Against that we have some of the most exciting talent (new and old) I have seen in recent years: new directors helming monster Hollywood movies, established names doing some of their finest work (Mike Leigh, Anthony Minghella, Roger Michell, Stephen Frears); British directors producing very commercial films (Calendar Girls, Bridget Jones) and there are more I could mention (Edgar Wright, Asif Kapadia, Matthew Vaughn, Gurinda Chadha, Peter Webber, Mira Nair, Nigel Cole).
I came back to the UK in 1999 after nine years in Los Angeles building up and running a studio. I thought then that what was needed in the UK was a way of ensuring that when we have hits we have structures in place to ensure we get a fair share of the profits to pay for flops and make the numbers work.
Little did I think that the pressing issue in 2005 would be not how we retain the profits, but how those £10 million and under films we make here in the UK are actually going to get made. Two years ago, funding was pretty tight, and we knew that if markets softened (which they have) and the tax benefits were reduced (which they were), then it would be impossible to bridge the gap unless you have other capital: if you are Pathe, DNA or the film consortium with lottery money; if you have raised money through the market or from foreign sources or similar, or if you’re owned by a Studio. As many of these sources of funding are expiring or are themselves dependant on tax regimes, there is less equity about. So the hour is dark. Darker than most years in my lifetime.
A little history
I was born in 1949. Not a brilliant year for British films, but it’s a convenient year to begin looking at what has happened to us. In 1947, Britain faced a massive balance of payments crisis. The Labour Government put a 75 per cent ad valorem duty on imported film. Hollywood went berserk and stopped all American films coming to Britain. Did we stand up to the Americans? Certainly not. In 1948 an Anglo-American film agreement allowed significant tax-free remittances for films to the USA. But RANK was losing £3.35 million on 30 films produced in 1948, and Associated British Picture Corporation lost a lot on its three films, as did Korda’s British Lion. The Government acted. It set up the British Film Finance Corporation with a £5 million cheque.
Apart from Rank and British Lion, beneficiaries included Herbert Wilcox, Sir Carol Reed, Michael Powell and Emeric Pressburger (Andrew MacDonald’s relative – that family seem to do very well out of these things), Anatole de Grunwald, etc. In the course of the debate on the Bill, a certain Islington MP, Eric Fletcher pointed out that the most successful British Film of 1948 had been My Brother Jonathan. It had made a £6000 loss (around £125k by 2005 standards), based on UK cinema income alone.
With an equivalently budgeted film now, such as Sean of the Dead, nearly the whole negative cost has to come from video and TV in the UK. The point is (and was) that, unlike most other countries outside of North America, we cannot make money out of the British market alone. We are blessed and cursed that our mother tongue is English and we share a world market with the US. Two consequences follow: as we do not have access to the same capital markets as Hollywood, we need cashflow help over and above what other national governments supply; and we need non-UK distribution sufficient to allow profitability.
In 1948, the following problems had to be resolved:
• a reduction of cinema tax would mainly benefit American films;
• Government subsidies as such were and are anathema to Government;
• American interests would oppose subsidies under GATT.
They devised the Eady Levy. This levy (initially voluntary), which would generate £3 million (half to go to producers, half to exhibitors) in return for a reduction in entertainment tax, would cost the Treasury £300K. In addition, cinemas would be allowed to increase prices. The Treasury was happy, the exhibitors were happy, the Americans were happy (as they could benefit by making UK films and getting some of the Levy) and producers were happy. In today’s money, the £3 million raised would amount to £64 million.
In the years since then, three things that have led to the failure of our industry: lack of capital, lack of distribution but, most importantly, lack of ambition. The Rank Empire died a slow and painful death under its much-hated leader John Davis. As did EMI. As did Goldcrest. The one example of a man with great ambition was Lew Grade, who moved into film and US distribution – but his age and the times were against him. Here are just some of the committees and reports that we have suffered since that time:
• The Plant Committee;
• The Wilson Committee;
• The Geth Committee;
• The Middleton Committee;
• The Film Policy Review Group;
• The DCMS Select Committee on the British film industry.
I have dwelt at length on the origins of the Eady Levy for several reasons. First, how much we need a champion of our business in the bureaucracy and the government; second, how much we need an over-arching vision of what needs to be done; third, how important it is to build consensus and find solutions that do not alienate important sections of our business or government, and fourth, how important it is that the industry is unified.
It would be natural to look for that leadership from the Film Council, who only had two key missions to fulfil – building a sustainable film industry and spreading film literacy. It was therefore somewhat surprising to hear at the recent town hall meeting called by them that the reason we are in the mess we are in today is that the best and brightest are not to be found in today’s industry!
Many of us, while we support sector training diversity action and education for film workers (after all who is against good and for evil?), fear that if some effort does not go in to supporting producers there will be no industry for them to go to. As current empty sound stages tell us, we can’t depend on inward production.
To many of us, it seems that the UK Film Council – this Janus-like body, representing us to the Government but not representing us; representing Government to the industry, but helpless in light of, and blindsided by, recent tax changes, and not hearing criticism because it is the most powerful dispenser of patronage – is in need of reform itself.
However, I don’t want to bash the Film Council. I want to set out an agenda for change and improvement for the immediate future and medium term. In doing so, I have not formed another committee but have asked my fellow producers and industry experts.
An analysis
Are we sustainable without support? If you look around the world, you will see that in almost every significant country, the national film industry gets a tax break of 10-15 per cent and sometimes higher. Note that many of these countries are those where local producers can largely finance their films through TV and state subventions.
We should have those benefits but, because we have to compete with Hollywood for talent and markets (due to the shared language), we need equal broadcasting intervention plus additional cashflow support. On a tax level, independent film analyst Martin Churchill has proposed (and I agree with him) that instead of giving up on S48, we should defend it.
Existing practice clampdowns have largely stopped abuses of S48 and its continuance is simple and straightforward. Indeed, why have a £15m limit to the size of the British Film involved? The Enterprise Investment Scheme (EIS) should be expanded to give a 100 per cent write-off at a 40 per cent rate of tax with no annual limit. Because EIS schemes require investors to part with cash, this change would benefit the industry greatly, but not cause the Treasury significant pain.
But tax ain’t enough. That still puts us in a worse position than all of our competitors, so here are my four ideas for additional help:
Immediate action
• A gap fund. The Film Council would/should procure the setting up of a fund to lend the last £1 million or so a film needs in order to get it into production. The money lender would be in first position to recoup and attract very attractive interest rates. Several commercial operations already do this in the USA and some in the UK, but it would need central impetus.
• A borrowing facility against foreign estimates. Banks sometimes lend against foreign sales estimates. A higher percentage of these may be obtained through collective bargaining. Even more would be available if a degree of underwriting was available from the Film Council.
• A pre-buy of digital VOD rights. Say the Film Council bought these up front for £1 million per film for suitable commercial projects. And did so for a period of three years. It would immeasurably help our film financing efforts and provide a block of rights available to future players in this area, such as Apple, Microsoft and telcos who will need access to them to launch VOD service.
• A low budget film slate. I have already suggested to the Film Council that any sustainable industry is better than none. I have proposed a low budget film slate (average cost of £1 million) of 10 films fully funded out of the UK by TV, the Film Council, regional bodies, existing tax subsidies and a UK distributor. A modest success would make this profitable and sustainable.
Four Action Points for immediate results. In addition why can’t the Premiere Fund as an emergency measure supply pre-production cashflow and offer much softer terms for their investments?
In the medium term
Here are two initiatives: the BBC must do equity or have equity done to it. The BBC receives nearly £3bn per annum of public money and spends disproportionately on US films compared to UK films. Our industry discovers and supplies massive talent to all broadcasters, but particularly the BBC. This lack of reciprocity cannot be allowed to continue.
But it is not just the BBC: whatever some people think, Sky, Channel 5 and Channel 4 are also beneficiaries of monopolies granted by this country. The French see this and have taken action to ensure their publicly funded and publicly licensed broadcasters help national film producers – or at least do not discriminate against them. One way or another this must be brought to a head this year.
A levy for our times
I asked producers about their thoughts on a Levy for our time. Some form of equitable voluntary or compulsory additional contribution must come from those industries who benefit directly and indirectly from the UK film industry. For instance, exhibitors enjoy one of the lowest shares of box office that goes back to distributors. As few productions go on to recover 100 per cent of their P&A out of the UK – at this level, the taxman earns money, the exhibitor earns money and the distributor earns money, but the producer who makes the stuff earns nothing from this revenue stream. Looked at another way, even spending a modest £500K on P&A, a movie has to do over £2m before the producer can receive anything, but of course, again, everyone else has earned their money first.
It is perhaps no wonder that many financiers have been attracted to buying and selling cinema chains (among them, Legal & General Ventures, Boston Ventures, Clarity Partners Cinven, CDC Equity Capital, West LB). Indeed, last week Vue cinemas (financed by Boston Ventures) acquired the Star Century chain of cinemas for an estimated £50m, it having been sold 12 months ago for £22m.
US Distribution who benefit from a very healthy UK market, which also supplies much talent to them and has given and will give great tax breaks. (In some research done 10 years ago it was estimated that US studios earned over a four year period £13bn but only paid tax on £42m of that).
The model for the new levy would be the Eady Levy, which offended no-one and benefited many – and there is an excellent 1993 paper from Hydra/Oldsberg which shows how a tax efficient system of film depository receipts could help in a very similar way, with very little pain to the constituent parts of our industry.
The door is open for a brief moment (tax has not yet been finalized) to use a revision of tax laws to introduce such a system, without attracting opposition from exhibitors, US studios, major or minor distributors.
If one applied the rates of the last year in which there was an Eady Levy to box office today, it would generate £70-80m per year for production and other activities.
The long term
Finally, I want to talk about the long term. Again it would be great to have some ‘Future Think’ from the Film Council. Within the next five years, the financial model that has served the Studios for more than 50 years will end. Let me explain.
Film will be projected in cinemas by digital projection. What’s holding this up is financing the installation of new equipment. That will be solved. What won’t be solved is the question as to what will happen to the two-thirds of the screens that don’t justify conversion to digital projection and will not justify the continuation of chemical print supplies. The chances are that rentals will reduce considerably, as will distribution costs.
The market for film on TV will be transformed. Fragmentation will mean that large-scale sale of Free TV rights to a few dominant broadcasters will be a thing of the past. And big bucks for packages of PAY-TV rights will go too. Pay Per View and fragmented TV sales of a library will replace them. A long ‘tail’ of life for movie catalogues will be the name of the game.
The boom of home video will slowly be replaced by e-video – either packaged or non-packaged. And all this will happen sooner rather than later. It presents (as management schools like to divide these things) ‘threats’ and ‘opportunities’ – bad and good news.
Good news first. For as long as can be remembered, if you wanted worldwide distribution of films, it meant Studios. Only by harnessing their power could you get your films seen across the world, and – as importantly – get your hands on the profits of distribution that came with it. Subject to one condition, this will change, so that those profits might accrue to benefit a small industry like ours in the UK. In turn, there is a chance that the financial profile of the UK film business will change in such a fundamental way as to attract serious capital.
The one condition is that one has to get a film noticed. This means marketing. This means money. Now here’s where a new and exciting challenge arises. Can Government be excited enough to help a collective effort by Film UK to encourage a massive international collective marketing push for our films. Can the City?
Suddenly we are not an industry weighed down by the corpses of failed business such as British Lion, Rank, EMI Films and Goldcrest. We will be clothed in the bright raiment of the digital revolution and the prospect of becoming world-class players firmly founded on our world class and undisputed creative credentials.
Working together
So this is my analysis and my conclusion for action in the short, medium and long term. This is what we ask the Film Council to help deliver. It can happen if they will change to see the production community as partners in this great endeavour and not recalcitrant schoolboys to be lectured and whipped into shape. It can happen if we are united and determined to make happen in the 21st century what didn’t happen in the 20th.
What a marvellous prospect. It would simply do honour to a previous generation who had that vision – Korda, Balcon, J Arthur Rank, Pressburger, Powell and Putnam. Let us put aside our differences. Let us love one another and the Film Council and Gordon Brown. Let us believe in ourselves.
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Michael KuhnMichael Kuhn joined Polygram NV in 1975 and in 1991 set up Polygram Filmed Entertainment, which made and distributed over 100 feature films and won 14 Academy Awards. Films included Four Weddings and a Funeral, Notting Hill, Dead Man Walking, The Usual Suspects, Lock, Stock and Two Smoking Barrels, Elizabeth and Trainspotting. He was awarded the Michael Balcon Award for services to British Cinema in 1999, at about the time he set up Qwerty Films. Qwerty produced six features in its first four years and is starting production on Severance, directed by Christopher Smith (Creep). His book 100 Films and a Funeral was published in 2001. He was appointed Chair of the National Film and Television School in 2002. |