The British Film and Television Industries - Communications Committee Contents


CHAPTER 2: A better future for British films

Financing film production

60.  This section looks at the way in which a film may be financed, the financial support provided by the Government and how this might be made more effective.

FILM FINANCING MODELS

61.  The financing of film production follows two distinct models. The major American studios normally have sufficient financial capacity to fund the making of their films. Much of this capacity derives from their size and range of activities, including distribution. As indicated in the preceding chapter, despite various attempts, the British film industry has not been able to replicate successfully the American model of vertically-integrated companies, involved in production, distribution and exhibition, able to finance their own films. British producers who are not closely allied with an American studio have to follow a different model.

62.  An independent British film producer has to build up a patchwork of financing in order for a film to be made. He is likely to be eligible for film tax relief and can approach the UK Film Council, and BBC Film and Film4, the film investment arms of the BBC and Channel 4, who may be prepared to invest in the film. Beyond this, the producer may have to seek equity investment and pre-sale of the film to one or more distributors, against which he can obtain funding. This may still fall short of the finance required. Until the recession, banks might have been prepared to provide "gap funding", but the Committee was told that they had virtually withdrawn from film finance (paragraph 89).

63.  Some financing firms offer potential investors a "slate" of films in which to invest, which reduces the risk of investing in one particular film which turns out to be a financial failure, by spreading it over a portfolio, or slate, of productions. Ingenious Media told us that slate financing had become much more difficult to put together since the abolition of the previous system of incentives for film production through tax write-offs (p 190). Michael Kuhn, Qwerty Films, also mentioned the absence in the UK of financing of portfolios of films (Q 776).

64.  Charles Sturridge, Chairman, Directors UK, contrasted two films he had made: Fairytale and Lassie. Fairytale was essentially American funded and distributed by Paramount, while Lassie "was a classic example of the complexity of creating an independently financed film in the UK". Mr Sturridge said that "at the core contract meeting I sat at a table with eleven lawyers all representing different financiers. That is a sample of the kind of Byzantine complexity one has to go through in order to assemble what was in fact a very low budget, six-week shoot £6 million film" (Q 1437).

65.  This model varies from film to film. Tessa Ross, Controller of Films and Drama, and Paul Grindey, Head of Business Affairs, Channel 4, told the Committee that the genesis of Slumdog Millionaire involved fewer deals than normal. Film4, having read the book in manuscript and funded the pre-production work, agreed a deal with Celador Productions to co-finance the production. The fact that they did not require financing from other parties simplified and strengthened their position. Mr Grindey said "We were able to say with a high degree of confidence to the rest of the industry, to the distribution community, that this film was greenlit and going ahead and if you want to join the party then give us your best offer, which … took quite a lot of leverage away from the distribution community because our film was not dependent on any particular negotiation coming good" (Q 11). This demonstrates that it is possible to reduce the financial power of the distributor, but only where a simple and comprehensive deal can be put together.

GOVERNMENT SUPPORT FOR THE FILM INDUSTRY

66.  Most Western governments provide financial assistance to their film industries. They are able to support their industries in this way because the World Trade Organisation has, since 2005, recognised a cultural exception to normal trading rules. Reasons for doing so are as much economic as cultural. Governments support the creation of an industry which benefits from economies of scale and, once it reaches a critical mass, can prosper with less need of support.

67.  During this inquiry, we visited Germany, where we learned that, in 2008, allocations at the federal and regional level in support of the German film industry amount to €307m (Appendix 6). Government support for the film industry is common across Europe and North America. The largest element within this package of support is normally for film production, either through direct grants or through tax relief. One of the concerns voiced by the film industry is that film production support has become increasingly competitive between Western countries and, in the United States, between individual states, in an effort to attract foreign production. From a British perspective, there is a risk of British support becoming uncompetitive but also of accelerating competition.

FILM TAX RELIEF

68.  In the UK in 2007/08, total public support for the film industry was £261m. The largest single source of public support for production is the film production tax credit, which was estimated to cost £105m in 2007/08, or 40 per cent of total support for the film industry in its first year of operation. The film tax credit was introduced in the Finance Bill 2006. Its key features are that it is provided directly to the film production company—and not to those whose only involvement is providing finance—and it is available to companies making culturally British films, made to be shown in cinemas and where at least 25 per cent of qualifying expenditure will take place within the UK. Whether a film is culturally British is determined by a cultural test[27]. The tax relief is calculated on the amount of the qualifying British expenditure up to a maximum of 80 per cent of total qualifying expenditure, which covers pre-production, principal photography and post-production. Qualifying British expenditure is defined as services performed or goods supplied in the United Kingdom (known as the "used or consumed" provisions).[28]

69.  The current system was supported by most witnesses as essential to the health of the film industry. Tim Bevan, Co-Chairman, Working Title (and now also Chairman of the UK Film Council) said that the film tax credit was "working brilliantly for inward investment in terms of bringing the studios into this country to make big films here" (Q 1404). Michael Kuhn, Qwerty Films described it as "fantastic" and had been designed "very cleverly, very effectively" (Q 763). Lord Puttnam thought that "after three or four false starts … we have a system which seems to be fairly admired, which has been road-tested sufficiently" (Q 763). Gaynor Davenport, CEO, UK Screen Association, thought that, compared to previous film support schemes, the film tax credit is "a much simpler system which is more easily explained and more accessible for people who actually should be legitimately benefiting from the film tax incentive" (Q 930).

70.  Several witnesses noted the importance of the tax credit remaining competitive internationally if the UK were to continue to attract inward investment in film. John Woodward, CEO of the UK Film Council said "You need a tax credit frankly to be in the game, because most countries that are serious about their film industry provide one, but the UK tax credit … is worth up to a maximum of 20 per cent of the film's budget. If you go to Australia at the moment, you can get up to 40 per cent of your budget from the Australian government. If you go to Canada, if you use local and federal incentives, you can get up to 60 or 65 per cent of your budget. Ireland in the last week or two has moved its incentive up to be worth around 28 per cent … of the budget. So Britain at 20 [per cent] is at the low end, but we have always maintained the argument that in the UK, the tax credit is there as a cushion and an incentive, but in the end, this is not a Third World economy, we are not going to compete as an industry internationally on price alone" (Q 120).

71.  Stewart Till, then Chairman of the UK Film Council, added. "We are at the low end but we are still competitive in terms of tax relief. If our tax relief became very uncompetitive, we would go back to the government and advise them that things had changed; but they have not got to that point yet" (Q 151). He pointed out that, while the rate of tax relief was important, it was one of the three variables on which Hollywood studios made decisions on where to make a fill. He thought that the other two—the Pound/Dollar exchange rate and the quality of the workforce—were more important factors.

72.  Industry witnesses broadly supported this view. Roy Button, Managing Director, Warner Brothers Productions, said that his colleagues in Los Angeles and New York would always expect him to compare the government support available when proposing the location for filming a new project, but he acknowledged that there were other important factors (reference). Overall, there was no great pressure from the industry representatives for the tax relief for big budget films to be raised.

73.  We recommend that, given current financial circumstances and the value to the international film industry of a stable tax regime, the Government should keep the rate of the tax credit for big budget films at its current level. At the same time, we recommend that the rate of the tax credit be kept under review by the Government, in consultation with the industry, in order to ensure that the UK does not become uncompetitive as a venue for international filmmaking.

74.  It was suggested, however, that the tax credit be increased as a percentage of the qualifying expenditure for smaller budget films. Tim Bevan said that that the tax credit was working "quite well" for domestic British films, but that it might be improved. He thought that an increase in the tax credit to 30 per cent would make a significant difference to an independent British producer trying to finance a film. "That is because, as an independent producer, I know in my brain if I can get 18 per cent out of the UK that feels like top-up. If I can get 30 per cent that feels like a cornerstone piece of financing and I can go out and raise the rest of the money and I think it will encourage entrepreneurs because producer entrepreneurs are what we need in the business more than anything else"(Q 1405).

75.  Mr Bevan argued that this increase would be cost neutral for the Exchequer because "what you would get back in VAT and PAYE and inward investment is probably going to come out cash positive" (Q 1405). There are other, indirect, benefit from films being made in the UK, such as the effect on tourism of the use of British stories and locations. A recent report suggests that the Harry Potter films have led to a 120 per cent rise in visitors to Alnwick Castle in Northumberland and brought £9m worth of tourism to the region[29].

76.  The UK Film Council have provided the Committee with the main conclusions of a study, recently carried out by Oxford Economics, on the impact of increasing tax relief on low budget films[30]. The UK Film Council suggest that an increase in the rate of film tax relief on low budget films (which they define as total production costs of £20m or less) would increase the profitability of filmmaking and thus increase the number of films made or increase budgets. Oxford Economics have prepared high and low cases for the likely impact of increases in the net rate of film tax relief to 25 per cent, 30 per cent and 35 per cent. The results suggest that, even on the low case, an increase in the net rate of tax relief would be close to fiscally neutral for the Exchequer, with additional tax receipts covering 90 per cent of the additional cost.

77.  In our view, the primary purpose of an increase in the rate of tax relief for lower budget films would be to make it easier for independent producers to finance their projects and thereby to support the making of lower budget films which develop new British talent and tell British stories. It is not easy to define such British films in terms of budget size, but we suggest that, if increased support were available to films with budgets of under £5m, this would catch the sort of projects that we think should be given more support. Of the 66 British domestic feature films made in 2008, 60 had a budget of less than £5m[31], and would therefore benefit from the proposed change. The work done by Oxford Economics, while based on budgets of £20m or less rather than £5m or less, suggests that the cost to the Exchequer would be small.

78.  Given the problems faced by independent film makers in raising finance for their projects, particularly in the current recession, we recommend that the Government should consider raising the net rate of film tax relief for productions under £5m to 30 per cent.

79.  There were some suggestions for variations to the way in which the tax credit operates. A suggestion we heard was to extend the tax credit for genuine British co-productions to some part of the budget spent offshore. This view was advanced by Tim Bevan and by Roy Button, Warner Bros, who said that "if you have a wonderful film in England and it qualifies and you are doing all the shooting on it, and you have two weeks in France, the money expended on elements of facilities, cameras, lights, people that you have spent in England (so they have paid VAT, tax and everything remains in England) that you take to France does not count in your good spend in England" (Q 1409).

80.  Tim Adler, Screen Finance, thought that the "used or consumed" rule should be relaxed, "otherwise we are going to end up with a lot of parochial films" (Q 486). He noted that, as a result of the application of the tax credit, "the amount of UK co-production … has dropped off dramatically. He thought that, £70m of UK co-production expenditure had disappeared, involving British producers (Q 487). Alex Hope, Managing Director, Double Negative (a major visual effects company) also supported a change in the "used or consumed" provisions. He said that, on the film Hellboy, he had employed a crew to work in Hungary and "when they were working in Hungary they did not qualify necessarily; but when they came back to the UK they did. That would suggest that it would be better to have more Hungarians working on that production when it was being shot in Hungary rather than UK labour" (Q 932).

81.  This extension of the "used or consumed" provisions did not receive universal support. We were told that it could make it more attractive for film producers to use foreign studios, to the detriment of British studios. Michael Grade, Chairman, Pinewood Studios said that it would be using British tax revenue to create economic activity in other countries. He went on to say, "Public intervention in a market of this kind is to encourage spend in the UK … It is the economic activity around a film that is important, and it would be using taxpayers' money to create economic activity in other countries. I cannot see how you can invest taxpayers' money overseas and expect to get a return" (Q 1888).

82.  Nevertheless, we understand the wish of filmmakers to be able to keep the same crew on a British film when they do some work abroad without suffering financial penalty. The additional tax relief involved would not be large and would be, to some extent, offset by additional income tax payments by British resident crew members.

83.  We acknowledge that there would be a benefit to producers from a change to the "used or consumed" provisions, to extend the tax credit to production expenditure overseas, and the low cost of this change. We recommend that the salaries of personnel employed on a film should be considered eligible costs whether they are working in the UK or on location overseas so long as the personnel are paid and taxed in the UK.

THE VIDEOGAMES INDUSTRY

84.  The videogames industry is a growing industry that draws upon similar skills to the film industry—particularly in post-production—and has a degree of overlap in content. According to Skillset[32], the British videogames sector in 2008 included 155 companies specialising in developing games, 30 companies which published and produced games and 35 which provided games support. Employment in games development amounted to nearly 9,000 jobs and a turnover of £625m[33]. The market for videogames in the UK has grown rapidly, though with fluctuations, over the last three decades. Software sales grew from £73m in 1980 to £2.1 bn last year[34]. British companies have proved very successful in game development and, according to Richard Wilson, Chief Executive, Tiga (the trade association of videogame developers), the industry generates sales worth £2 bn annually in the UK and the rest of the world (QQ 971 and 972). Mr Wilson also told us that "a typical games development business in the UK earns about 46 per cent of its turnover from export of its product" Q 971).

85.  The videogames industry representatives told us that that they were under challenge from subsidised production overseas, and that this was evident in relative growth rates. Richard Wilson said: "Whereas the UK games industry has grown in terms of employees by about eight per cent over the last two years, in Quebec the workforce has grown by about 52 per cent because of the very generous tax breaks. At a federal level, there is a tax break for going into production that amounts to about 37 per cent. In Quebec itself the government, incredibly, will pay the salaries of game developers to the tune of 37.5 per cent of their wage costs" (Q 1015).

86.  Richard Wilson drew attention to a support scheme currently in operation in France, which provides a 20 per cent tax break for games production. Mr Wilson went on to say: "It would be fantastic to have the very generous tax breaks for going into production that our compatriots overseas receive for example in Quebec, but at a bare minimum we would like the UK Government to adopt a tax break of 20 per cent for going into production" (Q 1017). Ian Livingstone, Creative Director, Eidos pointed out that, while the film industry benefited from tax credits and the games industry did not.

87.  Tiga has lobbied the Government for a tax incentive for videogame development, but the Pre-Budget Report said that it was not persuaded that the evidence was "sufficiently compelling" to introduce such a tax incentive at this time. The Government did, however, announce plans to invest £3.5m to establish two centres of excellence for the games industry in Dundee and Manchester. [35]

88.  We recognise the claims of the videogames industry for support in the face of foreign government-subsidised competition, and recommend that the Government consider providing tax incentives for videogames production.

OTHER ISSUES IN FILM FINANCING

89.  Many witnesses drew attention to the difficulties of obtaining funding for British independent film production, particularly following the economic recession and the withdrawal of banks from funding of film production. Tim Adler, Editor Screen Finance, said that "a lot of the banks are now pulling out of film finance because they have had their fingers burnt and they cannot lend in the way that they used to" (Q 469). David Pope, CEO, New Producers' Alliance, told us that "the contribution to the financing of films the banks were making has, to all intents and purposes, gone". He said that banks had provided "gap funding", which is money committed "late in the financing stages and … required to be given back early in the recoupment process, and so that last 20 per cent of the budget has gone" (Q 386).

90.  While there was firm support for the film tax credit, some witnesses did point out that the previous system of film support through tax write-offs, though it had been subject to abuse, had attracted equity investment into the film industry. Ingenious Media argued that much of the relative boom in the production of British films after 2003 was due to equity investment. In turn, much of this investment was attracted by accounting rules that embodied the principle that investors' losses could, for accounting purposes, be offset against profits. These rules on "sideways loss relief" (SLR) governing individual partnerships were changed in the Finance Act 2007. In the view of Ingenious Media, the changes were "blunt and indiscriminate … and made no distinction between bona fide investment and tax avoidance" (p 190). Ingenious Media go on to say that their "experience as investors before 2007 was that the availability of SLR was crucial to attracting the large sums involved in putting together production slate financing. There was a vital linkage here: SLR effectively enabled the larger share of funds to be raised from investors—funds which, in turn, made the production tax credit work. In the absence of SLR, or an equivalent form of relief designed to encourage the raising of high risk equity capital, the production tax credit is insufficient in itself to enable films to be made" (p 190).

91.  Ingenious Media raised the potential role of Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme (EIS), in attracting risk investment to the audiovisual sectors. James Clayton, Chief Executive, Ingenious Investments said that there were "certain constraints in terms of size imposed by VCT and EIS rules, which made them [currently] not particularly suitable for film investment" (Q 812). We did not receive sufficient evidence in this area to make specific recommendations on particular vehicles for equity investment in film.

92.  Tim Adler suggested that the Export Credit Guarantee Scheme could be extended to foreign pre-sales of British films. British independent producers often depend on pre-sales to foreign distributors to finance their films. It is on the basis of these contracts that banks, or other investors, have provided funds to make the film. Although this source of funding has all but dried up since the onset of recession, if the Government were willing to provide guarantees for these contracts with foreign distributors, investors might be encouraged back into film funding. Mr Adler thought that "if a bank could have the risk underpinned by the Export Credit Guarantee Department it might encourage them to come back in to lend to film and television companies" (Q 469).

93.  Given the difficulties of financing independent British films, particularly following the withdrawal of banks from film financing, we recommend that the Government should look at ways of facilitating greater British private investment in film production. This would need to be done in a way that ensured that the private investment was genuine and not simply a means of tax avoidance.

IS THERE SUPPORT FOR A FILM LEVY?

94.  We discussed in Chapter 1 the Eady Levy, a levy on the price of cinema tickets to create a fund which could be used to help finance British films which was in place from 1950 to 1985 (discussed in paragraph 21). We asked a number of witnesses whether they favoured the reintroduction of a levy to help fund British productions. Lord Puttnam stressed the important role that the Eady Levy had played in helping his generation of British filmmakers to make their first commercial films and thus launching their careers. He noted that the Eady Fund "was responsible for 820 films, some very good films. The important point is that Ridley Scott's first film, Alan Parker's first film, my first film, the early work of our entire generation was partially funded out of the Eady Fund; that is not there any more. In every other respect I would say things are better now than they ever have been for people starting out in their career" (Q 748). He did not, however, specifically advocate its reinstatement, suggesting that it was not necessary in current circumstances.

95.  The levy continues to be used as a source of film funding in Germany. The German Federal Film Fund's (FFA) budget of nearly €70m a year is raised by a levy on cinema operators, video and DVD retailers, and public and private broadcasters. The Chief Executive, Peter Dinges, told us during our visit to Berlin that the levy system, which has been in place for 40 years, was, in effect, a solidarity fund, raising money and distributing it within the industry. It made the funding of the FFA independent of government, in the sense of not requiring budgetary subventions. It was also self-administering, with members of the industry sitting on the Board. However, he noted that the cinema operators had broken this solidarity by challenging the legality of the levy, on the grounds that the different treatment of broadcasters violates the principle of equal treatment in the German Constitution. A decision on the case is expected later this year (see Appendix 6).

96.  Other witnesses, notably the panel of film producers (Roy Button, Tim Bevan and Tracey Scoffield, Director, Rainmark Films) opposed the idea on the grounds that it would muddy the waters of existing government support (Tim Bevan: "I think if we get the tax rebate right that probably does it.") and suggested that, if it were levied on cinema tickets, could reduce cinema attendances (QQ 1416 and 1417).

97.  We were struck by the lack of support for the idea of a levy to create a fund for independent film production, which appeared to us markedly different from the position in the television industry, where we heard calls for the use of a levy to support production of British content (see Chapter 4). We conclude that this is, in part, support for the current film tax relief system, both in terms of the support it delivers and the efficiency of its operation. There is clearly a reluctance to go down the film fund route, perhaps because this might put in jeopardy the preferred means of support.

Role of UK Film Council and the British Film Institute (BFI)

98.  The UK Film Council was established in April 2000 as the UK's strategic agency for film, with the overall aim of building a more successful and sustainable British film industry. It is a non-departmental public body reporting to Parliament and the Department of Culture, Media and Sport (DCMS), constituted as a private company limited by guarantee and governed by a board of 15 directors. The UK Film Council offers policy advice to the Government on issues affecting the British film industry and also acts as an advocacy body for the industry. It provides funding to support script development, film production, film export and distribution, film education and film skills training. Its funding comes mainly from Lottery Fund income and the Department of Culture, Media and Sport grant-in-aid. From April 2010 it will be one of a number of organisations to have part of its Lottery funding diverted to the funding of the 2012 Olympics. Within the UK Film Council is the Office of the British Film Commissioner, whose role is to promote the UK as a venue for foreign (almost exclusively American) film production. To this end, he has an office in Los Angeles as well as London.

99.  The BFI is the UK's cultural agency for film and guardian of the national film collections. It was founded in 1933 and granted a Royal Charter in 1983. It is grant-in-aid funded by the Department of Culture, Media and Sport through the UK Film Council, with an additional £1m levy from commercial terrestrial broadcasters to fund the television element of the BFI National Archive. A further 55 per cent of its total funding is self-generated income.

100.  We sought evidence on the role played by the UK Film Council in supporting the UK film industry and whether this could be improved. Industry witnesses were generally supportive of the work of the UK Film Council and thought it an improvement on the more diffuse arrangements in operation before 2000. However, Michael Kuhn, Qwerty Films, expressed the view that the UK Film Council spread its limited budget too widely and should concentrate its effort on supporting film production (Q 769). Tim Adler, Screen Finance, said that the importance of the Film Council "cannot be overestimated. It is a very important body for the British film industry" (Q 460) but went on to note that it drove a hard bargain—some would say too hard—in its financing terms, achieving the highest rate of return of any film fund in the world.

101.  Witnesses also expressed concern that a part of the Lottery funding allocated to the UK Film Council for use in supporting UK film production is to be transferred to the Olympics. The annual transfer of about £5m represents 15 per cent of the UK Film Council's anticipated Lottery income for the years 2010/11 to 2012/13. This is not a huge amount in strictly financial terms but, in our view, it calls into question the practice of supporting an important industry through a source which can be diverted away for reasons unconnected with the film industry.

102.  The Secretary of State for Culture, Media and Sport, Ben Bradshaw, told the Committee that the Olympics was a unique event and that the UK Film Council was only one of the recipients of Lottery funding that was being affected by the Olympics. He thought it would have been "difficult … to make a case to uniquely exempt the UK Film Council from taking its share of the burden of the Olympics" (Q 2355). We welcome Mr Bradshaw's assurance that the reduced level "would not represent the new baseline" and that "there is no reason … why it should not be restored afterwards but that will obviously depend on the economic circumstances and on the Government's policy at the time" (Q 2354). We consider this issue further, in Chapter 5.

103.  We question, however, whether an industry body like the UK Film Council should be substantially financed by the Lottery rather than direct Government support. We regret the reduction in funding made because of the demands of the 2012 Olympic Games. We recommend that the funding level should be restored immediately after 2012/13.

PROPOSED MERGER BETWEEN UK FILM COUNCIL/BRITISH FILM INSTITUTE

104.  Since the Committee took evidence from the UK Film Council and the BFI, the Department of Culture, Media and Sport has initiated merger talks between the two organisations, which are continuing. Concerns have been raised about how a merged organisation might meet the different objectives which the two bodies currently pursue and what its status might be, bearing in mind that the BFI has charitable status and a Royal Charter.

105.  We put some of these concerns to the Secretary of State, who said that the Government wanted to ensure that the economic role played by the Film Council and the cultural role played by the BFI were maintained. "We would also have to be very careful about retaining within the new organisation the charitable status of the BFI, but we do think that … it is always worth looking at how organisations can work in a more streamlined way ... We are very well aware of the sensitivities of the BFI in particular, but we hope that we will be able to come up with a model that can preserve the qualities of both organisations and at the same time release money … to maximise the cultural benefits these organisations can bring. If one speaks to people who work day-to-day in the film industry, they often do not quite understand why we need to have these two separate organisations" (Q 2350).

106.  At a time when public expenditure is under pressure, the Committee recognises the need for the UK Film Council and the BFI to seek efficiency savings and that a merger may reduce their joint administrative costs. But these are not large organisations and potential savings are limited. The Committee is concerned that this should not be a forced marriage that damages the core functions of the existing organisations.

107.  We do not consider that the small saving, which a merger of the UK Film Council and the BFI would be likely to achieve, would by itself justify an amalgamation.

108.  If, however, the proposal for the merger of the UK Film Council and the BFI goes ahead, it will be important that any organisational changes neither prejudice nor deter private donations to the BFI's educational and archival work.

UK FILM COUNCIL FUNDING PRIORITIES

109.  In November 2009, the UK Film Council launched a consultation document[36] on its policy and funding priorities for the next three years, when the Council will have a reduced budget due to reduced Lottery funding. The Committee has already expressed its concern above at the loss of Lottery funding for film. In the circumstances, the Committee thinks it is right that the Council should focus on support for film production in the UK, including attraction of inward investment in film production. The UK Film Council is proposing to strengthen the Los Angeles office of the Office of the UK Film Commissioner. The UK Film Council reports that inward investment in the British film industry was at an all-time high in the first nine months of 2009 at £686.4m. The Committee supports the reinforcement of this success.

110.  We welcome the UK Film Council's emphasis in its consultation document on supporting British films and filmmakers as its first core activity, and its proposal to use funds recouped from its investment in film to top up the Film Production Fund's budget.

111.  We support the UK Film Council's continuing commitment, as part of its first core activity, to the promotion of the UK as an inward investment destination for film production. In this context, we strongly support the proposal to strengthen the Office of the British Film Commissioner.

Investment in film by the BBC and Channel 4

112.  The BBC and Channel 4, through their film arms, BBC Films and Film4, each invest around £10m-£12m a year in new British films. This is spread over five or more films a year and often takes the form of the first investment to get a project moving. The British independent film production sector finds this investment highly valuable and would like to see BBC and Channel 4 put more money into film. Tim Adler, Film Finance, emphasised the high value to the broadcasters of their small investment: "When you consider the paltry amounts of money that British broadcasters, such as Channel 4 and the BBC actually invest in the film business—£10 million pounds each—what they get in terms of the BBC brand around the world being seen on cinema screens is a fantastic deal from the broadcaster's point of view" (Q 494) The BBC invests 0.4 per cent of the licence fee in film; Channel 4 invests 1.8 per cent of its revenue.

113.  Mark Thompson, Director General, BBC, said that the BBC had to recognise that it is, fundamentally, a broadcaster and that the public pay the licence fee to receive broadcast services from the BBC. "I believe that at £12 million a year, we are at a level—this is paying, typically, investment in eight to 12 British films, alongside the Film Council, alongside Film4—that feels, to me, about right in striking the right balance. The public get from it not just a supply side benefit in terms of a British film industry which is making more feature films than would otherwise be the case, they also get to see these eight to 12 films on the air`"(Q 2087).

114.  Andy Duncan, Chief Executive, Channel 4, said that, for Channel 4, film investment was "not a commercial activity; it is ultimately a creative activity. It is about creative endeavour to invest in outstanding film ideas that might otherwise not be made. Crucially, Channel 4 has … first right to show those films on Channel 4 itself". The investment has "a huge knock-on benefit into the wider British film ecology that is wholly helpful" (Q 2160). Mr Duncan said that film investment was "very important as a longstanding part of what Channel 4 has always done. The investment in the sorts of British films that Channel 4 has done has had a real cultural and social value as well as an economic benefit to the British film industry … In balancing it over time, although sometimes commercially it is a cost … there are more successes than failures … Certainly I would hope … there will be the opportunity when the final budgets are decided to put a bit more in next year rather than less" (Q 2220).

115.  The Digital Economy Bill, which was introduced on 19 November 2009, proposes that the remit of Channel 4 be amended to include "the making of high quality films intended to be shown to the general public at the cinema in the United Kingdom and the broadcasting and distribution of such content and films".[37]

116.  There is clearly a need for the BBC and Channel 4 to keep their investment in film in proportion to their main activities, but this must be balanced against the value to the British film industry, and particularly the encouragement of new talent, which their investment represents.

117.  We welcome the provisions in the Digital Economy Bill, which would bring film production within the public service remit of Channel 4. We encourage the BBC to give greater recognition to the role that BBC Films can play in developing new projects and new talent in the British independent film sector.

Distribution

118.  As highlighted in Chapter 1, the distribution of films in the UK is dominated by American companies. While it may vary from year to year, UK Film Council statistics show that the six Hollywood studios have over 75 per cent of the British market and the British independent distributors share the remainder. Again, as Chapter 1 demonstrates, this is not a new problem, but has been with us for nearly a hundred years. The House of Commons Select Committee on Culture, Media and Sport drew attention to it in their report on the film industry[38]. The report noted[39] that "The nature of the British film industry is perhaps not what we would wish it to be" and this could certainly be said to apply to arrangements for distribution of films.

119.  David Kosse, Universal Pictures, suggested that the arrangements were not as detrimental to the distribution of British independent films as might, at first, appear. While Hollywood companies had 75 per cent of the distribution market in the UK, it did not mean that they were sourcing only Hollywood films. "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 from around the world" (Q 1051). He pointed out that, despite the dominant position of American distributors, British films still had around 31 per cent of the British market in 2008 (Q 1047). At the same time, the Hollywood studios sometimes fail to see the potential of a film and an independent distributor can pick up a worldwide hit. Danny Perkins, Managing Director, Optimum Releasing, told us that, in the last year, it had proved difficult to finance The Wrestler. "We got involved at an early stage, helped to sort [the financing] out and it became a film that resonated around the world and delivered for us really well in this market" (Q 1069).

120.  The Government has intervened before in the distribution sector, setting quotas under the Cinematograph Films Act 1927 (though these were aimed at supporting British film production). We did not receive specific suggestions for intervention by Government to try to encourage changes in this structure. But we were told that the arrival of digital distribution could end the dominance of the distribution sector by the American studios. Eric Fellner, Co-Chairman of Working Title and Deputy Chairman, British Film Institute, said that the barrier to entry was the network of physical distribution and the ability to get films into cinemas and do deals with television companies. "Once digital distribution becomes available … where we can go and make a film and we can stick it out there, if we can find a couple of hundred grand or whatever to publicise [it] …, the final barrier to entry to the industry will disappear … That is not more than five or ten years away; I do not know if they fully believe that but a lot of people in the industry believe that" (Q 1179).

Exhibition

121.  In his evidence, Professor Ian Christie, speaking on behalf of the Association of Independent Film Exhibitors, expressed concern over the position of smaller distribution and exhibition companies: "a typical small-scale film … gets very brief, fixed runs at a regrettably small number of cinemas around the country" (Q 1689). Professor Christie's specific concern was over the UK Film Council's Digital Screen Network initiative, a £12m investment to equip 240 screens in 210 cinemas in the UK with digital projection technology. He said that the scheme had been successful in putting the UK in the forefront of the new technology, with more digital screens in operation than any other country. But it had created problems. It had proved more expensive than expected and there were insufficient digital projectors to make the miniplexes work. Since the scheme was due to run out in 2011, there were problems of economic sustainability for independent cinemas (Q 1690). In fact, the UK Film Council has confirmed that all of the money allocated to the scheme was committed by May 2007 and there are no plans to extend the scheme.

122.  Given the pressures on the UK Film Council's budget, the Committee acknowledges that it is not realistic to call for the Digital Screen Network initiative to be extended.

123.  We urge the Government, the UK Film Council and the organisations representing the exhibition sector to find a way of completing the digital equipping of cinemas in the UK which, as necessary, provides help to smaller independent cinemas to purchase or lease digital equipment.

Audiovisual piracy

124.  One problem on which there was a wide measure of agreement among witnesses from the film industry was the threat to the industry posed by audiovisual piracy. There are two separate issues: camcorder recordings of films in cinemas and file sharing.

CAMCORDING

125.  Camcorders are used to record new films in cinemas for copying and sale as DVDs. This market exists, in part, because there is a time lag between a film's cinema release and its appearance as an officially-sanctioned DVD for rental or sale. The Committee was told that camcorded DVDs can now be of surprisingly high quality.

126.  Timothy Richards, Vue Entertainment said "This is sophisticated, organised crime … These are sophisticated recording devices" (Q 1655). Mr Richards went on to explain that, over the last ten years, governments in the United States, Canada, Europe and Australia had passed legislation making camcording in cinemas illegal. The UK was the last of the Western countries that did not have legislation. Phil Clapp, Cinema Exhibitors' Association, said that the problem had migrated to the UK, following the deterrent effect of legislation and its implementation elsewhere.

127.  Mr Clapp said that the need for legislation in the UK had been "a long-running discussion and debate with Government. Government officials would maintain that the current Fraud Act 2006 is sufficient to deter and prosecute … The difficulties with that are manifold … I have sat in several meetings with government lawyers where there has been a disagreement among them as to whether it is applicable. So … on a cold Friday night in the Cardiff Cineworld, a policeman turning up is hardly likely to be equipped to understand whether or not something is an offence" (QQ 1665 and 1666).

128.  Digital Britain states that, "in relation to rights, the Government believes piracy of intellectual property for profit is theft and will be pursued as such through the criminal law", which appears to support the case for specific legislation, given that there has, as yet, been no successful prosecution under the Fraud Act. But Lord Carter of Barnes stated that "the Government's view is that the Fraud Act 2006 should be fit for purpose, and that should be borne out when there is a suitable test case. But in any event there are other criminal offences which, depending on the specific circumstances, might be used instead or in addition"(p 398). Ben Bradshaw subsequently told us that a suitable test case had been found "and is coming to the courts imminently" (p 527).

129.  Irrespective of the outcome of the test case on camcording of films in cinemas, we remain concerned that the law is unclear and provides insufficient deterrent to abuse. We recommend that the Government reconsider the case for specific legislation to make it a criminal offence to record a film in a cinema by camcorder.

ILLEGAL FILE SHARING

130.  The second issue is audiovisual piracy through illegal file sharing. The case for action was most vividly put by Tim Bevan, Working Title. In describing the problems facing the business model of the film industry, he referred to two major problems: the economic downturn and a second "which is a far more pernicious one, in my opinion, is the digital world" (Q 1375). "Sales of DVD around the world are collapsing and this is because of the internet and basically file-to-file sharing on the internet and internet piracy. If we do not do something about that … then the creative industries broadly are in huge trouble. The creative industries I see as … a bucket of talent, which is fantastic for this country and it is fantastic for any country that has a strong creative industry base, but right now there is a hole in the bottom of that bucket and we need to do something about it" (Q 1376).

131.  Digital Britain sets out proposals for legislation to reduce unlawful peer-to-peer file-sharing. The main obligations to be placed on ISPs are to notify infringers that their conduct is unlawful and to collect anonymised information on serious repeat infringers. They may then be required to take technical measures aimed at deterring infringement, such as blocking or bandwidth capping. This is taken forward in the Digital Economy Bill, which sets out measures to tackle copyright infringement, firstly through more effective legal action and the education of consumers and secondly through reserve powers to introduce technical measures such as disconnection of persistent file sharers.[40]

132.  Given the strength of film industry concern about the threat from audiovisual piracy, as reflected in the evidence we received, the Committee supports the Government's decision to introduce regulatory measures to combat unlawful peer-to-peer file sharing.

133.  At the same time, we received evidence from the industry acknowledging that digitisation required changes in the business model by which film and television content is marketed. Charles Sturridge, Chairman of Directors UK, said that there was a revolution taking place in the dissemination of audio-visual work in films and television. "We are now facing a change which, although it is much debated and much discussed, understandably, is still not, I suspect, completely understood. We are in a sense in a generation of cavalry officers trying to work out tank tactics" (Q 1424).

134.  Martin Smith, Special Adviser, Ingenious Media told the Committee that the answer to piracy "is not only about changes in the law. It is about new business models, collapsing the windows [of distribution]" (Q 840). Michael Kuhn, Qwerty Films, spelt this out in detail. "The [windows] have been naturally collapsing, partly because of piracy—if you take too long a time before you bring out your DVD the pirates will have it, partly because if you are Sky and you are paying a huge amount of money for the pay-TV rights to a Hollywood studio you do not want to wait a year until it comes on Sky because people have forgotten the marketing campaign for Terminator 7 or whatever it was by then. There is a natural collapsing, therefore, but I would argue that it should not be resisted as it is now by the studios but encouraged, and windows should be differentiated by price. We should be saying "You can have whatever you want when you want but it is going to cost you more or less" (Q 772).

135.  Tim Bevan, acknowledged that "It is our job as an industry to come together to make a new business model for moving forwards, but then we have to have the backup of extremely forceful measures to stop this piracy because piracy is going to kill us" (Q 1377). "One of the things we have to do as an industry is come up with a business model that makes films available on the internet at a reasonable price and all the rest of it" (Q 1380).

136.  We welcome the decision of some companies in the audiovisual industries to change their business models in order to meet the legitimate demands of their customers while generating a return on their investment in content, and encourage other companies to do the same.


27   In order to obtain the tax credit, film projects need to pass a cultural test, scoring at least 16 points out of a possible 31. They are awarded points for: cultural content (16 points; story in UK, characters British, British novel, English?), cultural contribution (4 points; reflects a diverse British culture, heritage or creativity?), cultural hubs (3 points; studio, filming or postproduction in UK?), and cultural practitioners (8 points; cast, crew and producers British or from EEA?) Back

28   Co-productions are treated as national films, and thus qualifying for UK tax relief, where there a co-production agreement in place between the UK government and any other government, international organisation or authority. Back

29   "Stately Attraction: How Film and Television Programmes Promote Tourism in the UK", by Olsberg SPI, commissioned by the UK Film Council.  Back

30   The conclusions of this study will be published by the UK Film Council. Back

31   UK Film Council Statistical Yearbook, 2009, p 142; UKFC statistics do not record films with budgets of less than £500,000. Back

32   Skillset, the Sector Skills Council for Creative Media, "Computer games sector: labour market intelligence digest", 2008, p 1 Back

33   Ibid and Oxford Economics, "The economic contribution of the games development industry", October 2008, p 2 Back

34   The 1980 value is corrected for inflation and expressed in constant 2008 pounds .Estimates from Monopolies and Mergers Commission. Videogames: A report on the supply of videogames in the UK, March 1995 and Entertainment Retailers Association, Statistical Yearbook, 2008, p 18 Back

35   Securing the Recovery: Growth and Opportunity, December 2009 Back

36   UK Film: Digital innovation and creative excellence: Policy and funding priorities April 2010 to March 2013. Back

37   Digital Economy Bill [HL], Clause 21 (1) Back

38   Culture, Media and Sport Committee, Sixth Report (2002-03): The British Film Industry Back

39   Ibid, page 3 Back

40   Digital Economy Bill, Clauses 4-17. Back


 
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