The European Strategy: The Curse of Harry Potter (Part 3)

When we last left the European Commission, it was continuing its pursuit of  SMUS (Send Money to the US) based IP policies.  We raised some questions about the wisdom of this strategy.  But there is also a different EC conversation underway about revision of the rules governing public film subsidies.  And this one is more genuinely vexed and interesting.

As I noted in the Send Money Pt.2 post a couple weeks ago, Europe produces a lot of movies–over 1100 in 2009–but very few that reach audiences beyond the national markets in which they are produced.  Because movies carry a lot of the burden of representing culture in Europe, this failure generates a lot of anxiety.  So what to do?

The localism of the European cinema has an obvious linguistic component.  People want to see movies in their own languages.  But localism is also built into the elaborate system of public support for European film, in which dozens of national and regional funding bodies subsidize literally thousands of small production companies: 600 in France, 400 in the UK, 200 in Germany, and so on.  These subsidies are very unevenly distributed across the EU, but add up to roughly €1.3 billion in direct grants (see chart below) and about another billion in tax breaks.  According to the EC, roughly 80% of films receive some public subsidization.

The chart below presents this data as a per capita subsidy.  I’m not going to fully decapitize it, but the takeaway is that France provides the most in grants and the UK the most in tax breaks.  The UK leads overall with a total public subsidization of film production of around €1 billion.  France follows at around €600 million; then Germany at around €200 million. And things drop off from there (this was in 2004, and overall funding is said to have increased slightly since then).

A lot of this funding is contingent on the money being spent in-country–a requirement known as territorialization.  This is a complex issue that causes the Commission a lot of concern.  On the downside, it runs against the common market principles at the heart of the EU project.  It has also become a vehicle for competition among EU member countries to attract Hollywood productions–a race that in this instance the EC views as a destructive competition to, yes, send money to the US (here, pg.6).  On the upside, these rules prioritize a linguistic and cultural diversity agenda that is also at the heart of EC audiovisual policy.  Local productions are more likely to be in local languages, use local actors, reflect local circumstances, and so on.  Territorialization rules, consequently, blend cultural policy with industrial policy at the national level.  For these reasons, most people in the movie and TV business believe that territorialization is key to the overall case for audiovisual subsidies, since these decisions are still made nationally.

(The chart and most of the information above comes from the 2008 EC Study on the Economic and Cultural Impact, Notably on Co-productions, of Territorialisation Clauses of State Aid Schemes for Films and Audiovisual Productions (Bretell et.al.)

Anyway, the EC is required to revise its rules on AV subsidies by the end of the year and is now seeking input on a wide spectrum of issues in this area, of which I’ll highlight a few:

  • What should be the objective of State aid for films and audiovisual works?
  • How should the subsidy race to attract major film production be controlled?
  • What activities other than production should be included in the scope of the Communication and which State aid criteria are appropriate for such activities?
  • Does the digital revolution affect the State aid rules?
  • To what extent are territorial conditions justified?

Good questions!  A few observations and a couple proposals to follow:

The pros and cons of territorialization requirements seem like a wash to me.  The way I read the study, the overall effects are incalculable. The existing funding system is strongly dominated by the UK, France, and a few small countries like Ireland and Sweden, which provide high levels of support per capita.  But with the exception of Ireland, none of these have strong formal territorialization rules.  It is generally understood, however, that informal factors, such as the need for mastery of the language, bureaucratic culture, and social networks around different national funding bodies, play a large role in the de facto territorialization of cinema in those countries.  Most of the Eastern European countries, for their part, offer few if any subsidies, but do offer cheaper locales, labor, and outsourcing of services.  So while I’m sure there is tweaking to be done with regard to these rules, I don’t know what the EC could or should do about territorialization more generally, short of starting its own EU-wide funding body as a counterbalance.  On a list of problems with the EU audiovisual market, this would come third or forth for me.

Higher on the list for me is that, as a matter of cultural policy, it’s not clear why states should subsidize large commercial productions at all.  As the EC consultation notes, “such subsidies distort competition among European production locations. In these cases, the question is not whether the film will be produced but only where this will be done.”  There’s no compelling EU public interest here–only a race to create bad public policy in which EU states pay off the studios to keep production out of other EU states.

Small market and/or niche market products that the commercial model systematically underproduces are a different matter.  Territorialization may be a blunt instrument for achieving this kind of diversity, but such diversity strikes me as an entirely appropriate public policy goal.  Reasonable people will disagree about where/how to draw the line between the two, but clearly it should be drawn well south of the Harry Potter-level shakedowns described here–or circumvented altogether, as I’ll suggest below.

The biggest issue, ultimately, is whether European audiovisual culture can move toward a model that isn’t as sharply defined by subordination to Hollywood on the one hand, and by the cultural and institutional fragmentation of the EU market on the other.  There’s nothing new in this question, but the persistent failure to resolve it over at least two decades of coordinated EU/EC policy suggests that some rethinking of the state’s role in promoting culture may be needed.  Traditionally, public funding has been built around two goals: encouraging local production and attracting external investment.  Distribution strategies, in turn, have been mostly the province of state-funded broadcasting, which has been good at showing flagship productions to domestic audiences, but not much beyond that in either scope or reach.  Neither set of investments solves the basic challenge facing most European movies: obscurity.  In my view, it’s impossible to characterize this is a funding problem, a content problem, a filmic sensibility problem or anything else until the EU addresses the licensing issues that block widespread distribution and the cultivation of wider audiences.  And licensing in two respects:

First, the licensing issue that’s on the EC radar.  At present, European films are hard to distribute within Europe because rights clearance involves so many different companies.  Unlike in music, there is very little collective rights management in the audiovisual sector.  That there should be more, in some form, is uncontroversial at this point.  There are a variety of proposals to address these issues, many of which get hung up on the lack of incentives for producers to do anything about the issue.  Here’s a suggestion.

  • The EU could create a transitional program to make grants to production companies in return for turning over management of their rights to an EU-wide collective rights organization.  This would be voluntary: if a company felt it could do a better job managing it rights, it need not apply. If the rights organization does its job properly, these incentives can be phased out.
  • Such grants could also come with requirements to share production budget information, which would partly address the lack of data around things like territorialization and begin to create the evidentiary basis for the next round of rationalization of EU cultural policy.

Second, EU funding bodies should think more creatively about how to ensure wider digital distribution of European works.  Few of these films make money.  Most suffer first and foremost from obscurity.   And the wider European and international markets are already locked up by American movies and TV.   How, under these circumstances, do you build an audience for European movies?  Here’s a modest 2-part proposal:

  • Make significant public funding contingent on creative commons commercial use licensing of the work after an initial period of commercial release.  Let’s say, provisionally, 5 years after first release–after the major distribution windows are over.
  • Allow the production company to buy out of this clause if it chooses to do so (if, say, the film is a hit) by paying back the funding agency.

In addition to encouraging much wider circulation of European film through legal channels, such an approach would also:

  1. Slowly defuse the anxiety around piracy (there is no starving auteur with violated rights at the end of this story).
  2. Create a probably permanent competitive advantage over Hollywood in regard to transaction and licensing costs.
  3. Provide an ex-post way out of the public funding of blockbusters (while still protecting small market films and riskier bets).
  4. Provide a clearer sense of the public funding mission in the digital era: to maximize not only the production of culture, but also the ability to experience and enjoy it.

I have no illusions about the difficulty of getting stakeholders on board for this (or something like it).  But these would be big wins for the EC and Europe.  And absent some similar game changer, we can look forward to having the same conversation ten years from now, just in time for the Harry Potter reboot.

 

More…  From a 2010 Oxford Economics Report funded by the UK Film Council, which discusses the race to the bottom (not their words) as the big studios shake down countries and municipalities for tax breaks.  Unfortunately, the study does so in order to justify why the UK should expand its own shake-down compliant film subsidy policies.

Hungary has developed what is essentially a three-pronged approach to luring foreign film producers: a significant tax incentive scheme is supplemented by a high quality infrastructure – spearheaded by the 50% state-funded Korda Studios, which opened in 2007 – and aggressive promotion of its offer in Hollywood. Through practical advantages such as 12-hour working days, English-speaking local crews and a variety of favourable urban and rural landscapes in which to film, Hungary has developed an attractive proposition to sell overseas. Hungary pioneered its tax incentive scheme for local and international co-productions in 2004. The system has seen considerable success, offering a 20% tax shield with money paid through a local third party sponsor, and the flexibility to be able to spend part of their film budgets outside Hungary without suffering a reduction in state aid. Despite the programme being halted for part of 2008 while it was investigated by the European Union on antitrust grounds, it has now been reinstated until 2013 after agreeing to implement “cultural eligibility tests” on prospective productions. The results of the scheme speak for themselves: overall spending on film productions has increased significantly and now Hungary is among the top countries in central Europe to host international productions. National Film Office figures show 11 co-productions in 2004, 13 in 2006, 25 in 2007, and 48 in 2008…. With other eastern European countries (such as Romania, Bulgaria and the Czech Republic) looking to emulate the success Hungary has achieved, and in some cases bounce back to production levels that were even higher than Hungary’s before the global downturn, the UK is likely to be exposed to further intense competition for film production budgets.

….

Amongst the plethora of US states offering packages of support to film-makers are long-established production locations such as California and New York. The New York state programme provides a refundable 30% tax credit – increased from 10% in April 2008 – on qualified production costs incurred by features, TV movies or series which shoot at a qualified local production facility. To be eligible, a production must shoot 75% of its location days in the state or spend $3 million or more locally. Additionally, the “Made in New York‟ programme provides an additional 5% refundable credit for productions shooting within the five boroughs of New York City.

Still More…. I’ll reproduce some interesting sections from the territorialization study on the views of practitioners (p.160), which I feel safe in saying that no one will otherwise read:

In the view of some critics, this [systems of territorialized public subsidies] results in “too many films”. In the words of one respondent, “there are too many ‘localised’ films on budgets of €1.5m to €2m.” One respondent referred to certain film-makers as “snipers” because they “know how to capture public funds”. A change in the rules, he felt, should encourage bigger budgets and more co-productions. He felt that many of the films going into cinemas in his country were “really TV movies”.

A minority of producers acknowledged that the disparity between national funding and European funding might be acting against the emergence of a pan-European film culture. In other words, the larger supply of funding at the national level, relative to European level funding, is holding back the production of larger films with a European rather than a national vision. The producers who voiced this opinion were not, in general, in favour of reduced national funding, but were in favour of enhanced pan-European funding. One producer described detailed proposals for enhanced support for pan-European distribution, but said that pan-European funding required the support of Member States and was unlikely to receive it.

There is a second strand of opinion, not widely represented by our interviewees, but with some eminent spokespersons: that the subsidy has allowed European filmmakers to ignore their audiences. David Puttnam advanced this argument in his keynote speech to the Copenhagen ThinkTank on European Film and Film Policy;

“For a number of years we in Europe were encouraged to believe that we could ignore our audience by hiding behind a comfortable and ever-shifting wind-break of subsidy…Yet, for all this public investment, and for all the energy expended on production, where are the European examples of work that this year sits comfortably alongside Crash, Goodnight and Good Luck, Brokeback Mountain or even Munich, all of them films that have a fair degree of cultural integrity and have managed to reap an equally fair degree of commercial success?”

This view is also echoed elsewhere in the Copenhagen Report: “The role of film funding and film policy has tended towards enabling producers, distributors and exhibitors to survive. In order to survive, producers need to have films in production; this leads to an over-supply of films that are “good enough” to attract public subsidy but not good enough and/or not marketed well enough to attract wider audiences and make a return.”

To explore this issue we decided to ask our respondents to comment on the following statement, to ascertain whether territorialisation clauses were hindering the possibility of a ‘European cinema’:

• Statement 1: “Removing territorialisation clauses will better enable a common European market for the production and distribution of film”.

Of the 21 interviewees who answered this question, the majority (62% – 13 respondents), disagreed with the statement. These respondents were from both territorialised and non-territorialised Member States. As we have already said, many respondents regard territorialisation as a foundation of financial support from public funds. Thus removing the clauses would result in less funding, with a consequential impact on both the volume of production and on budgets. The respondents who agreed with this statement were mainly associated with larger and more commercial companies. The eight respondents who agreed with the statement were all from production companies in France, Spain, Germany, Denmark and Finland….

Some of these respondents simply believed that territorialisation rules infringe on commercial freedom and make production inefficient. If funding remained stable without territorialisation, then removal of territorialisation would increase the efficiency and reduce the costs of co-production. Others believed that this would actually be a stimulus to co-production, and thus better enable a common European market for the production and distribution of film. They attached to public subsidy would further increase the incentive to co-produce, acknowledged that a reduction in the intensity of territorialisation clauses but possibly at the cost of the number of films made. A minority of respondents felt that public subsidy distorts the film market, which, if left to itself, would resolve it in a way that is consistent with the cultural objectives. However, these are theoretical arguments and evidence is not available to model them in detail.

For smaller, less commercial companies, who are likely to be more reliant on public subsidy, there will be a greater negative impact on the number of coproductions they make.

There is in fact fairly widespread recognition that, whereas linguistic and cultural diversity are recognised as core objectives of EU cultural policy, they are to some extent in conflict with the economic objective of a common production and distribution market. The European Film Companies Alliance (EFCA), in its response to the Workshop, also acknowledged that cultural and linguistic fragmentation in Europe is an obstacle to an internal European market. The biggest European films, according to EFCA, make the majority of their revenue in their domestic market; and this leads to a greater focus on national audiences by producers.

 

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