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was told that they had virtually withdrawn from film finance (paragraph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
|
