The British Film and Television Industries - Communications Committee Contents


Memorandum by Ingenious Media

1.—What do the UK film and television industries currently contribute to the UK economy and British culture? In what ways might this contribution be enhanced?

BACKGROUND

  We shall focus on the second of these questions. The film and television industries are both forms of media business, so it is helpful to summarise the main contours of the changing media universe.

  Audio-visual and creative content markets are increasingly consumer-driven. The adoption of digital technologies has led both to market fragmentation and an explosion of consumer "choice". From a business perspective the main relevant features of the resulting landscape are that:

    — For a combination of structural and cyclical reasons, revenues in traditional (or "old") media companies, including those US multinationals like Disney and Time Warner which dominate the international film business, are declining, with potentially severe consequences for future investment;

    — traditional media companies are struggling to transform themselves away from reliance on outdated delivery systems (selling units of physical product such as DVDs).

    — digital delivery mechanisms, primarily via broadband and mobile, have enabled consumers to access content, particularly music but increasingly also TV and film content, by illicit file-sharing, without paying for it. The fastest growing area of P2P file-sharing, or "piracy", is TV content. Meanwhile, driven by faster broadband speeds, film piracy is also growing apace; and

    — finally, a widespread cultural attitude has been fostered, particularly among the young, that content is "free".

  On the "benefits" side of the equation it is true that digital distribution mechanisms, for example video-on-demand (VOD), are generating a multiplicity of new pricing models for content. However, these are invariably unprofitable in the short to medium term.

THE ECONOMICS OF THE CREATIVE INDUSTRIES

  The film and television industries are also both species of creative industry. The UK has an enormous reservoir of creative talent—in the film and TV industries as more broadly across the creative spectrum. However, for a variety of complex reasons we are not good at building sustainable creative businesses here. The result is that we do not have the kind of mature, fully scaled businesses in the UK which would allow us to take full commercial advantage of the opportunities presented to us by our creative brilliance and technical skills.

  Even our most brilliant audiovisual successes, for example Four Weddings and a Funeral, deploying British writers, producer, director and actors, tend to generate box-office income, profits and tax revenues which end up somewhere else, usually the USA. This is typical. We have failed to design and implement policies for the creative industries which would, expressed positively, enable the economic benefits of creative success to be owned and enjoyed in the UK, and, less positively, prevent our creative industries from slipping further into the status of service facilities to the rest of the world.

FILM AND TELEVISION

  Against this background the future for our film and TV industries is uncertain. We have yet to develop a commercially sustainable model for commercial content investment, either in the audio-visual or other content segments of the wider creative economy.

  We have largely failed to build significant independent business capacity in the creative economy generally. However the change to the Terms of Trade brought about in the Communications Act 2003 has enabled us to build a few independent TV production companies which, though not financially significant in the wider scale of things, have been successful in making programmes, competing internationally and delivering export revenues.

  There is much talk in government and regulatory circles about "new business models". All new business models for online and mobile distribution of audiovisual content are embryonic and experimental. Film and television are completely different propositions as regards their financing models, but to our knowledge none of these models are currently generating sustained revenues or significant profits.

PUBLIC POLICY

  The contribution of the UK film and television industries to British culture has been discussed extensively in our universities and elsewhere. Their contribution to the UK economy is less well documented, and as far as we can tell has been largely ignored by the Treasury.

  In recent years two reports especially have helped to illuminate public understanding of the economics of the audiovisual sectors. The House of Commons Select Committee on Culture, Media and Sport published a comprehensive and brutally accurate report in 2003 entitled The British Film Industry. This correctly identified the historical weakness of the UK film "industry", or cottage industry as it really is, as being an obsession with production and disregard for distribution (see below).

  Then in 2007, the Work Foundation published a much broader analysis entitled Staying Ahead: the Economic Performance of the UK's Creative Industries. This study underscored the economic importance of the creative sector to British life and the wider knowledge economy, but also drew attention to the weaknesses and challenges that confront all our creative industries, including the audio-visual sector.

  The Work Foundation, NESTA (National Endowment for Sport, Technology and Arts) and others have highlighted serious shortcomings in the availability of relevant economic data on the creative economy. This deficiency has been acknowledged by statisticians at the DCMS. We do not have good information, for example, about the extent of economic "spill-overs" between the subsidized performing arts, especially theatre, and the commercial UK film and television industries, although anecdotally we know these are extensive.

  Most TV and film actors, directors and producers get their training in the subsidized arts sector and/or at the BBC. Many of them move backwards and forwards throughout their careers between the public and private domains. It is unfortunate that we do not have better data with which to document and understand these "spill-overs", thereby facilitating informed, evidence-based policy-making by government.

  It follows that the second part of the Committee's first question is more difficult to answer than it might be, in that any measures to enhance the economic contribution of the film and television industries are likely to be based on a less than adequate understanding of important aspects of the overall "balance sheet" of the creative economy.

  The real answer, however, has already been highlighted. In film and TV, as elsewhere in the creative economy, we need to design and implement policies which would enable the economic benefits of creative success to be owned and enjoyed in the UK. This is above all a matter of creating sustainable business capacity, and we are a long way from achieving success.

2.—How do the current UK arrangements for distribution and exhibition of films affect the commercial success of the film industry? How might long run changes in international film production and distribution affect the UK film industry and its export potential over the next decade? To what extent is the raising of finance an inhibiting factor in UK film projects?

  These questions were addressed by the Commons Select Committee on Culture, Media and Sport in its 2003 report. This highlighted what the Committee regarded as the key structural weakness of the UK industry, that it was producer-driven. By contrast, it noted, a winning film industry is distribution-led.

  The Select Committee highlighted evidence submitted by the UK Film Council to the effect that:

    The scattered and fragmentary nature of the (British) financing model contrasts sharply with the integrated model which forms the basis of US studio financing. The "cottage industry" approach of the UK production sector, comprising scores of film companies, is remarkably successful at delivering excellent, culturally significant but ultimately unprofitable British films. This industrial structure (also) fails to deliver a consistent flow of films such that risk can be spread across a slate of projects. This inability to run a portfolio of films to mitigate financial risk acts as a very strong disincentive to private investment into the production sector. Obviously this approach (also) does nothing to build the significant corporate structures which are essential to achieve a sustainable industry.

  This analysis still applies in broad terms, although it is important to note that the value chain of all content businesses has been significantly impacted by digitalisation.

  At Ingenious we have created a number of integrated film funds in recent years. These were based on the realisation that the keys to commercial success in the film business were, exactly as the Select Committee had described, distribution, sustainable financing and an uncompromising practice of working with the best creative talent available. This allowed us to raise several hundreds of millions in investment capital which was invested, alongside a variety of partners, in such films as Girl with a Pearl Earring, Vera Drake, Hotel Rwanda, Bride and Prejudice, Notes on a Scandal, Hot Fuzz and The Golden Compass.

  The period after 2003 marked a relative boom in the production of British films. It was stimulated to a degree by government tax reliefs, notably at the lower budget end of the market, but was due mainly to equity investment. Much of this investment was attracted thanks to decades' long accounting rules that embodied the principle that investors' losses could, for accounting purposes, be offset against profits. These rules were changed in the Finance Act 2007. The consequences for the raising of finance for independent UK film production have been both negative and significant.

  It is not completely clear what the Committee is referring to in its reference to "long run changes in international film production and distribution", which are many and various. It should be noted that digitization and "digitalization" trigger both positive and negative effects. On the one hand they help industry reduce production and distribution costs significantly; on the other they facilitate "piracy" at the level both of illicit P2P downloading by individuals in their homes, and industrial scale copying by professional crooks.

  In the absence of effective action—nationally and internationally—to combat both forms of "piracy", we are faced with a collapse in profits in the film industry, some half of which have derived from DVD sales in recent years.

3.—Have the 2006 changes to the tax credit system been of benefit to the UK film industry? Have they had a perceptible effect on UK film production? Are the qualifying conditions, including the "Britishness" test, for the tax credit appropriate? Are any types of film or types of commercial arrangement unreasonably excluded?

  The short answer to the main question is that it depends completely on the criteria established for making a judgment. We would say "no", but this response has to be set within the wider context of the tax system as a whole.

  At Ingenious we disagreed with the replacement of a fiscal incentive by a grant to producers. In our view this change was always likely to remove, or at least diminish, commercial incentives. We failed to win that argument however.

  Given that we could not persuade HMT/HMRC to preserve the principle of fiscal incentives, we offered qualified support to the introduction of the film production tax credit. This was in the context of the tax system as it existed before 2 March 2007. The restriction of so-called "sideways loss relief" (SLR) governing individuals in partnerships was introduced on that date by government as an anti-avoidance measure. The new legislation (Finance Act 2007) was both blunt and indiscriminate. It made, and continues to make, no distinction between bona fide investment and tax avoidance. The government rejected a legislative solution devised by Ingenious that would have enabled it not to throw out the baby with the bathwater.

  The tax credit can provide up to 20% of the funding for British films, leaving 80% or more of remaining funding to be raised from private investors. Our experience as investors before 2007 was that the availability of SLR was crucial to attracting the large sums involved in putting together production slate financing. There was a vital linkage here: SLR effectively enabled the larger share of funds to be raised from investors—funds which, in turn, made the production tax credit work. In the absence of SLR, or an equivalent form of relief designed to encourage the raising of high risk equity capital, the production tax credit is insufficient in itself to enable films to be made. This was true even when banks like Bank of Ireland and Alliance and Leicester were still in the film financing business, from which they have now withdrawn.

4.—Is the UK Film Council meeting its objectives of giving support to production and export of British films? Could it do more to assist the UK film industry's contribution to the UK economy?

  The Film Council (UKFC) cannot meet its objectives stated at their most ambitious level because it does not have the levers at its disposal that would be necessary to deliver success. For the film industry to enhance the contribution it makes to the UK economy it would need to benefit from a radically new content investment model, sustainable financing and the capacity to build business capacity. UKFC cannot achieve any of this unaided. There is a sharp disconnect between means and ends in the Council's remit and powers.

5.—Is the current business infrastructure in the UK conducive to the acquisition of the managerial and technical skills required by the film and television industries? Is the business environment conducive to the emergence of entrepreneurial talent, which can take advantage of opportunities in the creative industries?

  The answers to these apparently straightforward questions are far from simple. General UK business culture tends not to look upon creative business, as in film and TV but also music, games and publishing, as "serious" business. This is in marked contrast to the USA where the entertainment industry is mainstream business and can recruit easily from the ranks of the best MBAs. In consequence, we have great difficulty finding business talent to partner with creative talent at the same level of excellence.

  Our answers, therefore, would be "Probably not" and "not really" respectively, but these are very complex issues.

  One of the most promising initiatives in recent years has been the inauguration of the Centre for Creative Business (CCB) at the London Business School under the leadership of Prof. John Bates. This was a collaboration between LBS and the University of the Arts which depended crucially, however, on LBS support and contributory government funding. CCB's failure to attract sufficient funding commitments to continue to operate at LBS is a sad commentary on our priorities in this crucial area of policy.

6.—How successful has the regulatory system been in supporting UK content in television? Are there particular types of programming, such as drama, children's or factual programming, for which more support is needed? Could more be done through regulation or incentives, for example, to encourage non-public service broadcasters to commission original UK content? Might financial measures, such as industry levies, be feasible and effective?

  A combination of Channel 4 and the quota system has been successful in supporting TV content, notably by incentivizing content creators and independent producers through changes to the terms of trade. In this respect the Communications Act 2003 has been a remarkably successful regulatory intervention.

  However, in the commercial sector, broadcasting content providers have historically been hooked on advertising, revenues from which are in steep decline. A combination of falling advertising revenues, new technology (eg personal video recorders), changing consumer behaviour and greater competition for consumers' discretionary leisure spend poses a serious challenge to programme makers in all genres, with falling budgets and higher deficits for programme commissions.

  All television genres are affected, but factual and news genres are particularly vulnerable because international co-production is not an option (as it is in the case of children's programming). Drama programming is also under pressure because the commercial broadcasters cannot afford the steep hourly budgets required to develop quality content. Meanwhile ITV has commissioned and paid for a significant number of dramas that it has not broadcast due to bizarre accounting rules.

THE FUTURE

  The UK is blessed with exceptional talent in both TV and film-making—as in the creative industries generally. The UK film and TV worlds are closely intertwined. Los Angeles is full of British writers, directors, producers and actors working in both forms. It would be folly to throw away this important national asset by not addressing the problem at the heart of the question, which is that audiovisual content businesses are going to find it increasingly hard to finance quality programme-making.

  The holy grail of sustainable content investment—in film and television as well as music, publishing and games—requires a variety of responses. There is an opportunity for independent providers of risk capital to "fill the gap" created by falling revenues in traditional media companies. In the longer term the key is creative business sustainability, a goal which to date has proved elusive. The virtuous circle of sustainability lies in attracting more and higher quality business talent, drawing in more investment, practising the portfolio (or "slate") approach to investing, attracting yet more investment, and so on. We are a long way from achieving this.

  In both the short and longer terms the role of regulation is likely to be critical. We should not return to an earlier dispensation in which talented creators and producers were treated as mere employees and obliged to hand over their rights to their employers. A vibrant independent TV production sector is vital to maintaining the UK's competitive edge in the global market.

  We do not have a position on levies, other than to note that they are universally unpopular with consumers.

  However, we would draw the Committee's attention to the role of tax incentives, notably Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme (EIS), in attracting risk investment to the audiovisual sectors. There is significant potential for enhancing the role that these reliefs play in attracting investors to entertainment funds, but only if the rules that currently govern them are substantially revised. We have made representations to the Chancellor on this subject.

7.—How will the structural changes facing the UK television industry, and particularly the public service broadcasting component, affect UK originated television content? To what extent are these effects irreversible? To what extent are they being offset by changes elsewhere in the creative industries sector? What are the implications for television content creation of digital switchover and widespread broadband availability?

  Again, these are exceptionally complex questions. The role of the BBC will remain crucial in seeding innovative content and encouraging the take-up of digital services generally. The future of TV content development will be determined by which of the other competing broadcast brands are able successfully to transfer to the internet, where quotas do not apply, and to "monetize" programme consumption.

  The Committee asks about outcomes, but the outcome of this process in a converged world is unknowable! It is likely to be determined by a combination of two factors: (a) the tendency of future regulatory interventions; and (b) a global "battle of the brands" for attention and consumer spend.

  The point about regulatory intervention can hardly be overstated. The BBC is itself a historic regulatory intervention. At the other end of the scale the Culture Secretary's recent decision to ban product placement in all UK originated PSB content (as distinct from news, current affairs and children's programming where there is complete consensus on prohibition), is a case in point. The ban will have the effect of demolishing the viability of some new business models, and weakening the viability of others, at a time when ministers are urging creative businesses to be more innovative!

March 2009





 
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