Examination of Witnesses (Questions 1040-1117)
Mr Mark Batey, Mr David Kosse and Mr Danny Perkins
17 JUNE 2009
Q1040 Chairman: Good morning. Thank
you very much. You know what we are doing. What we are trying
to do is to look at the film industry and try and evaluate what
contribution it makes both to the economy and culturally, and
see if there are proposals that we can make to government which
would help that. So that is, basically, what we are about. Thank
you, first of all, for the written evidence, which I think is
very clear. Could I just start by asking you, in a sense, to introduce
yourselves? David Kosse, you are at Universal Pictures, are you
not?
Mr Kosse: Yes.
Q1041 Chairman: Mark Batey, you are
the Chief Executive of the Film Distributors' Association.
Mr Batey: That is right.
Q1042 Chairman: I will come to you,
in a moment, Danny Perkins. Can we start with you? Tell us what
your role is and who you represent.
Mr Batey: The Film Distributors' Association
is the very long-standing trade body for the theatrical distribution
sector in the UK. So the remit is the companies that release and
launch films in cinemas—that initial sector of the market.
As you know, the noble Lord, Lord Puttnam, is our President (we
are very fortunate to have had David for the last six months as
our President), and the Association is formed of 22 member companies
now. I think it was 21 when we submitted our written note a few
months ago, but we have 22 member companies, who, between them,
account for 96 % of cinema-going in the UK. So those 22 companies
are the local UK offices of the six multinational film companies,
and 16 of the independent companies, two of whom are represented
on the panel here as independents.
Q1043 Chairman: In fact, am I not
right, the top 10 distributors have a 95 % share of the market?
Mr Batey: Yes, just about. You find that in
an awful lot of markets, do you not? Even though there is an enormous
choice of films and an enormous supply of films in the marketplace—ten
a week are new releases in this country—the top 20 of those,
normally, account for 45-50 % of gross receipts. There is nothing
terribly unusual about that, but, yes, that is true.
Q1044 Chairman: Is it possible to
divide up how many of those are UK distributors and how many are
in the United Sates?
Mr Batey: Sure. It is a slightly complicated
picture. The six studios, if I can call it that—the six
British offices of the multinational companies—normally
account for approximately 75 % of the market. It varies between
65 and 75 over the year because, of course, it is a very product-led
thing. Normally, those six companies account for around three-quarters
of the UK market.
Q1045 Chairman: Those companies are
Warner Brothers, Paramount, 20th Century Fox, Universal, Disney—
Mr Batey: That is right; those are the six.
Then the other 25 % is hotly contested—
Q1046 Chairman: That is only five,
but there we are. Warner Brothers, Paramount, 20th Century Fox,
Universal, Disney—
Mr Batey: Disney and Sony Pictures.
Q1047 Chairman: Thank you.
Mr Batey: However, that is not the same as saying
that Hollywood has a 75 % market share and Britain has a 25 %
market share, because all of those multinational companies have
long recognised the importance of local product around the world,
and they are all engaged in British, specialised films (Sony Pictures
released The Damned United, for example, a few months ago—the
Brian Clough movie); they are all involved in that sort of niche,
specialised, local sector of the market. The Film Council's own
data for market share of British films last year was 31 %, which
is very healthy. I think it was 28 % in 2007 and 31 % last year.
So that is a pretty healthy figure. Some of that 31 % of British
film production or co-production is distributed by the multinational
companies and some is distributed by local British companies.
It is a complex picture.
Q1048 Chairman: I understand, but
the profits from these big six would go back to the United States,
just like for an English company working in the United States
the profits would come back here.
Mr Batey: Ultimately, it would go back to the
parent.
Mr Kosse: Could I interject? The profits on
films are a complex thing to look at, but the studios usually
take a financing model; they take a financing model in the profits,
therefore there are participants in those profits, who are producers,
actors, writers and directors. So on a British film that is a
huge hit, yes, the distribution side or the financing side of
the profit would come back to wherever that company is. In some
cases it is Japan and in Fox's case it is Australia. However,
the profits from the filmmakers—their side of the profits—go
to wherever they reside and wherever they come from. So in the
sense of something like Mama Mia!, which was a huge British
film that we financed, the profits went to the studio as the financier,
who took a distribution fee and then back to the participants.
Q1049 Chairman: Is there any rough
guide about what percentage of the profit from a film (let us
take a film that is in profit because some films are not), would
go to whom? What percentage would go to the distributor? What
percentage would go to whoever put up the finance? What percentage
would go to the filmmaker?
Mr Kosse: I think the rough guide is the net
usually comes back to kind of 50/50, but it is how you define
the net. So there is not really (I wish there was) a simple guide;
each and every one is a negotiation. The distributor tends to
take, as a service fee for the distribution, between 8 and 15
% of the gross receipts, across all media, as their fee compensating
them for the overhead infrastructures and the risk that they are
taking.
Q1050 Chairman: So 50/50 is not too
bad a working rule for us to have in mind?
Mr Kosse: That is a long, long-standing—that
is going back years and years. But it is how you define that net.
The producer then has to pay, traditionally, their commitments
out of their 50 %. So they might have participations with writers
and directors, there would be resource material if it was based
on a novel or short story and then the residuals to actors, writers,
craft people—all have their fair share.
Q1051 Chairman: In what way do the
United States distributors operate in the UK? How does it differ
from the UK? One, say, is basically, just doing very much the
same job; it just happens that the only difference is ownership.
Mr Kosse: The studios are a very different animal
from the UK independent distributors, but I can let Danny talk
about that more. The studios, generally, are a model as to financing
on a global scale a slate of movies—15 to 20 movies on a
worldwide basis—and source those films from around the world.
For us, many of our films come from the UK; roughly, over the
years, probably five or six movies a year—sizeable budget
movies—get produced here. The UK distributors have to acquire
their films wherever they can acquire or produce their films—from
the UK or from somewhere else. The UK distributors do not have
the production infrastructure of a studio the way we do.
Q1052 Chairman: Let us turn to Mr
Perkins. You are the Head of Entertainment.
Mr Perkins: For Optimum Releasing, an independent
distributor.
Q1053 Chairman: How big are you?
Mr Perkins: We are about 2 % of the market,
and that is on a good day, really. So we are small in terms of
the grand scheme of things but we are a company of about 50 people
now. We have grown over the last ten years buying films independently
and acquiring rights, and developing our portfolio of rights,
and we exploit theatrically, then on video and for television
as well.
Q1054 Chairman: You are UK?
Mr Perkins: We are UK only, yes. The company
was bought a couple of years ago by a French media company StudioCanal,
so we are part of a European group which has distribution in France,
Germany, the UK and Benelux. We are part of that as an independent
financier of films that is an alternative to the American studios.
Q1055 Chairman: Why did you sell?
Mr Perkins: We started the company with two
of us, with very low overheads. We got to a stage where we were
risking more and more money and we felt we needed the security
of a parent company so that we could continue to grow the business
in the way that we were without the risks that were involved.
We had various people that we spoke to from all around the world
and the European parent that we have had a big catalogue of films,
and the security that we have for DVD to pick these films out—1,400
British films that we own. It was just the right way of us growing
the business.
Q1056 Chairman: In your judgment,
is there any way that a UK originating company could ever become
a sort of competitor to the big distribution companies in this
country?
Mr Perkins: It would have to work alongside.
We share the same language as Hollywood. That is a good thing
and a bad thing, I suppose, really, in that Hollywood films will
dominate the market. A company, to grow to that sort of size,
would have to work with the studios and with the bigger players
in the market. From scratch it is a big ask. There are some very
strong independent companies but they have alliances with American
companies. That is the key to it, really.
Q1057 Chairman: So, frankly, the
chances of a Warner Brothers or a Paramount or a Universal being
created in the UK are not so great?
Mr Perkins: Not great. I would love to say that
they were, but no.
Q1058 Chairman: This is my last question:
in the negotiations with the distributor, presumably, the film
itself, and what slice goes to these people who made the film,
etc. is going to very much depend on the perceived popularity
of that film. In other words, if I come to you with James Bond,
I am negotiating from strength.
Mr Perkins: Absolutely.
Q1059 Chairman: However, if I come
to you with Barton Fink, that may be another matter.
Mr Perkins: I think we can sit here with a great
example over the past twelve months of Slumdog Millionaire,
which was financed by Channel 4. The American partner in the film
was Warner Brothers, which pulled out of the film, and they had
to sell the US rights on the finished film, so Fox were able to
pick up the film in the US, having seen it, and it won eight Oscars.
It has taken a fortune worldwide and that is British filmmaking
talent and British writing talent, and I think it is something
to be proud of that films can come from here at all sorts of levels
(last year, with Mama Mia!—British talent) and create
a huge success, a phenomenon, and then Slumdog Millionaire
coming along and working around the world. We have seen, with
things like The Last King of Scotland and The Queen
in the last couple of years that British films from here that
are not big blockbusters, unlike Bond or Harry Potter,
can work internationally very well and can be commercially and
critically successful. There are great opportunities in the market.
Q1060 Chairman: Commercially successful.
It depends how you define it, does it not? Commercial successful,
comparatively, but the big profits are probably not being made
by the filmmakers.
Mr Perkins: I think The Queen is a great
example of a film that, right up until release, might have been
a television film—it might have been shown on ITV—but
it took $55 million in the US and won a hatful of awards. The
money that it made then on DVD, the people involved in that film
did very well out of it. So there are opportunities.
Chairman: Thank you.
Q1061 Lord Inglewood: I hope you
will forgive me; these questions are particularly directed to
Mr Kosse and Mr Perkins. What does a distributor do? Clearly,
you often provide money and help produce a film but then you actually
physically distribute it and promote it. Can you describe, simply,
what it is that you actually do under the umbrella of the description
of being a distributor?
Mr Perkins: In its purest form it is acquiring
rights and exploiting them—making as much money from those
rights as possible, so those rights can be theatrical, which is
the release in the cinemas, DVD or home videos (home entertainment
rights) and television rights, and it is the distributor's job
to make those rights as valuable as possible. So he is investing
money in advertising, publicity and promotion; when you put the
film on at the cinemas it is negotiating with the cinemas; it
is making people interested in seeing the film and then, hopefully,
making enough noise and attention about the film so that people
are then interested in buying DVDs of it, which is really the
commercial driver—certainly for the independent sector—and
then the television rights as well would have a higher value if
you have been successful in the other ancillaries.
Q1062 Lord Inglewood: As a source
of finance, on occasions, you are also in the business of creating
the very rights you subsequently sell.
Mr Perkins: Yes, and in that sense we would
be investing against our perceived value for the film on its release.
Obviously, the more risk we take the earlier we get involved in
a project—whether it is a premise or a script or a film
that has been shot and needs money—then we get a bigger
share of those rights.
Q1063 Lord Inglewood: You analyse
it on a completely hard-nosed basis.
Mr Perkins: Yes, I think we have to. The market
is too cut-throat to indulge ourselves; it is about the film delivering
and people wanting to see the film. In some circles people think
it is vulgar to talk about the business being a commercial success,
but I think if a film is commercially successful it means that
people have seen it and I think any filmmaker would want their
film to be seen by as many people as possible.
Q1064 Lord Inglewood: Is that the
same for Mr Kosse? You are operating on a bigger canvass.
Mr Kosse: It is quite similar. We tend to look
at things on a hard-nosed basis but, at the same time, we do things
for relationships. It is a business for relationships, occasionally,
and you take a risk on a film; if you have had two or three successes
with a filmmaker and their next project is more risky than their
last you tend to factor that into your decision making to provide
support. So if we have made four or five successful films with
a filmmaker we will tend to make that filmmaker's next movie even
if it does not look as safe a bet as the last one. I would like
to make a point, if you do not mind, about the profits. The way
it works is that the profits follow the money invested in the
talent. That is where it goes to. So the distribution that is
done is a labour-intensive and capital-intensive business that
tends to generate a fee. It costs a lot of money to run a distribution
company, both in the UK and around the world, and what we do as
distributors is create awareness . We go from having no one aware
of a film to trying to get about 70 % of the cinema-going public
aware of a movie coming out in a week, and wanting to see it,
which requires a great deal of investment in advertising, most
of which goes on ITV and Channel 4, in the outdoor and on the
Underground. So there is a huge amount of support for that. But
the profits go to the people who finance the movie. If the next
Harry Potter was financed out of the City completely and
all the talent was produced here and all the talent was done here,
you would have every studio in the world biting your hand off
to distribute that, the way that, for example, the Star Wars
deals were done by Lucas Films, where Lucas Films controls it
and Fox distributes it for a very, very low fee because the revenue
potential is so high and they want to be able to have that film.
It is not really, necessarily, as obvious as who the distributor
is; you have to look behind them at who is the financier and what
are the deals.
Q1065 Lord Inglewood: However, you
guys are the gatekeeper to the income that any film might produce.
Mr Kosse: We are one of the collectors. There
is a series of gatekeepers; there is the exhibition where, in
this country, it is controlled by three players, basically, who
dominate the market. They are collecting the receipts first.
Q1066 Lord Inglewood: You negotiate
with the exhibitors.
Mr Kosse: We negotiate with the exhibitors but
they collect the receipts first, they pass them on to us and we
are passing them down to the filmmakers.
Q1067 Lord Maxton: Are in involved
in any way with the exhibitors? In other words, are you shareholders
in the company?
Mr Kosse: Do we have ownership? We do not have
any ownerships.
Q1068 Baroness McIntosh of Hudnall:
If you are a filmmaker, whether you are Stephen Spielberg or you
are some guy none of us has heard of yet who is making their first
film, the relationship with the distributor is a very critical
relationship, is it not? Mr Perkins, looking at the information
we have, it is clear that, although you only have 2 % of the market,
you have relationships with some very strong filmmakers. What
is it about what you do for them that would make them come to
you, and make that relationship with you, rather than going to
one of the Hollywood distributors? What are the benefits of what
you offer? Is it just about how much they can retain of what they
earn, or is something more complicated than that?
Mr Perkins: I think it is different in that
a lot of the filmmakers who work with us do so strictly within
the UK. I think, with Universal, it would be an international,
global deal, and I think they would make a lot more in that sense.
We have worked with some great people and we have worked with
some real talents, and I think that we are very open and transparent
as a company. In the independent sector, some of our competitors
are not the most honest companies in the world (I probably should
not say that for the record), but people come back to work with
us because they enjoy the experience, and I think we get close
to the films, we care about them and they like the passion that
we have for the films.
Q1069 Baroness McIntosh of Hudnall:
Can I just interrupt you? A cynic might imagine that a distribution
outfit of your scale would be picking up what the larger guys
do not want. Is that the case, and do you build your relationships
out of being, in the end, the only people who will take something
on?
Mr Perkins: Yes, you could look at it like that,
but I think the fortunate thing is that we have built a business
over ten years with the "scraps" that are left on the
table. The nice thing about the business is that it is not an
exact science and there are films that people do not see the value
in, but we can, and we can carve a niche by doing that. Even in
the past year, with something like The Wrestler with Mickey
Rourke, people did not want that film at all and it was a struggle
to finance it. We got involved at an early stage, helped to sort
it out and it became a film that resonated around the world and
delivered for us really well in this market. So I think you could
look at it that way. The great thing about British audiences is
that they do want different things. If you boil it down to an
exact science you would say there is no room for the independents
because the studios can cater for every taste and every genre
of film very effectively, and what I think is that the audience,
if you deliver a closed shop, will look out around the back for
something different. They want something original and unique,
and whether that comes from another country, in another language
or it comes from a British film that is made on a low budget in
a digital form, then I think audiences want unique vision; they
want something different.
Q1070 Baroness McIntosh of Hudnall:
Just to go back to something you said earlier when you were asked
about whether your decisions were hard-nosed, both you and Mr
Kosse said yes, they were, and you, I think, said: "We can't
afford to indulge ourselves".
Mr Perkins: Yes.
Q1071 Baroness McIntosh of Hudnall:
It sounds to me as though, to some extent, you not only can but
must indulge yourselves in judgments which other, perhaps, more
commercially-driven distributors are not prepared to go with.
Is that fair?
Mr Perkins: I think the level of investments
that an independent would make means you can afford more risk
because there is less financial commitment in the scale of a project.
I think we can take risk. We have had a good run in that our taste
is in tune with a proportion of the market, and I think that is
what we try and do. We absolutely will do something—sometimes
it is a gut instinct but it is only backed up by the numbers that
we think the film will deliver.
Q1072 Chairman: To a large extent,
this part of the function is rather like a book publisher, is
it not, in which you go to Harper Collins and they say: "We
don't actually think there is much in this", and then you
go to the small publishers and somebody picks up a worldwide best
seller.
Mr Perkins: Absolutely, and that is why it is
such an exciting business, I think, because you can have examples
like Slumdog Millionaire. There is one every year, almost,
it seems, which is great, but there are films that come from left
field, and it could be a timing thing or it can catch the mood,
and I think that is the opportunity when an independent can move
at a faster pace than a bigger company.
Q1073 Lord King of Bridgwater: We
are looking at world power lines and how one could see what levers
might be moved that might help the British film industry more
and make a contribution to the British economy, among other things—quality
of life. The people who seem to be left out of this, at the very
end of one of your submissions here, are the exhibitors. Do they
have any power in this? We have talked about distributors and
we have talked about filmmakers, but what about the people actually
showing the films?
Mr Perkins: Power in which sense?
Q1074 Lord King of Bridgwater: Leverage
or negotiating power.
Mr Perkins: Absolutely. Yes, they can decide
what—
Q1075 Lord King of Bridgwater: Or
are they continually at the mercy of the distributors who have
got the best films?
Mr Kosse: I think, in this country, we have
got one of the most consolidated exhibition sectors in the world.
Q1076 Lord Maxton: What about the
small independents?
Mr Kosse: Small independents are a very small
part of the market in this market, but you have got three players
that most of the world—
Q1077 Lord King of Bridgwater: Sixty
% with three people.
Mr Batey: Seventy %.
Mr Kosse: In most of the world you have the
top players—on average it might be seven—comprising
40 %. So those three exhibitors have a very, very strong negotiating
position. However, in terms of influencing the films being made,
they have very little influence.
Q1078 Lord King of Bridgwater: What
they are very tough on is the reward you can get for what you
have influenced.
Mr Kosse: And the conditions in which the UK
consumer sees cinemas: the condition of the screens, the condition
of the seats, the amount of advertising, the concessions; they
have a lot of control in the cinema-going experience: the quality
of the images. We deliver them a print or a digital master. They
have that final step in actually creating the environment for
that experience, and that experience can vary dramatically, depending
on their investment.
Q1079 Baroness Scott of Needham Market:
I really am still trying to understand what it is exactly that
you would see in a film that would cause a larger organisation
like yours to reject it, and yours (you described it as) "picking
up the crumbs". What is it exactly that you would spot in
one of those films that would make you choose it? To what extent
is it about your ability to market it rather than some intrinsic
quality of the film itself?
Mr Perkins: Every case is different, but it
can be that we see an opportunity in a film—the way that
we can position a film—that other people might not. The
independent sector is very competitive. The UK marketplace is
one of the most competitive markets in the world in terms of films.
The studios are very strong and they are active on big films and
they are also active on acquiring independent films. The independent
sector is very strong; there are some really good companies there
who are very well capitalised, and we have a condition where we
get the lowest rentals in the world from the cinemas, in terms
of the share of the ticket price that we get, but we have the
highest advertising costs. So when we look at our contemporaries
from other markets in France and Germany they find it incredible
how we make a business out of it. I think the interesting thing
for us is that despite all of this there are opportunities, and
there are films that sometimes we are surprised that other people
have not gone for that we see the value in, and that we put our
faith in and our money behind it, and try and make it a success.
Q1080 Lord Macdonald of Tradeston:
Going back to exhibition, why is it that, for instance, you have
got Odeon and Cineworld and yet there is, probably, each week,
a 90 % overlap of them showing the same films? That does not sound
very competitive. What is going on there?
Mr Kosse: They are both demanding the same films.
Mr Perkins: In terms of exhibition, the cinemas
are all owned by venture capitalist groups and they have very
stiff targets to deliver, and films are booked on the numbers,
on the performance that they think they can make from each screen
of the cinema. So we do not get any kind of special—we do
not expect any kind of special—conditions. You have to deliver
an audience, so another print of Harry Potter in screen
six as well as the ones in one, two, three and four would make
more money. You cannot blame the cinema for playing it because
they have to deliver their numbers as well.
Q1081 Lord Macdonald of Tradeston:
Let me take it one stage back then. I read in The Economist
that at Cannes this year there were 5,500 films on offer and,
perhaps, 600 each year would go into exhibition in the United
States. So that implies that 90 % of the films there will not
get a proper exhibition. Then, when we have only two multiplexes
in a large town, they are showing the same films. That sounds
to me like a market failure.
Mr Perkins: I think that is one way of looking
at it. However, the films have to deliver an audience. You could
very fairly say that those 5,000 films in Cannes we will allocate
to UK screens and we will play all of those. Having seen a lot
of those films, there are films that do not deserve to be seen
on a big screen in the UK, quite simply because they would only
be seen by the staff of the cinema; you would not be able to pay
someone to go and see some of the films. That is an extreme, but
it is hugely difficult for an independent to get into a cinema.
You can sympathise with them because they have to deliver, and
they will play the bigger films and they will play them in four
or five of their screens so that they can start every half-hour
so that someone turning up at a cinema does not have to miss a
film. It can polarise the audience in that every week there are
only one or two films working, and the concern is that people
do not expect any choice from cinema but the hope is that there
are still these independent successes that can come through, and
I think that shows that audiences do want choice and they do not
want to just see "A N other" bigger film and that there
is a broader audience there.
Q1082 Chairman: You said in passing
about the ownership of the three cinema groups and we have established
that it is a very consolidated industry.
Mr Perkins: Yes.
Q1083 Chairman: Who are they owned
by?
Mr Perkins: Odeon is owned by Terra Firma which
is a venture capital group.
Mr Kosse: Vue is owned by the management.
Q1084 Chairman: Are they all private
equity owned, is that what you are saying?
Mr Kosse: Yes. One is publicly listed; Cineworld
is publicly listed.
Q1085 Lord Inglewood: It sounds from
what you said that if a film cannot get a distributor it is not
going to be seen in any cinema group.
Mr Perkins: Yes.
Q1086 Lord Inglewood: Therefore the
distributor is important to the process as you described of disseminating
the film, and the names at the top of the table which have the
majority of the films are names that we all know, but those names
at the bottom are names really that many of us have never heard
of. Is it (a) easy to break into the distribution world, and (b)
is there a lot of churn?
Mr Perkins: You can get into the distribution
world but whether you can do that with any kind of longevity,
that is harder and it is a tough market to get into, it is a very
competitive market, and it is tougher now than ten years ago when
we got into it. In terms of churn you often find that producers
who cannot find distribution for their films will raise additional
money and self-distribute their films. I cannot think of any recent
examples of that being a success; there is a certain art to distribution
and you need those relationships and that experience to deliver
success in the market.
Q1087 Lord Inglewood: Is it in effect
a closed shop?
Mr Perkins: It is not a closed shop but if you
want to build something significant it is difficult and takes
time.
Mr Kosse: You certainly need reserves of capital
because as we saw with the top films generating most of the box
office, it is a hit business just like the music business used
to be and like the book business is as far as I know.
Q1088 Bishop of Manchester: Slumdog
Millionaire has been mentioned several times this morning
and we have been told in previous evidence that this is the only
example of an Oscar-winning film being wholly funded from within
the UK. Do you agree with that, and if that is the case do you
regard that as a one-off or do you think there is a possibility
that that will be a pattern for the future?
Mr Kosse: I do not know if it is the only one;
I do not know who Chariots of Fire was financed by and
how we define this thing of "wholly financed" is very,
very tricky, it is such a patchwork of finance. I would not be
able to predict the future on something like that but just to
clarify the point of view I have in terms of the scraps—independent
distribution is referred to a picking up the scraps—if you
take just about any project to the studios, with defined terms
for that project, half of the studios probably want to make the
movie and half of the studios would decide it is not worth risking.
If you took it to half the independents in the world, half of
them might like it and say they want to do it but half of them
might not see it. The studios do not have unlimited resources,
unlimited time or unlimited knowledge as to what is going to work
and everyone pursues their own strategy. People miss things and
sometimes they miss things like Slumdog Millionaire. Maybe
it is not in their business plan, maybe it is not in their strategy
to go after lower budget films because they do not have the resources
to pursue that. Maybe they have other agreements or arrangements
with producers that are using up most of their resources and they
do not want to get distracted by pursuing a film with a slightly
lower budget. Throughout the history of the business there has
been ample opportunity for the independent producers to find big
gaps in the system; it has been around the world since the movie
business began, there has always been independent production and
distribution that has risen and fallen based on different country
and different financing models that have come about.
Q1089 Lord Maxton: So far we have
been talking about the theatrical showing of films but are you
involved—you certainly are Mr Perkins—in what I would
call the levels down from that which are the DVD market, the television
pay to view and then if you like free to view and then of course
download through the internet on computers. Are you involved in
all those levels and what is the income stream from each of those?
Mr Kosse: Yes, we are involved in all of those,
we are in all rights and we own the catalogues. That income stream
changes by country and in the UK the DVD market is incredibly
important. With most films, if you put aside the cost of production,
it is very difficult even to recoup our expenditure on theatrical.
We might break even unless the film becomes a huge breakout hit,
say over £7-£8 million, and then a very profitable window
comes in and that is the DVD window which is under pressure due
to the closure of Woolworths among other things; that market is
therefore under a lot of pressure. Then it goes to television,
and that is where we capture most of our most profitable revenue
because there are no expenses associated with it.
Q1090 Lord Maxton: Is the DVD market,
like the CD market, going to be under pressure from the internet?
Mr Kosse: From the internet absolutely and from
piracy.
Q1091 Lord Maxton: But sale on the
internet is important, is it not?
Mr Perkins: The problem for the business is
that the DVD market is starting to decline now and there is a
move to electronic sell-through, to titles being available to
download. The problem for the industry is that the cost of digitising
all the content and making it available on the internet at the
moment is prohibitive compared to the business that is actually
being generated, so there will be a painful couple of years where
the market is not that big in terms of download revenue but the
cost of entry to that market is. That is what the industry is
going to go through in the next two or three years and the financial
model has to change slightly to account for that.
Q1092 Chairman: Mr Batey, you said
in your written evidence to us that the UK distributors invest
more than £300 million a year in releasing films. Presumably
that includes advertising for example.
Mr Batey: Absolutely.
Q1093 Chairman: Break down for me
the £300 million.
Mr Batey: Advertising is the major part of that
expenditure as we have already established. About £170-£175
million of that is media investment if you like, so the money
paid for spots on ITV, Channel 4, in magazines, posters and everything
else. About £120 million or so at the moment is the physical
print cost, whether that is trailers, the 35mm prints or the digital
prints and so on going out to cinemas week in and week out. There
are additional costs as well such as premieres, which are enormously
expensive. There is an average of a premiere a week in London
which is great for the citizens of London who were able to shake
hands with Shia LaBeouf and Megan Fox the other night, it is fantastic
for people that have access in London but it is actually an enormously
expensive thing to do and you do not necessarily get the media
coverage that you need off the back of it. That is another expensive
part of releasing a picture theatrically. If you look at it in
the round, the box office receipts in the UK were around £850
million a year last year and distributors are putting in £300
million to bring their titles to market. The £850 million
gross receipts include VAT and so on. The theatrical sector in
the UK is broadly—and obviously this is a huge generalisation—break
even, it broadly washes its face, and DVD over the last ten years
has been the cash cow that has driven revenue. The prices of DVDs,
as you can see yourselves on the high street with the prices you
are paying, are going down and the revenue from that important
slice of the market is declining and the rise in online purchasing,
downloading and so on has not yet at all anywhere near made up
the difference. It is a tricky model.
Q1094 Chairman: The £300 million
is in addition to anything you as the distributor may put into
the film itself.
Mr Kosse: Yes, it is in addition to the inward
production.
Mr Batey: That is right, that is the release
cost in the UK.
Q1095 Baroness Eccles of Moulton:
We have covered quite thoroughly the relationship dealing with
six big companies and distribution in the UK, but just one point
of clarification before I go on to ask you a question. They seem
to be collectively described as Hollywood-based but I have noticed
during our conversation that Japan was mentioned in relation to
Sony and Australia in relation to 20th Century Fox, so would that
mean that those two could then be described as Hollywood-based?
Mr Kosse: Columbia Pictures is only releasing
in the studios owned by Sony Corp but their headquarters and most
of their staff are certainly based in Los Angeles and they are
part of the Hollywood community. 20th Century Fox is owned by
Newscorp and again they are based in Los Angeles. Most of our
business is very people-dominated, people-driven and the executives
and people are part of the Hollywood community. Paramount is owned
by Viacom; Universal is owned by General Electric and Disney is
owned by Disney.
Q1096 Baroness Eccles of Moulton:
I understand; that is the situation. While we have been discussing
this subject generally there has been an impression gained that
it would be very good if more of the ultimate profit and revenue
from film could stay in the UK and there is perhaps more in this
connection that is being claimed by distributors. I wonder whether
Mr Batey has any thoughts about what could actually be done in
order to shift the balance, if such a thing was possible, so that
it is going to be possible to retain more of the ultimate revenue
for UK companies
Mr Batey: Do you mean UK productions or UK-based
distributors?
Q1097 Baroness Eccles of Moulton:
Whoever actually is UK-based and has invested in a film at any
stage in the process.
Mr Batey: It is a market driven thing, unfortunately.
It is going to be very tricky, it varies according to the film.
Q1098 Baroness Eccles of Moulton:
Mr Perkins, do you have any ideas in this direction?
Mr Perkins: I do not really. The fact is, as
David explained, the money follows the talent really and the amount
of British writing talent and British source material, everything
from the Lord of the Rings, Harry Potter, Bond films,
the Aardman films, have been phenomenally successful on a big
scale. Mamma Mia had British writers and there is a lot
to be proud of. Film is an international business and you cannot
be territorial about it. The fact that independently things like
The Last King of Scotland, The Queen and Slumdog Millionaire
have broken out and been successes around the world shows that
at every different level there is a lot of talent in terms of
writing, film-making and production talent to be excited about
the UK. It is part of an international business and if good films
can make money around the world the money will follow the talent,
whether it is a writer or a director. The ownership of the companies
involved in making that money is something that is established
and it is difficult to see how that can be changed.
Q1099 Baroness Eccles of Moulton:
It is a very deep-rooted culture and there would need to be a
cultural change so that perhaps investment could come from other
sources in order for more to be retained here.
Mr Kosse: It is very difficult to pinpoint and
say "put the money right here and this will change it".
A lot of the steps that have been taken by the Film Council about
the tax credits over the past decade have encouraged a broader-based
industry production which has ultimately delivered some of the
successes we have seen over the last five years. By having the
training, by having the inward production, having not just American
companies but companies around the world making films here and
using British talent and craftspeople in studios, rather than
making them in Budapest or in Prague, trains a base of craftspeople
and gives the industry more opportunities to ultimately develop
new talent relationships and new material that they then will
have an ownership stake in. Again, I do not know how it would
work but it is interesting that certainly a significant proportion
of all the studio slates over the past several years have been
financed through private equity, coming out of New York or in
some cases out of India or the Middle East. Private equity has
been a significant part of the studios' financing slate and—I
do not know because I am not that detailed in this but I suspect
that very little of that has come out of the City of London. American
and global financiers have taken a stake in the movie business
and they take an equity position.
Q1100 Chairman: Private equity is
not normal private equity that you are talking about there in
which it takes a stake in the company, it is actually taking a
stake in the film, is that right?
Mr Kosse: It takes a stake in a slate of movies
and as part of that stake it has conditions with us and we are
able to take a distribution fee for our services.
Q1101 Baroness Bonham Carter of Yarnbury:
Just as a point of information, Mr Perkins, you mentioned Aardman;
am I right in thinking that they had a relationship with an American
distributor or a studio and then that came to an end? Can you
just explain why that happened?
Mr Perkins: They had a relationship with Dreamworks
and they co-financed films with Dreamworks. Dreamworks Animation
went through some changes and Aardman have done a new deal with
Sony now, so they will have the rights to the next films.
Q1102 Baroness Bonham Carter of Yarnbury:
Were they for the moment left high and dry by this relationship
having broken down?
Mr Perkins: They came to the end of an arrangement
and they were open to new opportunities.
Mr Kosse: I do not think they were high and
dry, I think they were being courted.
Q1103 Baroness McIntosh of Hudnall:
I just wanted to go back to something you were saying right at
the beginning about how the net profit works. We know that the
net profit is a very mysterious thing but let us say that there
is a net profit from a movie, it gets distributed as between the
people who do what you do and the people who make the film. One
of the things that seems to be emerging from the sort of evidence
that we have had from film makers is that the most difficult thing
is for the originator of a film to hang onto enough of what they
own in terms of rights to be able to generate funds that will
then fund their next film or their next slate of films. Within
that, it has to be said, the distributors are often fingered—probably
quite wrongly—as part of the problem rather than part of
the solution because they are so important to getting the film
made in the first place that maybe the deals are quite tough.
Do you think that is fair from either an independent or a studio-based
perspective?
Mr Perkins: It is fair. Often in the independent
sector people will be keen just to get a film made and certainly
in the early stages of their career they might surrender some
fees within the budget so that they can actually make the film—it
would be better to be paid something for making it than not making
anything at all. We have been involved in a scheme called Warp
X which is ourselves as a distributor with the Film Council, Channel
4 and some regional screen agencies as financiers and we have
changed the model of the back end of the films. It is low budget
films, all less than £1 million, but the film makers could
come in and they would know that their film would have a UK release
through us, it would be shown on Channel 4 and it would be fully
financed, so it is kind of a mini studio. The back end of that
was changed so that the talent, whether it be the actors or the
directors, got a similar deal to the top end of the scale when
they talk to someone like Steven Spielberg or Peter Jackson, will
earn money from the start—as soon as the film starts earning
money they will be earning money. It is much smaller figures but
it is a different way of looking at it, to protect people in the
early parts of their career and build a relationship with them
in a different model. We have looked at that on that scale, but
our investment in slate films is not that big so we can afford
to be different with it. If we are investing a lot of money in
a film then we need to be in a position to get that money back
in the first place.
Chairman: We are coming to the last 15 minutes
and we have still got quite a lot of things to cover. Lord Macdonald.
Q1104 Lord Macdonald of Tradeston:
America has been dominant for the last century in this industry
and America has always protected its position in the global industry
very aggressively—indeed, you have still got on your books
the Webb-Pomerene Act of 1918 which allows you to form export
cartels outside your home market and distribute films in that
way. I am just thinking of the reciprocity here. It is very difficult
to challenge American dominance and American films give us great
pleasure, but how does British film fare inside this global deal
that is going on. What percentage of US box office is collected
by British films?
Mr Kosse: I run the international side of Universal
Pictures based here so I do not really look very closely at that
percentage. I would have to venture a guess that it is quite small
and it would depend on the year, but given that last year one
of the most successful films of the year was Slumdog Millionaire
you do occasionally have breakouts, but I would say less than
five %.
Q1105 Lord Macdonald of Tradeston:
You do have an enormously powerful negotiating position with a
century of momentum and all that money and expertise behind you,
so that has given you, obviously, a degree of resentment in many
markets. Is there anything changing in the traditional relationship
between the studios and the film makers in a country like Britain?
Mr Kosse: The relationships between the studios
and the film makers around the world are very, very strong. All
the studios have been pursuing more and more local productions
over the last five or six years and in Universal's case, going
back to the time when Universal bought Polygram, there has been
an ongoing and consistent investment in British film and in our
relationship with British film makers. If you qualify British
films as things like Harry Potter or the Bond movies, they
are forces to be reckoned with within the US market and the global
market. I do not sense the same animosity, I guess, between the
studios and the local film makers or the local film markets that
you know.
Q1106 Lord Macdonald of Tradeston:
If you have deals with British production companies, in how many
of those is there a clause that says "When you have made
this film we will get you an exhibition in the United States"?
Is that an important factor?
Mr Kosse: That would be done on a film by film
basis if we bought the British rights. If we were making a film
like Mamma Mia our investment in that movie is so large
to begin with for production investment that I do not think the
film makers in most cases need that kind of reassurance contractually
that they are going to get paid. They know we have just spent
so much money we need the US market to work to recoup our costs.
If we pick up a small independent movie, if we were thought serious
about buying Slumdog Millionaire after it has finished,
clearly the release commitment would have been part of that negotiation,
that is unfinished film.
Q1107 Lord Macdonald of Tradeston:
To Mr Perkins if I may, if you accept my former analysis that
if you have got 5,500 films at Cannes and only one-tenth of those
get exhibited in the cinemas so you have a basic overlap, that
seems to me to be a market failure in that there are bottlenecks
that should be cracked. Will the technology crack those, will
digital distribution crack it and will people like yourselves
be able to challenge better the majors who are at present dominant?
Mr Perkins: I hope so. With digital there is
an opportunity because one of the barriers to entry for a distributor
is the cost of the physical film prints. When we talk about £300
million being spent, a lot of that is on film prints. A film print
is probably around £600 to £800, for the physical print
that is shown through a projector in a screen. A digital print
could be around, say, £200, so there is a cost saving there.
In terms of our negotiations with the cinemas, if we have invested
that money in a physical print we want to get the most return
that we can so if we were in a screen we would say we want to
be on every show in that screen that week. The opportunity with
digital projection is that you could say we have got a film that
is a family film so after eight o'clock there is no business in
it, we will just take the afternoon shows and then the exhibitor
can put two films on in that screen, or we could say we just want
Sunday afternoons for this film because that is the only time
it is going to make some money. There is, therefore, a flexibility
in our negotiation with exhibition which is opened up to us because,
one, the prints are less expensive and, two, it is easier to supply
them through digital and look after them. There is an opportunity
there and a cinema can have a much broader offering. That is really
what we want, it is independence. The big films are good for us—anything
that draws a big crowd of people into the cinema, whether it is
Mama Mia or Harry Potter is great for the independent
sector because we want people talking about film, going to the
cinema and seeing posters and trailers. The big films are not
for everyone, our audience exists around that and someone might
say "I know a friend who went to see James Bond last week;
that is not for me but I quite the look of X", which works
for us. Digital can therefore be good for us in that if it allows
us to have more choice in cinemas then it can break that bottleneck
that you describe and there are opportunities where we do not
have to fight for every show on the screen in the week and we
are a better proposition to the exhibitor.
Q1108 Baroness Howe of Idlicote:
I am going back a little bit to the point that Baroness Eccles
was making because there does seem to be this feel—and we
have had it said to us many times—that there is not enough
money to really encourage the creative talent in this country.
What about levies, because they were in operation for something
like 35 years; would it be a good idea to reintroduce them? DVDs
may be on the way out but there are digital downloads and all
those sorts of areas; might that be a good idea?
Mr Perkins: A levy system to encourage British
films within cinemas would be difficult in terms of our dealings
with the cinemas. They complain as it is almost about their terms
of business and the best way of encouraging film makers is that
digital is an opportunity, because the cost of entry to make a
film, to release a film, can become lower. That is the opportunity;
I am not sure that any kind of quota or levy or something like
that would actually stimulate the market. The films have to be
strong enough to compete with the bigger films and they have to
survive on their own merits really rather than because they have
a local advantage
Q1109 Baroness Howe of Idlicote:
I was just wondering also whether anyone knew why the levies were
stopped in the first place; were they seen as a disadvantage or,
for example, would they be seen as a disadvantage if reintroduced
as far as the Americans are concerned; are there pluses and minuses
there?
Mr Batey: The Eady Levy in the mid-1980s was
stopped because at that particular time the market was on its
last legs. It was prior to the advent of the multiplex in the
UK and VHS video at the time was gaining traction very quickly
and cinema-going was still plummeting. It had reached around 54
million admissions a year which is less than a third of what it
is today and at that time the industry was pretty desperate to
have levies removed. That is one of the snags with them in a way,
that when the going gets really tough the industry would be desperate
on all sides of the industry, whether a producer or an exhibitor,
to get rid of them. It would be very difficult to introduce a
system that benefited some producers but not others; that would
be problematic.
Q1110 Baroness Howe of Idlicote:
Again, it is this talent; we have all agreed we have got it and
yet we are not able to tap into it. The Digital Britain
Report out yesterday was certainly suggesting a little bit of
levying in some respects, so again it is back in fashion. I do
not know that I am really convinced why not on the digital side
here too.
Mr Kosse: Again, a big part of what we need
to encourage the film makers to do is continue. We have been talking
a lot about the UK market and the dominance of the American studios,
but we forget that in the UK we share the English language so
UK film makers can be making the films, not just for the UK market
but for the UK market, the American market, the Canadian market,
the Australian market, and also English language films are the
predominant source of cinema around the world. They are dubbed
or sub-titled but still there is a huge opportunity for ongoing
continued export, and these bigger films that are dominant, things
like the Harry Potters or Mr Bean's Holiday, films
like that—if we encourage films to be made in this country
they do not need to depend just on the UK market, they have a
global market.
Chairman: We have three questions to get in. Lord
Maxton, then the Bishop of Manchester and then Lady Scott.
Q1111 Lord Maxton: To some extent
you have already covered this but I am still not entirely clear
about digital distribution in cinemas. Do you sell a single copy
of a film in digital form or do you sell multiple copies to the
cinema companies who then put it out in each of their cinemas,
or are we moving to a system where there will be a single copy
which they will then digitise across their system?
Mr Kosse: There is a system emerging called
"virtual print fee". In other words in the analogue
world we give them a print and they use it for a couple of weeks
under some terms. In the new world they invest a certain amount
of money to upgrade their systems. We agree with a third party
that we will loan them now a hard drive that they will have to
play and they will then give us a virtual print fee over time,
that will reduce in cost over time, until they recoup the cost
of that investment. At that point they have paid for their investment
and the costs of doing a print have dropped down to the cost of
the hard drive which is significantly lower but it is still material.
That is the model that is emerging over the world, whether it
is done by a third party or by the exhibitor themselves and that
is what they are using to fund the digital rollout.
Q1112 Lord Maxton: That is going
to put the small independent cinemas at an even bigger disadvantage
because presumably the investment required to show that type of
thing is considerable—it is cheaper once you get there but
the investment must be quite large.
Mr Perkins: It is where a third party can help
in that they can form a collective group that would borrow the
money to pay for the new projection system and then that is repaid
over time by the virtual print fee, so it can be that the independents
can have access to digital projectors as well.
Q1113 Lord Maxton: In parts of rural
Scotland there is public subsidy to cinema vans and they show
the major films, they do not show art films. Is public subsidy
a possible way forward?
Mr Perkins: Also what we have with the Digital
Screen Network is 200 digital projectors in the UK; it is one
of the leading markets in the world which is a good thing. There
are different ways to market and it can be that digital projection
equipment is cheaper to service and supply and can be used in
smaller ways like vans and things like that, so there are definite
opportunities there.
Q1114 Bishop of Manchester: One issue
that has been exercising this Committee is that of piracy, and
it would be interesting to hear from the point of view of the
film distribution business how you regard that issue. Are you
able to give any figures for the cost to you of piracy and any
ideas about how it might be addressed?
Mr Kosse: We would perceive piracy as the number
one threat to the industry for everyone—studios, independents,
everyone around the world. In terms of both hard goods and online
piracy, I have heard numbers as much as a 25 % loss.
Q1115 Bishop of Manchester: Is that
growing?
Mr Kosse: The market has been growing so yes.
Overall has it been growing as a percentage? I do not believe
it has been growing.
Mr Batey: It is the single biggest scourge that
IP businesses across the board face and the estimate for the United
Kingdom audiovisual sector is a loss of around £500 million
a year, around half a billion a year. In terms of just the theatrical
sector, that is right across the board, all sectors of exploitation.
Just in terms of cinemas the perceived wisdom from all the research
is that it is the equivalent of about a month's cinema-going,
so we would need 13 months to get to where we ought to be. One
of the specific steps that ought to be taken—and I do not
think it is covered in Digital Britain—is that camcording
needs to be made an offence. At the moment it is not, it is a
civil breach of copyright but it is actually not a criminal offence
to take a camcorder into a cinema, copy what is on the screen
and walk out with it. That just seems to me to be a nonsense.
Mr Perkins: We had someone caught in a cinema
once with a camcorder and half the film on tape, but they were
not allowed to be arrested. It could not have been any more red-handed,
so it is very frustrating for the people trying to enforce it.
Q1116 Bishop of Manchester: Are there
any other points? If you were saying to government or whoever
these are the ideas that we have to prevent piracy, you have mentioned
the camcorder, are there any others?
Mr Kosse: It is the ISPs and we have been public
on that, getting them to take a greater role in the pursuit of
pirates.
Chairman: The last question from Lady Scott.
Q1117 Baroness Scott of Needham Market:
Moving outside piracy and in terms of the general health of the
British film industry, widely defined, are current government
interventions in terms of the tax regime and the money that they
put into the Film Council sufficient? Is there more that government
can be doing, are there areas that they are not involved in and
they ought to be?
Mr Perkins: The tax credit for productions has
been a really good thing, it is an encouraging thing. The Film
Council has done some great work in the distribution sector over
the last few years and I know that their budgets are under pressure
because of the Olympics amongst other things. It would be a shame
if the distribution they have done and their support is under
pressure because that has been great for the independent sector
and for broadening choice within cinemas.
Mr Batey: Can I really underscore that; that
is absolutely key. The Film Council has been a terrific thing
over the last ten years. The P and A funding that is available
for distribution is a very small piece of its puzzle and we know
that they have a lot of priorities to address and that is fine,
but as digital grows and as the opportunity for more specialised
film grows around the UK as well it is important that there is
the software support if you like. This really is about content—it
is not about the black boxes—that is what drives consumption
and cultural development and it is important that that P and A
funding that the Film Council has is increased as the opportunities
for more specialised distribution increase around the country.
As digital grows the software support needs to grow in tandem
with that.
Chairman: Thank you very much. It is self-evident
that we could go on all morning asking you questions. It has been
a very fascinating evidence session and we may have questions
to follow up in writing so perhaps we could write to you, but
in the meantime thank you very much for coming and for the very
clear way you have given your evidence. Thank you.
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