Original publication: January 2019
Authors: Institute for Information Law (IViR): Joost POORT, P. Bernt HUGENHOLTZ, Peter LINDHOUT, Gijs van TIL
Short link to this post: http://bit.ly/2FsLTjP
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This report studies the role that territoriality plays in film financing in the EU today, what legal and market challenges territoriality faces as a key model for film financing and what the consequences might be for film financing in the future if EU policies were to further reduce or mitigate the scope of territorial exclusivity in the audiovisual sector.

Film Financing and the Digital Single Market: its Future, the Role of Territoriality and New Models of Financing

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A related aim is to provide information and analysis on Member States’ and EU models of film financing, the challenges film financing faces from digital developments and evolving consumer behaviour, and to assess possible alternatives to traditional methods of financing and policies to support this.

Film finance: problem analysis

The high upfront investments required for making a film and the large ex-ante uncertainty about its commercial success form the core challenge of film financing. Quality indicators such as reviews, recommendations and awards at festivals are unavailable until sometime after the production costs have been incurred. This implies that investors will partly rely on the reputation of a famous director, a stellar cast or other renowned parties involved in their decision whether or not to invest in a film.

Against this background, presale agreements which grant exclusive distribution rights for a certain distribution channel, time window and territory are a common way to finance a significant part of a film budget. To the extent distributors focus their operations on national markets – as is generally the case for broadcasters and cinemas – they are predominantly interested in exclusive rights within that market. Price discrimination between high-income and low-income countries and preventing other distributors from free-riding on their marketing efforts can also be reasons for a distributor to prefer selling rights on a territorial basis.

On average, European films are much less successful in attracting larger audiences than American films. While in Europe twice as many feature films are produced each year as in the US, the current market share of European films in Europe is typically 20 to 30% of admissions, TV broadcast, and TVOD and SVOD catalogues. This relatively weak position can, in part, be explained by language barriers and cultural differences in Europe. As a consequence, many European films miss out on economies of scale which can make them more dependent on territorial licensing than blockbusters.

Film financing policies in Europe

Motivated by cultural, political and economic arguments, a wide variety of policies offer support to the film industry, both on a pan-European and on a Member State level. In 2014, the last year for which comprehensive data are available, direct support alone amounted to € 2.15 billion in the EU Member States, about € 4.20 per capita. Various types of project and various film-related activities are supported, both in a direct and in an indirect manner.

Direct support takes the form of a grant or loan, the latter under different degrees of softness. In 2014, recoupment rates were in the order of a mere 5%. While direct aid schemes show great similarities, the specific conditions for eligibility and finesses differ per scheme and per Member State. Some mandate a theatrical release of films in the supporting country and might impose requirements on the timing of distribution windows.

Indirect public support is offered through incentive schemes – cash rebates or tax credits – or schemes that aim to stimulate private capital investment by reducing the risks or offering tax benefits for investors. Moreover, broadcasters and other audiovisual media service providers are mandated in most Member States to invest in the film industry.

Legal challenges for film financing in the EU

EU law aimed at removing national barriers to the Single Market has gradually diminished the role that territoriality plays in copyright. Furthermore, EU competition law sets strict limits on grants of territorial exclusivity, and prohibits clauses in broadcasting and pay television licences that prevent or restrict ‘passive’ sales to consumers/viewers in non-licensed territories. The freedom of right holders to preserve territorial exclusivity by way of contract is likely to become increasingly vulnerable to EU competition law, as territorial grants are no longer supported by underlying territorial rights.

Market challenges for current film financing practices

The influence of TVOD and SVOD services on film distribution, and thus on film financing in Europe is growing rapidly and major global players are currently dominating the market. Such services challenge the traditional separation of windows for each type of exploitation and possibly jeopardise the presale model on which European film financing is based.

Audiences find it ever harder to understand that the film of their choice can be available in Europe, but not in their country. The rise of transnational cultures, facilitated by migration and digital media, is essential for the progress of Europe’s cultural diversity but the territorial division of the European film market works against it. With decreasing audiences for European films and arthouse cinemas failing to connect to younger audiences, the effectiveness of the European film financing system is under pressure.

These challenges, however, leave intact the fundamental conundrum of financing a film. Potential sources of funding remain unaltered even though their mix may vary between films and over time. No fundamentally new models of film financing have been identified, and changes in models are mostly gradual. Crowdfunding and product placement are interesting and relatively new developments, but of limited significance in financial terms and likely to remain so.

Stakeholder positions

Industry stakeholders show a large degree of consensus. Their strongest arguments in favour of territoriality in film financing seem to be of a financial nature and lie in the role of territorial exclusivity for presale agreements.

The argument that territoriality stimulates cultural diversity in European film can be countered by the argument that it discourages transnational and pan-European cultural diversity and that it blocks European audiences from those same films.

Recommendations relating to territorial exclusivity

If territorial exclusivity were considered to remain indispensable for the financing and exploitation of EU films, the European Commission could be tasked with codifying film-specific rules on exclusive territorial grants of rights in the form of an amended Commission Regulation, somewhat similar to the ‘block exemptions’ that allow exclusive territorial allocation of markets in technology licence agreements in well-defined situations.

An alternative to territorial licensing is found in language exclusivity, i.e. exclusive grants of rights for distinct language versions of a film. Language exclusivity in audiovisual content distribution contracts may provide a more natural and legally more robust alternative for market segmentation along national borderlines. 

Recommendations relating to film funding policies

Combined with EU level schemes, national and subnational film financing policies complement each other in targeting all roles and actors in financing a film. No gaps in the support landscape were identified. Nevertheless, support schemes might be directed more actively towards connecting with younger age groups and transnational cultures. Research to monitor this might be a starting point to better understand these developments and to design optimal policies to reconnect with these groups.

In addition, regulation from funding bodies, broadcasters and in national laws that reinforces the traditional windowing system by mandating distribution via predetermined distribution channels, and even the duration of such windows, ought to be reconsidered. Flexibility for producers and distributors to choose an exploitation model as they see fit is crucial to succeed in the current dynamic market. Similarly, the development of a significant European VOD platform as a counterforce to the current dominance of platforms from outside the EU could be promoted.

A recurring theme is the large number of films that are made in the EU, in combination with the great dependency of films on support schemes and the disappointing commercial performance. More selective policies in awarding higher budgets for fewer films – including larger budgets for distribution, exhibition and promotion – would increase the chances for EU films to find the audience they deserve.

Link to the full study: http://bit.ly/629-186

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