LIST OF TABLES
LIST OF FIGURES
CHAPTER 1: INTRODUCTION
CHAPTER 2: THE DECLINE AND FALL OF THE EUROPEAN FILM INDUSTRY
CHAPTER 3: THE CURRENT STATE OF EUROPEAN UNION FILM INDUSTRY
3.1 MARKET SHARE OF GROSS BOX OFFICE
3.2 FILM PRODUCTION & MARKET SHARE OF NATIONAL FILMS IN EUROPE
3.3 DOMINANCE OF HOLLYWOOD FILMS IN HOME MARKET AND IN EUROPE
CHAPTER 4: THE PROBLEMS OF THE EUROPEAN UNION FILM INDUSTRY
4.1 HIGH FRAGMENTATION OF THE PRODUCTION SECTOR
4.2 DECLINING MARKET SIZE
CHAPTER 5: THE PUBLIC AID SUPPORT TO EUROPEAN FILM INDUSTRY
5.1 BRIEF HISTORY
5.2 MEDIA PROGRAMME OF EU
5.4 THE NATIONAL MECHANISMS OF PUBLIC SUPPORT IN EU
5.5 EU STATE AID RULE - 2001 CINEMA COMMUNICATION
CHAPTER 6: EFFECT OF SUBSIDY IN EU FILM INDUSTRY
6.1 CULTURAL PROTECTIONISM AND SUBSIDY TRAP
6.2 THE SUBSIDY RACE IN THE EUROPEAN UNION
6.3 THE IMPACT OF INWARD FOREIGN INVESTMENT IN EU FILM INDUSTRY
6.4 EU FILM PUBLIC AID POLICY: CULTURAL EXCEPTION OR FREE MARKET?
6.5 SUBSIDY RACE: THE US CASE
6.6 CONTROLLING THE SUBSIDY RACE - THE 2012 DRAFT OF NEW CINEMA COMMUNICATION
CHAPTER 7: THE TRANSITION TO DIGITAL CINEMA
7.1 DIGITAL CINEMA INITIATIVE
7.2 VIRTUAL PRINT FEE (VPF): THE BUSINESS MODEL OF DIGITAL CINEMA CONVERSION
7.3 THE DIGITAL TRANSITION IN EUROPE - RATIONALE FOR PUBLIC SUPPORT
7.4 STATUS OF DIGITAL ROLLOUT IN EU
7.5 THE DIGITAL ROLLOUT AND THE COMPETITIVENESS OF EUROPEAN FILM INDUSTRY
CHAPTER 8: EMPIRICAL RESEARCH
8.1 DOMINANT ECONOMIC POLICIES IN THE EUROPEAN FILM INDUSTRY
8.2 DEMAND AND SUPPLY IN THE DOMESTIC FILM MARKET
8.3 OTHER DETERMINANTS OF THE SELF-SUFFICIENCY RATIO
8.4 MODEL BUILDING
8.5 DATA COLLECTION
CHAPTER 9: CONCLUSION
TABLE 1: NUMBER OF FEATURE FILMS PRODUCED IN THE EUROPEAN UNION (2007 - 2011)
TABLE 2: EU MARKET SHARE BY EUROPEAN FILMS BY COUNTRY OF ORIGIN 2007-2011
TABLE 3: MAXIMUM AID INTENSITY PROPOSED BY DRAFT CINEMA COMMUNICATION
TABLE 4: ORDINARY LEAST SQUARE ESTIMATES FOR SELF-SUFFICIENCY RATIO (2007 - 2010)
TABLE 5: FIXED EFFECTS REGRESSION FOR PREDICTING THE SELF-SUFFICIENCY RATIO
TABLE 6 : RANDOM EFFECTS REGRESSION FOR PREDICTING THE SELF-SUFFICIENCY RATIO
TABLE 7: HAUSMAN SPECIFICATION TEST
TABLE 8: PEARSON CORRELATION MATRIX AMONG VARIABLES
TABLE 9: FIXED-EFFECTS REGRESSION FOR PREDICTING THE DOMESTIC FILM PRODUCTION
TABLE 10: FIXED-EFFECTS REGRESSION FOR PREDICTING THE AVERAGE BUDGET
FIGURE 1: EU MARKET SHARE BY HOLLYWOOD AND EU FILMS (IN % OF TOTAL ADMISSIONS)
FIGURE 2: EU MARKET SHARE OF GBO BY COUNTRY OF ORIGIN BETWEEN 2010 VS. 2011 (IN %)
FIGURE 3: CINEMA ATTENDANCE IN THE EUROPEAN UNION 2002-2011 (MILLIONS)
FIGURE 4: NUMBER OF FILMS PRODUCED IN EU AND US (2007-2011 PROV.)
FIGURE 5: CINEMA ATTENDANCE IN EU AND US: 2002-2011 (MILLIONS)
FIGURE 6: UK SPEND OF FEATURES PRODUCED IN THE UK, 2008-2011, £ MILLION
FIGURE 7: NUMBER OF FILMS PRODUCED IN THE UK, 2008 - 2011
FIGURE 8: COMPARISON OF COST OF FILM DELIVERY BETWEEN 35MM AND D-CINEMA
FIGURE 9: MARKET EQUILIBRIUM OF DOMESTIC FILMS WITH SUBSIDY AND/OR TAX
This thesis is dedicated to my wife Heraldina Maria Bettencourt Belchior for her unwavering support and my two sons Henrique Krishna and Sebastião Madhava who "lost me" for all this time. This thesis is also dedicated to my father, whom I lost midway in this journey, and to my mother who instilled in me the love for cinema.
My sincerest thanks go to my supervisor Professor Dr. Mário José Amaral Fortuna who motivated me to take up the challenge and to Professor Dr. Francisco Silva for his support and encouragement. Special thanks also go to Dr. Sameer Rege.
The market share of Gross Box Office (GBO) of European films have been experiencing a steady fall in recent years while the Hollywood films continue to claim more than 60% of market share within Europe. Every country of EU has devised public aid mechanism in the form of subsidies and tax concessions to protect the domestic film industry with a view to augment national film's market share against Hollywood's domination. Though the state interventions on the ground of cultural protectionism have been the integral part of EU's policy to protect the domestic film industry and to uphold its cultural sovereignty, the effectiveness of the economic policies needs to be investigated to ascertain whether these policies are boosting European film industry or wasting public money.
Hence, to assess the impact of the economic policies on the domestic film market, this study examine the impact of subsidy and tax concession on the self-sufficiency ratio, defined as the market share of GBO of domestic films, and attempt to identify other determinants namely market size, the number of domestic films produced and the average budget per film that explain the variance of self-sufficiency ratio in a country. Panel data of six years from 2005 to 2010 are used from twenty-seven countries of EU that have their own film industries. The results of OLS, fixed-effects and random- effects regression show that the subsidy and tax concession are not a significant predictor of the self-sufficiency ratio suggesting that the currently prevalent economic policy of public aid in EU might be ineffective. The study finds little evidence that the average budget per film and the number of domestic films produced are important determinant of the self-sufficiency ratio. Through the inclusion of GDP as potential market size in the model, the study found strong positive relation between the self- sufficiency ratio and the market size.
European Union, Film industry, Subsidy, Tax concession, Self-sufficiency ratio
In the 1900s, the European film industry exported throughout the world, at times supplying half the US market. By 1920, however, European films had virtually disappeared from America, and had become marginal in Europe. Theory on sunk costs and market structure suggests that an escalation of sunk costs during a rapid US growth phase resulted in increased concentration; eight surviving companies dominated international film production and distribution forever after. European film companies, although overall profitable, could not take part, and after the war could not catch up.
State intervention on the grounds of cultural protectionism has therefore been an integral part of the European film industry ever since the interwar years and continues to be strong today, finding its latest expression and legal backing in the UNESCO’s (2005) "Convention on Cultural Diversity" signed globally by 148 countries. Based on the principle that culture cannot be reduced to a commodity and should therefore be exempt from free trade deals such as the WTO, the treaty has also been criticized as a thinly disguised attempt “to offer a shield against the spread of American culture... [and] in particular Hollywood movies” (Pauwelyn, 2005).
To address the financing problem at the heart of the European film industry, most governments in Europe have introduced national and regional film support institutions, governing and handling the provision of subsidies. In 2008 there were around 200 of these support bodies in Europe (37 countries), providing a total amount of more than EUR 1.3 billion of public support (excluding tax incentives).
Despite generous public support, the European film industry still remains commercially unviable fundamentally because of a failure to attract audiences for its films (Morawetz, 2007). It can be said that largely the EU film industry is trapped in a vicious circle of "market failures" and "state intervention" and the EU film policy evolves between the duality of creativity and market, inherently stuck between art and commerce.
The objective of this study is to investigate the effectiveness of the current economic policies namely financial support for production of films in the form of subsidy and tax concession. The self-sufficiency ratio (SSR), defined, as the market share of total GBO achieved by the domestic films, is the key dependent variable that is being investigated as a function of subsidy and tax concessions and other determinants of the self-sufficiency ratio being identified that could explain the variance of SSR in a country. Panel data of six years from 2005 to 2010 are used from twenty-seven countries of European Union (EU) and a multivariate regression model is being employed to estimate the sample.
Chapter 2,3 & 4 of this study elaborate the principal reasons for the decline of EU film industry from its position of worldwide dominance, analyse its' current status in terms of supply and demand factors and identify the critical problems and challenges that the industry face currently.
Chapter 5 & 6 describe the existing public aid support mechanism of the EU film industry and the effects of these policies in EU film industry.
The transition to digital cinema in Europe and the business model of this conversion by adopting "Value Print Fee" model of financing is discussed in Chapter 7.
Chapter 8 states in details the empirical research, methodology and the results while Chapter 9 concludes the study.
At the dawn of twentieth century, the European film industry was the strongest in the world, at times supplying half the US market. In 1903, the market share of the European film companies in the United State was around 52%. By 1920, however, European films had virtually disappeared from America, the market share plummeting to less than 5% and had even become marginal in European market. The theory on sunk costs and market structure suggests that during a certain phase of the market’s evolution, a jump in outlays on film production would result in a disproportionate increase in revenue. The escalation parameter alpha, which reflects such a relation between sunk costs and revenue, increased substantially during the 1910s, due to product innovation - the emergence of feature film - and market integration - the integration of local entertainment markets into national entities, and national entertainment markets into an international one. The changing distribution practices which translated more of marginal distributor and cinema revenues into producer’s marginal profits (an endogenous increase in alpha) and, finally, an increasing homogeneity, with feature films getting a larger share of the film market and the film market getting a larger share of the market for theatrical entertainment also contributed to this windfall revenue generation (Bakker, 2003).
In the early 1910s, several smart entrepreneurs discovered that the film industry was in a transition from a low-alpha to a high-alpha industry and they invested large sums of money in portfolios of feature films, in some instances endogenously increased alpha by changing distribution practices. Many entrepreneurs joined in this escalation phase and doing this involved substantial risks. By the end of the 1910s, many of these had gone bankrupt. Only a few companies survived and they eventually became the five major and three ‘mini-major’ Hollywood studios that have dominated international film production and distribution since. Nearly all survivors had been involved in distribution and/or exhibition from early onwards, enabling them to be the first to discover the true value of, and changes in, the escalation parameter. Several, such as Paramount, the market leader, and Fox, had also been the very first movers in the escalation phase.
Since the increase of outlays on film production reached its height during the First World War, the European film industry could not take part. European film companies simply could not get enough capital to increase sufficiently the quality and quantity of production.
After the war, the European film industry could not catch up because, as sunk costs in the film industry increased, market size mattered more, while the European home market, which had been quite integrated before the war, was actually disintegrating because of war-related animosities, tariffs and regulation (Bakker, 2003). By the 1920s, the shock waves of the escalation of sunk costs during these few years had forced most large European companies to give up film production altogether.
The once prominent and creatively respected European film industry never reclaimed its status after the Second World War. Aside from a few admired filmmakers creating auteur films, too many European directors cranked out stale and uninspiring work. Others increasingly focused on art-house movies and abandoned the mainstream cinema. Over the years, this had led to low market share, in terms of gross box office, of European films compared to American ones.
In the European Union box office, the market share of the European films had been experiencing a steady fall, from 28,9 % in 2007 to 25,2 % in 2010 while the Hollywood films continue to gain market share within EU (from 62,4% in 2007 to 68,5% in 2010).
The recent provisional data of 2011 from European Audio-visual Observatory - Lumiere Database1 indicate that there has been a marginal reversal of the declining market share of the European films in 2011. The European films claim back market share of Gross Box Office (GBO) that they had lost to US 3D blockbusters in 2009 and 2010. It is estimated that the market share of EU films within Europe has increased by 3,3% from 25,2% in 2010 to 28,5% in 2011, back to the “pre 3D” levels of 2007 and 2008. On the other hand, the US market share fell by 7,1%, from 68,5% in 2010 to 61,4% in 2011, the lowest level since 2001. The part of the market share growth of EU films could be the result of the rise in production in Europe, which rose from 1226 feature films in 2010 to 1285 in 2011.
The market share for European films produced in Europe with incoming US investment, such as Harry Potter, increased from 5.0% to 8,4%, which accounts for the market share lost by U.S films not being completely claimed by EU films. Out of
EU market share of Gross Box Office by Hollywood and EU films 2007 - 2011
Source : European Audiovisual Observatory
US European Films
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Figure 1: EU market share by Hollywood and EU films (In % of total admissions)
the top five films at the EU box office in 2011, three were U.S. co-productions.
2011 was a year of stabilisation at the European box office as the marked upward trend of GBO of the past two years slowed down significantly, resulting nevertheless in an overall year-on-year increase. The EU GBO returns increased marginally by 0,7% from EUR 6.37 billion to EUR 6.4 billion, still the highest level on record. The cinema attendance remained stable with an estimated 962 million tickets sold but failed to achieve nowhere near the pre 2005 level of around 10 billion.
On the level of individual European markets, 2011 cinema-going trends varied significantly, with admissions decreasing in 11 and increasing in 15 EU markets for which data were available, while GBO increased in 14 and got reduced in 12 markets.
EU market share of Gross Box Office by country of origin : 2010 vs. 2011 (provisional)
Source : European Audiovisual Observatory
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Figure 2: EU market share of GBO by country of origin between 2010 vs. 2011 (in %)
CINEMA ADMISSIONS IN THE EUROPEAN UNION 2002 - 2011 (MILLIONS )
Source : European Audiovisual Observatory
illustration not visible in this excerpt
Figure 3: Cinema Attendance in the European Union 2002-2011 (millions)
The theatrical markets, which performed particularly well, were France (GBO record up to 4.7%), the UK (+5,2%) and Germany (+4,1%) while Spain and Italy experienced a significant decline in both admissions as well as GBO2.
In terms of film production, the production level continued to grow to 1285 feature films in 2011, 59 films more than in 2010 and a new record high. The growth was driven both by an increase in fiction, up 26 films, as well as feature documentaries, up 33 films. With over 200 national feature films produced in 2011, France and the UK were the countries with the highest production levels in Europe.
Table 1: Number of Feature Films produced in the European Union (2007 - 2011)
Number of feature films produced in the European Union 2007 - 2011 prov.
Source: European Audio-visual Observatory
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Despite the overall increase in production of films, it is strikingly evident that most of the national initiative feature films fail to garner significant market share even in their own national markets. The French films were successful in having the biggest market share in its own national market (41,6% in 2011, the highest since 1984) and attracted the largest number of admissions among European films, accounting for 10,5% of total EU admissions. Backed by strong results in their home market (a national market share of 37,5%), Italian films ranked the second in 2011, taking 4,6% of EU GBO, followed by German and UK productions which accounted for 3,7% of total admissions in the EU in each case.
Table 2: EU market share by European Films by country of origin 2007-2011
EU market share by European films by country of origin 2007 - 2011 prov. (In % of total admissions)
Source: European Audio-visual Observatory
illustration not visible in this excerpt
A country-wise market share analysis reveals clearly that in EU 27, apart from the four leaders (France, UK, Italy and Germany), only five countries (Czech Republic, Denmark, Poland & Sweden) were able to reach 20% of their own national market share. In rest of the EU countries, Hollywood dominates the market by capturing more than 80% of GBO. The situation is particularly distressing in countries with small film industry like Portugal, where the Portuguese films can only manage a market share of 0,70% of their own national market in 2011.
On the other hand, the American films enjoyed a market share of around 91,8% of their own home market in 2009, the share of EU films being only 6,8% with 97.2 million admissions in north American market3. The US film industry is a major private sector employer, supporting 2.1 million jobs, and nearly $143 billion in total wages in 20104. It generated $15,6 billion in public revenues in 2010 and one of the few industries that consistently generate a positive balance of trade, in virtually every country in which it does business, totalling to $11,9 billion in 2010, or 7% of the total U.S. private-sector trade surplus in services.
The estimates of the trade of audio-visual programmes between EU and North America indicate that the Europe’s deficit in the balance of audio-visual trade continue to rise from around 2 billion USD in 1988 to around 8,2 billion USD in 20005. Against an import of around 9 billion USD of U.S. audio-visual contents, the European companies could only manage to generate export revenue of 827 million, resulting an increase of deficit of 14,1% in balance of trade between year 1999 and 2000. According to the World Bank, Europe’s audio-visual imports exceed its exports by a ratio of around 4:1. In 2008, Europe imported roughly €14,7 billion in audio-visual services and could manage to export about € 3,9 billion, for a trade deficit of € 10,8 billion6.
The domination of the US films rests on the strength and size of its domestic market, its ability to invest and innovate, the existence of competitive benefits associated with the language and the ability to write-off films on the national market that will be exported (Debande & Chetrit, 2001). The structural weaknesses of the European film industry, mainly at the distribution level reinforce this dominance.
This dominance is also manifested in the advancement of foreign investment (mainly U.S.) at every level of the European audio-visual sector (production, distribution and exhibition of films, publishing, distribution and retails of video, television theme channels). There were 264 audio-visual companies (not including cable distribution company), registered in EU that, in 1999, were under the majority control of investors from outside the community, against 234 in 1998 and 162 in 19957. This represented in 1999 total assets of 15,3 billion EUR, against 5,3 billion in 1995. The operating revenue of these companies rose from 5,9 billion EUR in 1995 to 12,8 billion EUR in 1999. The investors of United States controlled 239 out of these 264 companies, representing 13,3 billion EUR of assets, or 87,2% of foreign assets with operating revenue of 11,9 billion USD, or 93,2% of the revenue of companies controlled from outside the EU.
The key economic features on the demand and supply side of the EU film industry can indicate the problems that the industry is facing today. From the supply side, the essential problem lies in the high fragmentation of the production sector accompanied with weak distribution and low level of vertical integration (Henning & Alpar, 2005).
Film production in the EU has significantly increased since 2004, reaching a production of 1285 feature length films in 2011 (compared to 817 in US). Between 2004 and 2011, the number of films produced in the EU has increased at an average rate of 5,3% per year, the annual increase from 2010 to 2011 being 4,81% (compared to the negative growth of -2,77% in US film productions).
Number of Films produced in EU and US between 2007 & 2011
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Figure 4: Number of Films produced in EU and US (2007-2011 prov.)
An analysis of the production figures of EU films suggests the high level of fragmentation of the production structure, characterized by an industry based on SMEs and weak ties to capital markets. In Europe the producers are not organized in any commercial structure that could properly be termed a “studio” in the American terminology. Small independent producers constitute the majority of European productions in a highly fragmented industry where 80% of the companies produce no more than one film a year8. This trend of fragmentation has increased exponentially in the last few years, as is shown by the examples of Germany and Spain: while the number films produced in the period 1996-2000 increased by 7% and 8% respectively, the number of production companies skyrocketed by 123 % in Germany and a record level of 216% in Spain9. In UK, the number of companies involved in the production of film and video contents has grown rapidly by 356% (from 1,745 to 7,965) between 1996 and 2009 whereas the total film production during the same period saw a growth of barely 25% (from 98 to 125)10.
It is not possible to find the cause of this growth using the available data but it is evident that these companies are not actively producing. It will be interesting to investigate the hypothesis, whether these companies are being established to exist only in books to cash in on loans, grants and subsidies.
Although the level of production in EU is around 36% higher than that of US, the number of cinema admissions in the EU is 25% less than that of US11. In spite of the fact that the gap between the cinema admissions in EU and US is steadily decreasing over the years, the market share of US films in home market being higher than 90% along with the domination of EU market with higher than 60% of gross box office for years, makes it difficult for the EU films to make returns on their productions.
The inherent weakness of European films to capture market share outside national territory is illustrated in the report on "Theatrical export of European films" by European Audio-visual Observatory, which indicates that only 103 (out of total 1285) European films had a theatrical commercial release outside of Europe in 2010. These 103 films had gained admissions to the tune of 70,4 millions, about 19% of the total admissions to European films in all markets. In 2009, European films had sold almost 84 million tickets outside Europe. Hence, admissions to European films outside of Europe declined by 16% year-on-year.
Perhaps even more problematic from a European-level perspective is the weak position of non-national European films in the fragmented European market, where films do not cross borders easily. Less than 30% of the admissions for European films originated outside national market, with large differences between countries (Vinck & Lindmark, 2012).
The market size for films plays a crucial role in its economic viability. As film production is marked by high development and sunk costs, they also have a relatively large minimum market size for making profit (Vogel, 2007).
CINEMA ADMISSIONS IN EU AND US 2002-2011 (millions)
Source : Theatrical Market Statistics 2011, Motion Picture Association of America, Inc.
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Figure 5: Cinema Attendance in EU and US: 2002-2011 (millions)
The small home market for European films limit the production budget, which reflects in its low production value and in its dependence upon state subsidies (Moran, 1997). The countries with successful non-subsidized film industry also enjoy a vast home audience like India, U.S. and China. Since 1970s, the declining domestic film industries in Europe, accompanied by a rising dominance of U.S. movies worldwide, may be explained by a relatively slow growth in consumer movie spending in these countries relative to that of the United States. That faster spending growth in the United States has served to increase the economic resources of American movie producers in comparison to their foreign counterparts, plausibly providing the foundation for the Hollywood studios to make a larger number of higher production value films than competing producers could offer (Lee & Waterman, 2006).
In general, as compared to the U.S., Europe has a volatile production sector, lacking critical mass, long-term perspectives, and distribution and marketing skills. The absence of private investors and the project-by-project character of film production have led to the dependence of the European production community on public support.
Since the end of the 1950s, the creation of public systems to fund film has become prevalent in the EU. The UK and Italy, which passed their first laws to protect their national cinema in the 1920s, were the pioneers of the field. The first public funding systems were in the form of automatic financial support for film production, where the subsidy amount is determined based upon the box-office revenues of a film and then transferred automatically to the producer or distributor, to finance their next film. In Italy, the automatic funding of production was put in place in 1938. In France and Spain, such a system was established in 1948 and 1964, respectively (but effectively implemented in 1977). The first selective funding systems, which were also initially focused on film production, were introduced during the 1950s at a moment when the first significant drop in cinema attendance was observed. British selective funding dates from 1949, and the French “advances on receipts” was introduced in 1959 along with the creation of the Ministry of Culture, while the Spanish system was introduced in 1983. Selective funding systems are a form of soft loan given to the producer to be recouped against future revenues. The last countries to introduce public funding were Portugal (1971), Greece (1980), Austria (1981) and finally, Luxembourg (1990). Automatic systems are perceived as sustaining the broad competitiveness of the industry (by providing a subsidy in the form of reward for success of the film), while the selective ones aim to achieve more cultural objectives targeted to specific niches of the film production like experimental works.12
During the mid-1980s, suggestions and ideas for helping the European film industry to overcome its weakness were gathered, until, in 1990, the first “Mesures pour Encourager le Développement de l’Industrie Audiovisuelle” (acronym: MEDIA), were greenlighted, with a budget of €200 millions over five years.
The first MEDIA programme, MEDIA I encouraged restructuring the cinema and programme industries, instilling certain working habits and forging co-operations links between professionals, as required by the Single market. The second Media Programme, MEDIA II, dating to 1996, allocated EUR 310 million over a five-year period, focused on three key areas: training, the development of potentially successful works and transnational distribution of films and audio-visual programmes. Since the beginning of 2002, the third Media Programme, Media Plus, is organized along the same key areas: development, distribution and promotion of European audio-visual works, aiming to allocate EUR 350 million and training programme for professionals in the European audio-visual industry aiming to allocate EUR 50 million between 2001 and 2005.
On 15th of November, 2006 the European Parliament and the Council adopted a new programme to support the European audio-visual sector: MEDIA 2007 with a budget of €755 million over seven years (2007-13). Its global objective is to enhance intercultural dialogue, mutual understanding and awareness of European cultures.
The Council of Europe’s main film aid programme is the EURIMAGES programme. The purpose of this fund is to support the European film industry, particularly by strengthening film production and distribution. In order to achieve its objectives, Eurimages supports co-productions by at least two producers from at least two member states, film distribution, the digitisation of films supported by Eurimages, and cinemas in general.
The national and European aid programmes complement each other in so far as they support different production phases or film categories. EU aid focuses on providing funding for the phases before and after the actual production (shooting), and the Council of Europe provide production, distribution and exhibition funding for European co-productions. In principle, there is nothing to prevent a combination of different aid mechanisms being applied at different levels. (Bron & Peter , 2011-2)
To address the financing problem at the heart of the European film industry, most governments in Europe have introduced national and regional film support institutions, governing and handling the provision of subsidies. The national mechanisms to provide support to national film industry vary in its nature and scope from country to country.
In France, the majority of the support comes from the taxes and levies on the turnover of public and private TV channels, exhibition, video and DVD and the other part supplied by the Ministry of Culture and communication, which is then “internally distributed” through both automatic and selective methods of funding. In 2011, CNC (Centre National du Cinéma et de L’image Animée), the principal funding institution, had an operating budget of around €806 million, by far the highest in Europe. In spite of the high level of funding available, French productions regularly co-produce with their European neighbours to the north (especially Belgium which offers a 150% tax deduction on investment) to avail the public funding available in their co-production partner country. This one way outgoing traffic from France had prompted the French government to create a tax scheme to encourage foreign productions to use French locations, titled TRIP (Tax Rebate for International Production) which had turned over an estimated €170 million in its first year (2010-11)13.
In Germany, the system is decentralized and carried out at regional level with direct and selective funding through regional funding agencies by providing interest free production loans. In 2007, a tax incentive based on a discount scheme had been formulated which offers a 20% tax incentive for eligible German costs. In UK, the national lottery fund was created in the nineties to provide the necessary funding. In 1996, UK opted out of the EURIMAGES programme making it difficult a market for co-production. To make it up, interesting tax concessions, which guarantee that the film productions in the UK able to get a rebate of up to 25% on qualifying UK spend, has been put in place and this accounts for the high level of inward production, mainly major Hollywood productions using UK studios, crews and locations - an average of around 30 a year bringing in some €1,18 billion.
In 2009, an estimated €2.1 billion flowed to the film and television industry from 280 (up by 72 from 2004) funding bodies based in Europe. The main target of this spend was production of films (65%) followed by distribution (8%), exhibition (6%) and promotion (4%)14.
The EU plays a “double role” in film financing thanks to its own MEDIA programme as a source of funding and also through its control of national aid systems through state aid laws.
Within the EEA, any assistance given by a public body to undertakings, which has the potential to distort competition and affect trade between EU Member States, is subject to the EU State aid rules enshrined in Articles 107-109 TFEU (Treaty on the Functioning of the European Union). This generally includes public support for audio-visual works namely film production.
Article 107 TFEU (ex Article 87 TEC) declares incompatible with the common market “any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods... in so far as it affects trade between Member States”. However, there are exceptions to this rule, the most relevant for the audio-visual sector being Article 107.3(d) on the basis of which the film production support mechanisms are assessed: “aid to promote culture and heritage conservation where such aid does not affect trading conditions and competition in the Union to an extent that is contrary to the common interest”.
In 1998, upon receiving a complaint that the French automatic aid for film production is exclusionary, the Commission in its decision on French automatic aid mechanism established the following specific criteria that it still uses in order to assess whether state aid to cinema qualifies under the culture derogation of Article 107.3 (d) TFEU:
1. The aid is directed to a cultural product. Each member state must ensure that the content of the aided production is cultural according to verifiable national criteria.
2. The producer must be free to spend at least 20% of the film budget in other member states without suffering any reduction in the aid provided under the scheme. In other words, the Commission accepted territorialisation criteria in terms of the requirement that up to 80% of the production budget of an aided film or TV work has to be spent in the country providing the aid.
3. Aid intensity must in principle be limited to 50% of the production budget with a view to stimulating normal commercial initiatives inherent in a market economy and avoiding a bidding contest between member states.
4. Aid for specific filmmaking activities (e.g. post-production) is prohibited in order to ensure that the aid has a neutral incentive effect.
In its 2001 Cinema Communication, the Commission gave further explanations as to the meaning and purpose of these criteria. The Commission’s assessment of aid for film production is currently based on the state aid rules indicated in the 2001 Cinema Communication, which has since been extended three times and is set to expire on 31 December 2012.
Despite generous public support, the European film industry still remains commercially unviable fundamentally because of a failure to attract audiences for its films (Morawetz, 2007). The reason behind this failure has been the mentality of "subsidy trap" wherein in order to qualify for the subsidies the producers often had to demonstrate that their films are not too commercial, as commercial films should get financing through the market (Dale, 1997). Consequently, the films are produced without keeping in mind the tastes and preferences of the audience and this failure to attract audience make them more dependable on the public money (Dale, 1997). It can be said that largely the EU film industry is trapped in a vicious circle of "market failures" and "state intervention" that is characterized by "Kornai effect" which refers to "a distortion in a firm's behaviour if it expects to be bailed out by state when it runs into financial trouble" (Kornai, 1979). This distortion can lead to a lack of managerial effort to maximise profit and a lack of innovation as rather than attracting customers, the firm focus more on persuading organisations that can offer financial assistance.
Since the decline of the European film industry in the beginning of the last century, the state interventions on the ground of cultural protectionism have been the integral part of EU's policy, which found its legal backing in the UNESCO's (2005) "Convention on the Protection and Promotion of the Diversity of Cultural Expressions". As one way of protecting its own cultural diversity and promoting local productions, the EU has secured an exemption from the free-trade rules of the World Trade Organisation as the "cultural exceptions" which entitles its member countries to place limits of imports of cultural items like films and to extend public support to the film industry.
A study of "Trade and Welfare in Motion Pictures" (Ferreira, Petrin, & Waldfogel, 2012) indicate that the international revenues earned by the industry through trade largely sustain the current level of investment of US film producers and enable to create high quality products. While examining the effect of elimination of European subsidies, they concluded that the major impact of this elimination is to reduce film investment in Europe. As a result of their reduced investment- and given their consumers' tastes for domestic films- the European consumers suffer losses in surplus. The effects on the producers are more pronounced which suggest that the subsidies function more like trade policy than cultural policy.
The goal of the state aids as approved by EU is to promote a “national cultural film industry” which promotes the cultural diversity of the European Union’s member states without distorting competition and trade between them. In reality, with the introduction of tax incentive scheme by various member states to attract film investments within national territory, a very different scenario unfolded.
In the early 2000s, the Czech Republic, in spite of not offering any tax incentive, was a favourite location for producers around the world because of its cheap prices and inexpensive highly skilled film professionals graduating from Czech film schools. Prague’s Barrandov Studios were the site of blockbusters such as Alien vs. Predator, Casino Royale and The Bourne Identity.
In 2004, Hungary, the neighbouring state, seized the moment and jumpstarted its local film industry virtually from scratch by creating attractive cash rebate scheme of reimbursing 20% of all local expenditure by filmmakers. Within four years, by 2008, the foreign investment in film productions in Czech Republic had fallen a stunning 85% to 40 million USD from 270 million USD in 2003. Contrarily, during the same period, Hungarian film industry witnessed a major inflow of foreign investment that prompted the film production spending to grow from 21 million USD in 2004 to 250 million USD in 2008. The Hungarian government paid back around 20 million USD in return as form of tax rebates to foreign and domestic filmmakers and its budgeted rebate is around €231 million until the end of 201315.
After years of pleading from Czech film industry, finally a 20% rebate scheme was formulated by Czech government and was approved by EU in 2010. The Bulgarians followed suit and proposed a 30% film incentive scheme in 2010, which is pending approval with the Commission.
If subsidy is a way to strengthen EU film production, it can also have the unintended consequence of destroying and devastating national film industries in some member countries. For example, in Italy, the famous Cinecitta Studios in Rome, which had produced many internationally known films for decades, was in the brink of closure in 2009 due to the fact that 71% of the Italian filmmakers were spending their budget abroad lured by attractive tax incentive from Eastern Europe16.
The essential qualifying criterion for state aid for a non-EU production is to fulfil the definition of culture derogation as mentioned in the Article 107.3 (d) TFEU that clearly specifies that the state aid can only be directed to a cultural product. Each member state is responsible to ensure that the aided production is cultural according to verifiable national criterion. In line with the principle of subsidiarity enshrined in Article 5 TEU, the Commission has authority only in verifying whether the member state has a regime to implement culture derogation definition but cannot determine definitions at its own discretion.
Although, the cultural test has been included in all the member state's film incentive programme, the definition and the emphasis of the cultural test varies between the member states as regard to the balance between the cultural and industrial criterion. In case of UK film tax incentive, the eligible film must pass a "Cultural Test", earning at least 16 points out of overall maximum 31 in a point based test divided in four sections encompassing cultural content, contribution, hubs and practitioners17. In case of Hungary, the qualifying film production must achieve at least 16 points on a 32-point cultural test in order to qualify for the 20% tax rebate but the majority of the emphasis of the test is on industrial criteria, such as using Hungarian or European department heads, cast and crew and doing production and post-production in Hungary18.
The afore-mentioned concerns by the member states and their national film industries can be fully understood in light of the economic impact that the inward investment has brought in to the major players of EU film industry namely the UK. According to a recently published report from Oxford Economics19, the core UK film industry has contributed over £4,6 billion (€ 5,7 billion) to GDP in 2011, paid over £1,3 billion (€1,62 billion) to the Exchequer in tax revenues (gross of tax relief and other fiscal support) and supported about 117,400 jobs. The inward investment films (large US studio based film produced in UK) generated about £3.7 billion (€4,6 billion) to GDP in 2011 and about £1 billion (€1,24 billion) in Exchequer revenues. The report also indicates that the Film Tax Relief scheme is vital to sustaining the competitiveness of the core UK film industry and it expects that the core UK film industry will attract between 6% and 8% of global film production over the period to 2015, with spend on inward investment productions maintaining or bettering its record 2011 level of £1 billion (€1,24 billion) per year. It is estimated that without the Film Tax Relief, the core UK film industry would be around 70% smaller which would be equivalent to an average loss of total UK production expenditure of £600 million (€ 746,8 million) a year over 2012-2015, of which around £500 million (€622,3 million) would be inward investment. This reduction in inward investment will cost £1,4 billion (€1,74 billion) of lost GDP with reduced tax revenue of £420 million (€522,8 million). In terms of market share of GBO, the UK films shared 36% of the box office, of which UK independent films earned 13% and UK studio-backed20 title 23%. The US films (excluding UK co-productions) saw a declining trend to 60% down from 72% in 2010.
It is evident that the inward investment in films produced in UK has more than doubled in last four years, from £433 million (€538 million) in 2008 to £1012 million (€1.259 million) in 2011, an increase of 134%, representing around 80% of the total investment (£1,272 i.e. €1,583 million) in film production21. Though the total production expenditure in all films (including domestic and co-productions) increased by 78% since 2008, the total spend on domestic films saw a reduction in the same period from £232 million (€289 million) to £200 million (€249 million) producing lesser number of domestic films (from 224 in 2008 to 200 in 2011). The number of coproduction films have also increased during the same period from 28 to 42, with an increase of spend on these co-productions from £51 million (€63 million) to £60 million (€75 million). In terms of total number of films produced in UK, there is a small reduction from 281 (2008) to 274 (2011).
Evidently, the increase in total investment in film production to the tune of £556,7 million (€693 million) in last four years can only be attributed to the production of US invested films with big budgets (refer Figure 6 & 7). The size distribution of budgets of inward investment features in 2011 demonstrate that 92,1% of the total inward investment of £1012 million (€1.259 million) was used to produce 15 films with an average production budget of € 110 million (€137 million). On the other hand, more than half of the domestic UK films in 2011 (54,4%) had a budget less than £ 5 million (€6,21 million)22.
UK spend of features produced in the UK, 2008-2011, £ million
Source : British Film Institute Statistical Yearbook 2012
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Figure 6: UK spend of features produced in the UK, 2008-2011, £ million
Since the introduction of France's film incentive programme, Tax Rebate for International Productions (known as TRIP) in 2009, the French film industry has boomed with 272 productions in 2011, which is the highest in terms of productions. The number of films with foreign investment had increased from 58 in 2010 to 65 in 2011, a record level along with the domestic full French film increasing from 196 to 20723.
The foreign investment in French film industry saw a growth of around 22% between 2008 and 2011, reaching €326,11 million representing 23,5% of the total investment in film production of €1,389 million24. In 2011, the market share of GBO of French films increased, reaching 39,8% (up from 33,9% in 2010) while that of the US dipping to 47,4% from 50% in 2010.
Number of films produced in the UK, 2008-2011
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Figure 7: Number of films produced in the UK, 2008 - 2011
It is ironic to note that the film public aid policy that was originally intended to counter Hollywood hegemony by promoting creation of European films is now actively subsidising foreign productions (co-productions or US runaway productions) to create jobs. These film projects are seen as large-scale foreign direct investments, with film institutions arguing that servicing incoming productions would provide local industry with an opportunity to gain valuable experience that would in turn facilitate domestic cultural production. While states clearly aimed to attract big budget commercial productions, they were able in this way to also exploit the narrative of the small, struggling European producer to justify tax schemes (Morawetz, 2007).
The EU film policy evolves between the duality of creativity and market, inherently stuck between art and commerce. The action of the European Commission in the field of cinema mediates constantly between the forces of the free market and the values of cultural diversity as the Commission attempts to pursue in its policy simultaneously the establishment of a common market for films and preservation of cultural pluralism of the audio-visual content, which appear by definition not easily reconcilable. The resulting compromise satisfies neither the proponents of ‘cultural exception’ nor the forces of "free market". Whereas the first regret the often-hypocritical affirmation of cultural diversity and the excessive impact of the forces of free market on the film sector, the others criticise the inconsistent and protectionist character of such a policy. The EU film policy fails to provide an appropriate solution to strike an effective balance between cultural specificity and economic integration aims (Herold, 2004)
The current subsidy race in the EU to attract foreign investment in domestic film industry had its root in the production tax incentive race initiated by Canada in the late '90s to attract Hollywood productions. The overwhelming success of Canada’s 1998 production incentive scheme that adversely affected Hollywood opened the floodgates for other countries like Australia, Germany, New Zealand, South Africa and the UK to formulate their own tax incentive schemes. Between 1998 and 2005, despite the 30% growth in overall production level, the production dollar spent in US declined by 14% and the same spend outside US had increased from 1,6 billion USD to 3,8 billion USD, a rise of 135%. It is estimated that this flight of runaway production25 from US territory, had resulted a cumulative loss to the US economy of 23 billion USD and 47,000 jobs per year.
Almost all of the US states had also joined this tax incentive race to attract film production and this had led to a “race to the bottom” where the outrageously expensive and unsustainable policies hurt not only the cash-strapped states26, but also the entire nation (Mcdonald, 2011). According to a study released by the Tax Foundation, forty states offered a record $1.4 billion in film incentives in 2010, predicted to be the “peak year” for state spending on film incentives as many states are ending this programme27. Since 1999, the US states had spent over 5,8 billion USD on film incentives. In spite of its initial promise, the film incentives had failed to encourage overall economic growth and to raise tax revenue. Though it is claimed that the incentives create job, but most of the jobs are temporary positions, often transplanted from other states (Henchman, 2011). In most cases, the jobs were created at a very high cost to the state treasury28.
A 2009 report "Pennsylvania’s Film Production Tax Credit and Industry Analysis" by the Pennsylvania Legislative Budget and Finance Committee analysing the state’s $75 million film tax credit and grant program estimated that the state loses $58.2 million on the program29.
The other effect of the tax incentive programme run by the US states is the declining share of California, the home of Hollywood, to the total US feature film production, dropping from 66% in 2003 to 31% in 2008. This can potentially signify that the tax incentive scheme is hurting the home of Hollywood which is considered as one of the most important “cluster” of film production in the world for its skilled professional workforce with experience in film industry for decades. The economic consideration to reduce production cost, more so in case of film production characterised by high "sunk cost" with very little scope for price discrimination, will always promote the runaway productions. The important question to investigate in light of the above is whether US film industry is losing competitive position in the global market for production of films.
While broad-based tax competition often benefits consumers and spurs economic growth and development, industry-specific tax competition transfers wealth from the many to the few. Movie production incentives are expensive and fail to live up to their promises but nonetheless, they remain popular with state officials. The negative results of the incentives may eventually cause this support to wither, particularly in tough economic times. Until then, filmmakers will continue to enjoy the bounty while taxpayers are left with the bill. (Luther, 2010)
Based on the 2011 Issues paper and the contributions received during the first consultation, the European Commission published a draft Communication on state aid for films on 14 March 2012 which proposes amendments to the 2001 Cinema Communication with the principal goal to control the competition between the member states to draw inward investment from large-scale, mainly US, film production companies.
In the Commission’s view, this so-called “subsidy race”, leads to a distortion of competition among European production locations and eliminating such subsidy races is precisely one of the objectives of the state aid provisions of the Treaty. In light of the above, the draft communication envisages the following amendments30:
1. Scope of activities:
The scope of the activities covered for the state aid will go beyond film production and will cover all aspects of film creation, from the story development to the delivery of the film to the audience - the existing rules apply only to production support.
Up to 100% of the aid awarded to the production of a given audio-visual work be spent in the territory offering the aid and not up to 80% of its entire "production budget" as is the case under the 2001 Communication. For aid schemes where the aid is based on the production expenditure in a given territory, such as film tax incentives, any production expenditure within the EEA must be eligible.
3. Maximum aid intensity:
The film aid directed to a non-European work will be limited to the following regressive maximum aid intensities, related to the production budget:
Table 3: Maximum aid intensity proposed by Draft Cinema Communication
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The public consultation on the draft communication evoked widespread reactions from public authorities including national governments, regional film fund agencies, exhibitor's and distributor's associations etc.
Broadly the responses can be summarised as follow:
1. The proposed regressive scale of aid intensity that aims to curb distortion of competition between the member states will put European film industry at a competitive disadvantage to attract large-scale investment compared to support available in non-EEA country competitors31.
2. The proposed new rules of territorialisation clearly threaten the stability and the sustainability of European public support to the audio-visual sector and the ability of Member States to develop and adopt policies and strategies to meet the future challenges of the sector. The proposed criteria of spending 100% of the aid amount and not 80% of the entire film's production budget will considerably diminish, if not eliminate, the leverage or multiplier effect of public policies. They will, therefore, eliminate the viability of national and regional film support schemes in many Member States, spread uncertainty for producers', and threaten jobs and the level and the diversity of European film production.
The technological breakthrough in the 1980s, with the introduction of compact disc in 1983 and subsequently with the introduction of digital sound recording in films and digital sound systems in the movie theatre in the '90s, initiated the shift from analogue to digital in the film value network (Vinck & Lindmark, 2012). With the advancement of digital technology, this shift progressed in the post-production phase of the film production, in film editing and in the area of special effects through computer-generated imagery (CGI). The final element of digital production was made possible by the introduction of high-end digital cameras in the 1990s that marked the beginning of digital cinema (d-cinema).
At the beginning of the new millennium, digital cinema introduced the projection of films through high-resolution digital projectors by using digital files. Though the first commercial digital cinema screening took place in 1999 in USA, the next few years were marked by research and development into the technology of making digital cinema a commercially viable reality by eliminating the threats that the technology would not become rapidly obsolete32.
The digital cinema gained interest amongst major US studios because of its cost efficiency (refer Figure 8)33 and flexibility in distribution34. In 2002, six major
Comparison of cost of film delivery between 35mm. and D-cinema
Source: Europa Cinemas: Proposal for a Digital Cinema business-model, Presentation of the first results for Europa Cinemas Conference 2006, Rinke Medien consult Gmbh, November 2006
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Figure 8: Comparison of cost of film delivery between 35mm and D-cinema
Hollywood players plus MGM created a joint venture known as Digital Cinema Initiative (DCI) who came up with its first set of specifications of d-cinema standards in June 2005 to form the basis for the standards-making process working its way through the International Standards Organisation. This process is now a global one, and national and European organisations play an integral part of it.
The essential prerequisite to an effective transition to d-cinema is the replacement of the traditional 35mm projector with digital projection systems and creating a digital distribution infrastructure, using either satellite or terrestrial to digitally deliver films and other content to the exhibitors. On an average, the conversion to digital projection system entails an investment of around €80,000 euros which is not a viable option for most exhibitors.
From the financing point of view, the digital cinema revolution is based on a major paradox: the (big) investment has to be made by exhibitors, but distributors will make the savings (DG Competition, 2009). In order to solve this paradox the US film industry has put in place the so-called Virtual Print Fee (VPF) model. This business model is effectively a subsidy for digital conversion from the private distribution sector to the private exhibition sector where a fee is paid to a third- party intermediary/integrator each time a film is shown for the first time in a cinema. These third parties collect (part of) the distributors' savings in the form of VPFs to contribute to the digital equipment of the participating screens. A number of third party integrators have taken up to managing these transactions and - more generally - the installation of digital projectors.
The implementation of this model has been more favourable for cinema exhibition sites with multiple screens and affects adversely the small single-screen independent exhibitors. As the VPF system is based on the week of release (i.e. is it a first run or not?) and the turnover rate (i.e. how many different films are shown per screen?), it is well suited to the multiplexes but not necessarily to the more diverse range of smaller or art-house cinemas. Single screen theatres with a low turnover and smaller cinemas screening films several weeks after their initial release may not generate enough VPFs to benefit from the existing deals.
Compared to US, Europe has a diversity of operators with 10% of European cinemas are multiplexes as opposed to 35% in the USA which makes the digital rollout more complicated35.
The result is that the VPF model has only been partially transferable to a European context. It is however imperative for (independent and/or art house) exhibitors as well as the distributors working with them that the transition is completed as soon as possible. As more exhibitors are converting to digital system, it increasingly becomes a threat for the continuing existence of those theatres that still own the traditional 35 mm projector, as they will not have access to 35 mm copies of films. The Twentieth Century Fox has already officially notified the theatre owners that it will distribute all of its films domestically in a digital format within the next year or two, bringing an end to 35mm film prints36. Fujifilm, one of the major producers of film stock, has also already announced that they will discontinue production of 35mm film stock "due to significant demand decrease resulting from digitalization in the industry"37 .
It is evident that the days of 35 mm film production and delivery system is going to be over very soon. In 2011, nearly 65% of all the U.S. screens (25621 out of total 39641) had already been converted to digital projection system. In UK, 70% of all the films released in 2011 were in digital media.
In a statement released during the 2009 San Sebastian Film Festival, the European National Film Agency Directors (EFADs) asked for "urgent and comprehensive public support for the digitisation of cinemas"38. According to the EFADs, one third of the 30,000 European cinema screens could disappear due to a system that privileges commercially successful cinemas. It is estimated that there are roughly 32,600 screens throughout Europe for which a digital rollout will cost €2.1 billion. The VPF model offered by Hollywood studios / distributors will cover around 23,800 screens and 5,000 will be converted by the theatre owners themselves. The screens which are not covered by VPF and do not have own funds to convert is "at risk" to close down. To convert these screens, a financing of around €465,6 million is needed, which has been termed by David Hancock, a senior analyst at Screen Digest, as the "digital shortfall"39.
The rationale for public intervention for digital rollout in EU, originates from the idea that the cultural diversity in Europe would be endangered and access to culture would be reduced for a large number of European citizens because the distribution of attractive films exclusively in digital format would prevent non- digital cinemas from accessing them, eventually leading to many cinemas closing down. Therefore, public support at EU and national level for the digitisation of cinemas should be put in place in order to ensure that the public has the access to the widest possible range of films and every country and region in Europe should be free to set up a support scheme in accordance to the conditions of the relevant national or regional markets (Blázquez, 2010).
In the introductory policy document to its public consultation on digital cinema40, the European Commission agrees that public intervention is critical to create a favourable environment for the cinema exhibition of European works and it acknowledges the right for Member States to provide support in forms of state aid for the digitisation of their cinemas.
Besides funding available at the European level through MEDIA 2007, many European countries have already introduced their own public support schemes for the digitisation of cinemas. In the UK, the UK Film Council launched its Digital Screen Network scheme in 2005. In Norway, the Film&Kino network of municipal cinemas launched its scheme in 2006 and negotiates VPF agreements directly with the major Hollywood studios. Though in countries like Germany, France and Italy, the support schemes have confronted political or legal difficulties, the rapid digitisation effort is forcing the independent distributors and exhibitors to hasten their strategic choices.
As on 2012, Norway, Luxembourg and Netherlands have already achieved 100% digital conversion. According to Media Salles's latest finding, the European digital screens number 21,789 with a 17,4% growth rate compared to the beginning of the year with a total digital penetration of 60,5% at 30 June 2012 (Bensi & Brunella, 2012). But there are considerable differences of penetration in various markets. With a penetration rate of above the European average, Belgium (approx. 93%), Finland (approx. 89%), Denmark (87.9%), the United Kingdom (approx. 86%) and France (80.5%) lead the race while Germany (approx. 54%), Italy (46.8%) and Spain (approx. 43%) and in particular on smaller markets such as Greece (16.9%), Slovenia (14.4%), Turkey (14.1%) and the Republic of Serbia (10.3%) are far behind.
France, with 4,397 digital screens, comes in first place with 20.2% of Europe’s digital base, followed by the United Kingdom (3,216 digital screens equal to 14.8%), Germany (2,500 digital screens equal to 11.5%), Italy (1,815 digital screens equal to 8.3%), Spain (1,750 digital screens equal to 8.0%), and Russia (1,632 digital screens equal to 7.5%).
Along with the increasing penetration of digitisation, the digital revolution is also transforming the way film is being accessed by the exhibitors by integrating satellites in their digital theatres which allow the rapid dispatch of films, trailers, commercials and live events at limited costs.
At present there are around 1,800 digital screens in 600 cinemas all over Europe, which already receive films and content from the control and assistance Centre of Open Sky-Eutelsat, one of the major players in the sector. In Italy this network has its highest numbers, with 800 screens in 300 cinemas served by the satellite. With the integration of the satellite, a “democratic” distribution system can be initiated that allows for programming of various types of alternative contents - for example live events - and is suited to the storage of films. In fact, by equipping the theatre with large-capacity servers, any exhibitor can set up his or her own library and thus meet the demands of the individual audiences (Celata, 2012). The digital conversion might equip the exhibitors the much needed flexibility and control over their programming according to the need and taste of the audience.
The distribution of the European films beyond its national territory has always been a structural bottleneck for the European film industry. The territory-based fragmentation and lack of marketing power has always limited the access of these films. Though the basic parameters of language and cultural preferences will remain unaltered in the demand structure, the cost-savings associated with digital distribution and the flexibility in which digital files can be reproduced, accessed and customised to reach small audiences, even in remotely located theatres through satellite connectivity, could bring in new opportunities for the European films to create a pan-European market for the European films beyond their national borders. It will be interesting to see how European and national policies can adjust to these newer conditions of market structure and capture the value.
The major Hollywood studios have essentially led the digital revolution in US and Europe. The economics of cost-savings and the strategy of economies of scale along with the elimination of digital piracy are the vital drivers of this process. The digital rollout has already posed a great threat to the existence of smaller art- house cinemas, which devote more screen space to European films. The successful conversion of these independent exhibitors and their alliance with the independent distributors will determine whether European film industry can cash in on the opportunities of finding new audience post-digital conversion. The elimination of the independent exhibitors might further deteriorate the exhibition of European films and its market share.
Existing economic policies in the film industry worldwide are divided into two major types: financial support for production, such as subsidies and tax concessions for the producers41 and the protection of the film market with screen quotas and import quotas (Kim et al., 2002). The screen quota compels theatre exhibitors to screen a minimum number of domestic films of national origin whereas the import quota aims to limit the volume of imported foreign films. Though, these regulatory tools had been installed in prominent European film industries, namely in France, Italy, Spain and United Kingdom, in the 1920s, it has been largely abandoned due to increasing globalisation of film trade42. On the other hand, subsidies and tax concessions have become the prominent economic policy tools within Europe. In spite of the fact that these economic policies that aim to boost the supply side of the European film industry have been gaining prominence, there is controversy about their effects on the film markets and very few studies have investigated the impact of these policies (Lee G. , 2010).
Though the essential purpose behind financial support to the film industry in Europe is to protect the market share of the domestic film from being eroded by the dominance of U.S. films that in turn signifies protecting cultural sovereignty, it is important to study its effect to ascertain whether these policies are boosting European film industry or wasting public money.
The conventional economic theory of free market implies that subsidies and tax concessions will lead to an outward shift of the supply curve with an increased production of goods and services. The increased supply of goods and services, in turn, will augment the quantity demanded and the equilibrium quantity. However, in the case of film industry, although the introduction of government subsidies and tax concessions results in higher numbers of domestic film production and increase in equilibrium quantities of domestic movies, it does not affect the equilibrium price mainly due to the fact that the movie-theatres generally employ a pricing model of uniform prices for differentiated goods where one price is charged for all movies, seven days a week, 365 days a year (Orbach & Einav, 2007). The Figure 9 demonstrates the effect of subsidy and tax concessions on market equilibrium in a free market environment where the introduction of subsidies and tax concessions shift the traditional supply curve S towards right to S´ and given the constant price P, the new market equilibrium point is created at E´ which indicates a higher level of domestic film production.
Though it is evident that the subsidies can stimulate the domestic film production, it does not guarantee that this will lead to an increase in the self-sufficiency ratio43, defined as the domestic film’s market share of Gross Box Office revenues, which alone can indicate the positive effects of supply-side economic policies that are being currently practiced in European Union film industry. In open economies of European Union, where US films are exhibited without almost any restrictions, the preference of audience in favour of Hollywood blockbusters might be a big hindrance for the growth of the self-sufficiency ratio.
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Figure 9: Market Equilibrium of domestic films with subsidy and/or tax concession
In lieu of the above context, it is essential to investigate
H1: Subsidies for the film industry will be positively related to the self-sufficiency ratio.
H2: Tax concessions for the film industry will be positively related to the selfsufficiency ratio.
The causal relation that exists between investment in a film’s production expressed in average production budget of a film and the film’s quality and popularity, suggests that an increase in film production investment shifts the demand curve for domestic films upward (Litman, 1982). This shift has the dual effect of increasing overall gross box office revenues and substituting domestic films for foreign films, which is likely to lead to an increase in the self-sufficiency ratio due to a relative increase in demand for domestic films compared to that of the foreign films, ceteris paribus, that is the quality of the foreign films remains unchanged (Oh, 2001).
Based on the aforementioned logic, it is expected that the shifting of the demand curve, that is an increase in market size for domestic films leads to an increase in the quality (expressed in increased budgets per film) and quantity of films produced, which in turn results in an increase in the self-sufficiency ratio.
Thus it is expected that:
H3: The higher average budget per film will be positively related to the selfsufficiency ratio.
Distinguishing the market size as the level of gross domestic product (GDP) as a potential market size and the box office revenue as a realized market size, Oh (2001) found support for the hypothesis that market size is positively related to the self-sufficiency ratio (Lee & Bae, 2004). Hence the following hypothesis is suggested to examine the market size and the self-sufficiency ratio in recent domestic film markets of Europe:
H4: The level of GDP will be positively related to the self-sufficiency ratio.
An increase in the number of domestic films might have a separate effect over the self-sufficiency ratio (Lee G. , 2010) and thus, the number of domestic films produced is added to the independent variables.
H5: As long as the number of domestic films increases, the self-sufficiency ratio will positively change.
To test the hypotheses, an ordinary least squares multiple regression model is employed. The model includes the existence of subsidies on film producers (SD), the presence of tax concessions on film production (TC), the number of domestic films produced (DF), the level of an average budget per film (AB), and the Gross Domestic Product (GDP) as the independent variables. The self-sufficiency ratio is (SSR) is the dependent variable. SD and TC are coded as dummy variables (1 for their presence, 0 otherwise). GDP is transformed logarithmically because its’ scale varied between the sample countries and the transformation is helpful to reduce heteroscedasticity. The SSR is a percentage. The units of AB and GDP are €1 million.
The model employed in this study is the following:
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where i = id of the country, t = time period.
Panel data from 2005 to 2010 were collected from 27 countries of European Union that have their own film industries. The countries sampled in this study are Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Sweden and The United Kingdom.
The data for the self-sufficiency ratio between 2005 and 2010 was collected from the various issues of Focus, World Film Market Trends (year 2006 till 2011) published by European Audio-visual Observatory during Marché du Film, Festival de Cannes between 2006 and 2011. The SSR data of 2010 was retrieved from the press release of European Audio Visual Observatory44. The data for the number of domestic films produced in each country were obtained from Screen Australia web site45. The GDP data were collected from the web site of World Bank (2012).
Ordinary least squares multiple regression estimation was carried out for each of the year between 2005 and 2010. As evident from the results enumerated in Table 4, the regression coefficients of all the variables demonstrated positive relationship with the self-sufficiency ratio for all the years between 2005 and 2010, except that of the Tax Concession being negative in 2005 & 2009 and that of Average Budget being negative in 2005, 2007,2008 & 2010. Furthermore, the examination of the p-values indicated that in the year 2010, the regression coefficients of all the variables were statistically significant signifying that all the variables were strong predictors of the dependent variable self-sufficiency ratio. Between 2005 & 2009, none of the regression coefficients were statistically significant with the only exception of GDP being significant in the year 2005 & 2006.
Table 4: Ordinary Least Square Estimates for Self-sufficiency ratio (2007 - 2010)
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Subsequently, the panel data regression models namely Fixed-effects and Random- effects regressions were carried out in STATA to estimate the longitudinal data between 2005 and 2010, the results of which are enumerated in Table 5 & 6. Thereafter, the Hausman Specification test is performed in STATA to choose between Fixed-effects and Random-effects models as the appropriate estimation model for the sample. The results of the Hausman test in Table 7 indicated that:
chi 2(5) = 10,78; Prob>chi2 = 0,0560
Hence the null hypothesis: H 0 = differences in coefficients not systematic, is not rejected.
Thus Random-effects regression model is considered to be the preferred estimation model for this study.
Table 5: Fixed Effects Regression for predicting the self-sufficiency ratio
Fixed-effects (within) regression for predicting the Self-Sufficiency Ratio
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Table 6 : Random Effects Regression for predicting the self-sufficiency ratio
Random-effects GLS regression for Predicting the Self-Sufficiency Ratio
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Table 7: Hausman Specification Test
HAUSMAN SPECIFICATION TEST
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Hypothesis 1 predicted a positive relationship between the existence of subsidies for the film industry and the self-sufficiency ratio. According to the result of the bivariate correlation analysis (see Table 8), there exists a positive relationship between the subsidy and the self-sufficiency ratio (r =, 427). The result of the Random- effects model in Table 6 showed, however, the regression coefficient of the subsidy was not statistically significant. This suggests that the subsidy for the film industry was not a significant predictor for the self-sufficiency ratio even when controlling for the other independent variables such as tax concessions, average budget, GDP and domestic films. This result was consistent with the findings of Lee (2010). Thus hypothesis 1 was not supported.
Hypothesis 2 predicted a positive relationship between the tax concessions and the self-sufficiency ratio. Bivariate correlation (r =, 145) indicated a positive relationship between the tax concession and the self-sufficiency ratio. Also the regression coefficient was not statistically significant in the model implying that tax concession was not a significant predictor of the self-sufficiency ratio. This is consistent with the results of Lee (2010). Therefore, hypothesis 2 was not supported.
Hypothesis 3 assessed whether the average budget per film is positively related to the self-sufficiency ratio. Although the bivariate correlation (r =, 425) demonstrated a positive relation, the regression coefficient indicated a negative relation. Moreover, the regression coefficient was not statistically significant in the model. Therefore, Hypothesis 3 was not supported.
Table 8: Pearson Correlation Matrix among Variables
Pearson Correlation Matrix Among Variables
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Hypothesis 4 predicted that the market size expressed in terms of GDP would affect the self-sufficiency ratio. Table 8 shows the result of bivariate correlation analysis that the LN GDP was strongly related to the self-sufficiency ratio (r=, 639). The model also showed that the regression coefficient was statistically significant. This indicates that a 100% increase in GDP would lead to an increase of ,0028 percentage points in the self-sufficiency ratio. The result was consistent with the findings of Oh (2001) & Lee & Bae (2004). Thus Hypothesis 4 was supported.
Finally, Hypothesis 5 predicted a positive relationship between the domestic film production and the self-sufficiency ratio. Bivariate correlation a well as the regression coefficient showed a negative relation with self-sufficiency ratio and the regression coefficient was not statistically significant in the model. This result was contrary to the findings of Lee (2010). Thus Hypothesis 5 was not supported.
This study attempted to examine the effects of subsidy and tax concession on the self-sufficiency ratio and identify other determinants namely market size that explain the variance of the self-sufficiency ratio in a country.
First of all, on the basis of the multivariate regression model, this sample showed that the subsidy and tax concession were not a significant predictor of the selfsufficiency ratio. This implies that there is no evidence that the economic policy of subsidies and tax concession, currently prevalent in the European film industry, increase market share of Gross Box Office of domestic films.
Furthermore, the study finds little evidence that the average budget per film is an important determinant of the self-sufficiency ratio.
Through the inclusion of GDP as potential market size in the model, the study found strong positive relation between the self-sufficiency ratio and the market size. Finally, the number of domestic films produced annually also did not turn out to be a significant determinant of the self-sufficiency ratio.
Further examination of the bivariate coefficients indicates that the presence of subsidies is negatively correlated with the number of domestic films (r = -0,103) but positively related with the average budget (r=0,068). In case of the presence of tax concessions, it is positively correlated with the average budget (r =, 274) and the domestic films (r=, 227).
In case, the subsidies and the tax concessions increase the production of domestic films and the average budget of the film, there might be a possibility that this might affect indirectly in increasing the market share of the domestic film’s earnings of the total Gross Box Office, ceteris paribus. Consequently, an increase in the number of domestic film production stimulated by subsidies and tax concessions could be viewed as an effective economic policy tool if it serves the purpose of protecting the domestic film industry rather than wasting public money.
Similarly, in case the subsidies and the tax concessions result in increased average budget per domestic film, it might be construed as an increase in quality of the domestic film industry (expressed in terms of average budget per film), which in turn might bolster the self-sufficiency ratio positively.
However, additional analysis using another two regression models46 concluded that subsidies and tax concessions are not significant predictors for the number of domestic films and the average budget per film (see Table 9 & 10). Rather, GDP is statistically significant in the regression model to predict the Average Budget of the film. Thus the results of the current study indicate that the presence of subsidies and the tax concessions might not only fail to contribute to the increase in the domestic film’s market share but also might not succeed in increasing the quantity of domestic films produced and in raising the quality of the domestic film industry.
This implies that the economic policy of subsidies and tax concessions as practiced currently in the European film industry might not be an effective tool to protect the domestic film industry from the dominance of U.S. films and to protect its cultural sovereignty.
Table 9: Fixed-effects regression for predicting the Domestic Film Production
Fixed-effects (within) regression for predicting the Domestic Film Production
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Table 10: Fixed-effects regression for predicting the Average Budget
Fixed-effects (within) regression for predicting the Average Budget
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Despite its findings, this study is limited in two ways. First, the independent variables used in this study are not exhaustive. Potential determinants of the self- sufficiency ratio would include the factors of production for domestic films that constitute the budget of domestic films and the impact of digital rollout and the changeover to digital film distribution currently undergoing in Europe. Finally, dummying the subsidies and the tax concessions might make it difficult for this study to understand the full impact of these variables on the self-sufficiency ratio.
However, the results of this study might be added to the small body of empirical evidence investigating the effectiveness of economic policy in the European film industry.
Since its decline after World War 1, the European film industry has suffered from chronic structural bottlenecks and market failures. The long tradition of EU policy support has strived to enhance the global competitiveness of European films and also uphold the cultural pluralism of European landscape. Over the years, a progressively complex public aid structure has been installed across Europe, in which European Commission led more culturally-inspired, selective funds coexist with industrially-oriented tax incentives of Member states. Some two billion Euros are invested into audio-visual support each year, mostly through national support schemes and funds, and usually targeted at production activities (Vinck & Lindmark, 2012).
Meanwhile, the dominance of Hollywood majors (Paramount Pictures, Sony Pictures, Twentieth Century Fox, Universal, Walt Disney and Warner Bros.) has significantly increased over the years in Europe. By producing only around 150 films per year, they now control 90% of the US market and over 60% of European markets. Creating vertical structures of production and distribution (including marketing), these majors commit significant resources, reduce and spread risks over several films by effective trading and positive home market effect and invest profits in newer technologies that provide them with competitive advantage. The characteristics and networks of operations of Hollywood studios are increasingly international, if not global in terms of creativity and talent, finance and capital, innovation and technologies, ownership and management, and above all, markets and revenue (Litvak & Litvak, 2006).
This struggle between the "nation state" of Hollywood majors and the "cultural ghetto" of EU film industry is essentially a confrontation between the forces of free market and the protectionist cultural philosophy where lays bare the disconnection between the policymakers and the realities of the market. The national mechanisms of state aid of member states in Europe have been increasingly tailored to attract foreign US inward investment and a subsidy race has been witnessed in recent years in UK and Eastern European countries (Hungary, Czech Republic and Bulgaria). In its role to monitor the competition rules of the member states, EU policy should be fully encouraging of the national efforts to promote the audio-visual production by attracting foreign investments with effective multiplier effect of economic benefits, while aiming at a greater consistency between cultural and competition policy objectives and more harmony between measures taken at European, national and regional levels (Herold, 2004). The New Cinema Communication 2012 could provide the Commission the perfect opportunity to bring about this harmony.
The digital rollout in European Union, besides its obvious impact as a cost-effective tool of access, distribution and programming of contents, can also provide a unique opportunity to strengthen the pluralism of European culture by harnessing the potential of this technology, which could reach audiences across borders. An access to audience beyond national borders could finally address the problem of inadequate market size to achieve critical mass that the EU film industry is currently plagued with.
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1 Press Release, European Audio-visual Observatory, Council of Europe, Strasbourg, 14 May 2012
2 European Audio-visual Observatory Press Release: EU box office inches to record high in 2011, 14 May 2012. Available at: http://www.obs.coe.int/about/oea/pr/mif2012_cinema.html
3 Focus 2010, World Film Markets Trends, European Audio-visual Observatory
4 The Economic Contribution of the Motion Picture & Television industry to the United States, Motion Picture Association of America, Inc.
5 European Audio-visual Observatory, Press Release, Strasbourg, 9 April 2002.
6 International Trade Statistics 2010, WTO (http://www.wto.org/english/res_e/statis_e/its2010_e/its10_toc_ e.htm)
7 European Audio-visual Observatory, Press Release, Strasbourg, 9 April 2002.
8 The European Audio-visual Industry: An Overview, European Investment Bank Sector Papers, Sept. 2001
9 Media Salles, 2002
10 UK Film Council Statistical Yearbook 2010
11 Focus 2010, World Film Markets Trends, European Audio-visual Observatory, Theatrical Market 14
12 This section is based on European Audio-visual Observatory (1999) and Le Floch-Andersen (2001)
13 Nederlands Film Fonds, Information of co-production market, UK & France
14 Press Release: “Film funding in Europe tops the 2 billion euro mark”, European Audio-visual Observatory 25 January, 2012
15 "Movie Industry Loses Business to Hungary: Budapest Lures Foreign Film Productions With Tax Incentives and Rebates" (http://online.wsj.com/article/SB124838757272177229.html)(Rousek, 2009); Retrieved October 10, 2012. Statistics 2011, Motion Picture Association of America, Inc.
16 “Europe Acts to End Film Subsidy Race; Film Biz asks: “What race?” (http://www.stop-runaway- production.com/2012/07/07/europe-acts-to-end-film-subsidy-race-film-biz-asks-what-race/); Retrieved 7 July, 2012
18 "European Commission OKs revised Hungarian film scheme" (Screen Daily, 17 July, 2008)
19 The Economic Impact of the UK Film Industry, Oxford Economic, September, 2012,
20 "Studio-backed" means backed by one of the major US film studios.
21 "Film market trends and film funding in 4 selected European countries": André Lange, European Audio-visual Observatory, Venice Film Festival 2012.
22 British Film Institute Statistical Yearbook 2012
23 "French movie industry attracts record number of international producers", EU Business, (http://www.eubusiness.com/Members/ubi/french-movie-industry-attracts-record-number-of- international-producers/)
24 Results 2011, CNC Dossiers nº322 - May 2012, Centre nacional du Cinéma et de l'image animée
25 Runaway production refers to films that were conceptually developed in the United States, but filmed somewhere else. (Mcdonald,2011)
26 As of January 2011, forty-four states, including all of the major players in the film incentive race, faced massive budget shortfalls that totalled a staggering $125 billion. (States Continue to feel recession’s Impact, Elizabeth Mcnihol et al., 2011)
27 Joseph Henchman, More States Abandon Film tax Incentives as Programs’ Ineffectiveness Becomes More Apparent, TAX Foundation: FISCAL FACT NO. 272
28 The state of Michigan awarded 39,96 million USD in tax credit to just one film: Oz: The Great and Powerful, which created 251 jobs, roughly half of which were out-of-state residents thereby costing around 300,000 USD for each job created. (Michigan Spending $40 Million to Subsidize “ Oz: The Great & Powerful ” !! Sets New Record for State Spend on Single Production! RUNAWAY PROD. RESEARCH (Mar. 4, 2011), http://www.stop-runaway-production.com/2011/03/04/michigan- spending-40-million-on-one-single-movie-sets-new-record-for-state-spend-on-singleproduction/.)
30 Draft Communication from the Commission on State aid for films and other audio-visual works (http://ec.europa.eu/competition/consultations/2012_state_aid_films/draft_communication_en.pdf)
31 Canada offers a maximum aid of 25%; South Africa: 20%; Singapore: 40%; the state of New York, US: 30%. (British Film Institute response to draft communication on state aid for films and other audio-visual works, June 2012)
32 "Background and Position paper on d-Cinema", Prepared by Think Tank on European Film and Film Policy for "The Independent Exhibition Sector and the Challenges of Digitisation Conference hosted by ICCA in Barcelona, the 5th and 6th of March 2010.
33 The cost efficiency is achieved through reduction of fixed costs (using digital tape instead of expensive negative film stock) and through digital projection where 35mm positive film print is replaced by digital files.
34 The content can be easily customised allowing "multilingual" content versions and distributed to the theatre via satellite, the web or on hard disc, which is much less expensive than analgoue movie prints.
35 Background Document on Opportunities and Challenges for European Cinema in the Digital Era, 13 Oct 2009 available at: http://ec.europa.eu/culture/media/programme/overview/consultations/docs/background_digital _cinema_en.pdf
36 "CinemaCon 2012: Fox will stop U.S. 35mm Film Distribution within two years", The Hollywood Reporter, available at http://www.hollywoodreporter.com/news/cinemacon-2012-fox-35mm- john-fithian-chris-dodd-distribution-digital-exhibition-315688
37 "Fuji says it will discontinue some motion picture products", Sept. 10, 2012, available at: http://www.deadline.com/2012/09/fuji-discontinue-motion-picture-products/
38 European National Film Agencies, San Sebastian Statement, 21 September 2009, available at: http://www.filminstitut.at/de/menu94/
39 "Digital Cinema Moves into Mainstream”, Screen Digest Report, June 21, 2010
40 "Introductory policy document to the Public Consultation on Opportunities and Challenges for European Cinema in the Digital Era", available at: http://ec.europa.eu/information_society/media/overview/consultations/docs/intro_consultation_ digi_cinema_en.pdf
41 Subsidy includes direct public funding of and investment in the domestic film production, and tax concession includes tax deductions, exemptions and credits for the production of films.
43 The self-sufficiency ratio in a given year is defined by the following formula: Self-Sufficiency Ratio = D / (D + F) Ё 100, where D is the revenue earned by the domestic films, and F is that of the foreign films’ in a given country and Gross Box office (GBO) = D+F.
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