Examination of Witnesses
Mr Martin Smith, Mr James Clayton and
Mr Andrew Noakes
Q785 Chairman: Welcome.
Thank you very much for coming. Certainly two of you have been
here throughout and have heard all the previous evidence so I
will not go through much of the preamble. Perhaps you could just
tell us in a few words a little about both your companies?
Mr Smith: Yes. Ingenious Media
is a financial investment and advisory business specialising in
media, including what we call progressive media, which is those
parts of the media which are at the forefront of technological
change, regulatory change and changes in consumer behaviour. We
invest in what I think it is useful to call the creative content
sectors. As well as film, it is television, music, games, live
events, and we have a number of businesses in these areas. We
have an investments business which James Clayton is the chief
executive of, which is the business of most relevance to the discussion
this morning. We also have an asset management business. We have
a corporate finance business. We have a ventures business, which
is at the small end of venture capital. We have three consulting
businesses which deal with media strategy advice, regulatory policy
advice and consumer facing businesses.
Q786 Chairman: Andrew
Noakes, we met you I think when we came to Pinewood.
Mr Noakes: You did indeed.
Q787 Chairman: Thank
you very much for that visit which was fascinating. To your credit,
you have worked now on every James Bond film since Octopussy?
Mr Noakes: Ten of them in total
out of the 22 that were made.
Q788 Chairman: You were
associate producer on Casino Royale and indeed on Quantum
Mr Noakes: Yes.
Q789 Chairman: Martin
Smith, you quoted a comment in a speech in 2008 from Alan Parker,
that we can never be the biggest film industry in the world but
we should be right up near the top of the league and not permanently
hovering in the relegation zone. Do you think we are in the relegation
zone at the moment?
Mr Smith: I think it very much
depends on criteria. I think there are three verities here which
dictate almost everything that we have to say this morning. It
may be helpful if I underline those. The first is this: Nobody
knows anything", in the famous aphorism of William Goldman,
the screen writer, critic and novelist. What Goldman means by
this is that in the film business nobody can predict what is going
to happen, either in relation to a specific film or even a slate
of films. It is about extreme volatility and extreme unpredictability
in terms of the demand side of the equation. The second thing
isand this is particularly relevant to your questionthe
tectonic plates are moving at the moment in a very specific way.
We have a combination of a structural change in media markets
brought about by the process of digitalisation, which leads in
turn to extreme fragmentation in media markets, combined with
a cyclical change which we all know aboutthe credit crunch
and so onwhich aggravates matters, which means that the
uncertainty which I have just been speaking about from an investor
point of view is even worse than it might otherwise be. The third
conditioning remark is that, it does not matter how brilliant
your script is; it does not matter how great your directors and
your actors are; you cannot do anything if you do not have any
money to invest. What we do is raise funds, raise risk capital,
from around 5,000 investors. It is very difficult to do and we
do it in an environment which is extremely sensitive, amongst
other things, to tax. As we know, the regime has changed. To go
back to Alan Parker's remark, already the context has moved on
since he made that remark. I think already it becomes more difficult
for us to compete in the Premier League, to use the metaphor that
Lord Puttnam used earlier. The corporate or house view at Ingenious
is that we will not be able to compete in the Premier League unless
there is a fundamental change in attitude towards the raising
of risk capital. This does not apply only to film; it applies
to all of the content sectors. Unless in this country we take
more seriously the policy requirement to encourage investors to
come in, unless we have an answer to the question what
is the risk adjusted rate of return that is necessary to bring
investors into the film industry?" we will not be able to
make that move from the Championship to the Premiership.
Q790 Chairman: Mr Noakes,
what is your view about the British film industry at the moment?
At times people appear to be rather depressed about the outlook
for it. How do you view it?
Mr Noakes: It is a rollercoaster.
When we are on a high, we are on a massive high and everybody
is working and everyone thinks it is rosy. There is always going
to be a decline and it just depends how far that goes down. If
it goes too far, there are too many people unemployed. There are
too many people saying that they are not working; it is not a
great industry to be in; it is not a great place to be. The ideal
would be just to maintain a level, whatever that level may be,
whether it be at the very, very top or whether we are happy to
be in the middle. I guess everyone wants to be at the top. What
we need to try to avoid is these peaks and troughs. The troughs
are killing the industry and companies. I know crews that are
now leaving. Certain people have decided they cannot stay in this
industry. It is just crazy. They are up; they are down. They do
not know where they are. Their wives are getting upset with it,
so they are just pulling out. That is enough, thank you."
Q791 Chairman: Your
own James Bond series of films is a bit of an argument against
all that. How long has it been going now?
Mr Noakes: Since 1962.
Q792 Chairman: You have
been through one or two general economic crises in your time.
Mr Noakes: Bond is the most successful
franchise ever. I do not know why. It is brilliant. It is James
Bond. It is English. It is everything that we want it to be in
this room. It is a formula that works. It is a formula that very,
very rarely changes from film to film. It is still the classic
great locations, great looking girls, the cars, the gadgets. We
have pulled away from gadgets at the moment but I think they will
come back. People do like them. Michael and Barbara are very traditional
about what you will see Bond do and what you will never see Bond
do. Sometimes people would suggest it would be great if you could
see Bond in his kitchen cooking breakfast. You never see Bond's
house. You do not want to know where he lives.
Q793 Chairman: Apart
from the characteristics of this wonderful actor, do you keep
the same film team with you?
Mr Noakes: Kind of. It is changing
now. Directors are coming in with their own agendas and their
own power. I think directors are getting more powerful. They are
allowed to bring their own crews in. They have a comfort zone.
Producers will give the job to a director and say, That
is your job. Now you make the movie. We are going to oversee you,
but the creative side is really your baby." He will argue
that he wants a core five, six or ten people, but from our side,
yes, we do keep the same family.
Q794 Chairman: James
Bond is meant to be quintessentially British, is he not? How much
British money goes into this film making?
Mr Noakes: Not a lot. None. It
is completely US financed.
Q795 Lord Maxton: Even
Casino Royale was not made in this country either, was
Mr Noakes: No, but it was made
under a co-production. We shot about six weeks in Pinewood. We
needed the 007 stage. It is a unique stage. It is the only one
Q796 Lord Maxton: The
external shots were all done in Prague?
Mr Noakes: We did a lot in Prague
and the Bahamas.
Q797 Chairman: Was that
right from the beginning? The first James Bond film was also US
Mr Noakes: Yes, very much so. Harry
Saltzman was the original producer and he was an Englishman. He
could not get any finance. He went to the American studios and
he could not. He then teamed up with Cubby Broccoli. He then arranged
the finance through United Artists. United Artists have ever since
basically retained the ownership of their rights. They keep being
bought and sold, but yes, it is always America and America will
receive the funds.
Q798 Lord Macdonald
of Tradeston: Mr Smith, you are obviously not burdened by any
great legacy in Ingenious. You have 5,000 investors. Have they
been investing long enough to see the kind of returns that you
would get from your approach to film financing?
Mr Smith: If I may, I will pass
that question to James.
Mr Clayton: Not quite yet. The
average lifecycle of a film from investment to the end of its
first cycle of economic life is probably six to seven years, so
we are still in the early stages. We can predict with a reasonable
degree of accuracy post-theatrical release what the ultimate revenue
stream will look like, but it is still too early to say.
Q799 Lord Macdonald
of Tradeston: Is there anything you would like to add if you were
able to listen to Michael Kuhn and his analysis?
Mr Clayton: I agree with every
single word he said.
Q800 Lord Macdonald
of Tradeston: There is nothing additional that you would want
Mr Clayton: It is important to
understand that the film business within the UK falls into two
parts. There is the aspect that is funded and driven by the US
studios, for whom the business is global. Then there is the aspect
that is driven by very hard working, tenacious, imaginative UK
producers who are originating and producing their own material
out of the UK. The two are very, very different.
Q801 Lord Macdonald
of Tradeston: It was a certain irony to hear my radical friend,
Lord Puttnam, explaining that he wanted to keep the entry barriers
up through 3D film because it was in danger, presumably, of being
overrun by people who could make films more cheaply. I noticed
in Cannes there were 5,500 films with only 600 released annually
in America. If we have a disruptive technology here that can blow
away a lot of the old structures and the old orders, I can understand
their trying to defend against it, but does this undermining of
an American dominated, international model not give the British
the opportunity to ride the new wave and form our own niche?
Mr Clayton: I do not think it is
us and them. I think 3D is beneficial for everybody. We are involved
with a very high profile 3D movie called Avatar, which
James Cameron of Titanic fame is directing, which is going
to revolutionise the cinemagoer's experience. It is completely
different to anything anyone will have seen before. The point
of that is giving people something in the cinema that they cannot
get anywhere else. There are huge pressures on people's leisure
time, whether it is TV, internet or games. To keep cinema front
and central, we as financiers and film makers need to offer the
cinemagoer something that they simply cannot get anywhere else.
I do think that as the technology improves and costs come down
3D film making will be something that everyone can pursue.
Q802 Lord Macdonald
of Tradeston: I can understand that but with video on demand and
digital distribution and so on, will that not undercut the old
models and therefore offer you the opportunity to try and create
a new model that would give Britain a better chance in the future,
because the wave is unstoppable, surely? You are not going to
hold back the tide.
Mr Clayton: That is right. That
is a very good question. The collapsing of windows is about price
differentiation. You give people what they want at the right price,
when they want it. The great advantage for video on demand and
immediate delivery technologies is that more products can get
into the market place. The challenge is how you market it. There
is a system of gatekeepers at the moment. The distributors decide
what films they want to buy and risk releasing. The cinema owners
decide how they want to programme and the TV stations decide what
they want to buy. With video on demand, in theory anyone anywhere
can make a film and make it available on the internet. What we
will need to see is people actually marketing them in such a way
that we, the consumer, can decide what we want to buy.
Q803 Lord Macdonald
of Tradeston: Can you model that with a potential audience now
Mr Clayton: It is impossible. There
are revenues starting to come through from video on demand. It
is still very embryonic. It is hard to predict to what extent
traditional revenue streams from theatrical and home entertainment
will fall and be compensated by the uptake in video on demand
Mr Smith: I was following the discussion
in the earlier session about video on demand. The business models
for VOD are all still untested, or almost completely untested.
None of these companies that I am aware of is making any money
or certainly not any serious money. It is fantastic for the consumer.
If you want to gorge on Chabral or Eisenstein every weekend, it
is great because you can actually access that long tail, to use
the well known phrase, much better. But for investors and from
a business perspective we really do not know where VOD is going.
Q804 Chairman: Can you
explain briefly the process involved in financing the latest James
Bond film, Quantum of Solace?
Mr Noakes: The studios are pretty
easy to finance. Bond is unfortunately too easy. I will probably
get shot for that. We base ourselves on the last movie. We know
what it took, so we can go to the studio and say, We want
to make the next film." They are going to give us an indication
of what they want to spend on the next one. They will look at
what the last film cost. They will tell us what they want to spend.
We will then start playing around with numbers and then it becomes
a bit of a horse trade. If they say they want to spend 180 million
and act like it is 200 million, we will compromise somewhere in
the middle. They know that they want the product; we know that
they want the product. It is just a matter of finding the right
number that fits for them.
Q805 Chairman: With
this degree of certainty, could you raise the money even in Britain?
Mr Noakes: I do not know for sure
but in all probability. In this case, Sony co-own the rights with
us. We own 50 per cent; they own 50 per cent. The rights are going
back to MGM after Quantum of Solace so we will be dealing
with MGM. MGM could pass it to any studio they like and say, Who
wants to finance Bond?" and do a deal with them.
Q806 Baroness Eccles
of Moulton: On the question of risk and reward, in the previous
evidence it became absolutely clear that the big risk on the distribution
side for big enterprises cannot really be dealt with here in the
UK. We talked about how that could be stimulated on a smaller
scale. From what you have told us about the investors that you
have collected together, that seems to be moving absolutely in
the right direction, but clearly it needs to grow. We were given
an example of the Film Council as being the possible source of
this encouragement. Do you think the fact that the distributors
take the risk and therefore they get the big rewards means that
our producing end is really suffering quite a lot from not getting
a fair cut of the cake and there are more efforts that can be
made in that direction added to the ones that we have already
Mr Clayton: The risk/reward equation
is absolutely at the heart of our investment policy. Assessing
risk in film is tremendously difficult. As Michael said, no one
says nothing but I would like to take Andrew up on his offer!
You could finance a James Bond film in a heartbeat out of the
UK because the track record is unparalleled. There is nothing
else like it. Going back to your direct question, we raise money
from investors on the basis that we pursue a portfolio approach.
That means a blend of studio distributed films worldwide where
you know that you have a partner who is aligned and you understand
the economics of that business; versus supporting the independent
sector and taking more of a view on how well an independent film
will perform. When we assess an independent film, one of the key
things we look forand this is the tension between production
push and distribution pullis how receptive distributors
are to that project. There is a balance between taking money from
a distributor at script stage, which shows they believe in the
project, they are prepared to release it, they think it is going
to work, and sacrificing potential upside from their territory
if it does work, versus holding it back and going for it later
when you hope that you have a film that has exceeded your expectations.
Our view is you have to strike a balance between the two. You
want some distributor buy-in, so that you have sold off some of
your territories to show that the film does have a value. Then
you would also like to hold some back so that if the film performs
you are benefiting from the upside.
Q807 Chairman: We keep
on talking about Championship and Premier League and everyone
seems to agree we are in the Championship and not in the Premier
League. Is most of Europe in the Championship as well?
Mr Clayton: I would not say that
we are any better or worse off than the rest of the European territory.
In some respects, I think the English language is a big advantage
for us because it is something that does sell better internationally
when the films work, whereas local language production is often
generally constrained to its home territory. It is priced accordingly.
Occasionally you have break out films that do translate and cross
over but I think our English language is a huge advantage. A lot
has been written and spoken about the holy grail of the pan-European
distribution business which would go some way to helping create
scale in the independent sector, but for cultural reasons that
is extremely difficult to execute.
Q808 Chairman: The cultural
reasons being language?
Mr Clayton: Yes. The only people
who have successfully pursued it are the studios because they
deliver a type of product that works in any territory: big, event
driven films with stars.
Q809 Chairman: Which
you can dub?
Mr Clayton: Which you can dub.
Typical, lower budget, English films with particularly English
subject matter are much harder to distribute, notwithstanding
the language, internationally unless they have very mainstream
Q810 Lord King of Bridgwater:
We have clarified a lot this morning and you helpfully heard the
earlier evidence. This business about how to help British film
production comes down very much to how you can get more investment
into the original production of films. In your evidence you mention
this issue about VCTs and EIS as well. In fact, the press comment
I have here is that that is looking quite a promising area. How
many people are there like you working in this field? You are
one of the companies trying to rally round investors. Is that
Mr Clayton: A handful.
Q811 Lord King of Bridgwater:
How do they rate? You said you try and tackle 5,000 investors.
Mr Clayton: We have an existing
investor base of around that number, but we raise funds annually,
so with each year the investor base increases. We have current
investors who return and the network grows every year.
Q812 Lord King of Bridgwater:
Have you the material in which they need to invest? In other words,
have you plenty of opportunities for investors or do you not have
Mr Clayton: It is challenging.
One issue that is worth underscoring that Michael referred to
earlier is that there are certain constraints in terms of size
imposed by VCT and EIS rules which make them not particularly
suitable for film investment. The other challenge is we raise
money and then we deploy it. It is fine where we can deploy amounts
with US studios because their businesses are hugely capital intensive
and volatile and their conglomerate parents put a lot of pressure
on them to find co-financing sources that smooth out that volatility.
Finding good quality, commercial UK independent films to invest
in is much more challenging.
Q813 Lord King of Bridgwater:
How many companies are there like you, do you think?
Mr Clayton: Five or six; ten at
Q814 Chairman: When
the rules changed on tax credit, you seemed to be a bit underwhelmed
by that or am I wrong? I think you said in your speech, Mr Smith,
that where private investors previously stood to lose only £60
out of every £100 invested now they stand to lose the lot
in an unsuccessful venture.
Mr Clayton: This goes to the issue
of sideways loss relief". When you are raising money
for investors and trying to encourage them to take the decision,
to take the risk of supporting creative content, which as we all
know is an incredibly risky business, we as fund managers have
to find ways to try and de-risk that investment for them, make
the investment decision as easy as possible. Part of the way we
do that is working with trusted partners, where we have an alignment
with our money and their money. Another way is tax. A lot has
been written about this. I think it is important to understand
that you could use tax to enhance cash flow, perhaps protect downside,
but the investors' overall return always depended on our ability
to choose the right films and make the right deals with their
money. Without that knowledge, without that safety net from tax,
if the films do not work, it is very hardin fact, probably
impossibleto look a sophisticated investor in the eye and
tell them that it is a good idea to back film. Studio films, yes,
because they have a consistent track record of delivering returns.
Independent films? It is much, much harder because you simply
do not know what is going to work. Slum Dog Millionaire
is a very good example. We backed the last two Danny Boyle films,
Millions and Sunshine, both of which lost money.
I am not afraid to perhaps embarrass myself by saying if we had
been presented with that project, a $15 million film with an Indian
storyline with no cast, based on the last two films, I would have
said no, because the risk and the return just did not work.
Q815 Chairman: Had it
been under the old regime, you would have?
Mr Clayton: Yes, absolutely.
Q816 Chairman: In other
words, what you are saying is the tax cushion has gone?
Mr Clayton: Correct.
Mr Smith: I think this is a vital
point because it is the context within which we formed a view
about the film production tax credit. When we discussed with HMT
and others what the new credit should be, it was in the context
of a tax regime which was abolished on 2 March 2007. It is the
relationship between the two which is crucial.
Lord King of Bridgwater: Do we know
what the abuse was?
Q817 Baroness McIntosh
of Hudnall: I think that is where we want to go. This Committee
has struggled over the last several weeks to understand firstly
what was the nature of the tax system that was subsequently abolished
and what were the kinds of abuse that led to the Treasury in the
end deciding that they wanted to pull the rug from it. How does
the new system work and why is it your view, as I understand it
is, that it is a less beneficial system from the point of view
of attracting investment into film? Could you give us a little
seminar on both bits of that as briefly as you can?
Mr Clayton: It is a very complex
Q818 Baroness McIntosh
of Hudnall: We did get that much.
Mr Clayton: The underlying premise
was that if you lost money by taking a genuine risk investment
you could relieve that loss against your other earned income.
You were taxed ultimately on your net position as opposed to your
gross position. Our aim in our business is to create a sustainable
bridge between private investors and creative communities. To
do that you need to make their returns from performance of the
film or the TV programme or the video game or whatever it may
be. It was a sector that really needed policing because amongst
all that you could have vehicles that had a commercial engine
at their heart. Equally, you could have vehicles that were simply
about tax avoidance. Put in 20, you get back 40, no further returns
from the film, end of story, so essentially free money to the
studio or the film producer as opposed to a genuine risk investment
that is seeking a genuine return from that risk. What we argued
for at the time was a pre-clearance mechanism and a purpose test
which would have allowed HMRC and the Treasury to vet the propositions
that were in the market place and give certainty both to the investor
community and the film community. Coming on to the new tax credit,
one of the best things that it has achieved is it has given absolute
certainty. It is in the form of a grant, because it is money that
has gone. Notwithstanding how successful the film is, HMRC and
the government do not participate in the receipts from that. Under
the way we operated, as worldwide receipts came back into the
UK tax net, they were taxed on those individuals who had made
an investment, being the same individuals who would have enjoyed
the tax relief had the film not performed, so there was a symmetry
to it. The film tax credit is fantastic in terms of certainty.
What it does not do is stimulate inward investment from the private
investor community, which is essential if one is serious about
Q819 Baroness McIntosh
of Hudnall: We are struggling to understand why the old system
was open to abuse and what the abuse was. As I understand it,
you are saying, to put it very simplistically, that it allowed
people who really had no interest in the film business and who
were not concerned in any way with the quality of the product
that was going to be produced, who had no commitment to that,
to invest money in any old project, to put it very crudely, from
which they could then get back a substantial financial return.
Is that right?
Mr Clayton: Correct, notwithstanding
Q820 Baroness McIntosh
of Hudnall: Your view at the time was that in some wayagain,
correct me if I am wrong about thisthe Treasury and HMRC
could have taken a position that would have meant there was more
quality control in respect of the kinds of project.
Mr Clayton: Absolutely.
Q821 Baroness McIntosh
of Hudnall: And that would have resulted in a beneficial tax scheme
that delivered more benefit than the current one but was firmly
located in preserving the quality of the product.
Mr Clayton: You have explained
it far better than I did. That is absolutely right and the two
would have been very complementary together. You could have had
investment from the private investor community allied with the
film tax credit, which gets you a long way towards being able
to finance your budget.
Q822 Baroness McIntosh
of Hudnall: If we come on to now, we have a tax system which delivers
certainty in the way that you have described. It has certain aspects
to it about which people are not entirely wholeheartedfor
instance, the cultural test which has certain things attaching
to it which apparently have an impact on co-productions?
Mr Clayton: Yes.
Q823 Baroness McIntosh
of Hudnall: There are presumably other complex, technical aspects
of it which I have not got hold of yet which are different. Is
there anything in the current system that could be modified, as
you see it, from an investment point of view, without substantially
increasing the risk that the Treasury will find itself stuck with
another loophole but which would help with attracting inwards
investment? Martin Smith made the point about the public policy
implications not just about tax credit but about more general
encouragement of investment into the business. It seems to me
you are distinguishing that from simply saying, Put public
money into it".
Mr Clayton: Correct. Within the
framework of the tax credit as it currently stands, no, I do not
think there is anything you could do to attract private investment
into it. While we are on the subject of the tax credit, there
is probably one point that is worth making in terms of its effectiveness.
It is very attractive for the US studios because at its heart
is a core expenditure test based on where your expenditure takes
place. If you are an American studio bringing American stars to
the UK, provided you satisfy your Britishness test, your spend
on those stars goes towards calculating the basis of your rebate.
If you are an independent producer trying to make your film for
the lowest possible amount of money, which often means working
outside the UK because it is a high cost jurisdiction, taking
UK talent and working in, for example, another EU Member State
does not count. That is an anomaly which has caused the levels
of co-production in this country to fall off a cliff.
Q824 Baroness McIntosh
of Hudnall: You do not think that could be modified within the
Mr Clayton: I think that could
be modified to make producers' lives easier, but I do not think
it does anything to help the argument for pulling in inward investment.
Q825 Chairman: If that
anomaly was withdrawn, would that help in terms of encouraging
Mr Clayton: It would help producers
but it would not help investment from the private sector.
Q826 Baroness McIntosh
of Hudnall: From a public policy point of view, what would help
to encourage the idea that a government can do, other than manipulate
the tax system? Mr Smith, your point is we do not take the film
business seriously. We do not regard it as serious commercial
activity. Is that correct?
Mr Smith: It is. It is why the
discussion we have just been having about the film production
tax credit is essentially a discussion about the 17 or 18 per
cent. We do not focus on how we raise the other 82 or 83 per cent.
This is the problem from a public policy perspective. The Treasury,
as far as we can tell, does not engage with these issues at all.
It is very important to understand the idea that we came up with,
when the tax regime was changed in 2007. Bear in mind this is
not about film tax; this is general accounting rules. The Treasury
at the time was not aiming at the film industry. It was aiming
at all sorts of partnerships in timber and all kinds of other
places. There was abuse taking place across the economy. They
came up with this change and we said, Look, oh Treasury.
We understand that you are seeking to eliminate tax avoidance.
We agree with that as a policy objective. We will give you a way
which enables you to eliminate tax avoidance but does not throw
the baby out with the bath water. Here is the amendment. This
is how you do it. You have the purpose test and you have pre-clearance."
I will not go further into the technical details, but that is
a matter of parliamentary record because those amendments were
tabled during the course of the passage of the Finance Bill 2007.
Government whipped against them because the Treasury did not want
to engage on the key issue of how you encourage risk investment
into the sector. The position of the Treasury wasand as
I understand it still remainsthat all we are going to do
on film is in the film production tax credit. We are not interested
in the risk profile of the creative economy as such. The policy
objectiveand I think this is the right questionis
that if, as we are told in the rhetoric of government on the importance
of creative industries to the future of our economy, if we wish
to will the ends of a creative economy which is growing and which
is contributing more to our performance within the global economy,
we also have to focus more on the means, which is how do we get
investors into this sector as a whole. That is what the Treasury
has not focused on and, unfortunately, the Culture Department
which does have an interest in these issues is simply too weak
to get these issues raised at the right level within Whitehall.
That is our perspective.
Q827 Chairman: There
is a fundamental point here. Let us say you are going to get concessions
here and there. Do you believe that it is companies like your
own that have the future of the film industry in your grasp? Do
you think that the film industry is going to be relying on private
investors coming into this area?
Mr Clayton: I would hate to think
that it is on our shoulders alone but I do think private investment
is absolutely essential. The economics of the independent market
place at the moment are such that if you are an independent producer
trying to raise £5 million for your quite British film, international
buyers will by and large want to wait to see the finished product
before they make a decision. They will not pre-buy it, which gives
you a contract you can take to a bank to get discounted. There
is the tax credit which is fantastic in its own way. If you cannot
raise money from strategic partners elsewhere in the film business,
then it all comes down to private equity and private investors
prepared to take a punt on that film's performance. At the moment
in this country that is in the hands of the UK Film Council, BBC
Films and Film 4 and outside that a handful of friends and family
who are prepared to back the film maker's judgment.
Q828 Chairman: And yourselves?
Mr Clayton: And ourselves.
Q829 Chairman: How does
that compare with raising money in the United States? How much
of the money raised depends upon private investors putting money
in? Are there a lot of high value, private investors who do that?
Mr Noakes: In the States, I am
Mr Clayton: In recent years there
has been a wave of what is loosely called Wall Street money that
has agreed to co-finance slates of studio films with studio partners
over a period of two to three years. That money is drying up now
because the markets have turned but the conglomerates, the parents
who own these studios, generally do not like expensive subsidiaries
that consume a lot of capital for a long period of time and have
a very volatile industry. They prefer distribution, where they
are not taking production risk so they are very keen to find financing
partners wherever they can.
Q830 Lord Macdonald
of Tradeston: There is an old saying on Wall Street that if somebody
has gone slightly off their head they have Gone to Hollywood".
In other words, they have started investing in film.
Mr Clayton: It is still true.
Q831 Lord Macdonald
of Tradeston: The people who did invest in film lost their shirts
as well recently, did they not?
Mr Clayton: I am not saying we
know any better but there is a graveyard of investors who have
gone to Hollywood with stars in their eyes and been told what
is a good deal when it is not.
Mr Smith: The hedge funds became
very interested in the last two to three years in Wall Street
and over a period of three years Wall Street hedge funds raised
about $13 billion to invest in slates of Hollywood films. With
one or two exceptionsthe Dune slate is an exceptiona
lot of people have probably lost their shirts.
Q832 Lord Macdonald
of Tradeston: Maybe Her Majesty's Treasury noticed that.
Mr Smith: Maybe.
Q833 Baroness Howe of
Idlicote: You were very much part of the discussion that went
on about reintroducing a levy. What about that as an additional
source of funding? What sort of areas in today's world, rather
than when it was originally evolved, could you legitimately take
a slice of for film production?
Mr Smith: I think it is a very
interesting idea. I followed the earlier discussion with interest
and I think there is considerable merit in going down that road.
However, I do have also to reflect on my time in the 1980s when
I worked for the National Consumer Council in a number of capacities.
Like many Members of the Committee, I remember the great furore
around the proposal to place a levy on blank audio tapes. The
whole of the consumer movement, the National Consumer Council,
Which? magazine, the National Federation of Consumer Groups,
everybody in the world came out against the idea and that is why
it did not happen. Strangely enough, within the political economy
of the UK, the idea of levies is a controversial one. Notwithstanding
that, I think it is a very interesting idea not least because
it would generate not large sums of money but potentially some
money which could be redirected back to producers and provide
some element therefore of sustainable finance going forward.
Mr Clayton: There is an interesting
system in France. I forget what it is called. It applies a levy
to independent French films which is then set aside and available
to those producers for investment in their next project. It rewards
success. It is not a grant that the producer gets irrespective
of performance. It means the better his film does the more money
he has to either develop his next project or contribute to his
next production, which seems to me to be a logical approach.
Q834 Chairman: Does
that mean, if a Hollywood film is shown, no levy?
Mr Clayton: In France it has to
be a French qualifying film to be eligible for the levy. That
precludes most Hollywood films.
Chairman: That sounds very French.
Q835 Baroness Howe of
Idlicote: Thinking of some of the areas which are doing extremely
well like video games, which perhaps once or twice in some less
than desirable areas use films, would that be an area for top
Mr Clayton: I am not sure, to be
Baroness Howe of Idlicote: I will leave
that with you.
Q836 Lord Hastings of
Scarisbrick: If, from your previous questions, levies are a way
of raising money and piracy from your evidence is a way of losing
it, could you quantify some of the scale of what you see as being
lost through piracy and what the trajectory is?
Mr Smith: A very painful subject.
Mr Clayton: We have a live example.
One of the films we co-financed recently was Wolverine,
a spin-off of the X Men series, released at the start of
May. Shortly before release in April, a partially completed version
of the film found its way onto the web. It was downloaded four
million times and Fox, who are our partners on the film, estimate
that it probably knocked $20 million to $30 million off the box
office. It demonstrates that piracy really is a very clear and
present danger. There has been a lot of talk about it and people
have said broadband download speeds do not really permit film
yet. It is not here. It is not with us. It is. I think that is
a big wake up call for the industry.
Q837 Lord Hastings of
Scarisbrick: Would you see a way of charging the broadband providers
because they access the capacity for the download?
Mr Clayton: As you appreciate,
it is an emotive topic for the ISPs because their view is it is
not just their fault. There are some interesting areas for debate.
Q838 Lord Hastings of
Scarisbrick: What would you do about it?
Mr Clayton: There is probably only
a hardcore of consumers who know where to find this material on
the internet. For most people, they probably have to go to Google
first, so to what extent should we be asking the search engines
to take some responsibility for directing people to this content?
Q839 Lord Hastings of
Scarisbrick: Be specific. If you had to frame legislation on this,
what would you want to do?
Mr Noakes: We met with FACT, the
Federation Against Copyright Theft. They put the question out
to a company that did research and they think that piracy is costing
something like £500 million a year. It is a company called
Ipsos which is recognised in doing this stuff, so it is a pretty
good number. If anything, it is a conservative number. You mentioned
the ISPs. The ISP providers get revenue. They advertise on their
sites so when you are about to click on and download Quantum
of Solace or whatever there is all this advertising sitting
around it and they are getting revenue from that, from an illegal
act that they are doing. They know what they are doing because
they can absolutely watch their band width. If any one of us here
is an ISP and we are throwing out two terabytes a day, it is pretty
obvious we are streaming out pirate videos. They do not want to
engage with fact or government. It is wrong. If you know something
is going on, do not close your eyes to it and make money out of
it. You have to be honourable and abide by the law. The government
needs to tackle the ISPs directly, head on, and say, Enough
is enough." You cannot say the blinkers will not allow you
to see around the sides. There is some craziness in the law. We
have a test case where we have had a few guys go into a cinema
and video our film. There is no law against camcording a film
in a cinema. It is absolutely legal. FACT have been advised by
the government that what they should do is try and prosecute these
guys under the 2006 Fraud Act on going equipped to commit fraud.
That is bizarre. You know we own the copyright; we know we own
the copyright. What is on at the cinema is ours and the revenue
should come back to the appropriate party, be it the US studios
or the UK independents. We are happy to have a test case to try
and push this through.
Q840 Lord Hastings of
Scarisbrick: Some people would argue this is inevitable because
of the internet, broadband and IT availability. How do you mitigate
Mr Clayton: I think you can mitigate
it by collapsing the windows, so there are no dark periods. Part
of the problem with piracy is that the film comes into the cinema
and it then goes. If you have to wait four to six months before
it is available on DVD, that is when piracy will be consumed;
whereas, if it is always available but at different price points,
it is like music and finding the point at which people are prepared
Mr Smith: There is a formal answer
to the question which is that what we have submitted to Lord Carter
in the Digital Britain exercise that he is leadingwe, Ingenious
Mediais that there should be a new regime in which the
ISPs have a formal responsibility. We have dreamt up the idea
of connected provider liability, the point being that we want
them to assume a responsibility for what goes out on their wires
for the reasons just mentioned, but also we want it to incentivise
them because they also need to make a penny here and 2p there.
It is about a carrot and a stick. We have to bring the ISPs into
this as part of the solution. I agree absolutely with James. The
answer to piracy is not a simple one. It is not only about changes
in the law. It is about new business models, collapsing the windows
as James has just described. It is a very complex set of issues.
It is also about media literacy. Lord Puttnam has argued many
times that we have to promote a discussion, not just in schools
but within society generally, which encourages people to recognise
the value of the creative content which is being made available
to them so that they do not think it is right just to nick it.
That is really the problem that we are facing.
Chairman: We are interested in what
you have said about Digital Britain because we should have that
in the next couple of weeks and we will see what they say on piracy.
I think we need no persuasion, having listened to evidence from
a number of people, that this is quite a complicated area and
a complex area to take action in. We also note obviously the importance
that various witnesses have put to it.
Q841 Lord Gordon of
Strathblane: In your evidence you say that the Film Council cannot
meet its objectives because it does not have the levers at its
disposal that would be necessary to deliver success. Are you referring
to finance or powers?
Mr Smith: Our view on the Film
Council is that the objectives which it is set do not correlate
means and ends. They are given the task of achieving something
which they cannot achieve because they do not have the necessary
levers at their disposal. They are not able because they do not
have the powers and they do not have the commercial skills, frankly,
to bring in significant amounts of investment.
Q842 Lord Gordon of
Strathblane: What needs to be changed?
Mr Smith: That is quite a big question,
as is the whole question of the nature of the Film Council. In
a sense, you are inviting me to answer that.
Q843 Lord Gordon of
Strathblane: If it could be improved, we would like to know how.
Mr Smith: I would start by asking
the question Which way does the Film Council face? Does
it represent the government to the film industry or does it represent
the film industry to the government?" There is little doubt
in my mind that it represents the government to the film industry.
Certainly if you look at what it was saying about the film production
tax credit and the wider tax issues that we were referring to
earlier in 2007, it was speaking on behalf of the Treasury. That
worries me, speaking personally. It does not seek actively to
promote the view of the industry to government. It does it the
other way round. It does extremely valuable work on what I would
call the supply side of the equation. It does fantastically good
work in training and skills, in the roll-out of digital screen
and so on. All of that is fine. What it does not do, because I
do not think it can, is significantly contribute to the raising
of risk capital. That has to be a task which rests much more broadly
across government proper. That is a Treasury function. It is a
Q844 Lord Gordon of
Strathblane: A Treasury function to raise the risk capital?
Mr Smith: It is a Treasury function
to promote a regime in which it is attractive to invest in these
assets. It is also an issue for BERR and others in Whitehall.
The real problem, if I may say so, that I have with the Film Council
is the way in which it provides a narrative for what is happening
in the industry as a whole. If you look at what it said last year
for example when its annual report came out, it is a Panglossian
view of the world. All is well in the best of all possible worlds,
because actors and actresses are doing fantastically and we are
winning lots of Oscars and so on and so forth, all of which we
agree with on the creative side; but the narrative that they produce
is not an accurate reflection in our view of the state of the
independent UK film industry. It talks up the game. Is there very
much happening in the independent sector at the moment? Not a
lot is the fact of the matter.
Q845 Lord Gordon of
Strathblane: Could it not be argued that in stressing the successes
of the British film industry the Film Council is in fact representing
the film industry to the Treasury and showing what a worthwhile
investment it is?
Mr Smith: I do not have a sense
that, when the going gets tough, it sides with the industry. The
question of the change in the tax rules in 2007 is a prime example.
We fought the battle. We drafted the amendments. We went out and
lobbied for a change which we believed would have a beneficial
effect on the propensity of investors to invest in the industry.
We were not supported by the Film Council. We were opposed by
the Film Council.
Q846 Chairman: Are there
any additional, short points that anyone wants to make? Mr Noakes,
what is your view on the general availability and levels of skills
in the British industry?
Mr Noakes: We have a very great
level of skills. I know Vector have been here and they have been
saying that we should bring foreigners in here. Sometimes you
are going to have to let some foreigners come in. To let ten people
in to employ 2,000 people is not a bad ratio. We are still developing
skills. There is the Production Guild that is doing inward training
within ourselves. There is a bunch of us. The Brits do run their
own programmes. Skillset is a fantastic organisation. It has an
awful lot of cover. I did not realise that Skillset has to cover
many issues, not just film, which is what I am interested in.
The industry is not broken but it could break. There are cracks
and the cracks will either get bigger or smaller. The tax credit
definitely brought Quantum of Solace back to the UK. Without
it, Quantum would not have been in the UK. It just needs
to be looked at. The Germans have a great incentive. They allow
up to 30 per cent of their script pages to be shot in foreign
countries because they recognise films will go abroad. If you
have to shoot the Eiffel Tower, you have to. You cannot avoid
Q847 Chairman: Are the
Germans a big competitor to somebody like Pinewood?
Mr Noakes: Definitely. They have
very big studios in Berlin. The Czech Republic will come in with
a tax break. I hear this from the Czechs. I still talk to them.
When that comes in, they are going to be unfortunately more competitive
than us. Within the studio side, the American studios will pay
a comfort factor. They may pay a million, two or three million,
to come and shoot in the UK because you are guaranteed to get
your movie made here. You are going to get the service. You are
going to get the studios. Nothing really is going to go wrong
here. The tax credit is not changing. It says exactly what it
does on the tin. If you qualify, you will get your money and you
will get it very quickly, which I think is fantastic. We have
to remain competitive. From my side, competitiveness is the biggest
issue. If we do not, we will fall into a slump in a few years'
time. We will not have films. Either the Czech Republic or Hungary
will kick off again. They will get strong.
Q848 Chairman: Who is
the major competitor at the moment?
Mr Noakes: Hungary, the Czech Republic
and America. There are 40 states in America that have different
tax incentives. As soon as one comes up with one, the next state
tops it with something else. There is a little auction going on.
New York has run out of money because theirs was so good that
everyone went there.
Q849 Chairman: And Germany?
Mr Noakes: I did read all the agreements
and I just got so bogged down with remembering numbers. I will
gladly sit down and write up a synopsis of all the various breaks
that are available.
Q850 Chairman: Presumably
that is something you would look at?
Mr Noakes: Most definitely. You
would look at your project and try to figure out where is the
best place to make it, initially for the film and then certainly
for the money. Business people will be jumping as much as the
creative people as to where we should be making this film. If
you have a headline that Australia is giving you a 40 per cent
tax rebate, these guys in America will not want to know the ins
and outs. They will just start screaming at their underlings,
Go and find out. Tell me why I should not be making a film
in Australia." That is their kind of mentality. They will
read the headlines.
Q851 Baroness Eccles
of Moulton: Do we not always have the edge on technical skill?
Mr Noakes: We do. In Prague they
suffer but when we did Casino Royale we took something
like 100 people out there from the UK. We were told we were mad
and we did not need to take so many, but we wanted to. We wanted
our comfort zone and we were still saving enough money to go there
and have our comfort zone. Next time round, you could be taking
fewer. The trouble is you go to a country that is cheap and you
teach them and you will take on two guys that you may need to
do one guy's job. The next time you go there, one guy can do the
job. We are our own worst enemy. We are educating the rest of
Europe. Hungary is massive at the moment and I believe Hungary
is still cheaper than the UK.
Q852 Chairman: These
are some of the things we should look at. Mr Smith, do you have
a last point?
Mr Smith: That is the point. We
have the best technical skills and we have the greatest talent,
but we do not capture the commercial upside in this country. We
must raise our sights higher. We are not happy with the idea of
being consigned to being offshore facilities managers, either
to Hollywood, Mumbai or Shanghai. We do need to build business
capacity. Michael Kuhn is right.
Chairman: We are very grateful to you
for coming today. It has been a very important piece of evidence
and a rather good morning from that point of view. Thank you very