Support for the creative economy

Written evidence submitted by the Independent Film & Television Alliance (IFTA)
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IFTA welcomes the opportunity to participate in this important parliamentary inquiry over the UK’s creative economy. In recent years, IFTA’s member companies have been associated with many high-profile British productions, including Slumdog Millionnaire, The King’s Speech, A Single Man and The Iron Lady (see case study on this film on page 2 of this paper).The British film industry is a prime example of the UK successfully punching above its weight as a creative economy, through the effort of entrepreneurial SMEs which-more than ever-need appropriate regulation and incentives in order to remain sustainable and fully exploit the emergent opportunities in the digital economy.

In this response, we have chosen to concentrate on only one set of issues in the list published by the committee, namely the role of copyright in supporting growth in the UK’s creative sectors. We are referring specifically to the wording laid out in the Committee’s Call For evidence, posted on the www.parliament.co.uk website:

"The impact on the creative industries of the independent Hargreaves Review of Intellectual Property and Growth, and the Government’s Response to it. The impact of the failure, as yet, to implement the Digital Economy Act, which was intended to strengthen copyright enforcement. The impact of proposals to change copyright law without recourse to primary legislation (under the Enterprise and Regulatory Reform Bill currently before Parliament);"

IFTA’s international membership dictates that we focus primarily on those aspects of national consultations which directly impact the capacity of our member companies to raise finance internationally and export films to foreign markets. The UK film industry successfully exports its productions to many countries around the world, where many have been released to critical acclaim and commercial success. We believe sound and robust copyright is the lifeblood of our industry throughout the world and that the UK possesses-through its current copyright law and enforcement structure-a prime competitive asset in incentivizing creative enterprise and attracting global inward investment into its filmed entertainment and other high-value creative goods.

1. Copyright sustains the economic value of UK film creativity

IFTA's membership is comprised of independent film production and distribution companies based in the UK, the United States and the rest of the world. The term "independent" generally describes film producers and distributors that finance, produce and distribute outside of the six major Hollywood film studios.

Economists describe film production as a high-risk product, characterized by a lack of standardization, very high upfront costs and marketing costs and little price flexibility. The typical major studio economic model mitigates such high risk through concentration and integration, both vertical and horizontal. A studio is in a position to finance 100% of production and marketing costs on a new film because it is also able to acquire all rights in the film and control its worldwide distribution directly, through international subsidiaries. In other words, studios take all the risk and control all of the economic upside from the exploitation of rights through their U.S. and international distribution units.

Although major Hollywood studio films have a dominant market share in many national markets worldwide, this economic model is the exception rather that the rule for producers. The independent production, finance and distribution model is the predominant one, be it in the UK or the rest of Europe. In the independent model, companies are small to medium sized enterprises on a far smaller scale than major U.S. studios. Their access to capital is generally more restricted and most do not directly own or control distribution either nationally or internationally.

In order to adapt to such market parameters, independent film producers finance film projects largely through pre-selling exclusive rights to a film while it is still at script stage or in pre-production. Those rights are pre-sold most of the time on an exclusive basis to a single distributor in a given country. The value of the pre-sale contract may be collateralized by a bank, thus allowing the producer to finance the project itself, before the film is produced . In turn, the confidence shown in the project as evidenced by presales of distribution rights also serves to attract equity investors who take reassurance in knowing that the film will be exploited by distributors who have taken a risk position on the project.

Copyright and the ability to control the exclusive rights related to copyright constitute an asset that is monetized and commercialized, thereby enabling the funding of film production costs and the authorized distribution of completed films.

In order to further illustrate this point, a detailed case study follows-the film, The Iron Lady, was developed and financed by Pathé, an IFTA member based in the UK, using rights-based transactions as its main business strategy.

The Iron Lady – a case study

A winner of two 2012 Academy Awards, and a box office success with over $124m worldwide, The Iron Lady represented a substantial creative and financial risk for its majority backer, the European film company Pathé. This original story was a stylised biographical take on the character of Margaret Thatcher, the most influential British politician of her generation.

Whereas the median budget for a national European film is around £3.5m, The Iron Lady was in a far more ambitious-and riskier-bracket at 11.75m. A key factor in raising a budget of this level was the cast. The producers knew from the inception of the project that they needed both a star and an actress of uncommon skill and ability to portray Lady Thatcher. From their perspective, Meryl Streep was the only actor who met both criteria and who would therefore enable them to raise the necessary funds from pre-selling the film to international distributors (see below).

Although a company of some standing in the European market, with consolidation in both France and the UK, Pathé could not afford to take 100% of the financial risk on The Iron Lady’s budget. Unlike the Hollywood studios, which can call on vast resources and control the distribution of their films in the global marketplace through wholly-owned distribution subsidiaries, European film companies can only very rarely afford to fully finance a film off their own cash reserves.

In this case, Pathé partnered with Channel 4, the British Film Institute, and a UK tax equity investor, Goldcrest. Pathé still had to put up £5.15m, almost 45% of the budget (60% of the equity invested in the film), which Pathé would then recoup pro rata and pari passu with its fellow equity investors out of revenues from the worldwide exploitation of the rights excluding only UK terrestrial TV rights.

Of course Pathé could not start production on the film with that level of risk investment unless absolutely confident that its valuation of the international rights in the film was accurate enough. Pathé therefore presented the packaged film to the international market. The intention was to pre-sell the project to film distributors in key territories around the globe, or at least establish their appetite for the film…

The pre-sale of the exclusive rights illustrates how strategic rights derived from copyright can be used as a powerful incentive and stimulant to financing new films:

How rights make films happen – the pre-sale explained

The pre-sale of a film project consists of a producer (or its appointed sales agent) persuading a distributor in a specific country to take a risk by committing to buy exclusive distribution rights in a film in its territory, before seeing the completed film (. a decision based on reading the script and knowing the director, cast and budget). The distributor will agree to pay a fixed amount-a minimum guarantee of royalties-on delivery of the completed film in return for exclusive distribution rights in its own territory.

The producer is then able to present the distribution contract to its bank which will cashflow (after discounting) the promised payment against the collateral of the distributor’s undertaking to pay, and the cash made available is then used to finance the film’s production budget.

During the Toronto International Film Festival in September 2010, Pathé was able to sign a significant number of pre-sale deals (totalling approximately £4m) based on the script, director and cast for The Iron Lady.

The timing of Pathé’s decision to take the project into production was coordinated to ensure that they had market feedback from film buyers in Toronto before committing to heavy pre-production expenditure in September (production as such was not scheduled to start until February 2011).

This typifies business practice in independent cinema: major international film markets, (e.g. the American Film Market [AFM] owned and operated by IFTA, the European Film Market, or the Marche du Film in Cannes) are routinely attended by professional producers offering their films, international sales agents, and national film distributors buying and selling films.

Of course the strong Toronto sales performance did not mean that the film was then risk free. The major territories of North America and Japan remained unsold (and if they remained unsold the investors would lose money). However it did mean that Pathe was willing to take that risk with a view to shooting the film, creating promotional materials and then screening the film to those buyers from the territories for which the exclusive rights remained unlicensed, at the Marche du Film in Cannes 8 months later (May 2011). That strategy worked and the remaining territories were all sold in Cannes.

However, it should be noted that most production companies are insufficiently resourced to carry the quantum of risk Pathé was willing to carry into principal photography (roughly £2.5 m). An independent film company with more modest resources than Pathé-which is the majority of film companies in Europe-may have had to put the project on standby or write it off altogether (i.e. taking a loss on all the development costs incurred to date), because it would not have been in a position to go ahead and produce the film with such a significant risk exposure. The film’s star, Meryl Streep, would not have been able to wait till that risk had been fully laid off, owing to her many other commitments.

Pathé itself took a calculated risk, banking on the prestige of the project and the tour de force performance they expected from Meryl Streep, to generate enough pre-sales to eventually cover itself financially.

Every step of the way in the story of how The Iron Lady came to be made, we see how film producers used the rights derived from copyright strategically in order to transform a story and a creative vision into what eventually became an award-winning and commercially successful film.

2. The UK Copyright review – copyright as a driver for innovation

Over the past three years, IFTA has participated in successive Government consultations on the UK copyright framework. The Hargreaves review was a cause for concern for our industry as it appeared to have been built on the ideological preconception that copyright had become an obstacle to innovation and growth in the nascent online economy. Based on the detailed empirical evidence we are able to collect from our Member companies on the front line of the rights licensing economy, there is no significant corroboration for this conception of copyright as a barrier to digital business expansion. Of all the reasons why Internet start-ups may struggle to launch and/or survive in a cut-throat marketplace, allegedly onerous content or overly complex licensing requirements are seldom strategic. It would be neither fair nor effective to bring about new regulatory constraints on rights holders-or further limit exclusive rights so as to subsidize another sector of the economy, such as Internet start-ups.

IFTA believes that solutions to accessing content for online businesses lie in the market itself. And this market is changing at an unprecedented pace. Far from stifling innovation in the UK content marketplace, it appears strong copyright legislation has acted as a clear stimulant. In today’s online distribution of films, the UK has close on 50 different platforms and portals. These new players run the whole gamut of business models and technologies, from subscription VoD (LoveFilm, Sky), to individual downloads based on secure payments (iTunes, Sony) and advertising-supported platforms (Blinkbox).

The only clearly identifiable blockages in this nascent economy are not due to opaque licensing practices, but more simply to instances when rights holders and platforms find it difficult to agree on the terms of a license, including a price for the sought-after content. But the resolution of these tensions are typical of a new technology marketplace and should be left to market-driven negotiations. This tension in the supply and demand equation is present in other segments of the economy and the fact that some licensees find paying for content onerous and find the transaction costs high, do not make them objectively so.

As economic value from the exploitation of exclusive rights in film continues to migrate from packaged video (DVD/Blu Ray) towards the online VoD platforms, it is anticipated that meaningful revenues will be generated from these new forms of exploitation, that these revenues will become "bankable" in the context of pre-production financing and that the new online platforms will contribute effectively to defraying the considerable sunk costs (development, production and marketing) of a film’s manufacturing cycle-and that professional film production will remain sustainable. Thus, IFTA believes more time is needed for the marketplace to adapt and find its own solutions before considering any substantive change to UK law or regulation. Changing the regulatory parameters while this epochal transition is in process would risk throwing a vulnerable economic sector out of balance without bringing discernible benefits elsewhere.

2.1. UK Copyright Hub

IFTA has welcomed the outcome of Richard Hooper’s feasibility work on the creation of a UK Copyright Hub. We support the principle that this practical project be deployed on an opt-in, non-exclusive and pro-competitive basis. Above all, it is important that this initiative should steer clear of interposing itself between rights holders and platforms other than in cases where both sides would voluntarily choose to use the Hub as an intermediary under clearly defined terms. Although we are supportive, IFTA is aware of the fact that the type of licensing that the hub will hopefully facilitate will be of limited application to the independent film sector, due to the nature of the audiovisual product: copyrights and other underlying rights in each film generally end up under the direct control of the film’s producer or its assignees, thereby facilitating licensing of the content to distributors, broadcasters, online platforms, etc. This structure has served the sector well in the analogue era and it appears to be just as functional in the context of emergent digital platforms.

We note also that one of the intended uses of the Copyright Hub will be to serve the needs of libraries and archives. While IFTA supports the general principle, owing to the role of these institutions in serving the public interest, we note that our industry has had a long standing tradition of establishing voluntary agreements with film libraries and archives, with mutually agreeable dispositions to deal with issues such as digitisation, uses for research and study and inter-library loans. We believe the Hub should be designed with due flexibility so as not to disrupt or contradict such agreements where they exist.

2.2. Exceptions and limitations to copyright

IFTA is extremely concerned that the focus of UK copyright review, since the publication of the Hargreaves Report, appears to be primarily on introducing new exceptions and limitations to copyright. We are troubled in particular with plans for a broad-based private copy exception which appears to be based on the assumption that the attendant loss of revenues for rightsholders would not require the introduction of any kind of compensatory remuneration scheme as pricing in the marketplace would naturally adjust. We strongly dispute this analysis and urge this Committee to raise the issue with Government and the Copyright Office.

We welcome clause 57 of the Enterprise and Regulatory Reform Bill, which should ensure that new exceptions to be potentially introduced in UK’s CDPA must be within the boundaries defined in the EU copyright directive. However, we support the general call of our colleagues in UK film and related creative industries to oppose the notion that the introduction of new exceptions and limitations in UK law should be dealt with as a single package, within a single Statutory Order. The three-steps-test of the Berne Convention, which is also embedded in the EU Copyright directive, suggests that each new exception or limitation to copyright should be considered in its own right, especially with regard to its potential impact on the normal exploitation of a work and possible economic prejudice to rights holders, not as part of a package of other exceptions or limitations.

3. The need to tackle online piracy

The audiovisual value chain is being transformed at a rapid pace by the transition to a digital paradigm of content on demand anywhere, at any time and on any device. As the main revenue proposition continues its slow shift away from the physical medium as a dominant form of film distribution and migrates to digital online platforms, it is essential that every effort be deployed by the UK creative industries and by Government to combat online piracy. Failure to do so could result in the long run in one of the UK’s proudest creative sectors, its film and TV industry, beginning to fail as revenues evaporate.

Online piracy undermines the promises of a sustainable online content economy and is deeply corrosive of film companies’ efforts in developing new business models. Independent UK film distributor Momentum Pictures monitored peer-to-peer networks prior to the release in UK cinemas of the critically-acclaimed film The Fighter. The monitoring company detected 215,000 attempts to view the film online in less than a month. In a not so distant future, when the majority will consume films online, cyber piracy left unchecked will wreak havoc with the fundamental financing models for independent film. The UK’s film industry is made up overwhelmingly of dynamic SMEs and it is difficult to see how the majority would continue to have a sustainable future if illegal uses of content continue to proliferate unchallenged in the online space.

As an active member of the UK’s Creative Coalition Campaign, IFTA was involved from the outset in the advocacy of measures to curb peer-to-peer piracy which were incorporated into the 2010 Digital Economy Act. We continue to support Government in its process of implementing the relevant provisions of DEA and deploying a notice-sending mechanism which we believe will raise public awareness of the deleterious effects of piracy and encourage infringing consumers to use legal services, as it has in other countries where the measure was introduced. After the long delay resulting from the judicial review, we support Government and Ofcom in their efforts to ensure a swift implementation of the notice-sending measure.

However, as a trade association representing small and medium-sized rights holders, we are very concerned that the costs of notice sending will be prohibitive for many of the SMEs we represent and will effectively discourage them from filing copyright infringement notices. The success and credibility of the notice-sending measure will depend on its ability to represent the widest possible cross-sections of works from the widest possible cross-section of rights holders. Piracy’s impact on copyright works made by SMEs is devastating, owing to the more vulnerable and ‘upfront’ nature of the economic model for independent film. IFTA therefore urges the DCMS Committee to engage Government and Ofcom on this important issue, so that the costs of participation are not such as to discourage those rights holders which are most representative of UK creativity and creative enterprise.

Finally, it is a matter of consensus that although a legislative measure aimed at illegal peer-to-peer exchanges will be enormously helpful in raising consumer awareness over online infringement and encouraging legal uses, it will not be sufficient in tackling the various forms of illegal usage which prevail today. In this respect, IFTA welcomes the efforts deployed by DCMS in coming to grips with the issue of pirate websites offering downloads of infringing content and in looking at playing a more prominent role in bringing about the active participation of UK ISPs in the fight against online piracy. Precedents established in UK courts in the past year, over article 97(a) of the CDPA (implementing Article 8(3) of the EU Copyright directive), have been extremely helpful in clarifying the legal parameters under which a rights-holder may apply an injunction on an ISP whose service is being used by infringing websites. These court decisions have laid the ground for what should become an expedited process enabling a less onerous and more effective process to deactivate infringing websites in future.

Conclusions – key points IFTA’s members are active in the British film industry in both financing and international distribution. As partners of this successful yet vulnerable creative sector which has done so much to disseminate the British brand overseas, we believe UK copyright law is balanced and fair, ensuring the public interest is served whilst also offering creative enterprise a high level of intellectual property protection. As such, current UK copyright law and enforcement contribute substantially to the competitiveness of the national economy in attracting the hefty investments necessary to develop, produce and distribute quality filmed entertainment.

· FTA is concerned with current Government plans to introduce new exceptions and limitations copyright based largely on the biased conclusions and recommendations of the Hargreaves review of copyright. We believe the marketplace for UK creative rights in the digital environment needs time to evolve its own business-based solutions;

· IFTA notes with satisfaction that Clause 57 of the Enterprise and Regulatory Reform Bill, guarantees in principle that any new exceptions to be potentially introduced in UK’s CDPA must be introduced in full compliance the EU copyright directive. We are opposed to the exceptions under consideration being introduced to the Houses as an all-encompassing single Statutory Order;

· IFTA calls on the UK Government to implement the notice-sending measure codified in the Digital Economy Act without further delay. We believe that notice-sending will be effective in raising public awareness of piracy and encourage consumers to make use of the ever increasing array of legitimate online audiovisual content services;

· IFTA believes online piracy will not yield to a single legislative measure. Specific action continues to be required to take down websites in the business of offering content obtained illegally, a fast growing and especially elusive source of film piracy. We commend the Government for its consistent efforts in encouraging the involvement of UK ISPs in the fight against piracy and express the hope that it will continue to facilitate cooperation between ISPs and rights holders in future.

About IFTA

The Independent Film and Television Alliance is a non-profit trade association based in Los Angeles, California. IFTA represents the economic interests of over 150 companies from 23 countries, the majority of which are independent producers and exporters of feature films and television programmes. IFTA has 22 member companies in the UK, all of which are active in film production, sales and/or distribution. IFTA members produce about 400 feature films annually and countless hours of TV programming and this content is increasingly to be found on emergent online platforms in the United States, the UK and the rest of the world. IFTA regularly provides input to governments around the world on a wide range of copyright, trademark, financing and export issues that impact the independent industry.

IFTA also produces the American Film Market® (AFM®) each year in Santa Monica, California, where more than 8,000 industry leaders and participants from over 70 countries come together to carry out worldwide film and television production and distribution deal-making. Over $800 million in production and licensing deals are closed each year at AFM. The AFM provides a birds-eye view into the economic interactions that underpin the independent financing and worldwide distribution of audio-visual product and the importance of the global copyright framework which supports this dynamic trade.

In the UK, IFTA is an member of the Creative Coalition Campaign (CCC). As a pivotal market for independent audio-visual content worldwide, the UK is home to some of the most economically and creatively active member companies of IFTA. Over the years, they have been involved in a number of British Oscar®-winning films, including Gandhi, Chariots of Fire and Slumdog Millionaire, and helped to launch the international careers of these films. Recent productions to which IFTA’s members have been associated also include British critical and commercial successes such as Brideshead Revisited, The Queen, Happy Go Lucky, and Pride And Prejudice and the current mega-hit The King’s Speech, the winner of 4 Academy Awards® this year, including Best Picture®.

As the trade association for independent film companies operating on a global basis, IFTA boasts a breadth and depth of experience in measuring the positive impact of intellectual property law on the development of this vital segment of the audio-visual sector: independent film companies assume the majority of the financial risk for the production of a film or television program and control its distribution in a majority of territories worldwide. They are therefore entirely reliant on a coherent global framework for copyright and licensing, as well a robust enforcement, in order to raise finance to make the films and ensure their widest possible outreach to the consumers.

November 2012

Prepared 17th November 2012