I. EXECUTIVE SUMMARY
Background
In January 1999, the Directors Guild of America (DGA) and Screen Actors
Guild (SAG) retained Monitor Company, a leading management consulting firm,
to conduct an investigation into the phenomenon of "runaway" film and television
production from the U.S. The Guilds (on an anecdotal basis) had been noting
an accelerating runaway phenomenon, and the need to create an objective
quantitative analysis led to the study being commissioned. Partial funding
for the study was provided by a grant from SAG-Producers Industry Advancement
& Cooperative Fund. The study has two objectives - quantify the extent
to which runaway production has been occurring since 1990, and identify
the major causes.
Chart: Summary of U.S.-Developed Runaway Production,
1990 and 1998
U.S. runaway productions are those which are developed and are intended
for initial release/exhibition or television broadcast in the U.S., but
are actually filmed in another country. There are two major types of runaway
productions – "creative" runaways, which depart because the story takes
place in a setting that cannot be duplicated or for other creative considerations,
and "economic" runaways, which depart to achieve lower production costs.
The study’s focus was on these "economic" runaways. Note that the study’s
scope included theatrical films, films for television, television mini-series,
and thirty and sixty minute television series. Other types of productions
such as commercials, and news and sports programming were not included.
What Is The U.S. Runaway Production Problem?
The study results show that economic runaway film and television productions
are a persistent, growing, and very significant issue for the U.S. In 1998,
of the 1,075 U.S.-developed film and television productions in the study’s
scope identified by Monitor Company, 285 (27% of total) were economic runaways,
a 185% increase from 100 (14% of total) in 1990. When these productions
moved abroad, a $10.3 billion economic loss (lost direct production spending
plus the "multiplied" effects of lost spending and tax revenues) resulted
for the U.S. in 1998 alone. This amount is five times the $2.0 billion
runaway loss in 1990.
Of these 285 economic runaways in 1998, 100 were theatrical productions,
and 185 were television (films for TV, TV series, and mini-series) productions.
The most prevalent type of economic runaway television productions were
movies for TV. A total of 308 movies for TV were produced in 1998; 139
(or 45%) of these ran away for economic reasons in 1998, up from only 30
productions in 1990. Out of a total of 534 theatrical productions in 1998,
100 (19%) were economic runaways, up from 44 in 1990.
In terms of economic impact on the U.S., economic runaway TV films have
the largest ($2.7 billion) impact, followed by feature films with budgets
larger than $25 million ($2.4 billion impact), and with budgets smaller
than $25 million ($2.3 billion impact). It is noteworthy that feature films
have such a significant economic impact. Conventional wisdom held that
economic runaways are a television movie phenomenon and that larger productions
would tend to remain in the U.S. since the infrastructure required to produce
them wasn’t available abroad. This data may indicate the leading edge of
a trend with larger-budget productions running away.
To Where Do These Productions Run Away?
Canada captures the vast majority of economic runaways, with 81% of
the total. Australia and the U.K. capture another 10%. In 1998, 232 productions
ran away to Canada, up from 63 in 1990. TV movies have had the highest
propensity to runaway to Canada, with 91% of the 139 TV movie economic
runaways landing there. The 127 U.S. economic runaway TV movies filmed
in Canada in 1998 is more than five times the 23 in 1990. The study found
that countries other than Canada, Australia, and the U.K. have a small
share of U.S. runaways, although recent high-profile runaway productions
in Mexico such as "Titanic" highlight the need to monitor developments
in selected other countries on an ongoing basis.
These productions are leaving at a time when U.S. domestic production
has been growing, so the runaway phenomenon has gone relatively unnoticed.
Although the number of U.S.-developed feature productions grew 8.2% annually
since 1990, the number of U.S.-developed features that ran away to Canada
grew 17.4% annually. Similarly, the number of U.S.-developed television
programs produced in the U.S. grew 2.6% annually since 1990, but the number
of U.S.-developed television productions that ran away to Canada grew 18.2%
annually during that time.
What Is The Impact of U.S. Economic Runaway Production?
The labor impact of these economic runaways is profound. In 1998 more
than 20,000 full time equivalent jobs were lost; 11,000 were positions
usually filled by SAG members (such as supporting actors, stunt and background
performers) and 600 usually by DGA members (directors, assistant directors,
unit production managers, associate directors and stage managers). The
balance were jobs in other production skills or trades, such as camera,
sound, production design, wardrobe, make-up, set construction and drivers.
When the effects of these employment and spending losses are totaled,
the impact on the U.S. of film and television economic runaways in 1998
was $10.3 billion: $2.8 billion in lost direct production spending, plus
$5.6 billion in multiplier effects and $1.9 billion in lost tax revenues.
The economic impact extends beyond the entertainment industry, affecting
local merchants and hotels. In 1998, economic runaways represented almost
15% of the $74.3 billion total impact of U.S.-developed film and television
productions in the scope of the study.
There have been notable regional impacts as well. Production expenditures
in core production centers such as LA and New York City have been growing,
but at slower rates than those of Canadian production centers. Other U.S.
production centers have experienced declines in production expenditures
since 1995 - North Carolina (-36%), Illinois (-20%), Washington state (-37%)
and Texas (-31%).
Forecasts of future U.S. runaway production show that under all basic
scenarios examined, without actions to stem economic runaways, economic
runaway production remains significant, potentially increasing in impact
to $13-$15 billion annually by 2001. A scenario with slower U.S. growth
and a stronger Canadian dollar keeps the U.S. impact at approximately $10
billion annually. Many foreign production infrastructure investments have
been made by U.S. studios; these investments will serve to continue attracting
additional productions abroad. Furthermore, the increased globalization
of the entertainment industry and incidence of international co-production
arrangements will also likely stimulate U.S. runaway production.
What Are the Causes?
Why have productions been leaving at an accelerated rate since 1990?
The location decision for a production balances factors such as expected
revenues with the cost of production (labor, services, etc.) as well as
with the quality of talent, directors, and production crews. Historically,
countries such as Canada and Australia had limited production capabilities,
making them fundamentally unattractive despite potential savings. Recently,
however, the quality of Canadian and Australian crews has improved to a
point where most productions can be filmed in these countries without a
major difference in quality/productivity.
As foreign crews and infrastructure have improved through experience
and direct investment, their ability to handle larger, more complex productions
increases. For example, British Columbia and Ontario combined have well
over 1 million square feet of sound stage space, as much as the space in
New York and North Carolina combined. Canadian film commissions have also
been very aggressive in promoting their locations to the U.S. entertainment
industry.
In addition, the value of Canadian, Australian and U.K. currencies all
have declined by 15% to 23% since 1990 relative to the U.S. dollar, reducing
production costs abroad. Factor costs (wages/rates) in these countries,
which were generally lower than those in the U.S. in the early 1990’s,
have also increased at a slower pace than in the U.S. As a result, producers
realize at least a 15% reduction in production costs from lower labor costs
and costs of goods and services when filming in Canada.
Very visibly (for example, by having Revenue Canada (the Canadian IRS)
representatives at the recent Locations ’99 trade show in Los Angeles),
foreign federal and regional governments have also been offering rich tax
incentives/rebates on production activity in their jurisdictions. Canada
offers federal and provincial tax credits of 22% to 46% of labor expense
(yielding up to a 10% reduction in overall production expense), and Australia
offers more than a 10% labor tax credit in some cases. Note that these
are not credits for national or cultural content productions; they are
available to any qualifying production employing foreign nationals. In
addition, Canada, Australia and the U.K. offer up to a 100% tax credit
for qualifying "national"/ "cultural" productions, and many other countries
offer generous tax credits to producers.
The combined result of the exchange rates, lower costs and government
incentives allows the producer of a typical TV movie (production budget
of $3 million) to reduce production costs by 25% or more by choosing to
film in Canada. Similar percentage savings are available to the producer
of a $20 million feature who chooses to film in Canada.
It is important to note that Canada has followed an integrated approach
to launching its film/television production-oriented initiatives during
the past several years. This approach begins with a relatively undeveloped
production industry, and launches a series of (usually tax credit-centered)
initiatives to attract production activity/investment, but often creates
qualifying requirements for those incentives that stimulate hiring of local
personnel. As a result, local production crews, actors, production managers
and assistant directors gain valuable experience/training and are therefore
more capable and attractive to other producers. At the same time, investments
in physical infrastructure are sought so that more and more productions
can be accommodated. As these production capabilities expand, other tax
incentives such as those for local labor expenditures are offered to further
stimulate demand for local production resources. Ominously, this approach
to capture productions is readily replicable by other countries; in fact,
Australia is moving along a very similar path to that pursued by Canada.
How Large Is The Gap To Be Closed?
Clearly the U.S. faces major challenges in stemming the tide of runaway
production. The solutions will not be simple because the causes are several
and very complex. However, the cost gap to be closed to retain production
in the U.S. may not be the entire 25% production cost disadvantage. Several
producers interviewed mentioned that if the budget for U.S. productions
were brought to within 10% to 15% of costs in Canada, then they would make
the argument to keep that production in the U.S. Producers generally want
to work where they live, and most live in the U.S. production clusters.
Furthermore, these clusters contain all the resources required, as well
as access to financing, development, and distribution resources, which
provide a distinct advantage to producers. Obviously, certain productions
cannot afford even a 10% cost disadvantage; recapturing these productions
will be the greatest challenge.
It is important to note that U.S. film and television economic runaway
activity is at a high level, and that large productions are running away.
The significantly lower total production costs achievable abroad are compelling
to producers. The experience that foreign production crews, actors and
directors have gained in filming U.S. runaway productions represents an
ongoing source of advantage for these producing locations. Similarly, infrastructure
investments abroad represent permanent improvements that will continue
to draw productions out of the U.S. Without a meaningful response (or some
unforeseen development abroad), production employment opportunities and
associated economic benefits will continue to leave the U.S. at a significant
rate.
II. THE U.S. RUNAWAY FILM AND TELEVISION PRODUCTION
PROBLEM
A. Runaway Activity/Trends
The study’s first task was to define the scope of the U.S. runaway problem.
To accomplish this task, Monitor consultants created a database of film
and television productions extending from 1990 through 1998. Note that
certain types of productions are included or excluded (see Exhibit 1).
The study included independent and studio productions. Several sources
were used to create this unique database, as described in the Methodology
section.
Exhibit I
Productions Included |
Productions Excluded |
-
Feature films produced for theatrical release
-
Direct to video productions
-
Movies for Television/MOW/Telefilms
-
Series for television
|
-
Animation
-
Commercials
-
Daytime soap operas
-
Documentaries
-
Foreign films
-
Foreign language television
-
Game shows
-
Infomercials
-
Music videos
-
News programs
-
Public access
-
Religious programming
-
Sports Entertainment
-
Talk Shows
-
Television specials
-
Training films
|
Another critical item was the definition of a "runaway" production.
This study defines a "runaway" production as a production that was developed
in the U.S. and was intended for initial release/exhibition or television
broadcast in the U.S., but filmed partially or entirely outside of the
U.S. There are two distinct types of runaway productions: "creative" and
"economic." A "creative runaway" is defined as a runaway production that
was filmed partially or entirely outside of the U.S. due to script or setting
requirements, or actor/director preference. On the other hand, an "economic
runaway" is a production that was filmed primarily abroad to reduce costs
incurred during production.
While it is important to understand all runaways, the study focused
on economic runaways because they represent a more prevalent and addressable
issue than productions moving abroad due to the creative preferences of
artists. Nevertheless, the runaway production story would be incomplete
without a brief examination of all runaways, including creative.
Exhibit 2 shows overall production volumes of U.S.-developed productions
included in the study’s scope. This Exhibit also shows the rapid growth
in the number of all runaway (creative and economic) productions.
In 1998, 1,075 U.S.-developed productions in the study’s scope were filmed,
up 50.1% from the 716 filmed in 1990. 399 productions ran away from the
U.S. in 1998, up 91% from the 209 that ran away in 1990.
In 1998, a total of 534 theatrical films in the study’s scope were produced;
171 of these ran away from the U.S., for either creative or economic reasons.
The number of runaway theatrical films grew from 96 in 1990 to 171 in 1998,
an increase of 78.1%; during this time the number of domestically-produced
theatrical films grew 62.8%.
Exhibit 2: Annual Number of U.S.-Developed Productions
Exhibit 3: Total U.S. Creative and Economic
Runaway Productions
The extent of the runaway situation becomes more apparent in television
productions. In 1998, a total of 541 television programs were filmed; 228
(or 42%) ran away from the U.S., for either creative or economic reasons.
The number of runaway television programs grew from 113 in 1990 to 228
in 1998, an increase of 101.8%, while the number of domestically-produced
television programs only grew 10.2% during this time. Note that runaway
share of total U.S.-developed production grew during the 1990’s.
However, the real understanding of the U.S. runaway phenomenon lies
in the examination of economic runaways and specific types of productions:
feature films, movies for television, or telefilms (also known as movies
of the week), 30-minute television series, 1-hour television series, and
television mini-series.
First, the economic runaway summary. Exhibit 3 shows that the U.S. runaway
production growth is driven overwhelmingly by economic runaways. In 1998,
285 productions were filmed abroad for economic reasons, an increase of
185% since 1990. During the ‘90’s, the number of creative runaways grew
a modest 5%. As a result, economic runaways grew from 48% of total runaways
in 1990 to 71% in 1998.
Exhibit 4: Television and Theatrical U.S. Economic
Runaway Producions
Next, it is important to note the composition of economic runaways with
regard to theatrical features versus television. Exhibit 4 shows that U.S.
economic runaway production is being driven increasingly by runaway television
productions. While the economic runaway of theatrical features was 127%
greater in 1998 than in 1990, television is the main driver of the total,
representing more than half of economic runaways, with a 230% increase
since 1990. Only 56 television productions left for economic reasons in
1990; this number grew to 185 by 1998.
Exhibit 5: Components of U.S. Economic Runaway
Of these economic runaways, more than 80% are telefilms and feature
films. Exhibit 5 shows the number of feature films that ran away more than
doubled during the ‘90’s (from 44 to 100), but the number of economic runaway
telefilms more than quadrupled, from 30 to 139 between 1990 and 1998. In
general, productions that are running away are smaller-budget productions,
(telefilms and feature films with budgets under $25 million), which represent
75% of the total number of economic runaways. One-hour series are also
growing significantly at 163%, yet represented only 10% of all economic
runaways in 1998.
Exhibit 6: Annual U.S. Economic Runaway, by
Location
To where do these runaways go? Exhibit 6 demonstrates that since 1990,
the majority of U.S. economic runaway production goes to Canada. Section
III of this report examines the reasons for Canada’s success in attracting
U.S. productions.
In 1990, Canada captured 63% of all U.S. economic runaways; by 1998,
Canada captured 81%. The number of U.S. economic runaway productions captured
by Canada grew phenomenally from 63 in 1990 to 232 in 1998, a 268.3% increase.
Australia and the U.K. also captured some economic runaways; Australia’s
total grew from 5 productions in 1990 to 18 in 1998. The study examined
all major global production locations and found that no other country consistently
captured a meaningful percentage of U.S. economic runaway productions.
Obviously, high-visibility runaways such as "Titanic" which filmed in Mexico
are noteworthy, but do not appear to indicate that Mexico will replace
Canada as a significant destination.
Canada not only captures the majority of all economic runaways, but
also successfully captures nearly all telefilm economic runaways as seen
in Exhibit 7. In 1990, only 23 telefilms ran away to Canada for economic
reasons; by 1998 this number was 127, representing a 452% increase. The
127 telefilms Canada captured represent 91% of all runaway telefilms.
In the discussion of economic runaway trends, it is important to note
that the number of U.S. – developed domestic film and television productions
has been growing since 1990, (8.2% annually for feature films, and 2.6%
annually for television), illustrating why some U.S. production locations
are reporting increases in production days. To a certain extent, this growth
has masked the true impact of runaway production by creating a "rising
tide" for the domestic production industry.
Exhibit 7: Annual U.S. Economic Runaway Telefilms,
by Location
Exhibit 8: Compound Annual Growth Rate of U.S.-Developed
Productions, 1990 to 1998, by Location
However, Exhibit 8 shows that this U.S. growth is not commensurate with
the growth occurring in the top U.S. runaway production locations such
as Canada, Australia, and the U.K. For example, Australia is growing 26.4%
annually (1990-1998) in production of U.S.-developed feature films, or
more than three times the U.S. growth rate. Similarly, Canada is growing
at 18.2% annually in production of U.S.-developed television projects,
more than double the U .S. rate.
B. Total Economic Impact
The number of productions that runaway for economic reasons is notable,
but the real impact to the U.S. is economic, the result of lost production
direct expenditures plus the lost "multiplier" effects of those expenditures.
Exhibit 9 shows the methodology used to estimate the impact on the U.S.
economy when productions leave the U.S. Again, it is important to note
that only economic runaways are considered, not creative runaways. Note
that nominal dollars used throughout the study’s analyses.
Exhibit 9
The sum of the total direct production costs of these economic runaways
represents the total size, in dollars, of economic runaway production for
both theatrical films and television. In 1998 U.S. economic film and television
productions had $4.0 billion in direct production expenditures. This figure
represents the "negative costs" for the 285 U.S. economic runaway productions
in 1998.
Since economic runaways typically do most of the pre- or post-production
work in the U.S., and usually bring the lead actors and director from the
U.S. to the foreign location, not all of the production expenditures have
in fact "runaway." As a result, the production expenditures that remain
in the U.S. and the wages paid to U.S. talent are "repatriated" back to
the U.S. This "repatriation" more accurately captures the true direct spending
lost to the U.S. from economic runaway productions, because it reflects
actual practice by producers. In 1998, of the $4.0 billion in economic
runaway direct production expenditures, $1.2 billion remained in the U.S.,
yielding a net $2.8 billion direct production expenditure abroad.
A majority of this direct spending lost to the U.S. would have been
"multiplied" through the economy to further stimulate business in the motion
picture industry, and in related and peripheral industries. The U.S. Bureau
of Economic Analysis has developed widely accepted multipliers to estimate
the re-spending of direct production dollars. These multipliers were applied
to relevant subsets of the total direct spending lost to the U.S. ($0.88
billion of goods and services and $0.85 billion of wages and salaries).
In 1998, the multiplied effect of lost production expenditures totaled
$5.6 billion ($0.8 billion multiplied by 3.6 plus $0.8 billion multiplied
by 3.1).
Furthermore, when a production runs away, the payroll, income and sales
taxes on the direct spending and multiplier spending are also lost to the
U.S. National and state average tax rates were applied to calculate the
total tax revenue lost to the U.S. at the Federal and state level in addition
to the direct spending and multiplied spending lost. The lost tax revenues
totaled $1.9 billion in 1998.
Exhibit 10: Annual Direct Production Expenditures
Lost From the U.S.
As Exhibit 10 shows, $2.8 billion in direct expenditures were lost to
the U.S. in 1998 from both theatrical films and television economic runaways.
This figure is almost six times the annual impact on the U.S. in 1990.
There is a generally balanced split between television and theatrical film
direct expenditures. Note that while the number of economic runaway
television productions such as telefilms increased more rapidly since 1990,
the larger budgets of feature films make the comparison of expenditure
levels appear more balanced.
Exhibit 11 shows the economic impact calculation for 1998. $4.0 billion
in direct production expenditures on U.S. economic runaway productions
occurred; the U.S. retained $1.2 billion for reasons mentioned above. The
remaining $2.8 billion then triggers the multiplier effect discussed above,
to yield a total multiplied impact of $5.6 billion in 1998. Taxes lost
on the direct production expenditures and multiplier effects yield another
$1.9 billion in impact. The total economic impact (combined effect of direct
spending lost, multiplied dollars, and tax revenues lost) was $10.3 billion
in 1998.
As shown in Exhibit 12, the 1998 $10.3 billion impact is five times
the $2 billion economic impact in 1990. The split of this impact between
theatrical films and television production is roughly even. The impact
on the U.S. economy of both film and television runaways has grown consistently
and rapidly. The impact of feature films grew 422% between 1990 and 1998;
the impact of television production grew 409%.
Exhibit 11: Total Annual Economic Impact of
U.S. Economic Runaway Productions, 1998
Exhibit 12: Total Annual Economic Impact of
U.S. Economic Runaway productions
It is important to place this $10 billion impact in the context of total
U.S. film and television productions. In 1998, the impact on the U.S. economy
from direct production expenditures on U.S.-developed theatrical films
and television included in the study’s scope is estimated at $74.3 billion.
This includes expenditures on projects that were filmed wholly or partially
in the U.S. The U.S. economic runaway productions represents almost 14%
of the total impact of film and television productions. This 14% is lost
from the U.S.
Exhibit 13: Direct Spending and Multiplier
Effect, by Industry, 1998
Exhibit 14: Economic Impact of U.S. Economic
Runaway by Category, 1998
Economic runaways impact the U.S. economy both directly through the
loss of direct spending, and indirectly through the loss of multiplied
dollars. With regard to direct spending, $800 million that would have been
spent on goods and services in the U.S. were lost in 1998 due to economic
runaways. The industries that most significantly felt the effects of this
direct spending loss were the equipment rental, travel and hotel, and catering
industries as seen in Exhibit 13, amounting to almost $200 million in 1998
alone. In addition to the loss in goods and services, the loss in wages
and salaries paid to those working on film and television productions amounted
to an additional $2 billion in 1998.
Also in Exhibit 13, the multiplied dollar impact shows $3 billion in
goods and services lost due to economic runaways. For example, the hotel
industry suffered an estimated loss of $1.3 billion in 1998. Other industries
that felt the effects of runaway production were real estate, professional
services, medical services, retail trade, and restaurants and bars. Wages
and salaries in these and other industries are also lost when productions
move abroad, and result in a loss of $2.6 billion that would have been
paid in the U.S. had the productions not runaway.
Exhibit 15
The most significant economic runaway impact comes from telefilms and
feature films. Exhibit 14 shows the 1998 impact by type of production,
and shows telefilms representing more than a quarter of the impact, or
$2.7 billion. Smaller-budget feature films represent about the same as
telefilms, at $2.3 billion, but a surprisingly large portion (23%) of the
economic runaway is from feature films. Almost half of the $10.3 billion
economic impact, or $4.7 billion, is from economic runaway feature films.
One-hour television series, television mini-series, and thirty-minute television
series represent 18%, 6% and 4% of total economic runaway, respectively.
C. U.S. Regional Impact
While larger U.S. production centers such as New York City and Los Angeles
have experienced growth in production expenditures during the past several
years, this growth has not been experienced in all U.S. film and television
production centers. U.S. production locations outside Los Angeles and New
York City are often involved with smaller-budget projects which have been
particularly affected by runaway productions. As noted earlier, 75% of
the economic runaways in 1998 were smaller budget projects such as telefilms
and feature films with budgets under $25 million. Exhibit 15 shows that
direct production expenditures in North Carolina declined 35.8% from 1995
to 1998, a decrease of $120 million. Washington state, Illinois and Texas
also experienced declines of 37.5%, 19.8%, and 31.0% respectively since
1995. Collectively, these four states lost almost $200 million in direct
production expenditures since 1995.
D. Direct Labor Impact
When a production leaves the U.S., virtually all the work is performed
by non-U.S. production staff and crew. For example, 10 to 30 supporting
actors, stunt and background performers, and 40 to 150 crew members are
hired in a foreign location, on average, each time a film or television
production leaves the U.S. Had the production not been a runaway, those
positions would have been filled by U.S. artists and craftspersons. Runaway
productions result not only in an immediate direct job loss in the U.S.,
but also in a broader loss of employment through the multiplier effect.
State and federal governments also lose income and payroll tax revenues.
Exhibit 16: Total Direct Employment Impact
of U.S. Economic Runaway Productions
It is a challenge to classify job losses in the film and television
production industry. Generally, there is not a specific event affecting
full-time employees such as a plant closing as occurs in other industries.
However, there are approximate numbers of full-time equivalent positions
lost when a production runs away from the U.S. Exhibit 16 shows the loss
of full-time equivalent positions to SAG, DGA, and other union and non-represented
people employed in film and television productions. Overall, nearly four
times as many jobs were lost in 1998 than in 1990; 23,500 full-time equivalent
positions were lost in 1998, compared to 6,900 in 1990. During the last
ten years, a total of 125,100 full-time equivalent positions were lost
due to economic runaway. These figures are reinforced by the many anecdotal
examples of those involved in U.S. production activity either having to
leave the industry, or scaling back their activity as fewer opportunities
are available.
Of the 23,500 lost full-time equivalent positions in 1998, approximately
11,000 were lost to SAG and 600 to DGA, an increase of 479% for SAG and
200% for DGA over 1990 figures. During the last ten years, 52,500 full-time
equivalent positions were lost to DGA and SAG: 48,700 to SAG and 3,800
to DGA. The bulk of full-time equivalent losses (12,400 in 1998 and 76,000
over the last ten years), affects people other than SAG or DGA members,
such as members of the International Alliance of Theatrical and Stage Employes
(IATSE) U.S., other union members, or non-represented labor.
SAG positions affected include supporting actors, stunt and background
performers. DGA positions affected include directors, assistant directors,
unit production managers, associate directors and stage managers.
E. Future Impact
The study also sought to assess the likely future impact of U.S. economic
runaway production through 2001. A number of future scenarios were evaluated,
reflecting several potential environments for production volumes. For example,
positive U.S. economic growth, a slowing of U.S. economic growth, and relative
strength/weakness in key foreign exchange rates and production incentives
were considered in gauging the likely future impact of U.S. runaway economic
production. Note that these scenarios assume no major U.S. response to
the economic runaway problem.
Under these scenarios, without major intervention to address the causes
outlined in Section III, the level of runaway production will remain significant.
The total number of U.S. economic runaways could range from 327 to 476
by 2001, but will not likely decline from the 285 economic runaway productions
in 1998. The annual economic impact on the U.S. could range from $10 billion
to $15.1 billion by 2001. By 2001, lost full-time equivalent positions
could total between 22,500 and 36,000 annually.
III. THE CAUSES
A. Production Location Decision Drivers
As illustrated in Exhibit 17, the process of determining a production
location involves balancing a set of complex economic factors against an
equally complex set of production requirements. The exact tradeoff is also
determined by the philosophy with regard to cost sensitivity and creative
values of the company with which a producer is affiliated. The needs of
the financier(s) also determine the importance placed on each set of factors.
Exhibit 17
Economic factors have always been important to producers but they have
taken on increased importance as the evolution of the entertainment industry
creates greater pressures to reduce production costs. These costs have
been steadily increasing; average feature production budgets in data gathered
by Monitor Company increased by 13% annually from 1990 to 1998. In developing
a production budget, the producer must estimate how much revenue the project
will generate. Costs are then considered relative to this anticipated revenue.
Several types of costs must be considered. "Above the line" costs (such
as principal actors and directors) can represent a large portion of the
total production costs but in many cases much of the "above the line" cost
is predetermined by outside entities such as financiers who require certain
kinds of talent with box office value. There is often considerably more
flexibility in how "below the line" costs (such as supporting actors, production
crews, etc.) are achieved.
Production requirements broadly include any creative considerations
as well as production capabilities at the location under consideration.
Creative considerations include limitations placed on a project by the
script or the preferences of the talent, director, and/or producer involved.
Certain high-profile directors and actors are often given more influence
over these decisions, but many others only have a limited or no voice.
The need of the producer, studio or financier to control the project also
constrains the number of location choices. For example, a key barrier to
producing in Australia is the physical distance and time zone differential.
Although technology will enable dailies from Australia to be quickly available
in the U.S., several producers indicated that there is no substitute for
"on the ground" production oversight. In addition to the talent and creative
considerations, the ability to secure a talented crew and to have access
to required infrastructure such as soundstages or production equipment
weighs heavily on the decision.
B. Exchange Rates and Factor Costs
Producers noted the differences in wage rates and scale between the
U.S. and Canada as particularly significant. These differences are due
to a combination of exchange rate and wage rate differences. Wage rates
in Canada, Australia and the U.K. have consistently been lower than the
U.S. during the past few years (see Exhibit 18). The largest differences
between the U.S. and foreign rates have been for positions such as unit
production managers and assistant directors. These differences have only
been exacerbated by rapidly declining exchange rates in these key countries
(see Exhibit 19). In particular, since 1988 the Canadian dollar has declined
in value by more than 20%, and the Australian dollar by almost as much.
Exhibit 18
Despite tremendous demand for cast and crews in Canada, Australia and
the U.K., wage rates have not risen significantly over time. In fact, even
after adjusting for exchange rates, scale in Canada, for example, is increasing
at a slower rate than in the U.S (see Exhibit 20).
Other production cost items, while mentioned by some vocal industry
players, do not appear to have a large impact on the decision to produce
in a foreign location. For example, for many productions the ability to
prepay residuals to actors in Canada can be more expensive than paying
SAG residuals. Furthermore, many producers do not consider the residual
stream while budgeting a production because residuals are frequently paid
by another entity. Other factors such as differences in union work rules
between the U.S. and Canada, while visible to producers, do not appear
to generate consistently material savings.
Exhibit 19: Foreign Exchange Rates Relative
to the U.S. Dollar
Exhibit 20: Charges in Weekly Scale Wages 1990-1998,
at Constant 1990 Exchange Rate
C. Foreign Tax Incentives
Historically, government tax incentives have targeted projects that
promote cultural content. Typically these incentives were complex, required
extensive paperwork and had onerous qualification requirements. As state
and national governments recognized the economic importance of U.S.-developed
productions, significant efforts were made to expand their incentive programs.
Not surprisingly, Canada has led the charge by offering federal rebates
since 1996 of 11% on spending for all Canadian labor involved in a production,
regardless of content. Provincial governments were quick to supplement
these incentives, creating a total of a 22% to 46% rebate on Canadian labor
expenditures (see Exhibit 21). Some advantages of these incentives are
that they are available to all productions, have no annual limits to the
number of rebates being offered, greatly simplify paperwork, and are structured
as direct rebates, not tax credits. Several companies have entered into
the business of filing paperwork and providing advances on the incentives
to producers in exchange for a fee, helping producers address cash flow
issues.
Exhibit 21
Unlike other countries, Canada has gone out of its way to ensure that
producers are aware of the incentives and their subsequent savings. It
is not uncommon for Canadian government officials and film commission representatives
to fly to Los Angeles, New York City, or other U.S. production centers
to attend events or meet directly with film and television producers to
advertise their incentive structure. For example, representatives of Revenue
Canada (the Canadian IRS) were at the recent "Locations `99" show in Los
Angeles, promoting the Canadian incentives. Canadian labor and industry
representatives have indicated that incentives are geared to attract foreign
productions. Recent initiatives in Canada to discontinue the incentives
for foreign producers have been met with strong opposition from Canadian
labor and government officials, who note that these productions represent
several thousand jobs and millions of dollars in economic impact, more
than offsetting the money paid in incentives.
Exhibit 22: Illustrative Cost Comparison for
a $2.9MM Network Telefilm
Exhibit 23: Illustrative Cost Comparison for
a $20MM Feature Film Production
Once production is completed, additional savings can be realized by
applying for tax rebates associated with Canadian labor spending. The exact
amount realized is determined by the amount of Canadian labor used. In
a typical case, the incentives would increase the total budget savings
to 25% - 26%. However, payment of rebates can take up to a year. The first
wave of payments of the Canadian rebates are only now being received by
producers.
D. Total Cost Differences
As a result of the above conditions, U.S.-developed productions located
in Canada have been able to realize direct savings of approximately 17%
to 20% and total savings including incentives of up to 26% (see Exhibits
22, 23). Approximately 60% of the direct savings come from "below the line"
labor cost differences. These cost savings can be achieved because all
of the "below the line" crew is sourced in Canada. In addition, labor rates
and fringe benefits are less expensive in Canada. For productions in and
around
Toronto and Vancouver, location expenses are cheaper because much of the
crew is local and does not require accommodations. An additional 14% in
savings can be realized in transportation expense. The final element of
direct savings comes from differences in the cost of goods and services
such as sets and equipment. Other differences in Canada versus the U.S.
exist but are either minimal or are typically offset by related cost increases.
One example is the savings in "above the line" cast expenses that come
from hiring supporting actors in Canada. However, the increased travel
expenses associated with using American actors, directors, and producers
offset the majority of these savings.
E. Foreign Infrastructure
Historically, film and television productions have tended to locate
in or near large production clusters such as Los Angeles or New York, due
to their well-developed infrastructure and access to experienced cast and
crew, and despite the relatively high cost of production. Until the mid-to-late
1990’s, going to a foreign location required that producers import most
of the cast, crew and equipment to the location. Such significant logistics
and travel expenses generally more than offset any differences in exchange
rates and wages.
One critical outcome of the U.S. runaway production phenomenon is the
emergence of several countries as significant production "clusters." The
most notable examples are in British Columbia and Ontario, Canada, where
significant experience bases have developed and investments in infrastructure
have been made. Exhibit 24 indicates that British Columbia and Ontario
now have almost 1.5 million square feet of sound stage space, as much as
New York and North Carolina combined. The volume of production in these
areas has generated the start-up of numerous service companies including
post-production companies, catering companies, equipment rentals and other
key support services. The development of these production clusters accelerated
as U.S. companies made sizeable infrastructure investments in many of these
locations (see Exhibit 25). U.S. investment abroad creates short term support
for these production locations and a long term incentive to ensure that
production continues.
Exhibit 24: Soundstage Space by Region
Demand for the new Canadian production clusters has been so high that
many producers complain about the difficulty of securing crews or facilities
to start production. In fact, there have been instances in which a U.S.
producer has hired a crew only to discover later that crew members have
moved over to higher paying or more prestigious projects.
Another factor stimulating the development of production clusters in
certain areas is the availability of diverse settings and their proximity
and similarity to the U.S. Many productions are set in generic (often American)
towns or cities, which can easily be replicated in Canada but are more
challenging to replicate in other parts of the world such as the U.K. Many
settings and scripts also require actors to look and sound American, and
the cars and signs to look familiar to the American audience. Mexico, despite
its proximity and indisputable cost advantages, cannot easily meet the
need for U.S.-oriented settings, and has thus developed more slowly as
a production location. However, the production of "Titanic" in Rosarito
Beach demonstrated that large, complex projects can be completed in Mexico.
Moreover, the facilities constructed for that production are now being
marketed to other producers.
Exhibit 25
F. The Integrated Approach and Canada
It is important to note that Canada has followed an integrated approach
(see Exhibit 26) to launching its film/television production-oriented initiatives
during the past several years. In this approach a country begins with a
relatively undeveloped production industry. It then launches a series of
(usually tax credit-centered) initiatives to attract production activity
and investments, and often creates qualifying requirements for those incentives
that stimulate hiring of local personnel. As a result, local production
crews, actors and production managers gain valuable experience and training
and are therefore more capable and attractive to other producers. At the
same time, investments in physical infrastructure are sought so that more
and more productions can be accommodated. As these production capabilities
expand, other tax incentives such as those for local labor expenditures
are offered to further stimulate demand for local production resources.
Ominously, this approach to capture productions is readily replicable by
other countries; in fact, Australia is moving along a very similar path
to that pursued by Canada (see Exhibit 27).
How Large Is The Gap To Be Closed?
Clearly the U.S. faces major challenges in stemming the tide of runaway
production. The solutions will not be simple because the causes are several
and very complex. However, the cost gap to be closed to retain production
in the U.S. may not be the entire 25% production cost disadvantage. Several
producers interviewed mentioned that if the budgets for U.S. productions
were brought to within 10% to 15% of costs in Canada, then they would make
the argument to keep that production in the U.S. Producers generally want
to work where they live, and most live in the U.S. production clusters.
Furthermore, these clusters contain all the resources required, as well
as access to financing, development, and distribution resources, which
provide a distinct advantage to producers. Obviously, certain productions
cannot afford even a 10% cost disadvantage; recapturing these productions
will be the greatest challenge.
Exhibit 26: The Integrated Approach
Exhibit 27: Cumulative Production Experience
It is important to note that U.S. film and television economic runaway
activity is at a high level, and that large productions are running away.
The significantly lower total production costs achievable abroad are compelling
to producers. The experience that foreign production crews, actors and
directors have gained in filming U.S. runaway productions represents an
ongoing source of advantage that for these producing locations. Similarly,
infrastructure investments abroad represent permanent improvements that
will continue to draw productions out of the U.S. Without a meaningful
response (or some unforeseen development abroad), production employment
opportunities and associated economic benefits will continue to leave the
U.S. at a significant rate.
IV – STUDY METHODOLOGY AND KEY TERMS
Study Methodology
The U.S. Runaway Production Study was conducted from February 1999 to
the end of May 1999; the study’s key activities included:
-
The development of a feature-length and television program database for
all U.S.-developed productions since 1990, to quantify the scope of U.S.
runaway production. For this analysis, Monitor Company used a broad range
of sources (Hollywood Reporter, Variety, Baseline, SAG/DGA
databases, Internet Movie Data Base (IMDB)) to understand which entities
were involved in the production and where it was filmed, as well as budget
information where available. Monitor used a number of sequential criteria
to determine the runaway status of productions, for example: Did the production
involve a U.S. production company and/or have an English language title,
use English-language directors/actors, have an American writer and/or American
producer, have its first release in the U.S.? Monitor used setting/plot
information or input from producers to determine whether the production
was a creative as opposed to economic runaway.
-
More than 70 interviews with a cross-section of production industry participants
(producers,
Guild members and executives, film commissioners, etc.) to discuss current
U.S. runaway situation and causes.
-
Calculation of total U.S. economic impact. Actual or estimated budgets
for each production were used to define production expenditures. Once Monitor
quantified the production expenditures, expenditures on economic runaways
were totaled and certain components multiplied using Bureau of Economic
Analysis (BEA) multipliers to calculate total impact. Monitor Company also
used average actual tax rates to calculate the tax revenue effects of lost
direct production expenditures and multiplier effects.
-
Creation of forecasts for production volumes, expenditures and impacts.
Monitor analyzed historical production volumes and identified some explanatory
variables. Monitor then used available forecasts for those variables to
project production volumes under various scenarios.
-
Full-time equivalent positions were derived by dividing the number of runaway
productions by the average number of projects a director, production manager,
artist or craftsperson, etc. completes in a year. SAG full-time equivalent
positions, on the other hand, were based on an average annual utilized
member income.
Monitor Company, Directors Guild of America and Screen Actors Guild
would like to extend their sincere appreciation to the many individuals
and groups who contributed their time, experience and perspective to this
study: directors, actors, producers, executives, film commissioners, and
various industry associations. Many thanks also to the SAG-Producers Industry
Advancement & Cooperative Fund for the grant that partially funded
this study.
Definitions of Key Terms
Following are some key terms used in this report and their definitions:
U.S. Runaway Production (Film): A runaway production is any feature-length
film intended for U.S. initial theatrical release and developed in the
U.S. but filmed in another country by either a U.S. or foreign-based production
company.
U.S. Runaway Production (Television): A runaway production is
any TV show, series or television film first intended for exhibition in
the U.S. but filmed in another country by either a U.S. or foreign-based
production company under license agreements with broadcast networks, basic/pay
cable, networks, syndicators, etc.
U.S. Economic Runaway: A U.S.-developed feature-length film or
TV show, series or television film which is filmed in another country for
economic (cost reduction) versus creative (primarily setting) reasons.
U.S. Creative Runaway: A U.S.-developed feature-length film or
TV show, series or television film which is filmed in another country for
creative (setting, director/actor/producer preference) reasons.
Above The Line: The portion of a film’s budget which covers major
creative elements and personnel, i.e., those which are creatively unique
and individually identifiable. These are primarily story, acquisition,
screenplay rights, script development, writer, executive producer, producer,
director and principal members of the cast. The phrase "above-the-line"
refers to the location on the film budget of the specific expense items/person.
(from Cones, John W. Film Finance and Distribution: A Dictionary of
Terms)
Below The Line: Film budget items relating to the technical expenses
and labor (other than above-the-line) involved in producing a film, i.e.,
relating to mechanical, crew, extras, art, sets, camera, electrical, wardrobe,
transportation, raw film stock, printing and post-production. Below-the-line
personnel include the production manager, cinematographer, set designer,
special effects persons, wardrobe person, and make-up artist. The phrase
"below-the-line" refers to the location of the specific expense items/person
on the budget. (from Cones, John W. Film Finance and Distribution: A
Dictionary of Terms)
V. ABOUT MONITOR COMPANY
Founded in 1983 by Professor Michael Porter and colleagues at Harvard
Business School, Monitor Company is a leading global management consulting
firm of more than 900 consultants in 25 offices around the world. Since
its founding, Monitor Company has remained focused on a core mission: combining
leading-edge analysis with proprietary processes to help its clients define
robust, compelling strategies, as well as take the necessary actions to
transform these strategies into sustainable competitive advantage. Monitor
works with private- and public-sector clients. Monitor Company is headquartered
in Cambridge, Massachusetts; the U.S. Runaway Film and Television Production
Study team is from the firm’s Santa Monica, California office.
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