TUESDAY 10 JUNE 2003

MR FRANK PIERCE, MR MARK BATEY, MR STEWART TILL CBE, MR DAVID KOSSE, MR ALEX HAMILTON AND MS SAM NICHOLS

  Chairman: Lady and gentlemen, thank you very much indeed for coming to see us. Mr Fabricant will open the questioning.

  Q404  Michael Fabricant: Eight years ago we looked at this issue as part of the National Heritage Select Committee then, and one of the problems we came across was that there were not enough screens. Thanks to American companies who decided to take the bull by the horns (UIP being one of them) we had a new chain of multi-screen cinemas being opened up in the UK, and I believe this has meant we now do not have any shortage of screens. That is the good news—though, if you were here when I was questioning earlier on you will know that I am very concerned about the costs of distribution. I would like to ask Stewart Till, if I may, first of all, as UIP, what your experience has been? I believe you are getting out of film exhibition in the United Kingdom, but what has been your experience over the last few years? Why are you getting out? What are your experiences as a film producer in getting films distributed, promoted and generally shown here in the United Kingdom? You might also like to mention, too, the Easy screen experiment, if that is the word, in Milton Keynes.

  Mr Till: Let me start, if I may, with a slight point of information in that the exhibition side is a company called UPI; it has the same parents as UIP, Paramount and Universal, but I have no first-hand experience of exhibition. However, I will give you my views as a distributor and as an observer. You are right, there has been a fascinating sea-change in the last eight years, when Britain has gone from being perhaps one of the more under-screened developed film markets to, perhaps, the best-screened on a worldwide basis. Undoubtedly, I would argue, the main reason that the UK box office has grown at such incredible rates over the last 10 to 15 years has been the emergence of good screens. I think the pendulum has swung from being under-screened and offering the consumer not enough availability of films in pretty unattractive environments to too much the other way, and I expect my exhibitor colleagues would say that where we are now is that Britain—from the exhibitor point of view, not from an industry point of view—being probably a little over- screened with higher staff costs and high rent and rates, is not that profitable a business. All the exhibitors are looking at taking the right offer if it comes along. My understanding is that UCI have not said they will get out of exhibition but they will consider, as Warner Village have just done and Odeon have done, the appropriate offer. Wearing my distribution hat (the second half of your question), the UK, from a theatrical distribution point of view, is a difficult marketplace. On the plus side there is enormous growth at the box office (I think over 300% in the last 15 years, which is obviously wonderful news) and I think the audience on a per capita basis has gone from 1.8 times a year to the cinema to, I think, nearly three, which is wonderful growth. That is the good news. The bad news is it is probably the most expensive marketplace to release films on a per capita basis, and that has a lot to do with the cost of television advertising in this country. It is also a country in which you get, probably along with Australia, the lowest share of the box office. It obviously varies from film to film but it often is in the low thirties when in some of the European market-places it is the high forties. As a distributor you have got the very good news of a growing market-place and the bad news of a low share of the box office and high advertising costs. Also, when we are talking about distribution, more and more film revenue is not just about cinema it is about video and television, and the converse on the cinema side is a very, very healthy growing video marketplace that does compensate for the low share of the box office.

  Q405  Michael Fabricant: We were told that DVD penetration in the United Kingdom is far higher than that of the United States or anywhere else in the world.

  Mr Till: Not yet. When I said "video" I meant generically VHS and DVD. The penetration of DVD machines is highest in the US than anywhere in the world but—and this is my understanding—is growing at a fantastic rate in the UK and is at a 25% penetration rate in this country and I think will grow to 50%, 75% with enormous propensity for the consumer to buy DVDs or rent DVDs which is very encouraging for the whole industry. Finally, in terms of Easy Cinema, (I think "experiment" is a very good word) we are trading with Easy Cinema, we have supplied some films to them. My personal view is that it is a flawed business plan. In some areas where that entrepreneur has entered, price has been a big issue and my sense is, from a consumer's point of view, he does not have a problem about price but he might have a problem about the quality of the film he or she has seen that weekend. I do not think, if you researched this and I have not, the consumer would then say "We want cheaper cinema". So I suspect, whereas in other areas that price issue has been a relatively sensitive issue, I am not sure that with Easy Cinema that is the case. I think his plan is fundamentally flawed, and, also, the fact that you offer a cut-price, no-frills service, again, I think is not particularly relevant; I think the consumer wants to go to the cinema and have some sort of service in the concessions area. My and UIP's concern is that if that is a flawed business plan then that is his concern and if it fails then obviously be it on his head, but what we do not want to do is, through his aggressive marketing techniques, while he fails he destabilises the marketplace to the detriment of everyone, distributor and exhibitor.

  Q406  Michael Fabricant: That is very helpful. One of the things that you talked about was the amount of money retained by the distributors. Perhaps I should now focus my gaze on to Frank Pierce and Mark Batey of the Film Distributors Association. You heard just now from Stewart Till what we have heard from other witnesses here in the UK, and also in the United States, that far more is held back here in the UK and only 30% or so is passed on back to the producers. Why?

  Mr Batey: Thirty per cent to the distributor. Out of the ticket price that is paid at the box office, obviously VAT is paid and then approximately—and it does vary considerably—30% will be remitted back to the distributor who has provided the film in the first place and has released the film and marketed the film. So that 30% has to cover an awful lot of costs. Then, in turn, some money is remitted back to the producer in due course.

  Q407  Michael Fabricant: Clarify this for me, then: so it is not the distributors holding the money back from the film producers, you are saying it is the theatres holding it back from the distributors, who in turn are unable to pass—

  Mr Batey: Not holding it back. The exhibitor, obviously, collects the money in the first place, the exhibitor collects cash from the paying customer, and then there is a whole pipeline to follow. I would not say they are holding it back.

  Q408  Chairman: You are still not answering Mr Fabricant's question. Why? Why is this country unique in the take of the cinemas compared with pretty well every country in the developed world?

   Mr Batey: If I may just interject, I think you are talking to the wrong group because as a trade body we do not get involved at all in the bilateral agreements that are made between the distributor and the exhibitor. That is not our function. We are oblivious to that. Naturally, it is a generic and known fact that the terms in this country, along with Australia and for that matter South Africa and New Zealand, are on the low side. But, as I say, as far as the FDA is concerned, we never get involved in the sales and the bilateral agreements that are made between the exhibitor and the distributor.

  Q409  Mr Fabricant: Part of it came about historically, I think, because of the way the American film producers came to the United Kingdom thank God they did, too—and actually expanded the film market here in the UK as far as theatrical screening is concerned. As Stewart Till has said, there has been a sea change—his words—over the last eight years. Nevertheless, it is now providing a real hindrance to British film producers. Perhaps I should then ask someone who is a British film producer, from Momentum Pictures, if he has any observation to make on this.

  Mr Kosse: We are not really a producer; we are more of a distributor. As a distributor, we negotiate the best possible terms with the exhibition to get the highest percentage possible, but the percentages that have been described are market conditions percentage. In fact, they are probably lower than that for the independent sector. The more market clout you have as a studio with pictures, the more the exhibitors must have the opportunity to negotiate better terms. The answer as to why these percentages have turned out to be what they are is subject to a lot of interpretation. People have various theories as to why this is. The most common one I have heard is that, as the build-up happened with the increase in screens, the terms worsened. The reality is that in the market conditions now, for everyone in the marketplace—the studios, including the independents—the returns for distributors from exhibition offer the lowest percentages in the world. Fortunately, that is somewhat countered by it being one of the stronger video and DVD markets in the world and certainly for the studios it is probably one of the strongest paid television markets still in the world with Sky.

  Q410  Mr Fabricant: We heard that too but of course it was also pointed out—again I am talking about the sort of evidence we received in the United States with our 20 or so meetings there—that although it is good for DVD, and although it is good for pay TV, it does act as a hindrance for actual British companies producing home-grown movies here in the United Kingdom. You cannot get DVD distribution until you have produced the movie. Do you think there is a little bit of a cartel going on between the exhibitors, the fact that this change that came about when the screens were being constructed, and indeed when the screens were being owned by the film producers themselves, although this is now changing, is still being maintained?

  Mr Hamilton: In relation to the exhibitors, in some ways to anyone coming from any other business outside the film distribution and exhibition business, the accountancy practices and the revenue-sharing practices do seem somewhat obscure and archaic. But, by and large, the ongoing terms of trade set between film exhibitors and film distributors are set by the exhibitors, who assign a certain cost to the running of their screen and that is built into their capital expenditure, and then in principle they build in a small profit. This is apart from the actual profit they may choose to make in concessions. Whenever a new cinema is opened, a set of figures is presented to the distributor for them to supply films on that basis. There is quite often a degree of negotiation which follows that, but fundamentally it is marginal negotiation that takes place. You would say in terms of the terms of trade generally that those are set by the exhibitor. The distributor on a discretionary basis is entitled to ask for what is called in industry parlance special terms on individual movies. On those individual movies, which by their very nature are usually studio product because they represent normally what we would generally call blockbuster material, where the distributor feels that their product is highly desirable, they are seeking to obtain a larger percentage of the box office receipts coming from that. A cartel, as it exists, is purely probably a legacy of the historical growth in exhibition in this country. Until the early Nineties, that was largely dominated by a duopoly represented at one time by the Rank Organisation and at one time by MGM. That had a depressive effect on revenues for distributors, which has then continued because it was seen that exhibitors effectively—and this has changed in recent years but only around studio blockbusters—have the upper hand.

  Q411  Derek Wyatt: Can I ask Momentum a question? You said in your evidence that you do not feel that the Film Council is effectively lobbying the Government. Do you want to expand on what you would like us to say to help them lobby a bit better? How would you like that relationship to improve if you feel the Film Council are not lobbying the Government effectively?

  Mr Hamilton: I think there is a general consensus within the industry that the Film Council has been very effective in a lot of the measures that it has introduced and that it is continuing to look at the film industry in an holistic way. What strikes us, though, is that the influence that seems to be wielded by the MPAA in the United States, as an example, considerably outweighs that which the Film Council may wield upon the powers that be in the UK. Obviously that may be an outside perspective looking in but what I think, from an independent sector's point of view, we would hope that the Film Council could represent is almost an institutional representative to Government as well to act as a conduit for the concerns of the industry at large and sections within that industry. Just as it is fully beholden upon us to represent our case to the Film Council as to where our business interests and profits may lie, we would like to see the Film Council actually increase that lobbying position on their part. Whoever we speak to on the Film Council, they are not aware that they do not want to do that; I think they fully believe that that is part of their remit and we in distribution have generally supported the initiatives that they have undertaken over the past few years. That was a simple recommendation on our part and what we would look for in a Film Council, in response to one of the questions asked by the Select Committee.

  Q412  Derek Wyatt: We have had a memo, which you have not seen, from British Trade International, part of the DTI. One paragraph hurts me. It says: "Working closely with the DTI, the DCMS, the Foreign Office and the British Council...." We have five organisations that are representing us overseas. Why do we not have just one?

  Mr Till: That is a very good question, not least because you should only view the British film industry in terms of the world-wide environment, and we are lucky enough to make and produce films in a language that can travel and often we make films that have the ability to travel. I think the British film industry has to think on a world-wide basis rather than just about its activity in the UK. If I can take off my UIP hat and put on a Film Council hat, because as you may know I am also Deputy Chairman of the Film Council, I think the Film Council would welcome a more streamlined interrelationship with the government departments to operate more effectively. The Film Council's activities in the UK are predominantly with the DCMS, and that is a very fruitful and pretty effective relationship. As soon as we start looking outside the UK, it becomes more complicated and we have to draw together those organisations you mention or we get drawn into that debate. I think there is a need for a more cohesive government strategy on how the film industry can work with it on a world-wide basis.

  Q413  Derek Wyatt: Would your recommendation be that the Film Council in Los Angeles has that function or would you create a body called Film Council Overseas? How would we do it?

  Mr Till: From the Film Council perspective, there is an International Department based in London and the British Film Office in Los Angeles. Undoubtedly that is the right organisation for our interaction in North America with the studios. I do not think you would want to extend their remit around the rest of the world but, in terms of North America, from where you have obviously just returned, the BFO is absolutely the right organisation to represent the Film Council. I think it is more how the various government departments that have an interest in the marketplace outside the UK could most efficiently work together with the BFO in North America and within the Film Council's International Department out of London.

  Q414  Derek Wyatt: If you were us, what would be your recommendations? What would you want us to say to help you in this film inquiry?

  Mr Kosse: If I were to put it down to one thing in terms of a British distributor's perspective and a British independent film maker's perspective, it is television support for the British film industry beyond the tax support that, hopefully, will continue. I believe that is essential to getting most of these independent films made. The other factor in this has to be television. Certainly on the independent film side, particularly within the British market, the lack of television support for British films relative to the size of the business is a hindrance at this point for the independent sector.

  Mr Till: If I can wear three hats simultaneously, the UIP hat, the Film Council hat and a Skillset hat, I would say three things. I agree completely, wearing my Film Council hat, with David Kosse of Momentum, that the British broadcasters do not do enough for the local marketplace. They do a lot less than their counterparts throughout the rest of Europe.

  Q415  Derek Wyatt: Can you explain what it is then that you would like them to do? Is that buying more film or joining you in the core funding, or what?

  Mr Till: It is all and any of those things. Critically, what the British film industry needs from the broadcasters is predominantly investment. That could be equity funding in films, development money in film, production financing, acquiring television rights; you are cutting the same cake different ways. I think the statistic is that something like 2.8% of films shown on British television—free, terrestrial television—in recent years has come from new British films. There is not an investment in British film production. I think there should be encouragement for that, and obviously the Communications Bill as a starting point has the ability, if that is seen through. Also wearing my Film Council hat, I would hope that this Committee endorses the role of the Film Council, acknowledges it is early days but that it has achieved a lot, and that the support of the Government both in strategy making and in funding is a good thing and should be furthered. Finally, I think we should look not only at short-term issues and short-term problems, but we as an industry, both the private and public sectors, have to pay more attention and spend more resources on training and education. I do think we are operating in a world-wide environment worth, say, $60 billion, growing at a rate of 6%. You have probably heard this before but there is no other mature market in the world that is growing at that rate. The British Film industry can get more than its fair share of that with enormous economic and cultural repercussions. I would hope that this Committee in its thoughts not only focuses on the short term but also on the long term through training and education.

  Chairman: I apologise that we have to pause at that point.

  Q416  Alan Keen: I noticed that Sam Nichols was nodding enthusiastically when David Kosse asked for recommendations for TV to be of more help to the film industry. Is that because you think that would particularly help independent films to get a showing if they were shown on television? I know you are also talking about TV action and putting money in to make films. I understand that.

  Ms Nichols: I think on all levels there are various ways that broadcasters could help. David Kosse and Stewart Till mentioned that broadcasters become involved with feature films but at that level broadcasters have cut down the number of films they are showing. Also, particularly in terms of the commercial decisions they are making in respect of advertising revenues, if British independent films are shown, they may not be shown in the prime slots that are valued more highly because of the advertising slots within those films. That does mean the money available to go back to distributors who are selling their films to the broadcasters is diminished and keeps diminishing. You will find a lot of independent films are shown at 10 p.m. or at midnight. The financial reality of that is that the money that those films are therefore worth to the broadcasters and distributors is much less, which makes it an ongoing losing battle to promote British films on television from the distribution side.

  Q417  Alan Keen: Last week we heard about the tremendous cost of advertising as part of the film industry. Is there enough cohesion and discussion between distributors and the exhibition and the film makers to be able to promote independent films? Could not some of the money spent on advertising of the blockbusters go towards advertising the independent films?

  Mr Kosse: That takes you back to the television story again. A studio or a large independent runs a financial scenario when releasing a film and they decide how much they are going to spend promoting and advertising that film. Studios have output deals with pay television but some have output deals with free television, or at least they have an idea of what they are going to get from free television. If you have one film that does £20 million at the box office, or is a huge blockbuster, you can sell, along with that film, 12 films that do a much smaller amount. When they are spending their money, they factor in that they are going to get a guaranteed sale to the broadcaster of a certain amount of money based on whether the film does £1 million or £2 million at the box office, whereas an independent company that specialises mostly in British films, which does not have a driver, so to speak, does not have that guaranteed revenue, and so they are going to be more conservative with regard to how they spend the money in marketing that film. Therefore it becomes a self-fulling prophesy that the film does not work. That might be part of the justification behind some of the Film Council P&A support that is coming on board right now, and that is very welcome and anticipated by the independent sector. It all comes down to anticipated future revenues because we all know that in most cases we are not going to get most of our marketing spend back from theatricals. We are running a lifetime scenario, and the independent can count less on the television revenues from the UK than the majors can.

  Q418  Alan Keen: Can I ask you a question which is not directly connected but is indirectly connected. This may be looking only through my eyes, but do the special effects play a bigger part in the blockbuster movies and are feature films becoming more and more cartoons? We would not all recognise some things as special effects because it is done so cleverly. Do you think that there will be a move back by the public from those sorts of films using all those special effects towards the more artistic type of film, as I would hope, a film based more on the dialogue rather than on the action? Is there any sign of that or are we doomed to just exist on blockbusters?

  Mr Till: I do not think you are doomed at all. I think potentially we are in a very healthy situation. On a world-wide basis audiences are growing at the cinema and for watching video. It is not just that the same people are going more often but the audience is becoming older, wider and more diverse. This summer, obviously the big blockbuster fashion has been The Matrix and X Men, which are very driven by special effects. There is a film coming out soon, and this is an appropriate venue for a commercial for one of our films, called The Hulk, which is based on a comic book character. It is directed by Ang Lee, who has done Sense and Sensibility and Crouching Dragon, Hidden Tiger and all the special effects have had exceptionally intelligent treatment. I hope one of the biggest films of the year will be a work entitled Love Actually, the Richard Curtis comedy. He wrote Four Weddings and a Funeral and Notting Hill. Love Actually probably will not have a special effect in sight. I am a great optimist about this and I think that we are getting to the situation where there is an enormous variety of product. Another film, and it has nothing to do with UIP, Calendar Girls, could be a wonderful British film. I hear, as you do, the Buzz from (Tan) is great, and again there are no special effects. I think you are getting films aimed at the younger people which are very special effects driven but with a broad range of tastes and appeal. There is so much opportunity for Britain because we have, after the west coast of America, the most fertile land cost-efficient area of special effects. That is a great plus about this marketplace. We can do the special effects in this country. We have a growing legion of writers; we have the creativity; we are probably the one country after the US that can make these films covering the big special effects genre films, as they are called, to the drama, well-written projects.

  Q419  Alan Keen: We have been disappointed that there are no targets for introducing digital distribution because of the cost of it and it would be difficult to do sooner than five or 10 years, as we were told last week. Digital distribution obviously would be more expensive per ticket bought in smaller communities but it would help to distribute the independent films around the country and probably would make the total audience grow further. Is there any chance of the industry getting together to develop and spend on digital distribution?

  Mr Till: Absolutely, and I think it is unfortunate that five years ago people got carried away. One of the things about new technology, whether it is satellite television, DVD, CD or broadband distribution over the internet, is that takes longer than the optimists believe. I do believe digital distribution is round the corner; I think round the corner is three to four to five years. That is nothing in the grand scheme of things. Because it can take a year or two to make a film, that is not that long. What is holding it back is not the exhibitors and the distributors coming to an agreement; it is just that the quality is not quite good enough yet. Once the quality is strong enough, and that is not that far away, there is quite a transparent dialogue between exhibitors and distributors. The exhibitors can say that the cost of the kit is X; the distributors will say, "We will save this on the cost of prints" and both are visible numbers. It would be very easy to negotiate some sort of trade-off in the terms during some sort of pay-back period, once you get the digital exhibition projection into the cinemas, with enormous economies of scale, which you can then put into the village hall—perhaps not the prime, state-of-the-art equipment but a version of it that will follow on the back of the economies of scale. I think really I would argue for a little bit of patience perhaps over a three to five year time frame for the scientists to get the quality right, and then it will flow into the marketplace; this will not inhibit it. As UIP, we spend hundreds of million of pounds a year on prints on a world-wide basis that add no real value. At least with marketing money, OK, you go to an audience. The cost of prints is like the cost of tyres on your car; you have to have them but it gives you no pleasure or added benefit. The moment you can replace prints with a cheaper way of getting the film on to the screen, that has to be to everyone's benefit.

  Q420  Alan Keen: To give an example, and I represent the western half of the London Borough of Hounslow, for a long time the Watermans Arts Centre was the only screen in the borough, but it did not have many seats. Then we got Cineworld at Feltham, the second busiest in the country. You would think there is a football match coming out if you are there on a Saturday night. There are so many people there and it is so exciting, right across the cultural diversity of our west London area. We have another theatre in addition to the Watermans, in the Hounslow Centre, the (Paul Robeson) Theatre. They have begun to show the odd film. They have difficulty filling the theatre every night of the week. Digital distribution would help theatres like that, would it not? If they cannot fill the seats for live shows one or two nights a week with specialist films, even Gerald would come if some of his favourite old films were shown on there occasionally. That would attract him to Hounslow as I do not think he has ever been. Do you agree with that system? It would be new faces which came?

  Mr Till: Absolutely, and the beauty of digital projection—and digital covers a multitude of sins including DVD—is that it will help every sector. It will help the big release because they will not have to pay for the cost of 800 prints; it will help a multiplex that can perhaps programme in the afternoon specialist films either for a niche audience or of an historical nature as well; and it will offer more choice. The multiplexes I believe will be sightly more like television channels with different programmes in the afternoon and evening because the cost of distribution will be so much less as there are no prints, and that small hall will not have to worry about the costs of the prints. It will help the whole distribution exhibitions centre. As you know, the Film Council received a capital grant from the Arts Council to invest in cinema . Very deliberately we are putting that money in to digital projection because we think that will leverage the most effect into the marketplace. With that £15 million, rather than build three screens or two cinemas showing specialist films, you can put up a whole host of digital projections into a number of exhibition screens with their co-operation. It is a very good way of accessing films across the board.

  Chairman: Thank you very much indeed. I apologise again for the interruption.

  The Committee suspended from 4.21 p.m. to 4.32 p.m. for a division in the House