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«Jonathan Haskel Imperial College Business School, CEPR, Ceriba, IZA and UK-IRC Keywords: copyright, IP, innovation, knowledge, investment, ...»

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There are significant drawbacks to using aggregate industry data in this way. The industry structure is actually more complicated than the above description makes out, and is basically divided into two components. 32 The major studios (e.g. Disney, Fox, Paramount etc.) have in place long-term deals with production companies. In some cases the production companies are wholly owned by the studio. In others they are technically independent, but are often located on studio premises and work under the direction of the studio, which in turn funds all of their production and owns all final asset rights. The production company is incentivised with bonuses if financial targets are met. Contracts with studios and the relative independence of the production companies vary case-by-case. For example, one industry practice is for the production company to have an agreement with the studio where the latter acquires the rights to distribute the movie to cinemas and DVD producers, and the production company retains the television licensing rights. This can be thought of as the studio acquiring the rights in the short to medium term, but the production company retaining the long-term asset rights. Since the majority of revenue is earned soon after release, the studio effectively acquires the majority of asset rights. The upshot of this is that it is hard to distinguish between production and distribution using data from the SIC, and that some revenues in the production industry will also be derived from the commercialisation of owned originals, since long-term rights are often retained in that industry.

The other part of the industry consists of independent production companies. These firms produce films either with their own funds, through conventional borrowing or by engaging with outside investors. They then seek to sell the final asset to studios, again with the studio acquiring the right to distribute to cinemas and on DVD, 33 and the production company usually retaining all other rights. Some independent production companies are large but the majority tend to be small, private companies that make relatively low-budget movies, distributed either by specialist divisions of major studios or independent distributors.

So, in practice, the studio owns the majority of asset rights, but often not all of them. As well as the production company, the writer of the screenplay, or the director and/or lead actors(s), may also be granted some percentage of rights. Likewise the author of the literary original if the production is based on an already copyright protected work. Such arrangements are private and differ case-by-case.

No information on the sources of revenue for either the production or distribution industry are published by ONS. In some cases the production company may be an in-house unit within We are grateful to Bruce Nash of the-numbers.com for supplying us with valuable insights into the structure of the film industry.

The distributor pays for marketing and distribution, and typically receives a fee of around 30% of all cinema and video revenues.

the studio and in others it may be a subsidiary, alternatively it may be a wholly independent firm. This raises a variety of classification issues. For instance, an in-house unit within a large studio may be classed as a separate reporting unit within Film Production. Alternatively it may be part of the same reporting unit as the studio, and be allocated to Distribution. 34 The production company may also generate revenues from the production of television programmes or commercials.

The significant amount of international trade that takes place in film production introduces further complications when interpreting industry aggregates. Trade is particularly important in the context of Film where countries compete using various tax/subsidy incentives.

Production revenues are generated from at least three sources 35:

i) UK-located production of UK-owned assets ii) Non-UK located production of UK-owned asset iii) UK-located production of foreign-owned assets Only i) and ii) are part to UK GFCF, and only i) and iii) are present in UK industry data. The third term, iii) is an export, since the asset rights are not held in the UK. This is analogous to a vehicle produced in the UK but purchased as an investment good by a foreign firm.

Additionally, note that ii) is an import, but crucially is an import of asset rights, and is therefore part of GFCF.

Due to the complexity of the industry and the lack of suitable industry data available, we have chosen not to present any estimates based on industry aggregates in the main body of this report. Industry data on output, inputs and international trade are presented in Appendix 2, along with an approximation of GFCF designed to illustrate the type of industry data that is available along with its limitations.

Alternative estimates of UK film production industry Current estimates of UK GFCF in Film Originals are based on a sample of UK production.

To provide some comparison, Figure 16 charts the total production costs or budgets of all UK-certified films, as defined by the UK Film Council (UKFC, 2009). As discussed previously (see Box 1), this does not necessarily mean UK-owned films and so does not refer to just UK investment, but rather to the total investment in originals including that by other funders or co-producing countries. As can be seen, from 2006 to 2008, production costs for See Hellebrandt and Davies (2008) for a fuller description of classification issues that arise from the distinction between reporting and local units.

As mentioned, in practice since the production company often retains some asset rights they also derive revenues from those (usually licence fees for TV broadcast).

UK-certified feature films (both Schedule 1 and co-productions) were around £0.8-1bn. The figure of approximately £30m in the National Accounts implies that just 0.002% of the costs of UK-certified film originals represented UK investment. A more informed estimate requires more knowledge on the production costs of films that are owned by UK organisations and foreign organisations respectively.

Figure 10: Total Expenditure on UK-classified (not necessarily UK-owned) film 2,000 1,800

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Note to figure: The above chart is taken from the UKFC Statistical Yearbook, 2009 (Figure 16.2). It refers to production budgets for Schedule 1 films, and total investment for co-productions. More information on the definition for Schedule 1 films is provided in Box 1.

Source: UK Film Council Figure 17 is taken from the same report but this time charts UK spend, closer but still not equivalent to what we are attempting to estimate. It shows that between 2006 and 2008, UK spend on the production of Film Originals was around £600-800m. Although this series will certainly include films where the UK owns zero, or a minority, of the rights to the final asset, it also indicates the scale of investment that is potentially missing from the official data.

Subtraction of UK production to which the UK does not own asset rights (exports) would yield an approximate estimate of UK investment.

Looking the composition of Figure 18, an approximate estimate of UK investment could be derived using the data on ‘Domestic’ productions and some proportion of co-productions.

Using data for 2008 in this way would yield an estimate of around £200m. Such a figure may be a more appropriate proxy for investment in the National Accounts.

Figure 11: Total UK spend, by type of production (1992-2008) 1,200 Note to figure: The above chart is taken from the UK Film Council Statistical Yearbook, 2009 (Figure 17.2). Spend is allocated to the year in which principal photography started, and is only for films with budgets over £500,000. ‘Inward’ is defined as substantially financed and controlled from abroad, attracted to the UK because of script requirements, infrastructure or tax incentives. ‘Domestic’ is defined as made by a UK production company, and wholly or partly produced in the UK. ‘UK coproduction’ (excluding inward co-productions) involve the UK and other partners, usually under the terms of a bilateral agreement or the European Convention on Cinematographic Co-production.

Source: UK Film Council Table 7 below presents expenditure shares for non-exclusive production types in 2008. As can be seen, approximately 64% of expenditure went on inward investment productions, suggesting that in 2008 36% of UK expenditure went on films that were largely financed and controlled from the UK. Applying such a factor to the figure of £1bn in Figure 17, would provide an estimate of UK investment of approximately £360m, twelve times greater than the estimate currently used in the National Accounts.

Table 7: UK expenditure shares (%), 2008

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8.4. P(Y)Y, Downstream Output. Film As shown in the discussion of ONS methods for Books and Music, it is possible to derive a measure of capital income using data on downstream revenues with an additional assumption on the proportion of those revenues that flow back to the asset owner in the upstream. As noted, this is not conceptually equivalent to a measure of investment, although it can be shown to approximate investment if we invoke some strong assumptions.

In practice, estimating downstream revenues is extremely difficult since it requires detailed data at both the industry and product level. For instance, in the case of Film, first it would require data on the full streams of all revenues, including those earned from DVDs, TV broadcasting and merchandise, but not where they refer to TV programmes, sports or music.

It should also not refer to films owned by non-UK organisations. In our dataset we do have partial information on box office revenues, and a small amount of data on North American DVD sales revenues. However, this is only a small component of the true downstream and we only have these observations for a limited number of UK films.

We also have the following information, provided to us by the-numbers.com. First, studios typically receive 50-60% of domestic (US) cinema revenues. Secondly, domestic (US) video revenues tend to roughly equal domestic (US) cinema revenues, and again approximately half return to the studio. Thirdly, TV, merchandising and other revenues are typically around 25% of cinema revenues. Finally after taking account of overheads, taxes etc., studio revenues approximately equal the production budget plus advertising costs, with a small loss usually reported by the studio for most films.

Therefore we did consider using our partial estimates of downstream revenues to back out investment, making the following assumptions. First, that the creation of film originals is in steady-state. That is capital deepening is constant with the additional restriction that there is a uniform life-length and depreciation rate across individual originals. Second, North American DVD revenues are approximately equal to US revenues. Third, 50% of DVD revenues are equal to 50% of Box Office revenues. Fourth, that the above approximations apply to international revenues and not just the US. Fifth, application of a factor of 1.25 would account for television, merchandising and other revenues. It turned out that our initial estimates based on this method were very similar to those based on production budgets. This is likely due to our use of box office and DVD revenues to impute data on budgets where they are missing, and the incomplete nature of the data on downstream revenues. Therefore we did not proceed with this method.

9. TV & Radio Originals

9.1. ΣP(X)X, Upstream Input Costs. TV & Radio The ONS methodology for estimating GFCF in broadcasting originals is a cost-based approach. The following re-estimation builds on the ONS method and improves the data using industry sources.

The following information is based on discussions held with the BBC and data contained in separate OFCOM reports on the Public Service Broadcasters (PSBs) and the Communications Industry. Virtually all UK investment in the creation of originals is undertaken by the PSBs.

The major non-PSB broadcaster is Sky, however data on investments made by Sky in UK stock productions are not available from OFCOM. Despite broadcasting approximately 400 channels, Sky investments in UK originals are considered to be relatively small at around £100m 36 once sports and rights to other flow programmes are excluded. Instead their model is based on either repeats or licensed imports, with the majority of Sky expenditure on stock programmes made up of rentals for the rights to broadcast a show for set period or number of broadcasts. It is correct to record such expenditure as intermediate consumption for the user (in this example Sky), and capital income for the owner of the asset (say, a US network), just as for a cinema that pays a rental to project a film for x months. The difficulty arises when, say Sky, pays for the rights to broadcast for, say, 5 years. In that case it could be argued that Sky has made an investment in the licence to use, using OECD terminology. Accounting for this in practice would require detailed data on the timing, value and volume of such payments by broadcasters. Such data are simply unavailable.

Source: Our discussions with the BBC, and a Lecture by BBC Director General, Mark Thompson,

given at the Edinburgh International Television Festival. Text available at:

http://www.guardian.co.uk/media/2010/aug/27/mark-thompson-mactaggart-full-text Of the PSBs, the Channel 4 model is based entirely on commissions and acquisitions, with no in-house production. ITV broadcast a mix of own-account and purchased productions, but must meet a requirement that 25% of broadcast hours are filled by productions from the independent sector. Similarly the BBC is based on a mixed production model, with 25% of broadcast hours filled by independent productions and the additional requirement that 50% of hours are filled by in-house productions. Remaining broadcast hours are filled competitively, by either party. Channel 5 has no such obligations, and has a similar model to that of Sky.

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