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Contribution to the BFI Independent Film Commission’s investigation of the health of the UK independent film industry

Dr M. Franklin, Institute for Creative and Cultural Entrepreneurship, Goldsmiths College, University of London m.franklin@gold.ac.uk

Chair, BFI Independent Film Commission;

Please find herein and attached, a contribution to the BFI Independent Film Commission’s investigation of the health of the UK independent film industry.

This contribution draws on postdoctoral research conducted during 2016-17. It examines the complex and multi-layered subject of risk conceptualisation and management in the film industry, based on information from 47 high-level film industry professionals and 3 world-leading academics alongside some 310 documents.

To respect the request for 2-3 pages on the issues identified, including suggestions for action, this document summarises a few select research findings. The accompanying material (Part B) provides the necessary fuller contextualisation and methodology.

The findings relate to conditions impacting industry ability to make “culturally important and often very commercially successful British films”, and to capitalise on that creativity. A number of industry proposed initiatives are prompted by framing the consideration of intrinsic film project characteristics and structures of involvement in relation to the specific risk of financial loss and wider environmental uncertainties.

This framing addresses a blurred spectrum of risk types, levels, interactions and timelines. The research attends to: extended processes e.g. development conversion, project access and selection; market devices e.g. revenue forecast ultimates, sales estimates, finance plans, counter party analysis; conditions of interpretation e.g. motivation, rationalisation, organisational / national cultures; and business structures e.g. integrated models, cross boundary alignment, negotiated balance of power.

Resulting potential future directions for action include: institutionally recognised investment information provision, incentivised content R&D interventions, and umbrella support at the business level by inward investment infrastructure - all to enable growth and enterprise in British film (companies).

Improvements in resource access potentially driven by such initiatives could enable more productions of scale, in an audience attention environment that could be strategically addressed via technology-driven data sharing distribution and exhibition partnerships. The informed, smart use of data can drive evidence based policy, and underpin financial instruments such as the EC’s Cultural and Creative Sectors’ Guarantee Facility (CCSGF), or a UK proxy, including by facilitating improvements accounting and IP valuation, and efficiencies in contracting and revenue assessment. All such propositions also rest on nuanced contextual understanding of the role and limits of calculative activity in film as a creative endeavour e.g. the barriers to reverse engineering, and the instrumentality of certain tools for market making, as opposed to their transparency for identifying some particular objective value.

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Implications of Incomplete and Inconsistent Understandings of Risk: Communication Breakdown and Issues of Access to Information and FinanceThere are multiple and sometimes contradictory renderings of, and responses to risk, interacting across project, business and environmental contexts. This is not necessarily problematic for top-level market actors who have developed sophisticated understandings and insightful management strategies per their particular business models. However, a lack of consistency in terminology and conceptualisation adds to confusion in industry and policy documentation. This literature unhelpfully designates film as both an especially risky sector, and no more risky than other industries. It also conflates film with other creative industries, obscuring the detailed nature of its risk characteristics. The language, practices, instruments, and biases pertaining to risk in film have implications of misunderstanding and poor information availability. Professional financial services reports, financial literature, and trade commentary often suffers from lack of clarity, sometimes replicated within the sector itself. This contributes to a general environment of financial marginality for UK film companies.

It is an open question whether full industry transparency - e.g. with regard to fundamental dynamics of revenue distribution; intense competition and complexity in project access and control; unattractive, polarised market trends in UK entertainment; and environmental uncertainty due to Brexit, DSM, and tech disruption - would make the sector more attractive to those currently non-engaging. However, without detailed appreciation for the strategic parameters of involvement carefully employed by expert practitioners, including the importance of derived demand in industry organisation, and detail on market device operation, the sector is open to misinterpretation. This situation inhibits the exploitation of innovation built on solid foundations.

Starting with refining their own positions, processes and provision of information, government and public organisations could work to lead on delivering a number of empirically grounded initiatives. These could include examination of provision of development support, be it tax efficient, or with other investment attractions. Provided exploitation prevention can be realised, the burgeoning recognition of R&D as a legitimate arts practice could be leveraged to address film development. This segment was cited by interviewees as one where most value can be generated relative to expenditure. This is increasingly pertinent as newer buyers including FAANG-like companies tend not to invest in development where risk is often unmediated (or often production), rather acquiring finished content of more known quality. Additionally, tech-services companies that become film/VR/games producers cannot access R&D support to create their content – which is vital to whole ecosystem growth. An R&D initiative could provide an avenue for flexible interaction for involving distributors, to reflect competitive pressure militating distributors’ earlier project engagement, but also to encourage threshold levels of scale – in production and release.

Related to issues of information provision, mixed business model development, and the challenges of mid-higher budget independent filmmaking, is the need to identify the best collaborative cross-benefit framework for inward investment filmmaking and domestic film business success. Globally the benefits of large-scale inward investment activity on technology companies then able to move into film creation and rights exploitation are evident. How might similar umbrella benefits be derived for UK companies in other Film Value Chain (FVC) positions?

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Government / public organisations’ leadership is further required for (the regularly recommended) direction on accounting standards. This is inherently linked to access to finance, as difficulty in valuing film companies is typically presented as a key challenge. This is not an easy issue, in the US the SEC regularly state the need to present tailored risk factors to the specific business and avoid boilerplates. Whilst the challenge of effectively communicating the nature of risk and approaches to its mitigation is pervasive, there are areas for potential progress e.g. considering how to best capture the value of talent networks (track record), investment in development and future revenue potential. In multiple areas the industry lacks stable, regulated hallmarks of quality. Public organisations have historically set out support/approval of particular film finance initiatives e.g. the Film Tax Credit or EIS, they also grant accreditation to certain schemes or practices. They could explore possible accreditation for sector information provision e.g. revenue data, investment proposals etc. Access to finance reporting regularly suggests liaising between financial bodies and the creative industries. The development and provision of trusted expert information could be a first step on a path to potential long-term positive change.

The Role of Data and Discrete Tasks: Building Necessary Conditions for SuccessLack of reliable market data is regularly noted as a cause of independent film sector undercapitalisation. Whilst recognising there are no sufficient conditions for success, data analysis innovation could be maximised in discrete areas of demonstrable impact (avoiding generalised simplifications of reverse engineering).

Data accrue at different times and places along the FVC, and are rarely systematically combined, analysed or shared. Environmental proxies for the integrated logics effected by e.g. social Chinese ticketing apps reversing into production and finance via direct audience understanding and access, can be advanced by bridging gaps between exhibition and distribution, not least to address marketing inefficiencies. This initiative could combat silo-ing, inertia, and HR legacies, and enable SME collaboration by adopting inclusive, long-term approaches starting from minimum viable data packets – management models to learn from already exist. Steps can be taken by exploring decentralized data marketplaces, where data can be appropriately valued and computation may be effected on confidential, encrypted data at point of use. Industry leadership on blockchain-enabled advance is required – for areas mentioned above, and e.g. smart contracts for closing or film delivery to replace balance of power network reliance and thus potentially improve investor confidence.

Such approaches could also work at the aggregate level. Public organisations could work with the CCSGF capacity builder program to examine how data and expertise provision can be pulled together across markets. In France IFCIC has offered centralised expertise to lenders in the evaluation of creative propositions. Systemic investigation of revenue impacts of capped upside deals replacing incremental sales in HE can be examined and responsive business models developed. Pursuing long-term building blocks to streamline market access, improve audience understanding, and develop financial propositions is crucial to exploiting sector opportunities. This must be done accepting the existence of certain blackboxes, and respect for creative processes led by professional intuition: not closed probabilistic risk calculation, but experienced insight driving action based on informed reasoning. Please see accompanying material, and forthcoming report for details.

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Contribution to the BFI Film Commission’s investigation of the health of the UK independent film industry - 2017

Dr M. Franklin, Institute for Creative and Cultural Entrepreneurship, Goldsmiths College, University of London m.franklin@gold.ac.uk

Contents

1. Context of the Submission 12. Methodology 23. Select Key Findings and Potential Future Directions 3

a. Introduction: Communication Breakdown 3b. Implications of Incomplete Understandings of Risk 3c. The Role of Data and Discrete Tasks 7d. Industry Proposed Initiatives 9

1. Context of the SubmissionThis contribution is drawn from postdoctoral research conducted during 2016-17, which examines the conceptualisation and management of risk in the film industry.

The submission contextualises some select research findings in respect of their implications for this Commission’s stated aim to explore how UK film might take advantage of creative and commercial opportunities in the changing landscape across film, TV and digital, and look at what else can be done to support the diversity and growth of the independent sector.

Framing the field through the lens of risk enables tacit market understandings and under recognised characteristics to be illuminated. The approach illustrates where inconsistent and poorly articulated concepts and approaches may be holding back progress in the development of new strategies for dealing with inherent uncertainty involved in the creation and exploitation of film IP, and related business sustainability issues.

Research findings concerning multiple and sometimes contradictory understandings of, and responses to, risk – interacting across project, business and environmental contexts are pertinent to this BFI Commission.

Of particular relevance are: industry actors’ proposed initiatives corresponding to scaling of ambition; data analysis, transparency, and use; policy response to environmental uncertainty, R&D needs and umbrella support from inward investees.

The full research report will be presented and released at the Institute for Cultural and Creative Entrepreneurship (ICCE). The postdoctoral research was made possible through a 2014 donation to ICCE at Goldsmiths College by Patrick McKenna (CEO, Ingenious Group).

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2. Methodology The research is based on information provided by 47 high-level film industry professionals and 3 world-leading academics. The research process included formal interviews (36) and background consultations (11 & 3). The information provided includes experienced expert insight, direct data provision, demonstration of private IT systems and Beta testing of new toolsets. The focus is on the UK and film, but necessarily draws on the contextual environment, which is international and cross-media, with information from practitioners in the US, China and EU institutions.

Data SourcesInsight is drawn from across the Film Value Chain (FVC), from representative / regulatory bodies, and from those integrated with relevant broader audiovisual sectors (TV, VR, Theatre) and creative industries (music, publishing). The analysis benefits from the input of: independent film producers; independent film and TV producers; TV networks; public and private film financiers – specialist and institutional; physical production entities; integrated companies across production, distribution, exhibition in the UK & other territories; larger scale international / US producers; Mini-Majors; Majors; VOD platforms; and Chinese conglomerates. Experts in legal and business affairs; HR; casting; industry analytics; and VR –VFX further contributed to the study.

For independent companies, the interviewee was typically the Owner / Founder / CEO, and in production these entities are Oscar, Golden Globe and BAFTA nominees. Within larger companies / institutions / multinationals, the interviewees are at the level of: Managing Director, Chief Business / Creative Officer; Director / Head of Department (Productions; Legal and Business Affairs; Investments; Fund; Policy; Business Development; Creative Technology); Vice President (Legal, Commercial, Acquisitions). Professors consulted are at the Institute / Program Director level for initiatives combining business / management and creative arts in the US. Thematic analysis of the interview data was conducted alongside analysis of some 310 documents including company accounts, industry reports, academic literature and media releases.

Full Report Content and StructureThe full research addresses a substantiated concern that prompted the research, namely that conceptualisation and management of risk is poorly understood outside of film industry experts. The report is structured across four main chapters to provide a detailed analysis of the field. Chapter 1 frames the issue of multiple and imprecise diagnoses of risk, placing the concept in context – both regarding the balance of power in the FVC, and as a theoretical tool in relation to uncertainty. Chapter 2 examines current practice of detailed risk responses across material toolkits, thought processes, and business structures. The blurred spectrum of risk types, levels, interactions and timelines is approached across three sub-sections. These comprise: extended processes e.g. development conversion, project access and selection; market devices e.g. revenue forecast ultimates, sales estimates, finance plans, counter party analysis; conditions of interpretation e.g. motivation, rationalisation, organisational / national cultures; and business structures e.g. integrated models, cross boundary alignment, negotiated balance of power. Chapter 3 moves from sources of, and strategies towards, specific risks, to address environmental uncertainties - unpacking future oriented and macro level concerns: e.g. UK and international market

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conditions, SVOD impacts, investor perspectives (market & non-market), the Digital Single Market and territoriality. Chapter 4 addresses proposed responses and their contexts e.g. transparency, scale, data-led & technology-led approaches, regulation and public intervention, integrated support initiatives, financial instruments, and evidence based policy.3. Select Key Findings and Potential Future DirectionsThis Submission proceeds by addressing: the implications of incomplete understandings of risk; the role of data and discrete tasks; and their practical impacts in the context of initiatives proposed by industry interviewees.

3.a. Introduction: Communication BreakdownThe topic of risk is very broad and pervades the sector. Complex issues relating to conceptual terminology impact how the film industry is perceived, and how it operates.

Risk is a polysemic term, and there are multiple renderings of risk in the film business. This is not necessarily an issue for top-level market actors such as those interviewed for this research, who have developed sophisticated understandings and insightful management strategies to deal with their current needs, as per their particular business model. However, a lack of consistency in terminology and conceptualisation adds to confusion in industry and policy documentation and application. A literature that has unhelpfully designated film as both an especially risky sector, and no more risky than other industries, and that also conflates it with other creative industries, obscuring the detailed nature of its risk characteristics.

This subsection proceeds by addressing elements of the language, practices, instruments, and biases pertaining to risk in the film industry, and how these issues effect implications of misunderstanding and poor information availability.

3.b. Implications of Incomplete Understandings of Risk

Definitions and the role of language Risk in film is typically not understood to be probabilistic or quantifiably calculable in the Knightian (1921) sense, i.e. it is not explicitly differentiated from the wider notion of uncertainty through its ability to be measured, predicted and potentially systemically managed. 1 In general, risk is tacitly understood to be specific to financial loss of investment, and to pertain to the multiple components of activity and influences on the industry that may impact the chances of such loss. Although not consistently explicitly articulated, this risk directs much specific management activity, and is a response to the more general condition of uncertainty regarding future revenues from film exploitation - the environmental cause of risk, which is well covered in existing work.2

1 Dempster, A.M., (2014.) Risk and uncertainty in the art world. Bloomsbury Publishing: London. Knight, F. (1921) Risk, Uncertainty and Profit. Cosimo: London. 2 De Vany, A. (2004). Hollywood economics: How extreme uncertainty shapes the film industry. Routledge: London. ; Ghiassi, M., Lio, D. and Moon, B., 2015. Pre-production forecasting of movie revenues with a dynamic artificial neural network. Expert Systems with Applications, 42(6), pp.3176-3193. ; Hadida, A.L., 2009. Motion picture performance: A review and research agenda. International Journal of Management Reviews, 11(3), pp.297-335.

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Whilst use of quantitative methods is commonplace, when asked, only a single practitioner interviewed noted their use of probabilistic decision-making. Despite this, language related to probability is pervasive. Luck and likelihood are regularly used terms, whilst at the same time, reliance on tools for statistical inference is largely dismissed, as is the notion of pure chance.

Professional intuition is by far the most important driver of activity. It is regularly expressed in the notion of “taking a view” e.g. upon the likelihood of some outcome, X. “Taking a view” has different conceptual components – it indicates an informed, considered, but not a closed calculation. It is one contingent on parameters of methodology, the selection of which is subjective.

“Taking a view” emphasizes agency and reflects reasoned valuation in a space where knowing a definite final revenue outcome in advance is impossible. Subjectivity is explicitly required. Thus risk is framed not calculated, and though revenue forecasts - upon which much action is considered - are concrete numbers, these are understood to be extrapolations of possibility, not prediction.

Although there is effectively a general common agreement about risk sources and responses, there are differences in language, perspective and approach across different market actors. These differences are rarely fully articulated, leading to a lack of cohesion and clarity in terminology and conceptual content. Unlike other sectors including professional services, the film industry does not have a vocabulary or set of methods that consistently express the numerous readings of, and responses to risk, or any self-defined best practices. Instead, there are multiple tensions at play, and a reliance on practical experience and foresight imbued with positive and enterprising stances ahead of calculation. This limits the availability of contextually appropriate, detailed analysis of industry operation for entities potentially able to positively influence the conditions of UK independent film.

The FVC is Organised by Risk but Details of Practice are Often UnarticulatedThe independent film industry can be argued to be organised according to the segmenting of risk and return across the FVC on a project basis. The FVC provides for an uneven distribution of risk as more becomes known about the project, and the framing of uncertainty narrows (ambiguity becomes more tolerable). Risk and return are often asymmetrically aligned, and do not necessarily alter in parallel. There are contrasting views across FVC boundaries as to where the balance of risk and reward sit. Producers are largely responsible for development and typically stand to make (pressured) fees, whilst sales and distribution can put up significant sums to make production occur. For each situation there are contextual factors, however, there is a de facto commitment to recognise overall risk by operating according to the FVC.

The FVC is operated and mediated by several crucial market devices. These tools include the budget, sales estimates, tax credits, finance plans, recoupment charts (IPA), ultimates P’n’Ls, and digital engagement metrics (DEMs). They are often run in parallel, facilitating market actor interaction in a kind of mediated shuttle diplomacy. In the lack of detail with which such tools are explained, in specific relation to business model contexts, problems of communication appear.

Non-Probabilistic Approaches

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Market actors’ enthusiasm to designate the use of any particular device e.g. revenue forecasting models, as non-scientific reflects their respectful understanding of ultimate demand uncertainty. Their strategic response is insistence on well-structured means to protect against losses, specific to particularities of involvement.

Graduated practices such as reliance on multi-party finance and the FVC itself are predicated on aims to divorce, as far as possible, end audience uncertainty, yet retain some of its potential benefit. For example, cases where hard financiers leverage positions of equity benefits (profit participation) incompletely aligned with their provision of equity. The necessary acceptance of unknown ultimate demand, and the potential unbounded upside returns it facilitates, is a more well-known characteristic of the industry than the detailed construction practices that protect against exposure. Deal structure specifics that determine capacity for participant reward, are separate to, but interlinked with the chances of the individual film’s performance in primary and secondary markets. The spectrum of nuanced involvements (e.g. discounting tax credit, presales, and equity involvement) matched to particular characteristics per film e.g. secured distribution, and reliance on the wholesale market (derived demand), is rarely addressed in detail externally. There is an information gap that impacts policy, access to finance and wider perceptions.

Balance of Power Impingement on Formal Risk Management ToolsAdditionally, approaches to more technical issues, which might be considered tools dealing with risk as hazard prevention (delivery contracts, completion bonds) are subject to more contingent factors than is widely appreciated. This environment militates towards strategies such as counter-party analysis and partner track record reliance – effectively derived due diligence, being employed. This is so that risks of e.g. legal contracts regarding film delivery and payment not being honoured, can be avoided or managed according to balance of power relationships. This type of information is not usually captured in industry analysis and indicates the complexities of involvement that some potential new entrants deem too costly to learn.

There is a sliding scale of formality with regard to risk management processes and this extends to their description. So for example, whilst E&O insurance may be stipulated as a mandatory requirement in an investment Information Memorandum, the exact methods and expected outcomes of project selection and structure of involvement are less precisely expressed.

Recognition of IncongruityExamining a variety of business model approaches to risk in film, a running theme emerges of both regular use of established market devices e.g. P’n’L modelling based on historical data and comparable titles, and overt recognition of the fundamental limitations of such heuristics (which are individually tailored and contextually applied).

The viability of such tools is evident when analysed in situ and framed by their users. However, this level of appreciation is rarely widely disseminated. As a result, odd dualities, almost contradictory complexities can emerge. These carry over into information about the industry and blend with existing imprecisions of the literature e.g. oversimplifications and false dichotomies between creativity and commerce beget lack of confidence in how the industry operates. For example, in various formulations,

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market actors use past performance as an indicator for forecasting future revenues to inform their risk mitigation practices. Though evidently materially important, the practice is effectively disavowed in investment proposals. Strict interpretations of limitations on its overall effectiveness are commonly acknowledged.

The industry recognises the value in instrumental, if not objectively valid, valuation processes. These include casting ‘bankable’ talent and using sales estimates in order to facilitate (unverifiable) project derived demand calculations, thus closing finance and generating fees. As part of this process, there exists a self-recognised tendency towards greenlight / acquisition being based on optimism. This feature exists for a number of reasons: filmmaking decisions tend to be creatively driven by people with an intrinsic interest in realising the work, the overarching extreme uncertainty over revenue distributions3 leads to both a focus on optimism for project pursuit, and in terms of process - a practical and more clearly articulated attention to downside avoidance.

Film Industry Rationale is Complex and Imprecisely Expressed ExternallyIn some instances these industry characteristics can lead to problematic narrow framings and sure things4. These can occur for instance, where forecasts are made with methods that cut off the most extreme cases without methodological cause, or tools are utilised to justify executive decisions under the guise of predicting success. Management’s social understanding of risk is a major influence on market action. It is not completely dispassionate, objective decision making, rather, retained intrinsic bias can exist and infiltrate the structuring of various market devices. Such techniques have complex, contingent histories, are power and value laden, and may very well be oriented to career goals or impacted by silo-ing of information. In terms of optimistic thinking, a pertinent illustration is the availability heuristic, a way in which market actors may reason some state of affairs to be more probable than they are warranted in thinking if an example comes to mind very easily5 (consider the recurring exemplar of The Kings Speech).

Acceptance of uncontrollable factors’ / unknowable conditions’ dominant influence on ultimate project performance is deeply entrenched. This leads to some presentations of film activity showing work pursued despite absence of a business case and necessarily including overoptimistic perspectives to generate any market activity.

At the top level, whilst formulaic approaches are not used, the robust, high-quality subjective approaches that e.g. explicitly counter biased forecasting for meaningful profit as a business model are typically not well or widely expressed. Without detailed appreciation for the strategic parameters of involvement as carefully employed by expert practitioners, including the importance of derived demand in industry organisation, and of market device operation, activity is open to misinterpretation that does little to dispel perceptions of a non-transparent, extremely complex sector.

3 Steele, D., 2015. Rethinking the focus of UK film support: Is subsidising US studios a safe strategy for UK film production in the coming decade?. Cultural Trends, 24(1), pp.74-79.4 De Vany, A. (2004). Hollywood economics: How extreme uncertainty shapes the film industry. Routledge: London.5 Grant, J. (15.3 2011) “Plato’s Philosophy of Art”, Oxford.

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Almost all investment literature includes boilerplate instructions not to rely on information provided for investment purposes. In film this is further compounded in some documentation accredited by institutions responsible for regulating financial advisors, investment professionals and EIS, that includes incredibly problematic data sources and inherently flawed information. Professional financial services reports, financial literature, and trade commentary also suffers from imprecise or inaccurate language. Even in higher quality information sources, it could be argued potential upside is under-explained compared to the downside mitigation tools6, which are more fully explained, as revenue forecast assumptions do not tend to be made fully available and the relative reliance on talent / partner networks is unclear.

Impacts of Information / Knowledge GapsThis is undoubtedly a challenging issue. Without fully addressing the nature of risk e.g. according to its different types (self-sustaining / persistent environmental, cyclical), degrees (minor, bounded, structural), levels (individual, interpersonal, and organisational), dimensions (specific, systemic), and their impacts; stereotypical, broad brush and opaque understandings of the industry persist. Yet even transparent and full accounts would necessarily include some complex characteristics and problematic implications for potential investors e.g. the following generalities: the under appreciated reliance on derived due diligence; overestimation of peers’ sophistication in prediction modelling, yet rejection of data-led probabilistic approaches; the plasticity of market devices to suit individual market actors needs; and the self-recognition of the inadequacies of past performance as a guide to future activity, yet commonplace reliance on such measures.

In addition to the information gap and lack of nuance explored above (deemed contributory factors to lack of investment in the sector) there is also pertinent information largely absent from common understanding that concerns the role of market actors that effectively do not play by the rules of the game.

Access to successful conditions or resources for reorganising involvement in the FVC to a given market actor’s benefit often relies upon an ability to act outside the logics and constraints internal to the system. For instance, market actors with (non-film generated) capital resources to sway balance of power dynamics in their favour choose to engage in production on a selective basis. More timely, if less variant revenue streams, largely divorced from specific performance risk provide core business elements. These can be complemented when larger risks are entertained on specific projects, on desired terms. As a result it is very difficult to find fully transparent clarity of pathway to involvement in the business on attractive, intrinsically driven terms.

Evidence of a continued reliance on the glamour discount in order to secure new streams of investment to the industry is apparent. Following the 2007-8 financial crisis and continued digital disruption, the market has become increasingly competitive for packages considered to be less risky. The rare projects involving high profile talent evaluated as having demonstrable consumer and derived demand, are themselves often made non-commercial, through bidding up by market actors un-reliant on the economics of the film industry. These conditions prompt a need for a kind of evaluation arbitrage – the skill to identify non-obvious but high quality 6 Conversely poor quality documents typically oversell and oversimplify upside potential.

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projects alongside the necessary conditions to access and potentially profit from such works.

It is an open question whether full business transparency e.g. with regard to fundamental dynamics of revenue distribution, project access and control issues, market trends in UK entertainment competition, environmental uncertainty due to Brexit, Digital Single Market territoriality collapse, or tech sector disruption - would make the sector more attractive to those currently non-engaging. However, current opacity contributes a barrier to any exploitation of innovation being built on solid foundations. The next issue, which is connected to the lack of clarity in conceptual articulation, are repeated tensions regarding the potential uses of film data, including in relation to practices of transparency and reverse engineering.

3.c. The Role of Data and Discrete TasksAssessments of access to finance issues for the undercapitalised independent film sector regularly cite lack of reliable market data as a cause. Compared to other investment options, this characterisation of film is valid.

As with the issue of language, there is a lack of consensus and detail regarding what data transparency means and it’s potential benefits. Although full, clear, coherent, financial performance data on revenue distributions, combined with current means of access and involvement are not universally considered attractive, it is important to identify where better data, and better use of data can help. These uses can be contextualised with regard to where unhelpful, entrenched infrastructural norms can be changed e.g. inertia caused by lack of readily available, clearly foreseeable benefits to map alongside the certain costs of change. It is important, alongside the consideration of what kind of data would enable greater access to finance, to consider the potential use of such capital.

Provisions of extra public financial resources tend to be used as working capital for increased or diversified development costs, usually extra staffing or rights acquisition. This is as opposed to producers’ provision of equity investment in their own films – the typical lack of which prevents access to revenues high up the recoupment chart due to the involvement of gap financiers (also potentially providing tax credit and presales discounting facilities). The ability of producers to capitalise on their own successes lies not only with the ability to retain greater ownership of the production, but also the capacity to control more of the film’s life. It is not purely a matter of capital alone.

Measures to improve UK films businesses’ position must be cumulative and complementary, access to capital is one step, being able to put that capital to work appropriately is another. As an example, industry leadership on blockchain-enabled advances is required for piloting initiatives to examine e.g. marketing efficiencies and audience understanding; smart contracts for closing finance and executing payment based on revenue reporting; and other discrete areas where transparent management systems can be applied to replace balance of power network reliance and thereby potentially improve investor confidence.

A generic reading of data transparency and availability has been to place its value in relation to practices of reverse engineering, be that ultimates forecasting ratios, deal

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term negotiations, or budgeting. However, these heuristics have been greatly undermined by changing international markets, piracy and degradation of HE windows’ value. As a result it is helpful to be more precise about intended benefits of data use.

Reverse EngineeringDue to issues of “Hollywood accounting” and common reliance on delayed payment by distributors, more fulsome, accurate and timely reporting and payment would be helpful to improve film business management in general terms. However, the notion that greater access to data will increase chances of project success requires qualification.

Greater information about viewership is also desired to serve content valuation practice and future audience engagement strategies. Thus the black-boxing of SVOD viewership is a contentious area. A problematic issue, pointed out by those with intimate knowledge of full distribution windows including VOD dynamics, is the practice of reverse engineering. Mini-majors, studios, technology companies, financiers, and multi-media distributors evidence that without internal knowledge of buyers’ evaluative practice e.g. subscriber acquisition value breakdowns, viewing figures in and of themselves constitute incomplete information for considering the full value of the project.

However, though the extrapolated end goals of recent initiatives such as Sundance’s Transparency Project give overestimated illusions of control, there are potential benefits to increased data provision. Most notably, benefits are proposed in audience marketing efficiencies through collaboration across the FVC, especially between distribution and exhibition. It is in these areas of discrete tasks such as audience segmentation, film dating and pricing, that technology-led probabilistic approaches to risk can apply. Some tools do methodologically attempt comprehensive film packaging and forecasting based on probabilistic modelling, but promote themselves simply as decision support aides.

Currently, through-lines of data-led work at larger companies with requisite data access are inhibited by team specialisms, or silo-ing, inertia, or HR legacies, whereas independents do not have the appropriate data or expertise. This appears apt to change. At the larger company level, consumer rejection of periods of enforced darkness or artificial scarcity are driving a need to build different business models. Data efficiencies will likely play a role in any US Premium VOD windowing model. Implementation of such innovations may aim to effect the logics of Chinese social media ticketing apps, examples of which have integrated data analytics and reversed into production and finance via direct audience understanding and access.

Distribution / Exhibition and Proxies for ScaleData does not necessarily need to be “big” in the academic sense to be impactful, just profound. Analytical application of previously unavailable information can have demonstrable value. Links between exhibition and distribution in the independent sector is an area of clear potential.

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Data accrue at different points with different market actors, rarely are they collected systematically, let alone combined and shared with other stakeholders7. Building collaborative efforts for SMEs to access proxies for an integrated company’s resources could move FVC architechture towards alignment of visions for the life of a film – in its priority audience relationship pathways and marketing efficiencies. Steps can be taken by exploring decentralized data marketplaces8, where data can be exchanged in return for incentives. Different market actors could contribute data for subscribers and enable computation on confidential, encrypted data at point of use.9

3.d. Industry Proposed InitiativesThe multiple works of Olsberg SPI and Northern Alliance have rigorously and repeatedly set out the fundamental issues of the UK independent film sector.10 The number of UK domestic films produced and their low market share cited in Wiseman’s Screen article11 announcing the launch of this BFI Commission provides current context to the persistent and current problems faced in this area of the industry.

Imprecision of language with regard to risk by industry practitioners is also evident in the work of public organisations supporting film. Often this is connected to business support initiatives and the notion of sustainability. In general, public organisations do not have fully defined overarching strategic goals for indigenous film businesses in terms regarding sustainability, strength, viability or risk, but do include such terms in particular funding stream communications and policy documents.

The Role of Public OrganisationsPublic organisations’ terminology, process and strategy should be interlinked with processes used to measure and manage progress towards related goals. For example, in assessing how film businesses might demonstrate how they can become sustainable, or take calculated risks. The leveraging of that evaluative data for the benefit of the sector and transparency of analysis should be considered. Currently it appears there is a lack of data sharing across departmental silos and organisations, and the potential of using the information such organisations collect as a matter of course, is underexploited.

Understandably public organisations do not have the financial resources to set up a suite of interventions that alone might lead to a sustainable indigenous film industry, however defined. But a coherent vision for what might be created in partnership with all connected market actors is desirable. This can involve explicit recognition of the

7 See https://en.epi.media/news/news.56.bigdata-bigmovies-conference-proceedings/ 8 See the work of the Enigma Project at https://enigma.co/ for reference: https://enigma.co/enigma_full.pdf https://blog.enigma.co/beyond-catalyst-enigmas-vision-for-the-future-of-data-22fbb5845556 9 ibid.10 As has Steele re: profitability and production and the documents he cites: Department for Culture, Media and Sport. (1998). A bigger picture – Report of the film policy review group. London. Department for Culture, Media and Sport. (2012). A future for British film: It begins with the audience. London. 11 https://www.screendaily.com/news/production/bfi-to-investigate-health-of-independent-film-sector/5119831.article

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through-lines interlinking conceptualisation and management of risk in film business to the opportunities afforded for diverse representation and indigenous success.

It may be that globally scaled UK owned businesses, or smaller independent companies un-reliant on public funding do, or do not, represent the ambitions of the sector or the best route forward to sector improvement. This research found opinion was mixed and industry wide company modelling is a significant challenge in a sector where talent is continually moving in and out of film, moving in and out of independent companies, and in and out of the UK. Addressing how to corral that development possibility and need for support over time within a company framework is a substantial task. However, as the BFI recognised in welcoming a specific stream of government work on the right policies to build companies of scale12 (BFI, 2015), serious attention is required to explore the best options long-term. This requires a (currently absent) empirically led resource for data analysis – as recommended by Warwick Commission (2015)13.

Riskiness is often given as a reason to persist with the status quo e.g. to avoid diversity of talent / representation14, or to persist of inertia in business models. Without evidence-based change the status quo will persist, and according to some interviewees’ readings of current conditions, likely decline into a state of serious threat to independent filmmaking.

Therefore, addressing the understanding of risk is important at the fundamental level of protecting the possibility for domestic filmmaking such that it can reach a mass audience and achieve its goals as a public good: helping us understand the world and each other, inculcate empathy, share knowledge and joy. It is crucial that initiatives be undertaken to bring people into contact with film at all stages of its consumption cycle and introduce them to important films and topics. Ideas about differential pricing for UK independent theatrical release fit into this stream of thinking.

This is clearly an incredibly complex task requiring a holistic perspective. But at the same time there are discrete opportunities for positive action, which have been suggested by research participants, and indeed also operate in existing public work. These are set out below as areas for further investigation. A starting point of building on current success and adding complementarities appears to be a good strategy.

Ability to Capitalise on CreativitySupport for PEC, PEE, fee and overhead protection, and locked boxes have been noted as successes. When considering what suite of further initiatives might support the agenda of generating felicitous conditions such that success may be rewarded and reinvested, it is crucial that all potential all knock on effects of intervention are modelled. For example with increased tax credits to 40%, what are the potential implications regarding producers’ interaction with financiers that typically cashflow FTR alongside other provisions? A wealth of budget and finance plan information

12 British Film Institute. (2015) Response to the Business Innovation and Skills Committee Inquiry on the Digital Economy13 See http://www2.warwick.ac.uk/research/warwickcommission/futureculture/finalreport/ 14 See work of the first author - Coles, A. and MacNeill, K., 2017. Policy Ecologies, Gender, Work, and Regulation Distance in Film and TV Production. In Women, Labor Segmentation and Regulation (pp. 211-231). Palgrave Macmillan US.

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resides in different public organisations’ application and certification databases. Exploring how to harness this data, cognisant of technological, ethical, and practical application challenges is a key task. Initiatives such as Open Music Initiative15 and Enigma16 can further inspire such innovations in film.17

Increased low budget production may open access to more nominal releases and shop-window talent, but the ability to capitalise financially on success is minimal given the extant balance of power in terms of trade across the FVC. Investigation over the impact of increased UK FTR and lower limits to provision, as per HETV would provide avenues of insight. It is important to keep film incentives – their strengths and limitations - distinctly recognised so that its needs may be truly represented to government.

The multiple impacts of HETV and SVOD success require consideration. There are specific challenges, such as the need for more efficient materials to close finance, in part to facilitate flexibility of workflow as windows of talent availability emerge. There are macro considerations such as growing concerns of a bubble, or that TV may become like film: a ‘mere adjunct’ of US companies, dependent on foreign capital, addressing a globalised viewership.18 There are also major business model concerns that centre on the constriction of HE viewership into the SVOD window, in which incremental sales are not possible and thus the unbounded upside of film hits undermined alongside the attendant company impacts.

Potential responses suggested include serious consideration of obligations for SVOD production investment provision, with the political barriers noted. Relatedly, to counter the decreasing shelf life of film IP coinciding with SVOD operations, some research participants propose a focus on scale. Scale of project ambition inherently interacts with budgetary dynamics, audience reach and distribution requirements – and these connections illustrate the different dimensions of risk at play. Getting above a threshold status in order to compete with other entertainment options is deemed vital in order for a film to stand a chance of delivering meaningful revenue, upon which distribution and production companies might progress toward ‘sustainability’.

R&D Support - Tax Efficient / Cross FVC IncentivesDevelopment is the FVC segment regularly cited by research participants as the location where most prospective value can be generated relative to intervention expenditure. An initiative attracting investment support to development, provided the difficulty of excluding exploitation can be completely addressed, is presented as likely to have a meaningful impact on SME day-to-day practice. New entrant market actors including

15 See http://open-music.org/ 16 https://enigma.co/enigma_full.pdf 17 http://www.propellorfilmtech.com/18 See the work of R. Paterson BFI / Create.ac.uk.

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FAANG19 -like companies, tend not to invest in development where risk is largely unmediated. They tend to acquire finished product where quality is more known thus destabilising the overarching FVC architecture that relies on investment in production such that hits have a chance to emerge. To advance independent companies’ prospects by addressing this shift in disproportionate production involvement and value capture, examination of development support, especially that which might encourage scale of budget – and correlative release, would be advantageous.

Nesta assesses the recognition of R&D20 as a legitimate practice in the arts, arguing experimental development meets the systematic work requirement. This is becoming ever pertinent as an innovation issue as technology / services companies which also produce content for film, VR, games, cannot access support to help produce content – which is utterly vital to the ecosystem. Tech-sector led thinking is also put forward with regard to consideration of financial arrangements, with examples given of the Silicon Valley / Tech City VC model in which investors accept producers who deliver success should own a substantial portion of their work, even if they have not put up the cash.

This is not to say this research provided consensus on tax wraparound or tax support issues. Several successful businesses note the inherent problems of such interventions leading to the tail wagging the dog and undermining business processes, including ability to manage risk according to intrinsic properties rather than scheme timetabling for example. Additionally it was noted that EIS schemes, whilst a valuable source of project finance are not producing sustained companies in the main.

Business Planning and Business EducationAnother point of contention across the sector is the value of business skills and their formal expression. Some public organisations, investors, even some producers and the access to finance literature, cite the lack of ability to demonstrate traditional business management practices as a barrier to company and sector development.

Contrastingly, extremely successful practitioners view business planning as intrinsically not useful and thus, often a waste of time. Some instrumental uses are accepted e.g. for investor reassurance, but the core fallibility of the tool is highlighted.

This example points to a wider trend. When underlying dynamics of the industry are so powerful, with high likelihood of failure of the overall project, or at least very high likelihood of no control over the eventual outcome, the cost benefit analysis of engaging in formal management activity largely predicated on different industry environments is unattractive. This leads to circumspection when it comes to change, e.g. new data-led model adoption, especially if market actors are already successful in navigating complexity in some respects and can see definite gains in focussing on their core competencies.

However, there are areas of skill development that can be demonstrated to have value. Following the strategy of identifying discrete components of activity that most can agree upon is potentially a viable approach. For example, there is a knowledge gap in 19 Facebook, Apple, Amazon, Netflix, Google20 See Bakhshi, H. and Lomas, E. (2017) Policy Briefing Defining R&D for the creative industries. Nesta: London.

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traditional film businesses in applying cohort analysis to audience data, which is becoming increasingly prevalent as tech-led distribution companies further integrate across the FVC. Whilst keeping in mind the impossibility of reverse engineering success, there are certain benefits in training to speak the same languages / negotiate in the same currency across the FVC.

Accounting and IP Valuation The regularly recommended consolidation of accounting standards / statement of best practice is a topic inherently linked to the access to investment area, in which difficulty in valuing film companies is presented as a key challenge. This is not an easy or unique issue to address, in the US the SEC regularly state the need to present tailored risk factors to the specific business and avoid using boilerplate language. However, whilst that challenge of effectively communicating the nature of risk and approaches to its mitigation is pervasive, there are areas in which positive progress can potentially be made. For example considering how to best capture the value of talent networks (track record), investment in development, potential future revenues from rights exploitation. These issues require attention from the accounting perspective in terms of capitalisation of assets, in line with the wider industry environment being considered.

This is clearly an area requiring industry expertise. The next, connected area of suggestion also illustrates, as per earlier sections that in some aspects, the sector lacks stable, regulated hallmarks of quality, and some kind of appropriately resourced centralisation of expertise would be beneficial.

Risk Information and Data to Support Financial Instrument ProvisionPublic organisations have historically set out their support and approval of particular film finance e.g. the Film Tax Credit or EIS, and also grant accreditation to certain schemes or practices. It would be useful to explore how this could potentially work for information about the sector, revenue data, investment proposals and so on. Access to finance reporting regularly suggests liaising between financial bodies and the creative industries; the development and provision of trusted expert information could be a way to do more.

Public organisations could work with the capacity builders program of the EC’s Cultural and Creative Sectors’ Guarantee Facility (CCSGF) to begin examining how shared data and expertise provision can be pulled together, potentially to deliver a UK proxy. In France IFCIC offer centralised expertise to lenders in the evaluation of creative propositions21. The ability to smartly leverage available information is crucial to exploiting opportunities in the independent sector22.

As introduced in 3.c. technologically enabled data sharing and smarter collaboration utilising data across the FVC is eminently achievable. Application examples include enabling marketing efficiencies between exhibition and distribution in a contested windows marketplace where a better-known and actively developed cinema audience could help reduce elements of uncertainty for new products.

21 Monclus, R.P., 2015. Public banking for the cultural sector: financial instruments and the new financial intermediaries. International Review of Social Research, 5(2), pp.88-101.22 La Torre, M., 2014. The Economics of the Audiovisual Industry: Financing TV, Film and Web. Palgrave Macmillan. Sections 7-9.

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There are both technology and management templates for partnerships that can be examined and adapted e.g. Open Music Initiative23. As per the logics put forward in the rest of this submission, such initiatives are very long term and must start from simple building blocks to get all necessary market actors on board, the OMI started with identifying a Minimum Viable Data package for a song as a point to build from. The potential implications to address areas such as pooled anonymous data analysis, or networked trust to formalise the derived due diligence currently in effect over the multiple separate market devices currently mediating the FVC, is worth exploring.

Inward InvestmentAnother area of mixed industry viewpoints relates to the costs and benefits of inward investment successes to the independent film sector.

Identifying the best collaborative cross-benefit framework for inward investment filmmaking and domestic film business success is a key policy priority of some public organisations. The decrease of mid budget independent filmmaking is recognised as a barrier to talent development. The complex relations between the pump primer utility, talent escalator role and avoidance of functioning purely as a service industry require mapping out. For specific investigation is the role that inward investment companies can play in umbrella-ing UK domestic businesses. Across the world, the benefits of large-scale filmmaking especially on technological companies that are then able to move into film creation and rights exploitation, are evident. How might similar benefits be derived for companies in other FVC positions? Could movement of talent across independent to major projects be reciprocated with corporate benefits e.g. co-signing of loans etc.? These are all simply suggestions for further, serious investigation.

23 See http://open-music.org/

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