Aims of the investigation: (see note c)

 

The broad aim of the research is to carry out a comparative analysis of the European and American (Hollywood) film industry. The more specific aim is to identify the factors undermining the competitiveness of the European. film industry in both the domestic and international market and to suggest policies for future growth.

The issue has attracted a lot of attention among both policymakers and film industry experts, but no systematic economic analysis of the European industry’s structure and characteristics has ever been carried out. The origins of the European film industry problems rest on two main pillars. Firstly, the peculiar nature of the industry characterised by aspects such as a cost structure with high fixed (often sunk) costs and relatively small marginal costs (club goods or quasi public good) (R. Cornes and T. Sandler, 1996), unpredictable demand and hardly predictable costs (“prototype industry” L.Creton 1999), a very specific risk structure (De Vany 2004), the merit good nature of culture as an economic product. The second pillar refers to the very diverse and often uncoordinated set of protectionist and support policies that have been introduced over the last 60 years by European government concerned with the cultural and economic influence of Hollywood. The inter-relation among the industry’s specificities, the environment and the stakeholders’ behaviour is key to the understanding of the problems in the industry. It is proposed to analyse these two aspects separately in order to acquire a clear understanding of the interrelations and of the incentive structure that underpins the various relationships. In doing this it will be possible to identify the key elements in the evolution of the industry and the various strategic choices made at different junctures by key industry players.

 

The first part of the research will investigate the European’s film industry environment by analysing the effectiveness of the protectionist policies throughout the 20th Century.

The second part will focus on the nature of movies as economic goods by untangling the particularly complex processes of production and finance. The analysis will concentrate on the inherent risky nature of movies as economic goods. Financial instruments for the management of such a risk will be developed and tested with the use of large industry financial datasets.

Case studies will be analysed in the thesis’ third part with the aim of  illustrating the economic relationships between the various agents involved in film-production. The incentive structure among all agents will be exposed and the analysis will reveal how different arrangements or policy intervention can determine very different outcomes

A model describing the optimal interaction between the economic environment, the nature of the industry and the various stakeholders will be proposed in the fourth part. In turn, this will enable the analysis of policies that can support and strengthen the European film industry.

i) Rationale for the project

 

The audiovisual trade balance between the US and the EU is 6 billion dollars per year of trade deficit (C.Forest 2001).

 

The questions that this research intends to answer are:

Does the film industry protectionist environment found in Europe result in a less efficient industry than would otherwise be the case? How could these rules and incentives be changed to lead to a more competitive industry both in their own EU market and also internationally?

 

The nature of film as an economic good, of the various stakeholders, as well as the policies pursued by policymakers combine to produce a very specific industry structure where it is hard to separate the effect of each. The shape of the film industry is the result of a long and complex series of evolutions, interactions and events. The actual situation of the various national industries is the outcome of policies and of history but also of the various strategic choices, and their efficiency, made by the private stakeholders.

Those interactions lead to identify various industry structures.

The research will contrast Hollywood - structured around a free market or “laissez faire policy”, which has resulted in a vertically and horizontally integrated industry based on hierarchy - with a European industry, based on protectionist and support policies, where the strategic choices of the leading players have led to an “atomisation” of the industry, using market negotiations and specific spot contracts between the various stake holders for every film produced, instead of vertical integration.

As the the French has one of the most complete set of regulations in Europe (They invented them, mainly when Malraux was “ministre de la culture” and afterwards Jack Lang under Francois Mitterand’s presidency) , and one of the oldest ,it has all the qualities to element of comparison. Therefore comparison between the two (France and USA) will be central to the thesis, even though the European Union is now becoming more and more important in the European film industry (plan media II, eurimage), and is likely to play an increasingly important role in the future.

 

ii) The relationship of this investigation to previous work in the area

+

iii) Methodology

PART I

 

The first part will investigate the history of government policy towards the film industry since inception in the late 19^th Century. To do this a review of the historiography of the French Film Industry, calling upon the works of Bakker G., Abel R. ,Ulff-Moller J., Trumpbour J will be carried out. A further thread will review the literature concerning the economics and economic history of the film industry. The analysis will draw upon Sedgwick’s concept of ‘film as a commodity’ (Sedgwick 2000, Sedgwick and Pokorny, 2005). The investigation of efficiency will involve the study of the theories around merit goods, strategic industries, Pareto efficiency (Cornes and Sandler 1996), externalities in cultural goods (Baumol 1966), and economics of development, protectionism and free trade.

 

 

Part II

 

On the issue of risk assessment the analysis will be centred on De Vany’s (2004) analysis of the North American market for movies, which concluded that risk takes a kurtotic form, making the evaluation of the risk associated with the production of any particular film virtually impossible.

The limitation of de Vany's analysis lies in its methodology. By investigating the performance of films in this market as stand alone investments he fails to factor in that the ‘major’ studios produce portfolios of films – they spread their risk and that revenue streams other than those from theatrical markets (DVD, cable television etc) are not included in his rate of return calculations. The research will use different parameters, like the producer, the film director or the distributor, and will look at the film over its whole lifetime through the various distribution channels.

The risk linked to a film as part of the “securitization” of a film will be analysed. If a risk analysis is possible it will be then possible to do an expected present value approach.

As a film has a longer life outside of theatrical release, the idea is to see a film as a very risky asset at the beginning and as the different stage are passed and information gathered about the popularity of the film, its valuation will become more precise.

The different correlation between the results of the film in the different stage of the chronology of its life. The major stages of information are :

During preproduction:

-The budget put on a script which reflects the potential that the producers see in the film in term of returns.

-The various criteria used that leads to lots of films being stopped during the preproduction despite big sunk cost already invested, mainly because of unsatisfactory scripts or because of the cost involved compared to the potential audience.

During the post production:

-the results of the test through panels within studios before the release of a film.

After the release of the film:

Following the chronology of the media

-the result in cinema

-the result in DVD,

-the results in television (pay per  pay free channels).

 

An evaluation of the correlation between the budget, and the revenues at the various stages of the life of a film is carried out.

The aim is to check whether the highly selective way of producing films and the portfolio approach by studios leads to higher returns. Financial tools will be applied leading to a rationalised portfolio approach. Such analysis will provide a measure of the risk faced by the different shareholders of a film. It will also allow the investigation of various structures to share and to pool risk. Film will thus treated like any financial asset, leading to a portfolio approach to studios and producers.

A comparison of the returns of the various studios, producers, films, directors will be carried out.

The next part will investigate those differences of results and will try to show the impact of strategies and policies on the rate of returns of films and producers/studios.

 

Part III

 

This section will research how the environment and the way films are produced influence their rate of returns (as a single film or as a portfolio) and the risk involved. The first part questions the policies in Europe. This chapter investigates how this regulated environment influence practically , at every stage of production, the way a film is made. The research will analyse the different capabilities of producers or studios that make some more successful than others.

The method consists in choosing a number of case studies: various studio and producers working in different environments or using different strategies. By comparing their performances using the different tools developed to assess the rate of return of films and portfolios of films, given an analysis of the different environment, and of the different contractual and risk sharing framework, it will be possible to show how the regulatory framework affects different agents through the production process and accounts for their strategic decision-making .

As in Europe the industry is non-integrated where producers act like an agent for TV channels who are actually financing directly or through “pre achat”. Actually producers are agents also for the French citizens as the government invest public money in cinema. Those co-producers then hired the executive producer which can be sometimes one of the producers. Then the production follows on its non integrated chain: the technician, the actors, the workers are all “intermittent du spectacle” (self employed).The material will be rent. The post production will be also subcontracted to labs. The distributors are also sometimes external, often they are part of the capital through equity or debts, and then the producer is the agent of the distributor too.

 

The explanation of the gaps in efficiency will be discussed by comparing the case studies results with the contractual and regulatory framework, and the strategies followed. The analysis will expose the competitive advantages and the capabilities. The analysis will draw upon various databases like the CNC, Eurimage, and EDI/Nielson. Interviews will be conducted with producers. As a result it is expected to show that some organisations are better shaped and in a stronger position to face the difficult and highly specific problems associated with the industry of cinema. In other words that capabilities and competitive advantages exist and therefore that some structures, organisations and policies are more efficient than others.

 

iv)Proposed sequence of activities

 

Part I: 1 year

Part II:1,5 year

Part III:1,5 year

Part IV: 8 months

 

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