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?
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
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are struggling to transform themselves away from reliance on outdated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 film and television industries
are also both species of creative industry. The UK has an enormous
reservoir of creative talentin 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.
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
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
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.
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
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
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
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
In the absence of effective actionnationally
and internationallyto 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
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
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
investorsfunds 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
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
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
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 UK is blessed with exceptional
talent in both TV and film-makingas 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
investmentin film and television as well as music, publishing
and gamesrequires 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
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
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!