Film Industry: a special reportAs millions flock to the cinema to watch the latest round of blockbusters, Accountancy investigates the British film industry
As Accountancy went to press, November was on course to be the most successful month in British cinemas for 30 years with the arrival of the latest instalments of James Bond and Harry Potter films, in the build up to Christmas.
More than half of the 3,000 cinema screens in the UK are showing Harry Potter and the Chamber of Secrets and Die Another Day, the latest Bond adventure, which opened a week later.
Following hot on their heels is the second instalment of Lord of the Rings, released in December. But in the process, a host of independent British films are being pushed to the fringes of the cinema circuit, or not even seeing the light of day, to make way for the three blockbusters.
Harry Potter and the Philosophers Stone and Lord of the Rings: The Fellowship of the Ring grossed £60m in Britain last year. But while this may seem to indicate a success story for British films, the real picture is not so pretty.In poor wealth
Financially the British film industry is not healthy. The trouble is that it is fragmented, consisting of under-funded independent producers struggling to produce one film.
The common debate has been between directors and producers creating art house films and commercial films. Generally, too much attention is paid to creativity, and not enough to financial resources applied to marketing and distributing the finished product.
Business acumen and creative skills are not good bedfellows, and few in the British film industry combine both. So forming partnerships between creative and business talent is essential.
Investors in the industry have traditionally relied on the formula that one profitable film has to finance 10 that either break even or lose money. With those odds, no wonder backing one-off productions is thought to be so high risk.
Producing films could be seen as being akin to the venture capital business. It is high risk with a high failure rate, and with all the risk management and marketing techniques now available, success can still be random because of the 'X' factor of creativity and capturing the audience.
The success of films such as Amelie and Billy Elliot suggests audiences are more diverse than they once were.
New figures from Screen Digest show that cinema attendance in the UK is rising faster than in other countries. More than 17m people visited the cinema in the first six months of 2002, an increase of 25% on last year. But the main crowd pullers are still largely US productions.Homegrown challenge
The challenge is to build on the success of homegrown films like Robert Altman's period drama Gosford Park and football related Bend it Like Beckham and Mike Bassett: England Manager - both lottery funded - and ensure there are UK films that UK audiences want to see.
Films like the latest Harry Potter and James Bond instalments are guaranteed commercial successes even before they are made or released, and even though they are made in Britain with a British cast, they receive huge funding from the US. Independent films made by first time directors in the UK have more often than not struggled to gain the financial support they require to get the film off the ground.
Duncan Roy wrote and directed the independent British film AKA, which was released recently to only a selection of art house cinemas, but has since received critical acclaim and been nominated for several awards across Europe.
AKA, is about a young working class lad abused by his father, who leaves home and assumes the identity of a rich kid, passing himself off in aristocratic society, but battling to come to terms with his socio-sexual identity. It is cleverly shot in a split-screen format, but the director found it hard to promote such a challenging and controversial film.
'I begged, stole and borrowed to make the film, including re-mortgaging my house. I had to restructure the finances all the way through production until people began to take an interest in the film then the financing became a little more conventional,' Roy said.
Roy used a common method of finance in the British film industry known as sale and leaseback, which is a government initiative. Tax concession devices have increasingly become a proven stimulus for attracting investment finance in to the British film industry. Without the financial support of broadcasters, British film support has come from disparate sources.
Sir Alan Parker, who directed Evita and Mississippi Burning and is chairman of the Film Council, established in 2000 to provide financial support for the film industry, announced his strategy recently to help the UK capture a bigger share of the $60bn (£38bn) global film market.
The Film Council, which has an annual budget-of £20m, claimed it provided financial support to Roy for his film, AKA, although the director has publicly denied this.Getting down and dirty
Roy's major argument about British films is that 'independent voices in the British film industry are where we thrive best. But unfortunately the press don't always support the independent films and the public don't always get them. We need to avoid the glitz and glamour of Hollywood and get down and dirty and support the film industry that we are trying to make for ourselves and not get embarrassed by it.'
The reality for most film makers in this country is that their finished product is not going to make money, or their income stream isn't going to kick in, until video or DVD release. A very low proportion of films are released to the cinema circuit.
But placing a small British film in a multiplex and expecting people to find it by accident is not going to work because there is no culture in this country for finding art films unless you really look, Roy argues.
Hollywood studios have always had far greater financial resources to fund production, distribution and marketing budgets. Major films like Titanic and Saving Private Ryan had huge marketing budgets and stimulated public awareness before the films were screened.British humour
Several successful films that are quintessentially British in humour or setting, such as A Fish Called Wanda, Sense and Sensibility and more recently Notting Hill are financed by Hollywood.
British film production company Working Title has been hailed as a success story in the industry, with a portfolio that includes Four Weddings and a Funeral, Bean, Billy Elliot, Captain Corelli's Mandolin and Bridget Jones's Diary and has grossed more than $1.6bn at the box office. But it relies heavily on the financial support of Hollywood company Universal for its distribution.
There have been too few companies in this country that combine development, production and distribution of independent films.
British cinema companies Rank and ABPC use profits from their cinemas to fund their film production. But their duopoly of the market has now been lost to the seven major Hollywood companies involved in both production and distribution: MGM, Sony, Paramount, Universal, Warner Brothers, Walt Disney and Twentieth Century Fox.
In its first report published in 2000, the Film Council lamented 'a failure to attract significant finance from the financial markets or key potential trade investors.'
The most important development over the past three years is that the sources of finance have shifted considerably, especially in the last twelve months. The withdrawal of several broadcasters from film finance means they are not the first port of call for film makers anymore.Film Four failure
One of these key broadcasters of British independent films was Film Four, which has been shrunk down to a minor version of what it was due to heavy financial losses.
Kim Ballard, senior production and finance executive at Film Four, said: 'One of the core reasons for the collapse of Film Four was struggling advertising revenues on the Channel 4 side. Film Four is now winding down.
'We made big budget films like Charlotte Grey a couple of years ago, but can now only afford to show predominantly British films with British casts and production like My Beautiful Launderette.'US control
Problems also lie in the distribution sector which has never prioritised British films. Most of the biggest distribution companies in the UK are controlled by US studios, which makes it difficult to persuade them that the low budget British films are worth showing.
Even when a British film does break through and succeed in the global markets, the majority of the profits go back to the distributors with very little money reinvested in British film.
The five major US distributors, each of which is owned by a major US film studio, took 82.9% of box-office revenues in 1998, up from 76.5% in 1996. They distribute the films made by their parent companies leaving little room for films made by independent UK film makers.
Keith Northrop, a lawyer at Goodman Derrick, who has helped fund and been involved in production of independent British films, including the music film Honest, starring the All Saints sisters, said: 'It is very difficult for British films to crack UK distribution. For a British film to sustain life in cinemas in this country is very rare. There is a tendency for the British public to stick with what they know and feel comfortable with, which is generally American fare.
'Historically much of the revenue generated from the British cinema industry has been repatriated back to the US through a tax let out that allows Hollywood to recover royalties under the 1928 finance act.'
Prioritising the distribution and exhibition of UK domestic films is one of the Film Council's principal objectives.
Ian Thomson, press spokesman at the Film Council, said: 'We are effectively the public money face of the industry. In the past a lot of projects have gone out half baked and we are looking to change that. Concentrating more on the quality of the script, so that if the creative elements are there you will get far more interest from investors and eventually distributors because they can see the potential of the film.'
The Film Council is attempting to work with script writers and producers from the bottom up, giving them more time to develop scripts and work on production. British films have a reputation of going into production too early with scripts that are not sufficiently worked up.
But Northrop argues that the Council only has limited funds and sometimes a script and the production can take months, even years, to complete. So where will the rest of the funding come from?
'If you take out the broadcasters, into the breach step the various tax funds. At present tax-based funds are generating anything between 20% and 30% of the film's budget. These schemes consist of individual investors forming partnerships and getting a right of the production costs as one incentive to invest. But also acting as executive producers on films to generate their tax position.'
If a film spends more than 70% of its budget in the UK then it can qualify as a British film and proceed with the sale and leaseback arrangement as a tax incentive.
The film making establishment has accepted these funds as a necessary part of British film finance. In the past other methods have been tried to cover the same patch of the budget (20% to 30%), including insurance-backed gap finance.
The insurance scheme consisted of companies financing a hole in the film's budget against sales projections. They would insure that risk with an insurance company.
But despite that method being flavour of the month, involving hundreds of millions of dollars of funding, there was a meltdown in the market as claims on films filtered through.
'There were litigation issues between insurers and banks, but basically the main problem was it turned into a classic story of everyone jumping on the boat at the same time and it sank', Northrop said.
The present tax funds are a lot more solid and there is a lot more credibility surrounding them. They are raised through brokers by means of prospectors. There will be a review of the tax regime by the government in 2005, but if that hurdle is jumped without benefits being withdrawn then that is a strong source of financial development for the film industry.Film locations
Another traditionally reliable source of funding, in the form of US investment and reliance on UK technical expertise and craftmanship to develop, create and shoot films in this country, has been challenged by other countries.
'Britain used to be the first port of call for the likes of Steven Spielberg, with big budget films like Indiana Jones being filmed in the UK. But now the market has become more competitive and film makers are looking elsewhere to cut costs on production,' Northrop explains.
'The Matrix and Mission Impossible were shot in Australia and last year's Lord of the Rings was predominantly shot in New Zealand. In other words we have lost these films and the funds that come with them to a competing production base.'
According to newsletter Screen Finance there was a drop in the amount of money spent on UK and US collaborations, with a fall of 44% on last years figure. US buyers now provide only 25% of budgets compared to 50% several years ago.
The Film Council said $115m (£72.4m) had been invested in UK films in the first six months of 2002, down from $165.1m (£106.1m) in the same period last year.
On the bright side, new developments in technology, especially the internet, mean that British film makers have a new format to play with to establish further funding and increase opportunities for production and distribution of films on a global scale.
Cinema audiences are increasing, with more multiplexes being built in this country, and consumer spending on videos and DVDs is forecast to remain strong. Terrestrial, cable and satellite television networks have a huge appetite for films, and this demand is attracting finance to help the film industry grow.
A pan-European network of television, cable and internet organisations is forming and they will have an impact on Europe's film industry, both in terms of increased audience figures and investments.
The franchise model of mini studios with national lottery funding and supervised by the Film Council may change the face of the British film industry and build it up to a reputable force in the global market, but only if a more businesslike and international perspective is pursued, Baillieu and Goodchild argue.Accountants are needed
This is where accountants step in. Chartered accountant Nicole Jaeger, who works at British production company Ecosse Films, said: 'With British film production you need the creative side, but also the managerial side, which is why accountants are needed. They put together the financing and are involved in bringing tax funds to the table.'
Several film companies have two sides to them - a strong creative party and those with a solid financial background. To be a successful commercial company you need both.
Jaeger argues that accountants are drawn to the risk taking aspects of the film industry, not knowing whether a film is going to succeed or not. 'You get the chance to see a product develop from start to finish and can attach your name to it once it's finished, unlike in corporate business accountancy.'
Sir Alan Parker, chairman of the Film Council, argues: 'The UK film industry is not in need of quick fixes and band-aids if we are to succeed on the world stage. It needs nothing less than radical re-invention.'
His plan aims to:
• Use tax breaks to improve distribution of UK films at home and abroad
• Provide the UK with the 'best-equipped, most highly-skilled and flexible film workforce in the world',
• Give Hollywood access to state-of-the-art studios and post-production companies'
• Encourage financial bridges with major European film companies, and
• Forge 'strategic alliances' with countries outside Europe to get UK companies involved in big-budget productions