us to make. Unfortunately, we make fewer and fewer of them, despite pouring more and more money into them. I would like to declare at this point, having mentioned that word "money" which is, in fact, the word that is featured most frequently in the hearings that I have been privileged to attend here rather than the word "culture", I would like to mention a financial interest. I am an investor in one of the franchises; the Film Consortium. It is the best way, in fact, for any person to learn about the film industry to take a small flutter on a film company. Since I was anxious to find out how the consortiums were working, I had my broker buy me 50 shares; not too much to determine how I would write about any films that they might produce and not too small to make me a negligible person, but just sufficient. I paid, I think, 34 pence each. They are now worth less than a penny. I think that that reflects the way in which those three franchises were set up misconceived and, in two cases, mis-managed.

Q440  Michael Fabricant: Could I come back on that one and also to an earlier point that you were making? Because you said that one of the reasons for perhaps Hollywood's success, perhaps the Hollywood failure in some respects, is the genre thing. Could it not be argued that we have lost that and yet we did do that successfully? Now, while I realise that 10, 20, 30 years ago television was less powerful, it was the genre movie; Hammer Horror, the Carry On movies, Ealing comedies. Were they not genre movies and were they not the movies which made a real movie industry in England, which we now do not enjoy?

Mr Alexander: That is true. They were studio movies however. They were movies that used them for bread and butter purposes. They were very popular, the Carry On films, the Doctor films, the Hammer horror films. They were linked to the ownership of a studio and certainly in the case of Associated British Picture Corporation and the Rank Organisation, the two great power engines of our film industry in the 50s right up to the 80s, they were linked to the ownership of cinemas and the power to distribute your own films. That no longer pertains. We are talking of a different era. You mention Hollywood; how many of you ladies and gentlemen have mentioned Europe? You say, Chairman, you have come back from Hollywood. I will be very interested indeed to hear what you found there, but I should have thought that the future of this film industry, if we can call it that, that we posses in this country lay in the continent of Europe, not in Hollywood, not on the West Coast of America. We cannot challenge that. It has been the abiding mirage that attracts people towards it over the decades, usually into bankruptcy and certainly into grave financial disappointment. We can never make a success of challenging the Americans. However, we can make a success, and indeed have, of combining our talents with the film production companies in Europe. One company that was set up very successfully in the 1980s was a successor to the National Film Corporation, a grant aided quango which was partly private, consisting of three commercial companies and then a grant from the, I suppose it was called, then Arts and Libraries. It was succeeded by British Screen Finance first under Michael Relph and then under Simon Relph. It had a run of considerable success in making films in association with continental film producers. Simon Relph was heading that company when the Film Council was set up and the Film Council could not co-exist with British Screen Finance; there was no temperamental affinity between the two chief executives, Mr Woodward and Mr Simon Perry. Consequently British Screen Finance was closed down. The great backlog of connections it had made of understandings with producers, never mind the 50 per cent or thereabouts, recoupment rate it had, which is extraordinarily high, was thrown into disregard. It shows the success that after British Screen Finance had ceased to be and Simon Perry had been paid off, I went to Peter Ainsworth, who was then the Shadow Culture Secretary, and beseeched him to put down a question in the Commons to find out how much money had been transferred to the Film Council by British Screen Finance's demise, a figure that I was not able to obtain from the Arts Council which said "That is not our responsibility any longer", or indeed from the Film Council. To my surprise, it was over half a million pounds. That is a very nice sum of money to find in the pocket when you have taken someone else's clothes. If only we had had British Screen Finance in a federal arrangement rather than the Film Council in a unitary arrangement, we would be much better placed to take advantage of those film companies in Europe that want to make movies that have appealed and should appeal to the vast audience of the continent of Europe, rather than to challenge the more and more specific tastes of the audiences in the United States.

Q441  Michael Fabricant: It is interesting this genesis leading to the UK Film Council and whatever the mechanisms by which the UK Film Council acquired some of the assets of British Screen Finance, we are where we are. I was going to ask you anyway and now is a good time to ask you; what do you see as the future for the UK Film Council? Do you think now that their strategy for promoting British film - and I should say British film and not English film - is the right strategy given that we now just have the UK Film Council?

Mr Alexander: Well, my reply to that would have to be the reply that Mao Tse Tung is supposed to have made when asked what were the effects of the communist manifesto; it was too soon to tell. I would not like to prophesy doom or success for either because I really do not think that the evidence is in yet. We have seen relatively few films that the Film Council has money in, but I can only hope that they behave more wisely and certainly that they behave with greater competence than the Arts Council did, which reluctantly had thrust upon it, by the former Tory administration, the necessity of funding an entrepreneurial industry from an attitude of patronage. You cannot combine those two things. The Arts Council was naturally reluctant to realise that the film industry is a betting industry like William Hill. What you bet on is the public's taste and inclination to go and see a film two years, probably, after it has been conceived.

Q442  Michael Fabricant: But you are not arguing then that there can be no external Government or Lottery finance, that such external Government or Lottery finance should not be made available?

Mr Alexander: I am not. No, indeed, Mr Fabricant, but I am saying that the huge sums of money that were invested, and invested hastily, were inappropriate for that kind of an industry. In my written evidence I have said that the film industry is systemically dishonest. In all the years it has been in existence - and I do not simply refer to the British film industry - it has not managed a system of honest accountancy and it has not been able or been willing to create a true impression of net profit. I would not put money into an industry like that. I would have thought, since you asked me for figures, I will hazard a guess that if you put between 10 and 15 million a year into the British film industry through an organisation like the British Screen Finance, whose aspirations were determined by the market and also by their abilities to finance that market, we would be in a happier and a better position when 120 to 150 million pounds since 1995 has been basically largely lost.

Q443  Michael Fabricant: But does that not bring me back to my first question then? When you challenged me and said "Well, if only you can distinguish between an art film, a culture film and a mainstream film" and yet is that not the very difficulty that the Arts Council found?

Mr Alexander: No, the Arts Council's difficulty was understanding the film industry, not distinguishing between films. The Arts Council people, to use the word neutrally, were incompetent to finance an industry like the film industry. They realised quite quickly that it went against all the traditions of patronage. And I do not mean that in a majorative sense, but I mean that in the sense of putting money into what were considered to be creative and artistic worthies and their art effects and not expecting a profit to be made. The film industry expects a profit to be made and that has not a place that the Arts Council should have been asked to mediate. I am fairly certain that Lord Gowrie and his successors were very grateful indeed when the Arts Council had that responsibility lifted from it. But that was followed immediately by the three franchises that I would like to return to. You have heard evidence last week - I regret I was not able to be here because I was in Italy doing some work of my own, but I read the evidence that you were kind enough to send me and I would like to place on record my gratitude to the excellent secretariat that manages to get the transcripts to me. It really has been very useful. The three franchises, as you know, were about £33 million for Pathe and six related companies. I have yet to find out whether those six related companies of British producers are still associated with Pathe, as they were when they made their bid in 1997. The Film Consortium, the group in which I have my widow's might, which got about 30 million and the DNA Franchise that seemed, at the time, to be the most promising of all because it consisted of two very successful film producers, Andrew MacDonald and Duncan Kenworthy, one responsible for Trainspotting and the other for Four Weddings and a Funeral. Two and a half years later, after being awarded that franchise in 1997, they still had not produced one film that was visible on the screen. However, they had used their talents to facilitate successful products by major American companies, The Beach and Notting Hill. In fact, they did not use their application that they should have been responsible for in fostering the franchise that the public money had set them up in. Instead of 16 films, which they promised in their business statement, they squeezed with difficulty six films, none of which, I think, has any pretensions to what you might call art house films, but probably only one of which made what you would call a commercial profit at the box office and that was largely due to its being taken over, sponsored and heavily advertised by a subsidiary of 20th Century Fox. It is very interesting to read the particular statement made by Mr MacDonald in his statement because it seems like a flyer for continuing the relationship under public money with 20th Century Fox. If you will allow me to read the sentence in it, it says "And this is the main point; if we can retain our independence and form a relationship with a company offering worldwide distribution which invests in DNA alongside the Film Council, we are confident we can build a British company that can continue to produce and finance films which benefit British production, distribution and exhibition". I see no reason why the owners of that particular franchise, who had nearly £30 million, should be permitted, with what remains of it, to form an association with one of the major American companies because that is not certainly not one to create a self-sustaining British film industry. And I hope, since that particular company is owned by Mr Rupert Murdoch, who in another place has come under heavy fire in the Communications Bill, that that will be taken into account when the franchise expires, as it should expire next year, and that the money will be returned to the public purse or indeed to the good causes charity, rather than be given, however successful or not, to an American major that can only dominate the relationship.

Chairman: Thanks very much indeed for that, Mr Walker. I will call Mr Doran.

Q444  Mr Doran: You mentioned earlier in your evidence to Mr Fabricant, one of the comments that I picked up, Mr Walker, in your written submission and that was your comment that the film industry is systematically dishonest and you build from that, but before we get on to what you build from it, I would be interested if you could expand a little on what exactly you mean by "systematically dishonest".

Mr Alexander: Well, you have heard evidence from some of those people that should have hoped to recoup from the success of their films how little they have got or indeed having got nothing from it. Miss Gurinder Chadha, for example, the power behind Bend it like Beckham, had to confess to you that so far she had not seen a penny from one of her most successful films that made over £11 million in the UK. The way in which money is subtracted from the gross amount at the box office, creating great difficulties in being able to both access those sums and have them checked upon by reputable accountants has always prevented the people are the creative forces behind films from pursuing what they regard as their rightful profits, unless they themselves have a huge amount of money. One notices that in a few cases in which they have been pursued into the courts, particularly in America, it never comes to trial because the studio witnesses would have to swear on oath, and you know how dangerous that can be in the American legal system. Usually it is settled at the courtroom door and settled out of court. The film industry is not an honest industry in the sense that most of us investors would regard it as suitable for our own money, unless the tax arrangements in advance can be so certain that we are making money before the film is even made. It is possible under the arrangements made today, through the generosity of Mr Brown in 1997, to make money without even having shown the film. The Lottery was devised to finance things that should be of calculable benefit to the public. Now, there are ways of interpreting those words; public, calculable and benefit. But a film is not calculable, the benefit is not certain and the public, upon the evidence that is presented in the final results, has shown its indifference to the products that have been created at largely public expense.

Q445  Mr Doran: You mentioned Gurinder Chadha and I think for her the main villains were the distributors and the exhibitors.

Mr Alexander: Yes.

Q446  Mr Doran: So you are not exempting any part of the film industry from your charge?

Mr Alexander: No, I do not wish to say that everyone in the film industry is dishonest, no. Quite a few of the people even today are honest and worthy people, but it is a structure and the historical legacy of the film industry not to be an honest industry. May I, sir, just prevail upon your patience for a moment, since you have mentioned Bend it like Beckham, to show you the difficulties that that lady had which were not referred to in her evidence of raising the money? Let me read out to you the Bend it like Beckham official production companies. These are they which produced one of the British hits and it is quite revealing; "Kintop Pictures present in association with the Film Council and Filmfurdurung Hamburg and with the participation of BSkyB and British Screen and in association with Helkon SK, the Works, and Future Film Financing a Kintop Picture, Bend it Like Beckham, Bend it Films, Roc Media, Road Movies Co-production. Supported by the National Lottery through Film Council. Supported by Filmfordurung Hamburg". The six names of the executive producers are all German of the film Bend it like Beckham. If you went to Hamburg, you might well find that they are exultant over the success of one of the best German films of the year 2002, Bend it like Beckham. It is officially understood as a German-UK co-production.

Q447  Chairman: Am I wrong, Mr Walker, correct me if I am, but did not a great deal of the profit of Four Weddings and a Funeral end up in Hamburg as well?

Mr Alexander: Yes, it did indeed. That was, however, not financed by public money. That was financed by the one man who has come nearest to challenging Hollywood and that was Mr Michael Kuhn and significantly, you might think, he was the man who said least about his experiences in the film industry when he testified in the second week of your hearings. Mr Kuhn's PolyGram filmed entertainment, at the time of its demise in 1999, had a established a worldwide distribution and production circuit and had got the confidence of the exhibitors in many of the important European territories and overseas too and even in America to take the product because consistency of flow is the thing that exhibitors want and the thing that Hollywood can provide. PolyGram filmed entertainment was sold from underneath Mr Kuhn by parent owners who owned 75 per cent of PolyGram; that was Philips, the electronics industry that wished to boost the share price by getting rid of what Mr Core Boonstra, the Chairman, called "the bleeders" in the company, that is to say bleeding away the profits made by the hardware, the electronics and the printed circuits. But the man who came nearest to establishing a practical circuit for British films was, in fact, Michael Kuhn and it was a tremendous setback to the industry when PolyGram filmed entertainment went under.

Q448  Mr Doran: Can I move on from that point about the dishonesty of the industry? You make it clear that you do not think it is an industry that is worth investing in. I am not clear on exactly where you are so far as the Government is concerned. You have been critical, obviously, of some of the investments that the Government has made, but you also say in your evidence that there is a place for judicious Government intervention. So I would like to know exactly where you are on that.

Mr Alexander: Well, the place for judicious Government intervention is very much the place where British Screen Finance was at and where I hope the Film Council, unless it is consumed by megalomania, will realise it should be the sticking place. That is to say you should have adequate funds but you should not have a superfluity of funds because that means an over-abundance of production. That simply cannot be placed in results, as it did some years ago, in something between 40 and 60 per cent of the films that were made not being shown within 18 months to two years. Grey Gowrie, when he was Chairman of the Arts Council, took me out to lunch one day and said "Well, you are so smart, what would you do?" I said "Grey, I would buy a circuit of cinemas". The Cannon Cinemas had just come on the market. That in itself is a story of disaster, that two people who had no roots in the British film industry were given the go ahead by the former Conservative administration to buy up half the British film industry - Associated British Picture Corporation, the Elstree Studios, the Pathe Newsroom Collection and the wonderful 1,500 film library - and then to strip it of its assets two years later when they ran short of cash. That was Mr Golan and Mr Globus of Cannon Films. I said "If you bought a circuit of cinemas, Grey, what you could do is go down on a Saturday night with a sack and empty the cash box. Then you would have the cinema screens in which you could show your own films, but you also have the screens to show the American films and you would be in the happy position of making money out of the American films that take up 90 per cent of the screen time in this country". Gray's reply to that was "That is very interesting, but unfortunately the Arts Council we are not permitted to run a business". I said "Well, then what are you doing in league with the film business?" Absurd.

Q449  Mr Doran: But there must be other areas where you think Government help would be useful. For example, when we were in America we saw some superb advanced training facilities at USC, for example. Nothing to compare with here. So in terms of support and general strategic planning for the industry, what role do you see for Government there?

Mr Alexander: I think that is excellent. I am all in favour of that and my good wishes go out to the Film Council in what it is doing; the skills set and other training programmes. However, since you have mentioned that, might I allude to what happened? In 1998 when the Film Policy Review Group that had been set up under Tom Clarke reported on ways of re-financing the British film industry, one of the ways that they agreed upon, and appeared in their programme of the bigger picture, was to have a levy which would paid by the DVD companies, the television companies and the film companies of 0.5 per cent of the budget. That, they estimated, would bring in £15 million each year which would provide for the training of film people going into the industry, but also for the development of film scripts and for, in some cases, the production of either medium budgeted or perhaps one or two rather larger budgeted films whose budgets could be leveraged. There was such a shock reaction from the Motion Picture Association of America, under Mr Jack Valente, "The idea of asking us to contribute anything to a film production in another country that might challenge us" resulted directly in Tom Clarke losing his job as Film Minister and nothing was heard of that again. One has read the evidence of the representative for the Motion Picture Association of America here who gave the impression of the American Eagle benignly circling while the domestic fowl picked up little bits of grain. Believe me, that is a stance they wish to provide but any time the grain is threatened, the Eagle drops and Mr Valente or some other elder statesman comes over and tells the Government how the film industry that contributes so much through the Americans in Britain will be ruined by it, but backtrack very quickly. I do believe, although I have not been able to provide the evidence, that when Baroness Thatcher was Prime Minister one of the most welcome visitors at Downing Street was Lou Wasserman, whom our Chairman has referred to several times, and it was Mr Wasserman who said that "If you abolish the ED levy, which is taking now, along with VAT, a sizeable proportion of the ticket money that we like to be having sent back to Hollywood, we will agree to build cinemas in your country so that the Treasury will not lose" and within two years the ED levy was abolished. It was being exploited and abused anyway by the major American companies, but from that time on the grip of America on our national culture was tightened until today it is a stranglehold.

Q450  Derek Wyatt: Good afternoon, Mr Walker. Do you think, looking at the fact that you cannot get to the bottom of the funding of the three companies that you have talked about, that that is not a case for the National Audit Office?

Mr Alexander: Yes.

Q451  Derek Wyatt: Good. I agree on that too. Could you just tell me; in local planning law it would be possible for local district councils and borough councils and county councils to actually say "If you build a cinema here or a multiplex, you must show a proportion of European of British films". Is that something you are sympathetic to?

Mr Alexander: It sounds attractive. In practice it is difficult to make work because the reaction to that would be the immediate one of saying "We do not want to be nannied. Entertainment should be freedom of choice. We do not want to be told to see good films which will improve our aesthetic outlook or our souls. We want to see what we want to enjoy". And I am afraid that the powers that be would use that as a very convincing argument to say "Do not put us in a straitjacket otherwise the public entertainment will suffer". The idea of having a public benefit, which is, I believe, what it is called when a new building is put up and a certain proportion of it is given over to a piazza or a courtyard or something, is very attractive in sold bricks and mortar terms, but not in aesthetics or entertainment.

Q452  Derek Wyatt: But the figures that we have got are that usually on Monday, Tuesday, Wednesday and sometimes Thursday occupation of cinemas in the United Kingdom is as low as 25 or 25 per cent.

Mr Alexander: Yes.

Q453  Derek Wyatt: So is there not a case for just doing what I have suggested?

Mr Alexander: Well, you are hearing, I believe, from Stelios, the former easyJet man, and he may have much more up to date figures than I have and he certainly is a more experienced entrepreneur in serving the public than I am. I am paid to give my opinion, not to second guess the public. He makes a success of his business by second guessing the public.

Q454  Derek Wyatt: On Section 48, what do you think the damage will be to the UK film industry if it is not replaced?

Mr Alexander: There will be cries of woe, the begging bowl would be rattled, Oxfam would be called, probably there would be an appeal to humanity and no-one would seem to get poor. I doubt whether the restaurants would suffer all that much and after 18 months to two years those pieces of the industry that deserve to survive would have survived and probably have been in a better and leaner position for it.

Q455  Derek Wyatt: Where do you think the way that digital cinema is developing? Where do you think that that is going to take us?

Mr Alexander: I shall look with great interest on the experiment that the Film Council is doing by hoping to have the regional cinemas and eventually some of the multiplexes equipped for digital exhibition, but that will depend upon where the money is coming from to do that. It reminds me very much of the situation I wrote about in one of my books, Shattered Silence, which dealt with the four years between the ending of the silent movies and the beginning of the talkies, how technological revolution seceded revolution in a matter of months. And if you are going to digital projection, you should be wise after expending a huge amount of money in re-equipping cinemas that is going to last a bit longer. Look at Betamax; a name that has been consigned to the past now because it was overtaken by the VHS system. It is a gamble, sir.

Q456  Derek Wyatt: Would you recommend to this Committee that we should look at some digital tax break so that we could be the most advanced?

Mr Alexander: Yes, I would believe that it would appropriate to make a tax break that cannot be exploited or abused. I do not see why not, but I would do it judiciously and I would not make it an overall tax break until it is seen whether it sticks and is producing results.

Q457  Chairman: Coming back to Mr Wyatt's questions about Section 42 and 48; you have demonstrated a healthy scepticism on that. On the other hand, again and again when we visited the Hollywood majors the week before last we were told that 42 and 48 were critical in inducing them to bring inward film investment into this country. Indeed, the President of Colombia, who gave us quite a nice lunch, told us that if it had not been for the responsibility of this Committee in inducing the Government to adopt 42 and 48, he would only have served us sandwiches.

Mr Alexander: I do not hear a question, but I will respond to your comments. He would, would he not? That is the answer there. The cries that have gone out to preserve those particular Sections from the witnesses are very closely tied with the hope of the witnesses being able to eat well and live well in the future. In many cases they are the first people to be paid and even though the profits due may be remote, they have no wish to make their financial situation worse. What I am saying to you is that it has got out of hand. Gordon Brown's generosity has been ----

Q458  Chairman: He would not like you to use that word, would he? He hates ----

Mr Alexander: It is a bad word to use with a Scotsman. But it has been compounded by the skill of financial advisors and accountants, merchant banks and the Stock Exchange, good heavens, even in advertising agencies now to set up funds for film making, the idea being that the tax break will compensate for wretched film that is turned out. There is one company that I know (which I will not name) that employs a screenwriter who has a brief to produce a psychological thriller, a horror picture and a ribald comedy and the idea is to get a screenplay written so that there may be something solid to show to the investors with the guarantee that the investors will not lose their money but will be able to make a so far legitimate tax profit, even if the film turns out to be a dreadful movie that no-one particularly wishes to show or see. To my mind that is absolutely awful. There is a scheme whereby the prints and advertising of one of the major American companies in this country is subject to the same tax breaks because prints and advertising are the first things to be written off when a film has finished its runs. Therefore the investors get their money back and more in double quick time. These are dodges that have perverted and distorted the idea of what was supposed to be a legitimate way of helping an illegitimate industry.

Q459  Chairman: Over the years there have always been in this country - I do not mean permanently - if one was looking over, say, the past 70 years, there have been financial incentives brought about by the Government in one way or the other. There was the film quota, which was not a financial incentive but laid down the regime which brought about the era of quota quickies. There was the ED levy. Is your criticism, which we obviously must take very seriously, about the way in which financial incentives are used relating to the way in which they are used or do you believe that a British film industry ought to be able to make its own way financially?

Mr Alexander: The British film industry can no longer make its own way, but then that is commonplace with most film industries outside of Hollywood. Financial incentives are the first invitation to people to come and exploit and usually exploit them in the wrong way until eventually the abuse is ended. That is not only I, it has been other people here who have given evidence to you that say it is the same story in the end where the people who are extremely clever, clever not in a creative way but clever in a productive way where tax is concerned, stand upside down. The very reason for having a tax incentive which is to make films that the public can enjoy and sometimes enjoy very profitably. Their desire is to make the films that the public need not necessarily enjoy or indeed go to see which will make money for their clients. That is an abuse that should be ended. Either you make it more obligatory on the investors to hold their money for longer instead of being able to get it out almost immediately or sometimes before the film is shown, to insist that they keep it in and eventually pay their tax on it. Because, of course, it is tax deferral. It is not tax abolition that they go in for. But you are getting into waters that I really do not put anything more than a toe in because I am not a tax expert and I sometimes say to myself that that institution which has given me a fair amount of pain in my life, the Inland Revenue, should at least be congratulated on stopping some of the abuses by refusing to approve the tax break schemes that are presented to them now and then by the clever merchants in the City to make money for their clients but not to make entertainment for the public. It is to the Inland Revenue that we owe the stoppage of the major abuses at the moment. The Canadian film makers, for example, were able to have 16 per cent of their budget guaranteed without risk by coming over here and turning a few scenes in Britain and spending 20 per cent, as it used to be, of the budget of the film and then having the advantages of being considered a British film, have at last had the screw tightened on them - they now must spend 40 per cent. But there are people in the DCMS whose job it is simply to keep tabs on the Canadian film makers who have come over and abused our system. I do hope, sir, that you will find a chance of going over to Europe - it is not so far away as the West Coast of America - because I really do think that that would correct the perspective that you have been given from the American viewpoint by enabling you to see where the advantage lies in greater co-operation between Britain and Europe.

Q460  Chairman: I would like to put one other question. If there is time I would like to put two, but I would like to put one question certainly and that is this; if one is looking at the scene in Europe - you mentioned the Canadians and they are a factor to be taken into account - what we have been hearing again and again and again is that countries like the Czech Republic and Romania are attracting film makers, not because they can offer expertise, although the Czechs are building sound stages, but because the cost of labour is so low that they become more competitive in terms of attracting inward investment. Now, we cannot, and indeed I do not believe we should, have to pay rates as low as those countries, but does that not mean that in a very competitive market we do have to offer something else?

Mr Alexander: Yes, we do, but we offer already our skills. Of course, it is more expensive to make films here than it is, say, in Romania, but then when you make money so plentiful available, the first thing that is changed is the price tag of the goods. Five years ago the average British picture cost about £2.3 million, nowadays it is £4.3 - £4.4 million and rising. The film studios in continental Europe, of course, seize upon this because the labour is cheap and the labour is skilled these days. The Barandov Film Studios outside Prague can produce quality films every bit as good as Pinewood and Elstree. Romania is catching up fast. The technological and the computer generated industry that today more and more underwrites the film industry knows no frontiers either. The hugely increased demands of people who work in films over here has helped inflate the budgets and we are, in fact, living in an increasingly difficult situation in which we are pricing ourselves out of the market, much as some British manufacturers of porcelain or indeed telephone call centres go over to China and go over to India to find a cheaper base for operations.

Q461  Chairman: Finally, when we went to the University of Southern California they told us there that the, as it were, median member of the audience for whom United States films were made, on which billions of dollars were spent every year, was a 14 year old male. I take it that if we are to be competitive with the Americans, then we cannot do it by also trying to attract 14 year old males but that we might go a little bit higher up in the age scale and indeed appeal to both sexes.

Mr Alexander: If they could do it, they would do it. That is the short answer to that. The film industry is an industry without morality or without conscience. It is a profit making industry and if that appeals to 14 or even 13 or 12 year olds, the median market will go down rather than attempt to establish a higher, possibly more reputable, entertainment bracket.

Q462  Chairman: Mr Walker, thank you very much for contributing, both from your knowledge and from your experience. Thank you very much indeed.

Mr Alexander: Well, thank you very much, ladies and gentlemen, for having the patience to listen to me.

 

Memorandum submitted by Mr Stelios Haji-Ioannou

Examination of Witnesses

Witnesses: MR STELIOS HAJI-IOANNOU, Founder of Easy Group, and MR JAMES ROTHNIE, Director of Corporate Affairs, examined

Chairman: Gentlemen, thank you very much indeed for coming before us this afternoon. I will call on Mr Wyatt to start the questioning.

Q463  Derek Wyatt: Good afternoon. Can I just make a declaration? I am a non-executive director of a company called Spafax. We do some business with a company called easyInternetcafé. Welcome. Can we just have a sort of round up of where you are with your cinema in Milton Keynes and how it is going? We are also interested in the project.

Mr Haji-Ioannou: The cinema opened on the 23^rd of May. So it is less than four weeks that it has been in operation. The thesis I am trying to prove, why I am investing in this industry, is it will work if movie-going, going to the cinema, is price elastic. So I am trying to discover and prove that if you make something cheaper more people would consume that, so much more so that actually the total revenue will go up for everybody. It is early days. It is impossible to tell you, with three and a half weeks of experience, whether that is the case. But my experience from other industries is that you have to persevere longer than that anyway to find out. At the end of day you can only sustainably reduce prices if you sustainably reduce costs because, at the risk of stating the obvious, if the cost is above the revenue you do not stay in business for too long. My approach to reducing the cost in this business is first of all looking at the biggest asset, which is the real estate itself, the cinema. I think you mentioned earlier that that is a very under-utilised asset at the moment. I believe the average is about 20 per cent all days of the week on average. I think the reason it is so low is because the industry has refused so far to compete on price. I believe that because this is show business and this is run on the basis of taste and entertainment value and everything else, the companies competing in this space refuse to compete on price and they compete on creativity. So you put a film forward and either many people come to see it or few people come to see it and that makes it a success or failure, but nobody has ever in the past asked people to choose between prices. The yield management system, one which I have borrowed from the airline industry, attempts to fill that capacity. So that is one way you reduce the average cost; by using more of the asset. The other thing that I have done is I have removed all the extra expense of going to the movies like the popcorn and the drinks. They are very expensive and the reason that they are very expensive is because they are sold very inefficiently. In reality these people are inefficient retailers of popcorn and that is why you end up with a £3.50 packet of popcorn. My investment thesis again is yes, I hear what you say that that is why you make more money, but in reality if you allocate all of the costs I am not sure if that is profitable and my objective is to make it cheaper overall for the consumer to come in. So by removing it I have out sourced the refreshments to the customer. What I have discovered from the again very short experience I have had is that the consumers are much more resourceful at sourcing these refreshments at the price that they want and they are much more satisfied consuming them. And they actually take their rubbish with them when they leave. So essentially these are the two methods I have adopted in my attempt to reduce cost. Now, the problem is that people still come to the movies to see films and I have problems sourcing films at competitive prices, which is really the end of my ----

Q464  Derek Wyatt: But you have also got a limited time on the Milton Keynes complex. Is that six months or a year that you have got?

Mr Haji-Ioannou: The lease is a minimum of three years and I have an option for another two. So I have got long enough to try to see what happens.

Q465  Derek Wyatt: And your instincts are that there is a sort of unofficial cartel or people do not want you to succeed that are in the business because that would destroy their own economic modelling? That is your instinct, is it?

Mr Haji-Ioannou: Well, I think what is going on is that there are six distributors that control about 90 per cent of the box office in this country. The others, I think, are just scared to step out of line. I have no evidence that collusion exists, but I believe that it is entirely possible that it is tacit anyway. I think through signalling - because if you go through a press cutting service and track the way of cinema over the last couple of years as I have been announcing it and declaring my intention to enter the business, there are numerous unattributed comments by distributors and other members of the business saying "It will not work and we will not support it. It does not make sense. We are not going to make money by selling tickets at 20 pence" and all that thing. So the theory I am willing to put forward, without any evidence to back it up, is that what these people have done is they have signalled to each other and they have said "This is not an acceptable process. We do not want to start competing on price".

Q466  Derek Wyatt: So even if you bid the correct amount of money for a blockbuster, they will not let you have it?

Mr Haji-Ioannou: Well, I think it is worth explaining, for the sake of clarity, how it is done now and what I have attempted to do and how they have responded. I understand that at the moment the prices are fixed. So without ever admitting it they know what the exhibitor will charge. That is usually posted at the box office, so you can go and say "Okay, these are the prices". And what they argue about is the percentage of the box office that the distributor keeps versus the exhibitor, which is a declining percentage over the weeks in release. Now, my theory would be if you give me the same amount of time to exhibit the film, although I may occasionally be significantly cheaper than the others, I might be able to deliver to you the same amount of revenue. Their answer is "Well, it is all theory. You have not proven that yet. Why should I take a risk with you?" My response in the negotiation was I will guarantee a minimum amount. So I will keep the risk of succeeding or failing with this strategy; here is a sum of money. And the answer has been, despite that, "We are not willing to give you first run films".

Q467  Derek Wyatt: So have you discussed it with the Office of Fair Trading or with the Monopolies Commission?

Mr Haji-Ioannou: My lawyers have had one meeting with the OFT. The message that came back is that the only legal case that seriously has a chance of sticking is that of collusion and as always these things need evidence. So on the basis of one e-mail it is very difficult to prove even tacit collusion. So my expectation is that if we continue to operate in the market with the difficulty and continue making reasonable offers for films and continuing to get refusals, perhaps we can one day show a response which is so consistent that it can only be the result of tacit collusion.

Derek Wyatt: We wish you well. Thank you, Chairman.

Q468  Michael Fabricant: But can you blame the film companies when they say "Look, in the United Kingdom we get so little money back from exhibitors anyway and now you come along, 20p for a seat minimum"? Although I am told if you try and get a seat at the moment it is 50p, but anyway it is still pretty cheap. Can you blame them when they say "It is not going to generate the money that we need"? After all, easyJet does not say "Look, because we sell cheap seats on our aeroplanes, we want aviation fuels sold at less per litre than anybody else pays".

Mr Haji-Ioannou: Yes, I think the proper analysis as to whether they have the right to engage in that activity is to compare them with any other manufacturer of a product that attempts to interfere with the retail price. So the analogy is Coca Cola sold in a supermarket, according to the proper competition rules Coca Cola should not interfere with Tesco or Sainsburys' ability to price Coca Cola in the supermarket. I think it is called resale price maintenance.

Q469  Michael Fabricant: But there will be a minimum price that they will offer it for though and then it is up to the supermarket to decide whether they want to sell it with a big margin or indeed at a discount.

Mr Haji-Ioannou: At a loss, correct. There is an actual marginal cost to selling a can of Coke. I am not actually aware of any marginal cost of letting one more customer in to see a movie. So attempting to put a minimum price - and one of the studios has actually attempted that; Sony has said "We will give you the films, but the price is £1.30 per person". I believe again that is against the competition rules because they are attempting resale price maintenance. They should say "We expect from this print to make X amount of money and providing you are willing to guarantee that money, it is up to you how much you charge".

Q470  Michael Fabricant: Now, your whole basis that you talked about right at the very beginning - and indeed is the whole philosophy of your group - is the question of the elasticity of demand, as you said, and that you hoped to, by having lower prices, have a greater demand. What sort of capacities are you looking at? You say quite fairly, of course, after three weeks you cannot predict what is going to happen, but what is in your business plan? What are you aiming for?

Mr Haji-Ioannou: I think that you should attempt to fill about half the seats. I do not think it is unreasonable to expect it with aggressive yield management, this technique of saying that the Tuesday afternoon seat is very heavily discounted and I expect to make the difference up on the Saturday evening show, I should fill half the seats. I mean airlines, car rental companies, hotels, any other company involved in the travel business would be committing commercial suicide to fill anything less than 70 or 80 per cent of its capacity. I am not even hoping to get up there. I am saying that if you could get the capacity, the occupancy, at 50 per cent you should be able to bring the average price down to about £1.50 - £2.00.

Q471  Michael Fabricant: Demand is a function of price, as you have already said, but demand is also a function of the sort of movies that you are showing, the sort of product that you are offering. Now, given that you are not always available - and correct me if I am wrong - to get first run movies, what are the sort of movies that you are showing? Are you going to show different types of movies at different times of the day and different times of the week? What is your philosophy regarding that?

Mr Haji-Ioannou: We are willing to experiment in the sense that at the moment the first run blockbusters are unavailable, so it is all theoretical what we would have been doing if we had these films. The Matrix was released on the 22 May, the day before we started, and we did not get it. Whether we will get it in July remains to be seen, but that is again the subject of a commercial negotiation. Now, in the last three and a half weeks we have shown films that are between two or three weeks and several months old. We are now starting an experiment of showing even older films, in the sense that we have noticed that there is clearly a difference in demand between a recognisable film, a brand, and a film that people would not recognise. So it will be interesting to see whether people will go back to see Harry Potter I again if you made it affordable for families on Saturday afternoon, etc., etc. So I am willing to experiment with all of this, but let me just make a clarification here; the print comes into the cinema and there is a cost of hiring that print. That is the equivalent of the cost of goods sold. So as a business, I should be indifferent between hiring a film for 15,000 and earning 16,000, and hiring a film for 1,000 and earning 2,000 because the contribution from both is 1,000. So what I am trying to manage to cover my fixed cost is to maximise the contribution and that is why how much I am paying the distributors is fundamental to my ability to make a profit.

Q472  Michael Fabricant: Could I just ask, by the way, a detail but an important detail; what is the print quality like? I mean if this is a movie that has already been shown in a number of cinemas round the UK and then it gets to you, is it still in good condition?

Mr Haji-Ioannou: We have not started to experiment with the very old ones, the two year old ones, so I cannot comment at the moment. I have not heard any problems with the ones that we have been showing up to now.

Q473  Michael Fabricant: But even if it is three weeks old, by the time that it gets to be three weeks old at UCI (maybe I should not pick out a cinema) you do see the scratch marks or dust marks or whatever.

Mr Haji-Ioannou: We have not heard anything about the quality, but I could be wrong, I am not there every day.

Chairman: I used to chase Singing in the Rain around the West Riding and I have seen it a year after it was first released; it was perfectly satisfactory.

Q474  Michael Fabricant: So there, yes. Assuming it is going to be a success and assuming that you are going to clear the print, how do you see the game plan progressing? You were saying that you have got a lease for three years extendable to five years, I think you just said. If all goes according to your business plan, when do you expect to open your next cinema?

Mr Haji-Ioannou: I do not think I will increase my exposure in this business until I have solved, one way or another, the problem of distribution because without a properly functioning competitive supplier situation, I would be taking an unreasonable risk. I am used to taking on big companies and competing with them, but at the moment I am talking about my suppliers. So the relationship with these people is vertical; they have to supply me otherwise I cannot stay in business. And unless they either play ball because they see it commercially logically, or they are forced by competition authorities to play ball because they are obliged to by law, either the one or the other has to happen or I do not see how I can win this game. Remember, all they have to do is charge enough that I do not make a contribution. The difference between profit and loss is very small.

Q475  Mr Flook: Thank you, Chairman. I could have called you the Richard Branson of the cinema industry, but you are probably more like Freddy Laker; trying to take on a huge behemoth that is doing nothing other than probably getting in your way. And as much as I want to believe that what you are trying to do will succeed and as much as I want to believe that you will, there is a view that it could be a conspiracy or do you think that they are just not used to dealing with your business model, they just cannot get their heads round it?

Mr Haji-Ioannou: Yes, I think they are just not used or not willing to accept that films compete on price between other. Remember, the most expensive and the cheapest film retails at the same price. No other industry tolerates that. The £300 million Matrix and the £2.5 million whatever movie produced, XYZ, retails for the same price.

Q476  Mr Flook: Which, to some extent, does not make sense because if you go to a cinema and The Matrix is incredibly busy and sold out, you have to pay the same price to go and see the next crappy film.

Mr Haji-Ioannou: They compete on everything else except price, which in any other industry is nonsensical.

Q477  Mr Flook: However, if you go to a record store and you want to go and buy an album in the Top 20, the biggest discount - every time I go and try and buy one - from the recommended price is usually not much more than 10 - 20 per cent. And you are not paying say for - I bought The Clash - London calling again many years after I bought the original - you are not getting those incredibly cheaply until they are very old.

Mr Haji-Ioannou: Yes, in the CD business and the DVD business there is a cost of goods sold. Let us not ignore that in the sense that they have to get that thing into the shop and sell it, so ----

Q478  Mr Flook: Maybe, but they are all over production numbers, so in fact for most of the those companies, for Virgin or WESTMINSTER HALL Smith, when they are knocking those things out cheaply they are trying to actually sell excess production. So in fact there is not a marginal increase in cost.

Mr Haji-Ioannou: I mean I come from industries where the minimum to the maximum price has a ratio of often 20 to 1, 50 to 1. The idea that you discount a matinée by a pound, for me it is not enough to induce the use ----

Q479  Mr Flook: Your previous businesses have been tankers, jets and cars. So there is ----

Mr Haji-Ioannou: I am talking about the ones that are relevant, I think, the airline and the car rental basically, both.

Q480  Mr Flook: Yes, but there is quite a big capital outlay for those, whereas your capital outlay for a three year fairly cheap Milton Keynes business is not quite comparable to buying a jet and hoping that people will want to go and fly on one of those jets. How many people live within, say, five miles or ten miles of your multiplex in Milton Keynes? And is it a captive audience? How far do they have to go if they do not go to Milton Keynes?

Mr Haji-Ioannou: Well, Milton Keynes, as it happens, has two cinemas; a brand new expensive one and what has now been converted into easyCinema which was the first multiplex in the country 20 years ago. So it is a very interesting experiment to see how far you can grow the market. I think my point still remains; why are these people refusing to allow price to be determined by supply and demand?

Q481  Mr Flook: And as I said, I have no remit for them whatsoever and I hope you succeed, but it could well be that after six weeks or whatever it is - because you must have spoken to them before - they still have not got used to your business model and big organisations have to seek permission up, down, sideways to work out how to deal with you.

Mr Haji-Ioannou: Well, it is a problem. I am not denying the fact that the largest single risk I have, as a business at the moment, is if the distributors decide that this is not acceptable to them. And it is the risk of doing business.

Q482  Mr Bryant: Thank you, Chairman. You have raised some very interesting points about the tendency to move towards a monopoly in an industry which has two features; one, the vertical integration, the fact that ----

Mr Haji-Ioannou: Distributors and exhibitors.

Q483  Mr Bryant: Exactly. And secondly, the marginal cost being irrelevant. You know, when another person walks through the door it does not cost any more. It is exactly the same in television; it does not cost any more to get another person watching the television programme than to have one fewer. The difference is in terms of how to get people in through that door, seems to depend, from everything we have been told by everybody who makes films, on marketing and that that is the key. So there is maybe a marginal cost which is in terms of the marketing, which you are not then being prepared to pay into.

Mr Haji-Ioannou: I believe that even for the biggest blockbuster, the most heavily marketed and hyped movie, let us say it is released on the Friday, if you go in on the Tuesday after at 3 pm, you will find empty seats. So they are leaving money on the table and the only reason they are doing it is because they are afraid that price competition will be a slippery slope that would lead to an efficient market. You know, they are not filling the cinema every day, every hour. They are just saying "I would rather not start this game. Look what happened to the airlines when they started price competition. I would rather keep the price constant and only compete on creativity, hype, PR".

Q484  Mr Bryant: I know they are not filling all the cinemas. Last Thursday when I was moving house and there was no furniture to sit on in my house I went to watch Ripley's Game at the cinema and I was literally the only person in the cinema which had 650 seats. And that makes me worry a little bit about your future because if it is £5.35, not a large amount of money to go to the cinema in Llangarron, and if you are going to charge people 20p, you have got to get 25 extra people to sit with me in that cinema on a Thursday evening.

Mr Haji-Ioannou: Perhaps I should say - and there was an earlier question about whether you should subsidise the construction of more cinemas - I think this country and most other countries, as a result of the recent boom in multiplexes, have over-supplied. I do not think this industry needs any more capacity. And one of the reasons I rent is because there are too many of them. But the way capitalism should work in these circumstances is whoever builds the cinema should lose their money and then the next person should get the capacity at a more reasonable price, at a rationalised cost of capital, and then try and fill it at a different cost base. The person who made the mistake is the person who built the multiplex in the first place and there is no reason to sustain high prices now.

Q485  Mr Bryant: You talked about the distribution problems that you have. In places like my constituency where most of the cinema going is actually people going to their local community centre where they have cinema going facilities, like the Pontygwaith Community Centre or the Park and Go, these are tiny places in a way, they do not seem to have difficulty having first run movies. Why are you?

Mr Haji-Ioannou: What do they charge? I do not know. I am not familiar with this ----

Q486  Mr Bryant: It varies between £2.50 and £4.60 in a very price sensitive area with a lot of people with not a lot of disposable income.

Mr Haji-Ioannou: Well, I suspect that the distributors are worried that if we start price competition it will be a slippery slope and that is the only way I can explain it, but perhaps you should ask them. You know, I have seen examples of allowing films to be shown in cinemas that are marginally cheaper than others and they allow even the same cinema to have a pound off here or there for matinée performances and everything else. What scared them is the idea of wholesale price competition and the consumer transparently seeing the difference between a good movie and a bad movie. If it is cheap, it means it is not good, it is not in demand and that scares them, I think.

Q487  Mr Bryant: I have flown on easyJet quite often, but only on short flights, and I have never been on a flight, I think, where there was a film shown. Did easyJet ever show any films?

Mr Haji-Ioannou: No.

Q488  Mr Bryant: So did you have any distribution issues? Because it is one of the things that we have not referred to at all, but of course the airline industry is quite a source of money for the British film industry.

Mr Haji-Ioannou: The average length of an easyJet flight is one hour and 20 minutes, so to show a film does not even come into it and we have not got the facilities anyway.

Q489  John Thurso: Forgive me for coming back to the business model again, partly because I am fascinated by it and partly because I would like to know more about it, but also because ultimately if you are wrong and the impact that there could be in the market place is actually destructive to the British film industry, by the time anybody found out it would be far too late to do anything about it. So that is why I would like to look at it. Can I just get from you a little more definition of price elasticity, which I assume would mean that you price down, as in any yield management system, when you think you have got the troughs and price up when you think you have got the peaks. So that for an airline it would be you are looking for an average seat mile revenue, a hotel it is revenue per available room, so you are looking, I do not know, at some sort of average. What is the average? 20p is the headline price?

Mr Haji-Ioannou: That is the headline price, yes.

Q490  John Thurso: What is the average that you are looking to make?

Mr Haji-Ioannou: I believe that given real estate in Milton Keynes and a reasonable cost of film, which is the largest variable here, the one we all know, I think you should be able to do 50 per cent occupancy £1.50, which is well below what the competitors are charging.

Q491  John Thurso: So £1.50 would be the top price or the average?

Mr Haji-Ioannou: No, the average.

Q492  John Thurso: So actually on the busy nights for the good films ----

Mr Haji-Ioannou: It will be £4.00 or £5.00.

Q493  John Thurso: You are right up there with the ----

Mr Haji-Ioannou: Yes, and that is the idea. Something else we, as the Easy Group, do different to many other people in industries that do practice yield management, we start low and the price goes up. In other words, you reward people for committing in advance which is the opposite of some hotels, for example, that discount last minute, or even airlines. So the analogy here is someone who is willing to say "The Matrix has just come out. I am not really interested in the crowds and the hype of the first night. I will book now to see it three weeks later on a Tuesday". Why does that person not deserve a different price to someone who is willing to sort of stand in the queue on the Saturday night? Logically it is not the same product, why should it be priced at the same price?

Q494  John Thurso: On the costs side you used the phrase "outsourcing to the customer" and you have stripped out all of the fancy bits and bobs that get added on to that. Presumably outsourcing to the customer also means no service of any kind?

Mr Haji-Ioannou: We have people on the premises because of safety requirements and the way people gain entry into the screens is they book online, they are invited to print a bar code that serves as a membership card and they use that bar code, scanning it over a turnstile, to get in. So normally, if all goes well, there should be no human intervention. In reality, in practice, there are employees on the premises for safety purposes.

Q495  John Thurso: If, for example, you take the quoted box of popcorn at £3.50, if you knock off the VAT and look at the average sort of catering margin, you have probably got at least £2.00 to £2.50 of actual bottom line contribution or gross contribution. You did 4,500 seats in your first week, so you are looking £9,000 - £10,000 that you have denied yourself. Can you actually save that out of the wages? Because the rest is all fixed cost, the property and the rent, the rates and electricity.

Mr Haji-Ioannou: Yes, I hope that I will save it out of wages and having a less complex business. I also believe that if you make it cheaper overall, you will get more people in. I think consumers value the whole experience and they say "I can either stay at home or I can take a family of four to see a movie" add the popcorn, add the drinks, it has suddenly become a £40 decision. So I think consumers look at the entire expense and on that basis decide to stay away.

Q496  John Thurso: So the model that you are proposing is "Because you know it is the operation that I have got, would you arrange to buy your own popcorn or hamburgers or sweeties or whatever stuff and you bring it in with you"?

Mr Haji-Ioannou: Some people value it and they will go and source it themselves and other people hate it and will not bother at all. But everybody has the knowledge that the whole experience is cheaper.

Q497  John Thurso: I wish you well.

Mr Haji-Ioannou: Thank you.

Chairman: Actually, of course, one of the things that you would achieve is countering all this lonely experience of being one of three or four people in an auditorium. When I was one of three or four people watching Eyes Wide Shut I wished that there were three and it was not me that was among them. Mr Keen.

Q498  Alan Keen: Obviously it is the number of seats you sell and the money that you take that is important, but what are the comments you have had locally? If you asked me, for instance, I mean I would prefer your cinema to one that sold popcorn because I do not like the smell of them. But what sort of comments do people make to you about your project?

Mr Haji-Ioannou: Anecdotally the feedback has positive. Customers had a very low expectation to start with. Obviously the projection equipment and the screens are exactly the same, and the seats, so nothing in the hardware as such changed. They made a conscious decision to buy a film. So I did not force them to see one film or the other. And because they paid very little, I think that they came out feeling satisfied. I think consumer satisfaction comes out of under-promising and over-delivering and there is very little we have promised actually to fail. So I think that there are consumers who will continue to go to expensive cinemas. There are examples of cinemas all the way up to £12 with a license to sell alcohol and the full works and it is as expensive as going to a restaurant sometimes and that would be a niche market for those. And I think all the way to the other end you will find people who find the 20 pence three weeks in advance for the kids with some popcorn and Tesco cola is far better and far more satisfying.

Q499  Alan Keen: This is not so much a question, but I chair the All Party Football Group in Parliament and I have recently been to Brussels to see Mario Monti, the Competition Commissioner. And we all feel in football, right from the top of the Premier League downwards, that if Mr Monti forces the individual Premier League clubs to negotiate separately for their own games that there will be a lot less money going to football and we have got a whole structure, grass roots and lower leagues, to support from that. Now, the film industry has not really got that. We have got people who work in it and we care about them, but to me there is a parallel between the two industries. Have you been to see the competition people in Europe?

Mr Haji-Ioannou: No, I have not been to the competition authorities in Brussels.

Q500  Alan Keen: In my dealings, he would not allow this to go on. I do not mean he would not allow you to go on, he would not allow the film industry to go on trading as they do ----

Mr Haji-Ioannou: As always, it is a matter of evidence in the sense of you need, I think, for a sustained period of time to continue to make offers on films and get the rejections and get the procrastination and get the unreasonable requests for film hire and then paint the picture and say "You know, these people are not - it is not a coincidence they are behaving like that". I think that is what you have to prove.

Q501  Alan Keen: This is a question. Please will you go across to Europe and get Mario Monti to forget about football for a few years and concentrate on the film industry? There is much more to ----

Mr Haji-Ioannou: I will give Mario a call. Mr Monti has spent a lot of time in the airline industry too, I know. I know him, yes.

Q502  Mr Doran: I am intrigued by the 20 pence figure and just how you have reached that figure. [No verbal response] That is what I thought.

Mr Haji-Ioannou: It looks better than 30 pence.

Q503  Mr Doran: It is a great headline grabber. I am fairly familiar with your aeroplane operations because we have got an easyJet flight from Aberdeen, my constituency, down to Liverpool which is in direct competition with the BA flight to Heathrow and, from what I am aware of, I think your cost for a return flight was about a fifth of British Airways' most expensive flight, but obviously they have various offers and all the rest of it.

Mr Haji-Ioannou: My guess is that on average the price is about half, which is again the comparison we were trying to make.

Q504  Mr Doran: That will level out.

Mr Haji-Ioannou: Yes.

Q505  Mr Doran: Someone like me who needs flexibility tends to pay at the top end. So you are right, I can accept that. But the 20 pence - you licked your finger and put it in the air and I can see the headline grabbing aspect of that, but I just wonder how it is actually going to work in practice because I have always seen cinema going as a relatively cheap leisure activity. In my local cinemas the going rate is about £4.00 - £4.50 for a ticket, top line and you are absolutely right, there is not very much variation, but when you look at the economics of it - and we have been looking at some of the economics over the last few weeks while we have been undertaking this inquiry - the figure that you have mentioned from Sony sounds just about right for the take that the producers - I am not sure whether they were offering that as a producer or a distributor, that would be ----

Mr Haji-Ioannou: As a distributor.

Q506  Mr Doran: As a distributor. You heard earlier when we were talking to Mr Walker that we had the director and producer of Bend it like Beckham who claimed that the exhibitors and distributors took something like 75 per cent of the take of her film. So the producer is getting 25 per cent of the £4.50 or thereabouts and the rest is divided up between the two. And the economics of splitting up your 20 pence or your average, I think you said around about 1.50 or thereabouts, does not make it economic for anyone to give you that film.

Mr Haji-Ioannou: I think you have to solve the equation for the number of people who see the movie. If you start by offering a minimum of £1.30 - actually if you were paying Sony £1.30 you have to start at £1.50. If you start at a minimum of £1.50 and try and put it up, you will end up with X number of people seeing the movie. If you start at 20 pence and finish at £4.00 my belief is you will end up with two X, for example. That is what elasticity is all about.

Q507  Mr Doran: Okay, but your assumption is that you will pull more people into the cinema?

Mr Haji-Ioannou: Correct. Especially if you have the ability to promote it and sell it properly in the sense that you have to present the consumer, in my mind, with a very clear proposition and a very clear guideline as to what they have to do - like book three weeks in advance and you get a cheaper price, go on a Tuesday and it is cheaper. At the moment there is no incentive to book The Matrix three weeks in advance. It will be the same price as it was the first night.

Q508  Mr Doran: One of my local multiplexes sells a ticket, I think it is about £12, and you can go to see any number of films for the whole month. Now, that is getting close to your sort of prices and these are the sort of anoraks who want to be in the cinema on an afternoon.

Mr Haji-Ioannou: Yes, volume discount, which is what it is, is only one method of yield management, usually the most unsophisticated because what you are doing is you are giving a discount to your most loyal, keen customer and he is indifferent about when he goes. So invariably he consumes your most valuable piece of inventory; the Saturday night. Now, the way we practice yield management is you isolate your inventory and say "If you really want to get a discount, book in advance and go on a Tuesday afternoon when you are alone in the movie theatre". So you have to do it differently to fill the off peak, in my view. Volume discounts, we have seen them offered in other industries, they are not the answer. In one of my Internet cafés you can get a month unlimited pass to access the Internet for a whole month for £10 - £15. It is not the best way to do yield management.

Q509  Chairman: Well, obviously, as you will have seen, there is a very widespread interest in the Committee. We are most grateful to you for coming.

Mr Haji-Ioannou: Thank you.

Witnesses: RT HON TESSA JOWELL, a Member of the House, Secretary of State for Culture, Media and Sport, RT HON LORD McINTOSH OF HARINGEY, a Member of the House of Lords, Parliamentary Under Secretary of State (Minister for Tourism, Film and Broadcasting), and MR ANDREW RAMSAY, Director of Creative Industries, Broadcasting and Gambling, examined

Q510  Derek Wyatt: Good afternoon, everyone. Can I ask you where you think we will be with Section 42 and 48 in 2005 and where the lobbying starts and finishes, or is it your intention to look at the Canadian model or another model and generally what is your thinking currently?

Tessa Jowell: Just before I ask Andrew McIntosh to come in on that question, can I just introduce my two colleagues? Lord McIntosh of Haringey, who has just been appointed in the re-shuffle as our Minister with responsibility for a wide range of things, excluding film, but he very heroically - because he knows so much about ----

Q511  Chairman: I know Mr McIntosh's view on films ----

Tessa Jowell: You would indeed. This is what he is ----

Q512  Chairman: I know his view on The Pyjama Game.

Lord McIntosh of Haringey: And I know your view on the Judy Garland remake of A Star is Born.

Tessa Jowell: Anyway, so for that reason, we thought that it would be excellent if he came this afternoon. And Andrew Ramsay, who is the Director in my Department responsible for this area of policy. Andrew?

Lord McIntosh of Haringey: Well, Section 42, of course, of the tax relief has no end date. It will carry on. That is the one that is concerned with budgets over 15 million. But Section 48 is due to end in 2005 and there is an opportunity which we will pursue very hard with the Treasury to extend - not just to extend it in time, but to cover some of the issues which the Film Council has been raising in its second tranche of thinking on the subject and that is particularly, of course, getting involved not only with production but with distribution and exhibition.

Q513  Derek Wyatt: There is a mixed view in Hollywood; some said that the British system was complicated, some said that they had no issue with it. Most said, though, that the Canadian was much quicker. So I was just wondering, your analysis, where are you with looking at what Canada is like?

Lord McIntosh of Haringey: Well, we are three years old. The National Film Board for Canada is 60 years old at least, I should have thought, probably more than that. We have already brought together a number of rather complicated and inter-related film funding bodies into a single Film Council, which we think is the right thing to do, and they are already thinking again about the ways of extending the use of the money that they have from the Lottery. It is not just Canada. We are not unique in this. Virtually every country that makes films provides public funding for films. But the Canadian model, as I understand it, is largely a production model. We have particular difficulties because our distribution system is 90 per cent in the hands of six large US companies and we have difficulties, which have been expressed to you, I am sure, with actually getting prints to small exhibitors who want to show independent and British films.

Q514  Derek Wyatt: This morning we were at the British Film Industry looking at digital cinema and its implications. There was widespread - I cannot think of what the right word is - just unhappiness that Channel Four Films imploded because it was such a rich source and had such rich talent. Do you think there is a role here for the BBC to take on almost a studio type influence in the UK market and will that be part of your Charter Review?

Tessa Jowell: Well, the answer to the second part of your question is yes, it will. The Charter Review will look at a wide range of issues in relation to the BBC and seek, I hope, to achieve some definition of the BBC's role. They already put something like £10 million a year into film development and production. I think that, in a sense, the big questions which frame our response as Government to your inquiry is the legitimate and proper role of Government. You have already touched on the question of fiscal incentives, clearly as in a range of sort of creative policy the existence of the BBC is also important, but I think that this is an area where principally, subject to the right regulatory framework, we are looking for the industry itself to deliver its own solutions.

Q515  Derek Wyatt: With the development of a digital cinema concept, this has huge impact on our rural and semi-rural communities. I mean I have an island with 40,000 and we have no cinema. So is there a way in which you can see a digital tax incentive to help us to be the first to go digital in the world? And I wondered - no-one could give me the answer - given that the Chancellor has allowed hardware and software to be tax free, could a digital cinema system be either tax free or is there some way in which we can actually the smartest film going group in the world?

Lord McIntosh of Haringey: You are talking about £70 to £80,000 per conversion to digital.

Q516  Derek Wyatt: I know.

Lord McIntosh of Haringey: That is an awful lot of money, even if it were to be tax free and there is no agreement to do that.

Q517  Derek Wyatt: With all hardware it starts at the very expensive end and within five years it is very, very cheap. It is only a matter of scale.

Lord McIntosh of Haringey: Yes.

Tessa Jowell: And the Film Council, as you may have heard from them, have put a million pounds into a limited digital experiment in relation to non-theatrical exhibition and increasing availability of soft sub-titled prints for hearing impaired and audio visual description for visually impaired. So of course it may be appropriate to look at incentives in this area, but any decision about incentives is a matter for the Chancellor. The final point I would make, I think, is that the increase in digital technology obviously raises enormous challenges in relation to piracy which is of great concern to the industry, as you will no doubt have heard already.

Q518  Derek Wyatt: Alexander Walker, who was in front of us an hour ago, was scathing in his criticism of the £92 million allocated by the Arts Council to three separate film franchises. Do you think that this is a matter for the National Audit Office? How are we going to see where that money is? There is some lack of transparency, according to his evidence.

Lord McIntosh of Haringey: I do not think Government determines the priorities of the National Audit Office. It is a matter for the National Audit Office to decide what matters they want to investigate. If they ask any questions, they will be given proper answers.

Tessa Jowell: I mean this has been an extremely controversial programme and it is a controversial programme which has had mixed success. The franchises come to an end, I think, in the middle of next year, 2004, and the expectation is that where they have worked, as they have in relation to two of the franchise companies, reasonably well then they would continue but not funded by the Lottery. There are obviously lessons to be learnt and I think they are lessons that take us back to the first question, which is (a) what is the legitimate role for public or the public's money, as the Lottery is? I mean my general concern about investment which becomes controversial is the wider risk of undermining public confidence in the Lottery, both in distribution and in ticket sales. So they have had a mixed press. Alexander Walker has very well established and strong views about them. I think that by and large they deserve the mixed press that they have had.

Q519  Michael Fabricant: I was very pleased to hear Andrew McIntosh say that the Department would be lobbying hard to keep Section 48, because certainly all the evidence we have received in the United States is that they are businesses and that they will look at various locations for making films and, at the end of the day, often the price has to be right; if they are not always, it is off to location two. Will there be other areas where the Department might be lobbying the Treasury?

Tessa Jowell: Well, the present incentives focus on production. I think that there is a growing view that we should be looking at beginning to shape incentives to increase distribution and so, without going into such a sensitive area as the nature of the lobbying of the Treasury, I think it is fair to say that the Film Council - Alan Parker has made, I think, very clear his view on this, that it is now time, given the experience of the success of incentives which are directed at production, to look now at the other aspect of the full chain, if you like, and to look at distribution.

Q520  Michael Fabricant: That is a very welcome response because I think it is only recently, in the last few days, the Film Council pointed out that the mainstream film in the United Kingdom gets about 1,000 prints made, whereas the average Brit film is only about 70 prints. So are we to be surprised if a Brit film does not do quite so well?

Tessa Jowell: And they did make an announcement last week about additional help in order to increase the number of prints made.

Q521  Michael Fabricant: That is right. And I am pleased to hear that there may be additional incentives too, but I will not press you, Secretary of State, on that too far. Do you have a ---- Tessa Jowell: And why not? Because the decisions are not my decision, they are decisions for the Chancellor.

Q522  Michael Fabricant: No, that is right. Quite. Do you have a view at all on the type of film that ought to be made in the UK? Let me tell you where I am coming from; one of the things that we kept on hearing from various film producers and film companies in the United States is that maybe we are a little bit too obsessed with culture, and I know that you are the Department of Culture, Media and Sport, but nevertheless too much concerned with culture, too much concerned with arty farty films and that maybe we would become an industry if we were industrious and actually behaved like a business and realised that films - and I am quoting or maybe misquoting some of the executives who said that one of the problems is that we do not regard films as being entertainment. Does the Department have a view on this? Do you think we are being commercial enough in our country? Are we able to make those sorts of judgments? We heard, in fact, from Mr Walker earlier on. He said, quite rightly, that some mainstream films were in fact quite cultural and some cultural films have turned out to be quite mainstream. But does the Department have a view on this?

Tessa Jowell: Do you want to start on it, Andrew?

Q523  Michael Fabricant: He has only been there two days.

Lord McIntosh of Haringey: 30 hours, to be exact.

Tessa Jowell: Let me pick this up. I mean what the Film Council has done is to allocate its resources to different streams which recognise the difference between the kind of blockbuster commercial film, through its Premiere Fund, and then a series of other funds, First Light and the New Films programme which funds films which are more risky, which are likely to be less commercial and so forth. The Premiere Fund works in a way, as I am sure you now know, which recoups Lottery funding for re-investment from films which are commercially successful. Gosford Park and Bend it like Beckham are two of the films which have been particularly successful and funded by that programme. I think that ----

Q524  Chairman: I think you will have to resume that thought when we get back.

Tessa Jowell: I will keep that thought, develop it while we go and vote.

The Committee suspended from 16:26 pm to 16:46 pm for a division in the House

Chairman: Do you want to remind the Secretary of State of your question, Michael?

Q525  Michael Fabricant: I think, Chairman, we sort of explored that question before the division. So really I just want to ask a question relating to the evidence that you gave, Secretary of State. You point out, quite rightly, that more and more people are going to the cinema now and that that has to be a good thing, but more and more people are seeing American movies and not seeing British movies. So what can the Department do about it?

Tessa Jowell: I think this, in a sense, is a question at the heart of the inquiry, which is just what is the role of Government? As I said a few moments ago, the role of Government is to set the right kind of regulatory environment and I think that through the structure of tax incentives, we have been successful in doing that and attracting substantial inward investment. The second, of course, is to make the UK an attractive place for companies to come and make films. So obviously understanding the skill and training needs of the industry and using the apparatus of the Public Service, particularly Learning and Skills Councils, the employer-led skills set, are ways in which the industry can increase its sustainability, both through recruitment of young people, training and securing the necessary sort of technical resources in order to underpin the viability of the industry.

Q526  John Thurso: One of the things that struck me, from the evidence that was given by all of the people we really saw when we went to America, was that there are really quite clearly two industries. One is a straightforward facilities industry which is highly skilled with lots of technicians who produce films for whomever wishes to come and make a movie in this country. The other is the British film industry which is about producing British films, if you like the cultural side. I would like to concentrate on the former, the facilities industry, because that really is the inward investment. Effectively we are competing out there, as we would in any other industry, globally to attract people to come and spend their money in this country. One of the things we discovered was that a number of countries facilitate that inward investment by having people whom the producers can contact and who will help them, for example, in negotiations with the Treasury or point them in the right direction, who will help them and introduce them to people who have locations throughout the country. Who undertakes that role? Is there somebody who undertakes that role? Is it somebody within DCMS? And what could we do to make that person or persons as efficient as we possibly can so that we can deliver the maximum for inward investment?

Tessa Jowell: Well, there is a person who has this responsibility within the Film Council, the successor body, in part, of the British Film Commission. But I am entirely open to suggestions, through the Committee's inquiry and on the basis of the visits that you have made, as to how we could strengthen that. One area in which my Department acted as a broker was, for instance, trying to assist with the difficulties that many companies have with shooting locations in London, where there may be half a dozen local authorities and different agencies that have to be negotiated with in order to get road closures and necessary permissions and so forth. So if there are ways in which we can make the UK more attractive by measures like that, then of course we would look at that. It is ultimately positioning the role of Government in the public sector as enabling the industry, not second guessing what are essentially the commercial decisions of the industry.

Q527  John Thurso: Absolutely. I mean I think I view this in exactly the same way as, for example, to do with engineering or whatever the DTI or somebody in the Embassy, a Commercial Attaché, who is there and you can go to them and that person will help you with anything that is required for the inward investment. One of the points that came out, for example, was Braveheart which, although theoretically something to do with Scottish history, was made entirely or in large part in Ireland. Apparently the reason for that was the extreme co-operation of the Irish Government in lending soldiers. And whilst I am aware that ours are rather heavily committed in various parts of the world at the moment, they felt that the people here in London were not overly helpful with trying to get co-operation possibly from the Army. I mean is this a role where, for example, the Department could actually facilitate? Clearly we do not have soldiers so that they can be in movies, but occasionally if a good movie can be made using a barracks facility that is nearby while they are not actually stationed somewhere abroad, that might make good sense.

Lord McIntosh of Haringey: We do not apologise for not having a vast body of unemployed. We have got actors and actresses.

Tessa Jowell: But I think that this is on a sort of case by case basis. This is something that we do do. I mean I can remember when I was an employment minister being involved in some negotiation - I think it was when the first Harry Potter was being shot - about the employment conditions, the number of hours on set, of a very large number of the children that were taking part and the negotiation was successfully completed and it secured the shooting of the film at - was it Pinewood or Elstree? - one or the other. So yes, I mean I think that this is an entirely right and proper function for Government. Going back to your earlier question, what is important is that the industry more generally, the production companies, wherever they are in the world, know how they can get access, how they can get into Government and get into the public sector part of the industry in Britain in order to get that help.

Q528  John Thurso: Am I allowed one last question? It is a little, tiny suggestion, question, which is to tie in some of the work that Visit Britain, as it now is, because they have a wealth of data and if that could be linked in, then it seems that the Department is ideally placed to bring those assets together.

Tessa Jowell: Yes. Well, I agree and film tourism is one of those under-developed but popular themes. People love coming here to see where Harry Potter and other films shot in this country were made and so that is certainly something we would expect Visit Britain to build on.

Q529  Mr Doran: Thank you very much, Chair. I want to try and squeeze in two questions if I can. First there is a devil's advocate question; we heard from Alexander Walker earlier in the afternoon who had a fairly dim view of some of the help that is given to the film industry and part of that is based on his view - and I will read out a little part of his written submission to us "Film industries the world over are systematically dishonest. Their financial accountability would rarely stand scrutiny by the usual principles. Accountability of monies invested and received are subject to so many shadowy processes of subtraction that it is extremely hard to keep track of". Are these the sort of people we should be fighting to give money to?

Tessa Jowell: Well, it is typically colourful language. I think that where we did clamp down on abuse was in relation to the amendment or the clarification, if you like, of the sale and lease back provisions which were quite clearly being abused. The sale and lease back provisions under Section 42 apply to films which are being made for the cinema, not films which are being made for television. What became quite clear was that there was widespread abuse of this and the sale and lease back provisions ----

Q530  Mr Doran: But that was by our own television industry, not the film industry.

Tessa Jowell: Exactly, by our television industry. There is also, I think, some evidence which I have read of film companies sort of inflating budgets in order to maximise the benefit of the tax reliefs. Now, I mean, you just have to be vigilant about this kind of thing all the time and I am quite sure neither you nor Alexander Walker are making any kind of generalised judgment about the integrity of film makers.

Q531  Mr Doran: The second issue is about the role of our broadcasters in all of this and it is an area where we compare very unfavourably with some of the other European countries. For example, the French broadcasters contribute something like 37.5 per cent of the total French film spend. In a recent survey in Screen Finance magazine, the Spanish broadcasters contributed 35.6 per cent. Our broadcasters managed around about 5 per cent and of that 3.5 per cent came from the BBC. It is a pretty miserable performance and that is an area which is directly within your responsibilities. So have you any intention of addressing that problem?

Tessa Jowell: We have, as you may be aware, amended the Communications Bill in order to provide encouragement or expectation of broadcasters to collaborate in maximising potential investment in film. I mean considering the role that broadcasters can play in promoting film and that was a step that was taken precisely in recognition of the facts that you have very clearly set out. There are also, in addition, clear quotas for public service broadcasters in relation to independent production, original production and regional production. And I recently, following the report of the Committee that scrutinised the Communications Bill, undertook a review of programme supply that looked at the ways of increasing the resilience of independent production in this country and we have put in place a number of recommendations that we think will be safeguards in relation to that.

Q532  Mr Doran: The independent productions will be for television.

Tessa Jowell: They will be for television, yes.

Q533  Mr Doran: One of the major problems is, for example, that the ITV network, which for many years, as Lord Thompson called it, was a licence to print money, contribute exactly zero per cent and I do not think, from what I have heard you say and what I know of the amendments, that there is anything which is actually going to push them to do anything to make a bigger contribution.

Tessa Jowell: Expressly, no.

Lord McIntosh of Haringey: Not, it is not going to force them to do it, but there is a difference. There is a very basic and obvious point that in France, for example, if you are going to have films shown on television which are in the original language rather than sub-titled or dubbed, something has got to be done to support the French language film industry. And it is especially in the interests of the French, of Canal Plus and the others, to give support to the French film industry. They do not have the advantage or disadvantage of sharing a language with the United States.

Q534  Mr Bryant: I am not sure that is good enough, is it, really as an argument? That just because the French speak French and nobody else speaks French in the world that they have got to make films for themselves. Is the truth of that not that most people in Britain would quite like to watch films that reflect the world in which they live, their own environment, their own culture and so on and that is different from America? And whilst we may love watching lots of American films as well, the broadcasters have a real responsibility, especially when they receive so much money in the licence fee, to play a role in making more features films, do they not?

Lord McIntosh of Haringey: And they have from time to time. If you look at FilmFour, if you look at the work of David Rose in the 1980s, for example, startlingly successful ----

Q535  Mr Bryant: But from time to time and the 1980s ----

Lord McIntosh of Haringey: And there have been bad experiences as well, as we know. And you have heard, I think, from ITV, have you not, about their bad experiences with supporting films? These are not areas where Government dictates.

Tessa Jowell: No.

Q536  Mr Bryant: I am sorry, but we are about to enter a phase when there is going to be a renewal of the licence fee, of the BBC Charter, and in that process surely Government will be deciding what the role of the BBC is? Should we not be more explicit about the role of the BBC in fostering and enhancing a vibrant and lively film industry?

Tessa Jowell: Well, up to a point, but the BBC's principle role is to make films for television. I think that we could easily turn this discussion around in another context where you would be questioning me very hard as to why the Government had allowed the BBC to resile from its core purpose, which is the production of programmes for radio and television. Because every pound that is not spent on programming for television and spent on something else is money which is lost to viewers and licence fee payers. I think that that is the difficult balance. There is a role, but there will never be, in my view, a primary role for the BBC as a funder of British film. There is enough debate already about what the BBC's core purpose is and what latitude the BBC should have to spend licence fee money on purposes which are not central to its broadcasting purpose. I think that if you burdened the licence fee with an expectation that it was going to make substantial investment in film, then you would have licence payers in revolt at the loss of quality on their televisions at home.

Q537  Mr Bryant: But all these words, Secretary of State, are not absolutes. They are relative words; substantial, primary.

Tessa Jowell: Yes, they are, exactly.

Q538  Mr Bryant: I mean I am not even arguing for a primary or indeed a secondary role for the BBC, but somewhere down the list the making of feature films that not only reflect Britain to Britain, but also are then available for showing around the rest of the world, must surely be part of our biggest cultural institution that we have, which we fund to some enormous degree. Mrs Brown was originally designed as a film for television and then they realised the great success that it was becoming and it ended up becoming a feature film. Now, that is why I do not see that there is a logical problem about making sure that the BBC has a special role to make films as being in any way detracting from its role as making good television.

Tessa Jowell: Well, you are right. It is a matter of degree and I have given you the figure for the current year, which I think is in the region of £10 million. That may increase a little bit, it may decrease a little bit, but I think the central point is that the BBC is not going to become a major funder of British film and eclipse other bigger sources of income.

Q539  Mr Bryant: We heard earlier from the founder of Easy Group that he believes that there is a cartel out there which is making it difficult for new people to enter into the market of cinema exhibition and that basically the whole of the system is fixed. Do you believe that he is right?

Tessa Jowell: I do not know whether he is right or not. I do not know. I think that what we can do, we have talked a little bit about the extent of American dominance, I think that what we can do is to use the public resources that are available through funding of the Film Council, through money which is available from the Lottery, in order to deal with or address some of the market failure areas, the funding of innovation, the funding of new and risky films and, in some cases but never to a very great degree, funding - of acting as a banker for films which then go on to become commercial successes.

Q540  Mr Bryant: And distribution and exhibition? Because there clearly are some areas of market failure there as well.

Tessa Jowell: Yes, I mean I think I have made clear that there is more that could be done to increase incentives in relation to distribution and I would just say, finally, in relation to the allegation that you make, that if there is an abuse of market power, if there is a cartel operating, then the OFT should investigate it.

Lord McIntosh of Haringey: And it is also exactly the Film Council's stage two strategy, which is to extend from not abandoning support for production but extend to supporting distribution and exhibition.

Q541  Mr Flook: Thank you, Chairman. We have heard that the film industry in France is there, the Minister sort of half-jokingly said, to protect the industry of speaking French and we have heard that the BBC puts in a whole £10 million out of its £2,000 million into the film industry. When we were in the States we met a chap called Colin Calendar and he is a Briton and I think, by common consent, his was the most impressive meeting. Now, he is a Briton and last year Home Box Office, which he runs, makes $800 million. Now, Hollywood - no government gets involved, no state government, no county, no federal government gets involved in the film industry within California. What is your philosophy as to why the British Government should get involved in the film industry?

Tessa Jowell: For the reasons that I have set out over the last hour or so. I think that the scope and role for Government involvement is very specific. I think that there is a role for Lottery investment. I think that there is a role for my Department to allocate core funding to the Film Council. There is a need ----

Q542  Mr Flook: The philosophy behind it rather than the process.

Tessa Jowell: Well, because I think that there is a role for Government in promoting creativity, in supporting innovation and in building, through investment in culture, a sense of national identity and enthusiasm for culture. So I mean that is the philosophy. It is an intrinsically good thing that we have good challenging films for people to see. And ----

Q543  Mr Flook: But they do not get to see it because one of the things that we have come across is that the way it is set up in this country is that distribution blocks out quite a lot of those cultural films. So there they are all being subsidised to quite a great extent, yet this great cultural bonanza that the people of our country are hoping to see do not get to see any of it, or very, very little of it.

Tessa Jowell: So you move then to the second stage, which is from principle to practice and intervention and the Film Council, as I have referred to, took the initiative announced last week of increasing the number of funding for the number of copies that could be distributed for small film makers ----

Q544  Mr Flook: That is quite a long way - I mean that is only last week. What has been happening in the last 30 years, 40 years is the British film industry has been struggling.

Tessa Jowell: I mean the tax incentives for production have been in place for less than ten years. I think that it is important that we keep pace. The attitude of Government, the approach of Government, keeps pace with the way in which the industry itself is developing. I mean the British film industry has strengthened considerably in the last five to ten years. The public's interest in film, against all predictions, has sort of been re-awakened by the increase in numbers of people going to the cinema. We need to capture that in the way we support the industry, but it is like a modern way of supporting the industry, not of picking winners and propping bits of the industry which are never going to work terribly well.

Q545  Mr Flook: Secretary, you have only obliquely made reference to the financial benefits from the film industry and one of the things we also heard was the way in which a million dollars of tax break can actually bring in $20 million of foreign money into Britain or, more importantly, as we heard time and time again, in Prague and in Romania there are quite often British technicians going over who, of course, are then bringing their money back, because I cannot imagine they are going to stay in Romania. I do not think they really want to. But you did not sort of allude to that. You talked about a cultural positivism ----

Tessa Jowell: Well, I think I was drawing a distinction in your question between philosophy and policy. Policy, as I said earlier, is to create the right kind of tax regime and to create an industry which is sufficiently well skilled. A lot of these industries that service the film industry are highly mobile, as you suggest.

Q546  Mr Flook: Maybe that is where you and I might differ on the basis that I recognise that Colin Calender at HBO made $800 million because he had his eye on the bottom line, whereas you were talking about philosophy rather than finance.

Tessa Jowell: No, because you asked me about philosophy.

Q547  Mr Flook: Sorry, sorry. You mentioned culture in relation to my question about philosophy. Money pays for the culture. That is where HBO comes in for a lot of the satellite organisations that they provide the films to and it is very lucrative for them.

Tessa Jowell: Yes, but the money comes without Government assistance.

Q548  Mr Flook: Yes, it does, but the question is - when I asked you to lay out what you thought was the philosophy, you did not mention finance until I ----

Tessa Jowell: Well, of course it is important, but Government financing of film is always going to be nugatory compared to finance for film which is raised from other sources. So the Government's role is to maximise the potential for that investment, which we have done through the tax regime.

Lord McIntosh of Haringey: And that has produced the leverage. It is for you to ask the questions and us to answer them, but you are not suggesting we go back to the ED levy and have a levy on tickets and have quota quickies again?

Q549  Mr Flook: I did not say anything. I was really trying to get behind the Government's philosophy. Does it include a bottom line or is it just about cultural wonderment for the rest of Britain?

Tessa Jowell: I think if you look at the way the different Lottery programmes have been developed, I mean on a small financial base they reflect maximising profit through the Premiere film programme, introducing children to some of the technical wonder of film making through the First Light programme and providing investment for films which will never get a chance if there is not some Lottery money through the New Films programme and so forth. So it is a differentiated strategy, but Government is not going to become a major sort of substitute for commercial funding of film. It is Government's job to create the right kind of environment to promote that investment within a philosophical context where we see film as a very important expression of culture more generally.

Q550  Chairman: A good lively action sequence to conclude this afternoon's takes. Thank you very much indeed.

Tessa Jowell: Thank you.