U.S. RUNAWAY FILM AND TELEVISION PRODUCTION STUDY …/media/Files/Press... · film and television productions in the scope of the study. There have been notable regional impacts as

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U.S. RUNAWAY FILM AND TELEVISION PRODUCTION STUDY REPORTU.S. RUNAWAY FILM AND TELEVISION PRODUCTION STUDY REPORT

TABLE OF CONTENTSTABLE OF CONTENTS

I.I. Executive SummaryExecutive Summary Page 2Page 2

II.II. The U.S. Runaway Film and Television Production ProblemThe U.S. Runaway Film and Television Production Problem– A. Runaway Activity/Trends– A. Runaway Activity/Trends– B. Total Economic Impact– B. Total Economic Impact– C. U.S. Regional Impact– C. U.S. Regional Impact– D. Direct Labor Impact– D. Direct Labor Impact– E. Future Impact– E. Future Impact

Page 6Page 6Page 11Page 11Page 15Page 15Page 16Page 16Page 17Page 17

III.III. The CausesThe Causes– A. Production Location Decision Drivers– A. Production Location Decision Drivers– B. Exchange Rates and Factor Costs– B. Exchange Rates and Factor Costs– C. Foreign Tax Incentives– C. Foreign Tax Incentives– D. Total Cost Differences– D. Total Cost Differences– E. Foreign Infrastructure– E. Foreign Infrastructure– F. The Integrated Approach and Canada– F. The Integrated Approach and Canada

Page 18Page 18Page 19Page 19Page 20Page 20Page 23Page 23Page 23Page 23Page 24Page 24

IV.IV. Study Methodology and Key TermsStudy Methodology and Key Terms Page 27Page 27

V.V. About Monitor CompanyAbout Monitor Company Page 29Page 29

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I. EXECUTIVE SUMMARY I. EXECUTIVE SUMMARY

BackgroundBackground

In January 1999, the Directors Guild of America(DGA) and Screen Actors Guild (SAG) retainedMonitor Company, a leading managementconsulting firm, to conduct an investigation intothe phenomenon of “runaway” film and televisionproduction from the U.S. The Guilds (on ananecdotal basis) had been noting an acceleratingrunaway phenomenon, and the need to create anobjective quantitative analysis led to the study beingcommissioned. Partial funding for the study wasprovided by a grant from SAG-Producers IndustryAdvancement & Cooperative Fund. The study hastwo objectives - quantify the extent to whichrunaway production has been occurring since 1990,and identify the major causes.

U.S. runaway productions are those which aredeveloped and are intended for initialrelease/exhibition or television broadcast in theU.S., but are actually filmed in another country.There are two major types of runaway productions– “creative” runaways, which depart because thestory takes place in a setting that cannot beduplicated or for other creative considerations, and“economic” runaways, which depart to achieve lowerproduction costs. The study’s focus was on these

“economic” runaways. Note that the study’s scopeincluded theatrical films, films for television,television mini-series, and thirty and sixty minutetelevision series. Other types of productions such ascommercials, and news and sports programmingwere not included.

What Is The U.S. Runaway Production Problem?What Is The U.S. Runaway Production Problem?

The study results show that economic runaway filmand television productions are a persistent, growing,and very significant issue for the U.S. In 1998, ofthe 1,075 U.S.-developed film and televisionproductions in the study’s scope identified byMonitor Company, 285 (27% of total) wereeconomic runaways, a 185% increase from 100(14% of total) in 1990. When these productionsmoved abroad, a $10.3 billion economic loss (lostdirect production spending plus the “multiplied”effects of lost spending and tax revenues) resultedfor the U.S. in 1998 alone. This amount is fivetimes the $2.0 billion runaway loss in 1990.

Of these 285 economic runaways in 1998, 100 weretheatrical productions, and 185 were television(films for TV, TV series, and mini-series)productions. The most prevalent type of economicrunaway television productions were movies for TV.A total of 308 movies for TV were produced in1998; 139 (or 45%) of these ran away for economic

44

100

57

43

52

71

284

313

223

363

185

56

0

100

200

300

400

500

600

1990 1998 1990 1998

Summary of U.S.-Developed Runaway Production, 1990 and 1998

Number ofProductions

319

541

397

534

U.S.EconomicRunaway

U.S.CreativeRunaway

U.S.Domestic

Production

U.S.EconomicRunaway

U.S.CreativeRunaway

U.S.Domestic

Production

U.S.-DevelopedTelevision Productions

U.S.-DevelopedTheatrical Films

3

reasons in 1998, up from only 30 productions in1990. Out of a total of 534 theatrical productionsin 1998, 100 (19%) were economic runaways, upfrom 44 in 1990.

In terms of economic impact on the U.S., economicrunaway TV films have the largest ($2.7 billion)impact, followed by feature films with budgetslarger than $25 million ($2.4 billion impact), andwith budgets smaller than $25 million ($2.3 billionimpact). It is noteworthy that feature films havesuch a significant economic impact. Conventionalwisdom held that economic runaways are atelevision movie phenomenon and that largerproductions would tend to remain in the U.S. sincethe infrastructure required to produce them wasn’tavailable abroad. This data may indicate the leadingedge of a trend with larger-budget productionsrunning away.

To Where Do These Productions Run Away?To Where Do These Productions Run Away?

Canada captures the vast majority of economicrunaways, with 81% of the total. Australia and theU.K. capture another 10%. In 1998, 232productions ran away to Canada, up from 63 in1990. TV movies have had the highest propensityto runaway to Canada, with 91% of the 139 TVmovie economic runaways landing there. The 127U.S. economic runaway TV movies filmed inCanada in 1998 is more than five times the 23 in1990. The study found that countries other thanCanada, Australia, and the U.K. have a small shareof U.S. runaways, although recent high-profilerunaway productions in Mexico such as “Titanic”highlight the need to monitor developments inselected other countries on an ongoing basis.

These productions are leaving at a time when U.S.domestic production has been growing, so therunaway phenomenon has gone relatively unnoticed.Although the number of U.S.-developed featureproductions grew 8.2% annually since 1990, thenumber of U.S.-developed features that ran away toCanada grew 17.4% annually. Similarly, the numberof U.S.-developed television programs produced inthe U.S. grew 2.6% annually since 1990, but the

number of U.S.-developed television productionsthat ran away to Canada grew 18.2% annuallyduring that time.

What Is The Impact of U.S. Economic RunawayWhat Is The Impact of U.S. Economic RunawayProduction?Production?

The labor impact of these economic runaways isprofound. In 1998 more than 20,000 full timeequivalent jobs were lost; 11,000 were positionsusually filled by SAG members (such as supportingactors, stunt and background performers) and 600usually by DGA members (directors, assistantdirectors, unit production managers, associatedirectors and stage managers). The balance werejobs in other production skills or trades, such ascamera, sound, production design, wardrobe, make-up, set construction and drivers.

When the effects of these employment andspending losses are totaled, the impact on the U.S.of film and television economic runaways in 1998was $10.3 billion: $2.8 billion in lost directproduction spending, plus $5.6 billion in multipliereffects and $1.9 billion in lost tax revenues. Theeconomic impact extends beyond the entertainmentindustry, affecting local merchants and hotels. In1998, economic runaways represented almost 15%of the $74.3 billion total impact of U.S.-developedfilm and television productions in the scope of thestudy.

There have been notable regional impacts as well.Production expenditures in core production centerssuch as LA and New York City have been growing,but at slower rates than those of Canadianproduction centers. Other U.S. production centershave experienced declines in productionexpenditures since 1995 - North Carolina (-36%),Illinois (-20%), Washington state (-37%) andTexas (-31%).

Forecasts of future U.S. runaway production showthat under all basic scenarios examined, withoutactions to stem economic runaways, economicrunaway production remains significant, potentiallyincreasing in impact to $13-$15 billion annually by

4

2001. A scenario with slower U.S. growth and astronger Canadian dollar keeps the U.S. impact atapproximately $10 billion annually. Many foreignproduction infrastructure investments have beenmade by U.S. studios; these investments will serveto continue attracting additional productionsabroad. Furthermore, the increased globalization ofthe entertainment industry and incidence ofinternational co-production arrangements will alsolikely stimulate U.S. runaway production.

What Are the Causes?What Are the Causes?

Why have productions been leaving at an acceleratedrate since 1990? The location decision for aproduction balances factors such as expectedrevenues 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 limitedproduction capabilities, making them fundamentallyunattractive despite potential savings. Recently,however, the quality of Canadian and Australiancrews has improved to a point where mostproductions can be filmed in these countrieswithout a major difference in quality/productivity.

As foreign crews and infrastructure have improvedthrough experience and direct investment, theirability to handle larger, more complex productionsincreases. For example, British Columbia andOntario combined have well over 1 million squarefeet of sound stage space, as much as the space inNew York and North Carolina combined.Canadian film commissions have also been veryaggressive in promoting their locations to the U.S.entertainment industry.

In addition, the value of Canadian, Australian andU.K. currencies all have declined by 15% to 23%since 1990 relative to the U.S. dollar, reducingproduction costs abroad. Factor costs(wages/rates) in these countries, which weregenerally lower than those in the U.S. in the early1990’s, have also increased at a slower pace than inthe U.S. As a result, producers realize at least a15% reduction in production costs from lower labor

costs and costs of goods and services when filmingin Canada.

Very visibly (for example, by having RevenueCanada (the Canadian IRS) representatives at therecent Locations ’99 trade show in Los Angeles),foreign federal and regional governments have alsobeen offering rich tax incentives/rebates onproduction activity in their jurisdictions. Canadaoffers federal and provincial tax credits of 22% to46% of labor expense (yielding up to a 10%reduction in overall production expense), andAustralia offers more than a 10% labor tax credit insome cases. Note that these are not credits fornational or cultural content productions; they areavailable to any qualifying production employingforeign nationals. In addition, Canada, Australiaand the U.K. offer up to a 100% tax credit forqualifying “national”/ “cultural” productions, andmany other countries offer generous tax credits toproducers.

The combined result of the exchange rates, lowercosts and government incentives allows theproducer of a typical TV movie (production budgetof $3 million) to reduce production costs by 25%or more by choosing to film in Canada. Similarpercentage 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 anintegrated approach to launching its film/televisionproduction-oriented initiatives during the pastseveral years. This approach begins with a relativelyundeveloped production industry, and launches aseries of (usually tax credit-centered) initiatives toattract production activity/investment, but oftencreates qualifying requirements for those incentivesthat stimulate hiring of local personnel. As a result,local production crews, actors, production managersand assistant directors gain valuableexperience/training and are therefore more capableand attractive to other producers. At the same time,investments in physical infrastructure are sought sothat more and more productions can beaccommodated. As these production capabilitiesexpand, other tax incentives such as those for local

5

labor expenditures are offered to further stimulatedemand for local production resources. Ominously,this approach to capture productions is readilyreplicable by other countries; in fact, Australia ismoving along a very similar path to that pursued byCanada.

How Large Is The Gap To Be Closed?How Large Is The Gap To Be Closed?

Clearly the U.S. faces major challenges in stemmingthe tide of runaway production. The solutions willnot be simple because the causes are several and verycomplex. However, the cost gap to be closed toretain production in the U.S. may not be the entire25% production cost disadvantage. Severalproducers interviewed mentioned that if the budgetfor U.S. productions were brought to within 10%to 15% of costs in Canada, then they would makethe 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 resourcesrequired, as well as access to financing,development, and distribution resources, whichprovide a distinct advantage to producers.Obviously, certain productions cannot afford even a10% cost disadvantage; recapturing theseproductions will be the greatest challenge.

It is important to note that U.S. film and televisioneconomic runaway activity is at a high level, andthat large productions are running away. Thesignificantly lower total production costs achievableabroad are compelling to producers. The experiencethat foreign production crews, actors and directorshave gained in filming U.S. runaway productionsrepresents an ongoing source of advantage for theseproducing locations. Similarly, infrastructureinvestments abroad represent permanentimprovements that will continue to drawproductions out of the U.S. Without a meaningfulresponse (or some unforeseen development abroad),production employment opportunities andassociated economic benefits will continue to leavethe U.S. at a significant rate.

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II. THE U.S. RUNAWAY FILM ANDII. THE U.S. RUNAWAY FILM ANDTELEVISION PRODUCTION PROBLEMTELEVISION PRODUCTION PROBLEM

A. Runaway Activity/TrendsA. Runaway Activity/Trends

The study’s first task was to define the scope of theU.S. runaway problem. To accomplish this task,Monitor consultants created a database of film andtelevision productions extending from 1990through 1998. Note that certain types ofproductions are included or excluded (see Exhibit1). The study included independent and studioproductions. Several sources were used to createthis unique database, as described in theMethodology section.

Another critical item was the definition of a“runaway” production. This study defines a

“runaway” production as a production that wasdeveloped in the U.S. and was intended for initialrelease/exhibition or television broadcast in theU.S., but filmed partially or entirely outside of theU.S. There are two distinct types of runawayproductions: “creative” and “economic.” A“creative runaway” is defined as a runawayproduction that was filmed partially or entirelyoutside of the U.S. due to script or settingrequirements, or actor/director preference. On theother hand, an “economic runaway” is a production

that was filmed primarily abroad to reduce costsincurred during production.

While it is important to understand all runaways,the study focused on economic runaways becausethey represent a more prevalent and addressableissue than productions moving abroad due to thecreative preferences of artists. Nevertheless, therunaway production story would be incompletewithout a brief examination of all runaways,including creative.

Exhibit 2 shows overall production volumes ofU.S.-developed productions included in the study’sscope. This Exhibit also shows the rapid growth inthe number of all runaway (creative and economic)productions. In 1998, 1,075 U.S.-developedproductions in the study’s scope were filmed, up

50.1% from the 716 filmed in 1990. 399productions ran away from the U.S. in 1998, up91% from the 209 that ran away in 1990.

In 1998, a total of 534 theatrical films in thestudy’s scope were produced; 171 of these ran awayfrom the U.S., for either creative or economicreasons. The number of runaway theatrical filmsgrew from 96 in 1990 to 171 in 1998, an increaseof 78.1%; during this time the number ofdomestically-produced theatrical films grew 62.8%.

Productions Included Productions Excluded

• Feature films produced for U.S. theatricalrelease

• Direct to video productions

• Movies for Television/MOW/Telefilms

• Series for television

• Animation

• Commercials

• Daytime soap operas

• Documentaries

• Foreign films

• Foreign languagetelevision

• Game shows

• Infomercials

• Music videos

• News programs

• Public access

• Religiousprogramming

• SportsEntertainment

• Talk shows

• Television specials

• Training films

Exhibit 1Exhibit 1

7

The extent of the runaway situation becomes moreapparent in television productions. In 1998, a totalof 541 television programs were filmed; 228 (or42%) ran away from the U.S., for either creative oreconomic reasons. The number of runawaytelevision programs grew from 113 in 1990 to 228in 1998, an increase of 101.8%, while the numberof domestically-produced television programs onlygrew 10.2% during this time. Note that runawayshare of total U.S.-developed production grewduring the 1990’s.

However, the real understanding of the U.S.runaway phenomenon lies in the examination ofeconomic runaways and specific types ofproductions: feature films, movies for television, ortelefilms (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 3shows that the U.S. runaway production growth isdriven overwhelmingly by economic runaways. In1998, 285 productions were filmed abroad for

156 116201

136 171

113 97 100132

152153

201

196228

284 293 282268

294301

340

350313

223 248 263

301

324331

432

386 363

1178889960

500

1,000

1,500

1990 1991 1992 1993 1994 1995 1996 1997 1998

Domestically-produced theatrical films

Domestically-produced television programs

TV programs that runaway from the U.S.

Feature films that runaway from the U.S.

Annual Number of U.S.-Developed Productions

Source: Hollywood Reporter; Variety; Baseline; DGA / SAG Databases; IMDB; Monitor Analysis

Annual Number ofU.S.-Developed

Productions

29% 26% 26% 30% 33% 30% 34% 31% 37%

1,068

1,174

901926

818

733727716

1,075

Total U.S. Runaway as a Percentage of Total U.S.-Developed Production

1990-1998Percent Change

62.8%

10.2%

101.8%

78.1%

50.1% Total


100 106118

164

206

161

282

229

285109

8070

85

102

108

120

103

114

0

90

180

270

360

450

1990 1991 1992 1993 1994 1995 1996 1997 1998

U. S. Creative Runaway

U.S. Economic Runaway

Total U.S.Creative and Economic Runaway Productions

Source: Hollywood Reporter; Variety; DGA / SAG Databases; IMDB; Monitor Analysis

209

186 188

249

308

269

402

332

399

5.0%

185.0%

91.0% Total

Exhibit 2Exhibit 2

Exhibit 3Exhibit 3

8

economic reasons, an increase of 185% since 1990.During the ‘90’s, the number of creative runawaysgrew a modest 5%. As a result, economic runawaysgrew from 48% of total runaways in 1990 to 71% in1998.

Next, it is important to note the composition ofeconomic runaways with regard to theatricalfeatures versus television. Exhibit 4 shows thatU.S. economic runaway production is being drivenincreasingly by runaway television productions.While the economic runaway of theatrical featureswas 127% greater in 1998 than in 1990, televisionis the main driver of the total, representing morethan half of economic runaways, with a 230%increase since 1990. Only 56 televisionproductions left for economic reasons in 1990; thisnumber grew to 185 by 1998.

Of these economic runaways, more than 80% aretelefilms and feature films. Exhibit 5 shows thenumber of feature films that ran away more thandoubled during the ‘90’s (from 44 to 100), but thenumber of economic runaway telefilms more thanquadrupled, from 30 to 139 between 1990 and

1998. In general, productions that are runningaway are smaller-budget productions, (telefilms andfeature films with budgets under $25 million),

56 5875

92109

154 150

185

44 48

43

72

93

52

128

79

100

113

0

90

180

270

360

1990 1991 1992 1993 1994 1995 1996 1997 1998

Theatrical U.S. Economic Runaway

Television U.S. Economic Runaway

Television and TheatricalU.S. Economic Runaway Productions

Source: Hollywood Reporter; Variety; DGA / SAG Databases; IMDB; Monitor Analysis

100 106118

164

206

161

282

229

285


127.0%

230.0%

185.0% Total


0.0%Grew from 0 to

24 by 1998

Components of U.S. Economic Runaway

Annual Number ofU.S. Economic

RunawayProductions

282

161

206

164

118106100

229

285


33.3%

363.3%

163.6%

185.0% Total

72.7%8347

10471 76

28 35

48

82

70

120

110

139

44 47 4066

24

8

24

5

106

310

9 14 20

17

12

13

13

13

91720

171411

22

17

2229

30 62 3

7

2

4

4

5

8

0

100

200

300

400

500

1990 1991 1992 1993 1994 1995 1996 1997 1998

Mini-Series

Telefilms

1 hour TV series

30 minute TV series

Large budget films > $25MM

Small budget fi lms < $25MM

Exhibit 4Exhibit 4

Exhibit 5Exhibit 5

9

which represent 75% of the total number ofeconomic runaways. One-hour series are alsogrowing significantly at 163%, yet represented only10% of all economic runaways in 1998.

To where do these runaways go? Exhibit 6demonstrates that since 1990, the majority of U.S.economic runaway production goes to Canada.Section III of this report examines the reasons forCanada’s success in attracting U.S. productions.

In 1990, Canada captured 63% of all U.S. economicrunaways; by 1998, Canada captured 81%. Thenumber of U.S. economic runaway productionscaptured by Canada grew phenomenally from 63 in1990 to 232 in 1998, a 268.3% increase. Australiaand the U.K. also captured some economicrunaways; Australia’s total grew from 5productions in 1990 to 18 in 1998. The studyexamined all major global production locations andfound that no other country consistently captured ameaningful percentage of U.S. economic runaway

productions. Obviously, high-visibility runawayssuch as “Titanic” which filmed in Mexico arenoteworthy, but do not appear to indicate thatMexico will replace Canada as a significantdestination.

Canada not only captures the majority of alleconomic runaways, but also successfully capturesnearly all telefilm economic runaways as seen inExhibit 7. In 1990, only 23 telefilms ran away toCanada for economic reasons; by 1998 this numberwas 127, representing a 452% increase. The 127telefilms Canada captured represent 91% of allrunaway telefilms.

In the discussion of economic runaway trends, it isimportant to note that the number of U.S. –developed domestic film and television productionshas been growing since 1990, (8.2% annually forfeature films, and 2.6% annually for television),illustrating why some U.S. production locations arereporting increases in production days. To a certain

6 3 % 6 5 % 7 5 % 7 6 % 7 1 % 7 6 % 7 1 % 7 8 % 8 1 %

Annual U.S. Economic Runaway, by Location

100106

118

164

206

161

282

229

285


-3.8%

260.0%66.7%

185.0% Total

268.3%

Canada Share of Total U.S. Economic Runaway


RunawayProductions

63 6988

124147

122

201179

232

2210

18

17

11

11

12

24

6

18

10

8

9

9

10

455

25

56

19

39

18

242826

0

100

200

300

400

1990 1991 1992 1993 1994 1995 1996 1997 1998

Others

Australia

U.K.

Canada

Exhibit 6Exhibit 6

10

extent, this growth has masked the true impact ofrunaway production by creating a “rising tide” forthe domestic production industry.

However, Exhibit 8 shows that this U.S. growth isnot commensurate with the growth occurring in thetop 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, ormore than three times the U.S. growth rate.Similarly, Canada is growing at 18.2% annually inproduction of U.S.-developed television projects,more than double the U .S. rate.

8.2%

2.6%

17.4% 18.2%

26.4%

13.2%

18.5%

-4.4%

U.S.

Canada

Australia

U.K.

Compound Annual Growth Rate of U.S.- Developed Productions,1990 to 1998, by Location

Source: Hollywood Reporter; Variety; Baseline, DGA / SAG Databases; IMDB; Monitor Analysis

CompoundAnnual Growth

Rate1990-1998

77% 96% 94% 96% 88% 90% 94% 95% 91%

Source: Hollywood Reporter; Variety; Baseline; DGA / SAG Databases; Monitor Analysis

Canada Share of Total U.S. Economic Runaway Telefilms

Annual U.S. Economic Runaway Telefilms, by Location

400.0%

100.0%


-66.7%

452.2%

30 2835

48

82

70

120

110

139

363.3% Total

23 2733

46

7263

113104

127

3

2

4

3

1

2

3

1

1

2

5

2

5

1

4

6

2

2

2

3

0

50

100

150

1990 1991 1992 1993 1994 1995 1996 1997 1998

Others

Austral ia

U.K .

Canada


RunawayTelefilms

Exhibit 8Exhibit 8

Exhibit 7Exhibit 7

11

B. Total Economic ImpactB. Total Economic Impact

The number of productions that runaway foreconomic reasons is notable, but the real impact tothe U.S. is economic, the result of lost productiondirect expenditures plus the lost “multiplier”effects of those expenditures.

Exhibit 9 shows the methodology used to estimatethe impact on the U.S. economy when productionsleave the U.S. Again, it is important to note thatonly economic runaways are considered, not creativerunaways. Note that nominal dollars usedthroughout the study’s analyses.

The sum of the total direct production costs ofthese economic runaways represents the total size,in dollars, of economic runaway production forboth theatrical films and television. In 1998 U.S.economic film and television productions had $4.0billion in direct production expenditures. Thisfigure represents the “negative costs” for the 285U.S. economic runaway productions in 1998.

Since economic runaways typically do most of thepre- or post-production work in the U.S., andusually bring the lead actors and director from theU.S. to the foreign location, not all of theproduction expenditures have in fact “runaway.” Asa result, the production expenditures that remain inthe 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 spendinglost to the U.S. from economic runawayproductions, because it reflects actual practice byproducers. In 1998, of the $4.0 billion ineconomic 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 economyto further stimulate business in the motion pictureindustry, and in related and peripheral industries.The U.S. Bureau of Economic Analysis hasdeveloped widely accepted multipliers to estimate

Total direct production expenditures of U.S. economic runaways [Note that creative runaways are not included]

l Total expenditures to produce a film / show (Baseline; Variety;Hollywood Reporter)

Direct spending recaptured by the U.S.

l Payments made to U.S. companies and citizens were allocated backto the U.S. since the money returns to the U.S. economy

l Payments include principal actors and director salaries and postproduction (Production Executive Interviews, Sample Budgets,Monitor Analysis)

Component Description (Source)

minus

equals

plus

equals

Total direct spending lost from the U.S. l Total production cost net of spending returned to the U.S.

Tax revenue lostl Tax rates of 30%, 8.5%, 10% and 7.2% were used for federal income

tax, state income tax, payroll tax and state sales tax, respectively(IRS, Sales Tax Institute, Dept. of Labor and Industry)

Total economic impact l The total amount of money not realized by the U.S. economy as aresult of U.S. economic runaway

Multiplier effect of direct spending lost

l A multiplier of 3.1 was applied to wages and salaries (Bureau ofEconomic Analysis)

l A multiplier of 3.6 was applied to goods and services (Bureau ofEconomic Analysis)

plus

Exhibit 9Exhibit 9

12

the re-spending of direct production dollars. Thesemultipliers were applied to relevant subsets of thetotal direct spending lost to the U.S. ($0.88 billionof goods and services and $0.85 billion of wagesand salaries). In 1998, the multiplied effect of lostproduction expenditures totaled $5.6 billion ($0.8billion multiplied by 3.6 plus $0.8 billionmultiplied by 3.1).

Furthermore, when a production runs away, thepayroll, income and sales taxes on the directspending and multiplier spending are also lost tothe U.S. National and state average tax rates wereapplied to calculate the total tax revenue lost to theU.S. at the Federal and state level in addition to thedirect spending and multiplied spending lost. Thelost tax revenues totaled $1.9 billion in 1998.

As Exhibit 10 shows, $2.8 billion in directexpenditures were lost to the U.S. in 1998 fromboth theatrical films and television economicrunaways. This figure is almost six times theannual impact on the U.S. in 1990. There is agenerally balanced split between television andtheatrical film direct expenditures. Note that whilethe number of economic runaway television

productions such as telefilms increased morerapidly since 1990, the larger budgets of featurefilms make the comparison of expenditure levelsappear more balanced.

Exhibit 11 shows the economic impact calculationfor 1998. $4.0 billion in direct productionexpenditures on U.S. economic runawayproductions occurred; the U.S. retained $1.2 billionfor reasons mentioned above. The remaining $2.8billion then triggers the multiplier effect discussedabove, to yield a total multiplied impact of $5.6billion in 1998. Taxes lost on the directproduction expenditures and multiplier effects yieldanother $1.9 billion in impact. The total economicimpact (combined effect of direct spending lost,multiplied dollars, and tax revenues lost) was $10.3billion in 1998.

As shown in Exhibit 12, the 1998 $10.3 billionimpact is five times the $2 billion economic impactin 1990. The split of this impact betweentheatrical films and television production is roughlyeven. The impact on the U.S. economy of bothfilm and television runaways has grown consistentlyand rapidly. The impact of feature films grew

0.3 0.30.4

0.6 0.60.8

1 .0

1.5

0.2 0.3

0.8

0.5

1.3

1.3

0.4

0.2

0 .8

0.4

0.0

1.0

2.0

3.0

1990 1991 1992 1993 1994 1995 1996 1997 1998

Feature Films

Television

Annual Direct Production Expenditures Lost From the U.S.

AnnualProduction

ExpendituresLost($B)

0.5 0.6 0.6

1.0

1.4

1.1

2.1

1.8

2.8



415.2%

469.1% Total

550.0%

Exhibit 10Exhibit 10

13

422% between 1990 and 1998; the impact oftelevision production grew 409%.

It is important to place this $10 billion impact in

the context of total U.S. film and televisionproductions. In 1998, the impact on the U.S.economy from direct production expenditures onU.S.-developed theatrical films and television

10.31.9

5.6

2.8

1.24.0

0.0

5.0

10.0

15.0

Total DirectSpending Lost

to the U.S.(Including

Fringe)

Multiplier Effect ofDirect Spending

Lost

Total EconomicImpact of U.S.

EconomicRunaway

Total DirectProduction

Cost of U.S.EconomicRunaways

TaxRevenue Lost

TotalImpact$(B)

DirectSpending

Recaptured bythe U.S

Total Annual Economic Impact of U.S. Economic Runaway Productions, 1998

Source: Hollywood Reporter; Variety; Baseline; DGA / SAG Databases; Veronis, Suhler Associates; BEA; IRS; Federal Reserve; Monitor Analysis

1.1 1.11.7 2.2 2.4

3.03.8

5.6

0.90.8

2.81.6

4.8

4.7

1.71.0

2.8

1.5

0.0

5.0

10.0

15.0

1990 1991 1992 1993 1994 1995 1996 1997 1998

Feature Films

Television

Total Annual Economic Impact of U.S. Economic Runaway Productions

Total AnnualEconomic

Impact($B)

2.0 2.12.5

3.8

5.0

4.0

7.8

6.6

10.3


409.1%

415.0% Total

422.2%




14

included in the study’s scope is estimated at $74.3billion. This includes expenditures on projects thatwere filmed wholly or partially in the U.S. The$10.3 billion lost due to U.S. economic runaway

productions represents almost 14% of the totalimpact of film and television productions. This14% is lost from the U.S.

Economic Impact of U.S. Economic Runaway by Category, 1998


EconomicImpact

($B)

2.69

1.87

0.42

2.40 2.31

0.64

26% 6% 18% 4% 23% 22%

Category Share of 1998 U.S. Economic Runaway Impact

1.47

0.98

1.31

0.46

0.650.760.50 0.65

0.110.18

1.26

0.22

0.35

0.44

0.39

0.11

0.40

0.09

0.0

1.0

2.0

3.0

4.0

5.0

Telefilm Mini-Series 1 Hour Series 30 Minute

Series

Large Budget

Films >$25MM

Small Budget

Films <$25MM

Taxes

Multiplier Effect

Direct Spending

Catering All OtherGoods and

Services

MultiplierEffect of

DirectSpending

Lost

EquipmentRentals

ProfessionalServices

TotalImpact$(B)

Travel andHotel

Direct Spending and Multiplier Effect, by Industry, 1998


Wages andSalaries

Total DirectSpending

Lost to U.S.

Hotels RealEstate

RetailTrade

MedicalServices

Restaurantsand Bars

All OtherIndustries

Wagesand

Salaries

0.10 0.10 0.05

0.10 0.05 0.03

0.70

2.00 2.80

1.0

1.30

2.605.60

0.200.20

0.0

2.0

4.0

6.0

8.0

10.0



15

Economic runaways impact the U.S. economy bothdirectly through the loss of direct spending, andindirectly through the loss of multiplied dollars.With regard to direct spending, $800 million thatwould have been spent on goods and services in theU.S. were lost in 1998 due to economic runaways.The industries that most significantly felt theeffects of this direct spending loss were theequipment rental, travel and hotel, and cateringindustries as seen in Exhibit 13, amounting toalmost $200 million in 1998 alone. In addition tothe loss in goods and services, the loss in wages andsalaries paid to those working on film and televisionproductions amounted to an additional $2 billion in1998.

Also in Exhibit 13, the multiplied dollar impactshows $3 billion in goods and services lost due toeconomic runaways. For example, the hotelindustry suffered an estimated loss of $1.3 billionin 1998. Other industries that felt the effects ofrunaway production were real estate, professionalservices, medical services, retail trade, andrestaurants and bars. Wages and salaries in theseand other industries are also lost when productionsmove abroad, and result in a loss of $2.6 billionthat would have been paid in the U.S. had theproductions not runaway.

The most significant economic runaway impactcomes from telefilms and feature films. Exhibit 14shows the 1998 impact by type of production, andshows telefilms representing more than a quarter ofthe impact, or $2.7 billion. Smaller-budget featurefilms represent about the same as telefilms, at $2.3billion, but a surprisingly large portion (23%) ofthe economic runaway is from feature films.Almost half of the $10.3 billion economic impact,or $4.7 billion, is from economic runaway featurefilms. One-hour television series, television mini-series, and thirty-minute television series represent18%, 6% and 4% of total economic runaway,respectively.

C. U.S. Regional ImpactC. U.S. Regional Impact

While larger U.S. production centers such as NewYork City and Los Angeles have experienced growthin production expenditures during the past severalyears, this growth has not been experienced in allU.S. film and television production centers. U.S.production locations outside Los Angeles and NewYork City are often involved with smaller-budgetprojects which have been particularly affected byrunaway productions. As noted earlier, 75% of theeconomic runaways in 1998 were smaller budgetprojects such as telefilms and feature films withbudgets under $25 million. Exhibit 15 shows that

North Carolina Washington

$335

$232$203 $215

$0

$100

$200

$300

$400

1995 1996 1997 1998

$24

$13$21

$15

$0

$25

$50

$75

$100

1995 1996 1997 1998

-35.8%

1995-1998PercentChange

-37.5%


Source: State Film Commissions; Monitor Analysis

DirectProduction

Expenditures($M)

$101 $104

$83 $81

$0

$100

$200

1995 1996 1997 1998

$145

$123

$86$100

$0

$100

$200

1995 1996 1997 1998

DirectProduction

Expenditures($M)

-19.8%


-31.0%


TexasIllinois


16

direct production expenditures in North Carolinadeclined 35.8% from 1995 to 1998, a decrease of$120 million. Washington state, Illinois and Texasalso experienced declines of 37.5%, 19.8%, and31.0% respectively since 1995. Collectively, thesefour states lost almost $200 million in directproduction expenditures since 1995.

D. Direct Labor ImpactD. Direct Labor Impact

When a production leaves the U.S., virtually all thework is performed by non-U.S. production staffand crew. For example, 10 to 30 supporting actors,stunt and background performers, and 40 to 150crew members are hired in a foreign location, onaverage, each time a film or television productionleaves the U.S. Had the production not been arunaway, those positions would have been filled byU.S. artists and craftspersons. Runawayproductions result not only in an immediate directjob loss in the U.S., but also in a broader loss ofemployment through the multiplier effect. Stateand federal governments also lose income andpayroll tax revenues.

It is a challenge to classify job losses in the film andtelevision production industry. Generally, there is

not a specific event affecting full-time employeessuch as a plant closing as occurs in other industries.However, there are approximate numbers of full-time equivalent positions lost when a productionruns away from the U.S. Exhibit 16 shows the lossof full-time equivalent positions to SAG, DGA, andother union and non-represented people employedin film and television productions. Overall, nearlyfour times as many jobs were lost in 1998 than in1990; 23,500 full-time equivalent positions werelost in 1998, compared to 6,900 in 1990. Duringthe last ten years, a total of 125,100 full-timeequivalent positions were lost due to economicrunaway. These figures are reinforced by the manyanecdotal examples of those involved in U.S.production activity either having to leave theindustry, or scaling back their activity as feweropportunities are available.

Of the 23,500 lost full-time equivalent positions in1998, approximately 11,000 were lost to SAG and600 to DGA, an increase of 479% for SAG and200% for DGA over 1990 figures. During the lastten years, 52,500 full-time equivalent positionswere lost to DGA and SAG: 48,700 to SAG and3,800 to DGA. The bulk of full-time equivalentlosses (12,400 in 1998 and 76,000 over the last

5.4

9.0

6.2

11.0

5.0 5.35.7

8.0

9.5

7.2

12.9

10.0

12.4

0.30.2 0.3 0.4 0.5 0.4 0.6 0.52.11.9

2.5

4.75.9

0.0

10.0

20.0

30.0

1990 1991 1992 1993 1994 1995 1996 1997 1998

All Other Positions

SAG

DGA

Total Direct Employment Impact of U.S. Economic Runaway Productions

Source: Production Executive Interviews; SAG; DGA; Monitor Analysis

Number of Full-Time

EquivalentPositions Lost

(‘000s)

7.1 7.78.5

13.1

15.9

13.0

22.5

16.7

24.0


479%

238% Total

148%

200%0.6


17

ten years), affects people other than SAG or DGAmembers, such as members of the InternationalAlliance of Theatrical and Stage Employes (IATSE)U.S., other union members, or non-representedlabor.

SAG positions affected include supporting actors,stunt and background performers. DGA positionsaffected include directors, assistant directors, unitproduction managers, associate directors and stagemanagers.

E. Future ImpactE. Future Impact

The study also sought to assess the likely futureimpact of U.S. economic runaway productionthrough 2001. A number of future scenarios wereevaluated, reflecting several potential environmentsfor production volumes. For example, positive U.S.economic growth, a slowing of U.S. economicgrowth, and relative strength/weakness in keyforeign exchange rates and production incentiveswere considered in gauging the likely future impactof U.S. runaway economic production. Note thatthese scenarios assume no major U.S. response tothe economic runaway problem.

Under these scenarios, without major interventionto address the causes outlined in Section III, thelevel of runaway production will remain significant.The total number of U.S. economic runaways couldrange from 327 to 476 by 2001, but will not likelydecline from the 285 economic runawayproductions in 1998. The annual economic impacton the U.S. could range from $10 billion to $15.1billion by 2001. By 2001, lost full-time equivalentpositions could total between 22,500 and 36,000annually.

18

III. THE CAUSESIII. THE CAUSES

A. Production Location Decision DriversA. Production Location Decision Drivers

As illustrated in Exhibit 17, the process ofdetermining a production location involvesbalancing a set of complex economic factors againstan equally complex set of production requirements.The exact tradeoff is also determined by thephilosophy with regard to cost sensitivity andcreative values of the company with which aproducer is affiliated. The needs of the financier(s)also determine the importance placed on each set offactors.

Economic factors have always been important toproducers but they have taken on increasedimportance as the evolution of the entertainmentindustry creates greater pressures to reduceproduction costs. These costs have been steadilyincreasing; average feature production budgets indata gathered by Monitor Company increased by

13% annually from 1990 to 1998. In developing aproduction budget, the producer must estimate howmuch revenue the project will generate. Costs arethen considered relative to this anticipated revenue.Several types of costs must be considered. “Abovethe line” costs (such as principal actors anddirectors) can represent a large portion of the totalproduction costs but in many cases much of the“above the line” cost is predetermined by outsideentities such as financiers who require certain kindsof talent with box office value. There is oftenconsiderably more flexibility in how “below theline” costs (such as supporting actors, productioncrews, etc.) are achieved.

Production requirements broadly include anycreative considerations as well as productioncapabilities at the location under consideration.Creative considerations include limitations placedon a project by the script or the preferences of thetalent, director, and/or producer involved. Certainhigh-profile directors and actors are often given

Below theline

ExchangeRates

Above theline

RatesWorkRules

RatesWorkRules

Facilitiesand

EquipmentCrew Cost

Production CostProduction Cost

Crew DepthInfra-

structureCrew Quality

ScriptRequirements

Director / ActorPreferences

Ability to Control

Production Capability

Production Capability

Talent / Creative Considerations

Talent / Creative Considerations

AnticipatedRevenue

AnticipatedRevenue

FinanceVehicles

ProductionLocationDecision

ProductionLocationDecision

Economic FactorsEconomic Factors Production RequirementsProduction

Requirements

ResidualsGov’t

Rebates

Other


19

more influence over these decisions, but manyothers only have a limited or no voice. The need ofthe producer, studio or financier to control theproject also constrains the number of locationchoices. For example, a key barrier to producing inAustralia is the physical distance and time zonedifferential. Although technology will enable dailiesfrom Australia to be quickly available in the U.S.,several producers indicated that there is nosubstitute for “on the ground” productionoversight. In addition to the talent and creativeconsiderations, the ability to secure a talented crewand to have access to required infrastructure such assoundstages or production equipment weighsheavily on the decision.

B. Exchange Rates and Factor CostsB. Exchange Rates and Factor Costs

Producers noted the differences in wage rates andscale between the U.S. and Canada as particularlysignificant. These differences are due to acombination of exchange rate and wage ratedifferences. 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). Thelargest differences between the U.S. and foreignrates have been for positions such as unitproduction managers and assistant directors. Thesedifferences have only been exacerbated by rapidlydeclining exchange rates in these key countries (seeExhibit 19). In particular, since 1988 the Canadiandollar has declined in value by more than 20%, andthe Australian dollar by almost as much.

Despite tremendous demand for cast and crews inCanada, Australia and the U.K., wage rates have notrisen significantly over time. In fact, even afteradjusting for exchange rates, scale in Canada, forexample, is increasing at a slower rate than in theU.S (see Exhibit 20).

Other production cost items, while mentioned bysome vocal industry players, do not appear to have alarge impact on the decision to produce in a foreignlocation. For example, for many productions theability to prepay residuals to actors in Canada can

Supporting Actors

-75%

-50%

-25%

0%

25%

50%

75%

Higher

UPM

DP

ProductionDesigner

CostumeDesigner

Key Grip

Gaffer

Effective CanadianLabor Rates vs. U.S. Rates

-75%

-50%

-25%

0%

25%

50%

75%

UPM

DP

ProductionDesigner

CostumeDesigner

Key Grip

Gaffer

Supporting Actors

Effective AustraliaLabor Rates vs. U.S. Rates

-75%

-50%

-25%

0%

25%

50%

75%UK Crew Rates vs. U.S. Rates

UPM DP CostumeDesigner

Gaffer

Note: Rates may be above scale. Australia and Canada rates comparison are based on telefilm, UK on feature film. Assumed exchange rates: C$ = U.S.$ 0.68, A$ = U.S.$ .64, £ = U.S.$ 1.61

Source: OECD Main Economic Indicators, Interviews, Monitor Analysis

Lower


20

be more expensive than paying SAG residuals.Furthermore, many producers do not consider theresidual stream while budgeting a productionbecause residuals are frequently paid by anotherentity. Other factors such as differences in unionwork rules between the U.S. and Canada, whilevisible to producers, do not appear to generateconsistently material savings.

C. Foreign Tax Incentives C. Foreign Tax Incentives

Historically, government tax incentives havetargeted projects that promote cultural content.Typically these incentives were complex, requiredextensive paperwork and had onerous qualificationrequirements. As state and national governmentsrecognized the economic importance of U.S.-

1.78

1.58

1.95

1.74

1.57

1.49

1.62

1.53

1.68

1.681.65

0.660.70

0.740.74

0.740.760.81

0.890.860.85

0.82

0.630.68

0.810.75

0.740.670.70

0.780.780.78

0.83

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

UK

Canada

Australia

Foreign Exchange Rates Relative to the U.S. Dollar

U.S.$ PerUnit ofForeignCountry

Source: OECD


-15.1%

-23.4%-19.5%

Source: DGA; SAG;OECD; Statistics Canada

35%

39%

33%

38%37%

34%

28%32%32%

-21%

-50%

-25%

0%

25%

50%

U.S.

Canada

Changes in Weekly Scale Wages 1990-1998, at Constant 1990 Exchange Rate

Director UPM 1st AD 2nd AD SupportingActors

Growth inWeekly ScaleWage Rates



21

developed productions, significant efforts weremade to expand their incentive programs. Notsurprisingly, Canada has led the charge by offeringfederal rebates since 1996 of 11% on spending forall Canadian labor involved in a production,regardless of content. Provincial governments werequick to supplement these incentives, creating atotal of a 22% to 46% rebate on Canadian laborexpenditures (see Exhibit 21). Some advantages ofthese incentives are that they are available to allproductions, have no annual limits to the number ofrebates being offered, greatly simplify paperwork,and are structured as direct rebates, not tax credits.Several companies have entered into the business offiling paperwork and providing advances on theincentives to producers in exchange for a fee,helping producers address cash flow issues.

Unlike other countries, Canada has gone out of itsway to ensure that producers are aware of theincentives and their subsequent savings. It is notuncommon for Canadian government officials and

film commission representatives to fly to LosAngeles, New York City, or other U.S. productioncenters to attend events or meet directly with filmand television producers to advertise their incentivestructure. For example, representatives of RevenueCanada (the Canadian IRS) were at the recent“Locations `99” show in Los Angeles, promotingthe Canadian incentives. Canadian labor andindustry representatives have indicated thatincentives are geared to attract foreign productions.Recent initiatives in Canada to discontinue theincentives for foreign producers have been met withstrong opposition from Canadian labor andgovernment officials, who note that theseproductions represent several thousand jobs andmillions of dollars in economic impact, more thanoffsetting the money paid in incentives.

Once production is completed, additional savingscan be realized by applying for tax rebatesassociated with Canadian labor spending. The exactamount realized is determined by the amount of

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

IncentivesAvailable forCanadianContent

IncentivesAvailable forForeignProduction

l Canadian Film or Video Production TaxCredit (25% of eligible labor costs)

l Canadian content requirement* (CAVCO)

l Provincial Government: Services TaxCredit (11% of eligible labor costs in BC,Ontario, Quebec; Up to 35% in Manitobaand Saskatchewan)

l No content requirement, paperwork easy

l Capital Cost Allowance (tax shelter) used to attract privatefinancing

l Nets 4-8% of budget

l Provincial Government: Film or VideoProduction Tax Credit (20-35% of eligiblelabor costs)

l Canadian content requirement* (CAVCO)

*Note: U.S. productions can take advantage of the credit by co-producing with a Canadian company and hiring mostly Canadian key crew (8 out 10 CAVCO points)

l Capital Cost Allowance available to foreign producer if in co-production through sales and leave back arrangement

l Nets 4-8% of budgetl High transaction costs; more difficult to access than current

credits

l National Government: Film and VideoProduction Services Tax Credit (11% ofeligible labor costs)

l No content requirement, paperwork easy


22

Canadian labor used. In a typical case, theincentives would increase the total budget savingsto 25% - 26%. However, payment of rebates cantake up to a year. The first wave of payments of

the Canadian rebates are only now being received byproducers.

66 69

2,40870

21770

2,149

126

133

2,900

0

500

1000

1500

2000

2500

3000

3500

US$(‘000s)

Illustrative Cost Comparison for a $2.9MM Network Telefilm

Note: Assumes IA crews are hired in US and Canada; Exchange rate C$=U.S.$0.68Source: Producer and executive interviews; sample production budgets; Monitor analysis

26% Reduction

17% Reduction

DGC BTLProvincial Tax

RebateEffectiveBudget

ProductionBudget in the

U.S.

Federal TaxRebate

LocationExpense

Transportation

Other BTL

Cost of Goods

ProductionBudget inCanada

$150 $150

$14,832

$482 $2,518

$784

$15,916

$550$534

$20,000

0

5000

10000

15000

20000

25000Illustrative Cost Comparison for a $20MM Feature Film Production

Note: Assumes IA crews are hired; DGA director and staff; U.S. location costs priced for Boston; Exchange rate C$=U.S.$0.68Source: Producer and executive interviews; sample production budgets; Monitor analysis

US$(‘000”s)

DGC BTLProvincial Tax

RebateEffectiveBudget

ProductionBudget in the

U.S.

Federal TaxRebate

LocationExpense

Transportation

Other BTL

Cost of Goods

25%Reduction

20%Reduction

ProductionBudget inCanada



23

D. Total Cost DifferencesD. Total Cost Differences

As a result of the above conditions, U.S.-developedproductions located in Canada have been able torealize direct savings of approximately 17% to 20%and total savings including incentives of up to 26%(see Exhibits 22, 23). Approximately 60% of thedirect savings come from “below the line” labor costdifferences. These cost savings can be achievedbecause all of the “below the line” crew is sourcedin Canada. In addition, labor rates and fringebenefits are less expensive in Canada. Forproductions in and around Toronto and Vancouver,location expenses are cheaper because much of thecrew is local and does not require accommodations.An additional 14% in savings can be realized intransportation expense. The final element of directsavings comes from differences in the cost of goodsand services such as sets and equipment. Otherdifferences in Canada versus the U.S. exist but areeither minimal or are typically offset by related costincreases. One example is the savings in “above theline” cast expenses that come from hiringsupporting actors in Canada. However, theincreased travel expenses associated with usingAmerican actors, directors, and producers offset themajority of these savings.

E. Foreign InfrastructureE. Foreign Infrastructure

Historically, film and television productions havetended to locate in or near large production clusterssuch as Los Angeles or New York, due to their well-developed infrastructure and access to experiencedcast and crew, and despite the relatively high cost ofproduction. Until the mid-to-late 1990’s, going toa foreign location required that producers importmost of the cast, crew and equipment to thelocation. Such significant logistics and travelexpenses generally more than offset any differencesin exchange rates and wages.

One critical outcome of the U.S. runawayproduction phenomenon is the emergence of severalcountries as significant production “clusters.” Themost notable examples are in British Columbia andOntario, Canada, where significant experience baseshave developed and investments in infrastructurehave been made. Exhibit 24 indicates that BritishColumbia and Ontario now have almost 1.5 millionsquare feet of sound stage space, as much as NewYork and North Carolina combined. The volumeof 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.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

U.S. Canada UK Australia

Soundstage Space by Region

SquareFootage in

Millions

5.9M ft2

1.6M ft2

0.8M ft2

0.5M ft2

LA

NY

NC

Miami /Orlando

Chicago

BC

OntarioQuebec Other

Source: Film Commissions; Interviews; Reel West; Playback International; Montreal Shooting Guide


24

The development of these production clustersaccelerated as U.S. companies made sizeableinfrastructure investments in many of theselocations (see Exhibit 25). U.S. investment abroadcreates short term support for these productionlocations and a long term incentive to ensure thatproduction continues.

Demand for the new Canadian production clustershas been so high that many producers complainabout the difficulty of securing crews or facilities tostart production. In fact, there have been instancesin which a U.S. producer has hired a crew only todiscover later that crew members have moved overto higher paying or more prestigious projects.

Another factor stimulating the development ofproduction clusters in certain areas is theavailability of diverse settings and their proximityand similarity to the U.S. Many productions areset in generic (often American) towns or cities,which can easily be replicated in Canada but aremore challenging to replicate in other parts of the

world such as the U.K. Many settings and scriptsalso require actors to look and sound American, andthe cars and signs to look familiar to the Americanaudience. Mexico, despite its proximity andindisputable cost advantages, cannot easily meet theneed for U.S.-oriented settings, and has thusdeveloped more slowly as a production location.However, the production of “Titanic” in RosaritoBeach demonstrated that large, complex projects canbe completed in Mexico. Moreover, the facilitiesconstructed for that production are now beingmarketed to other producers.

F. The Integrated Approach and CanadaF. The Integrated Approach and Canada

It is important to note that Canada has followed anintegrated approach (see Exhibit 26) to launchingits film/television production-oriented initiativesduring the past several years. In this approach acountry begins with a relatively undevelopedproduction industry. It then launches a series of(usually tax credit-centered) initiatives to attractproduction activity and investments, and often

U.S. Studio 1994 1995 1996 1997 1998

Viacom(Paramount)

Disney

MGM

WarnerBrothers

Fox

l May, 1997 — MGM and Bridge Studios jointlyopen 25,000-square-foot Studio 5/6 inVancouver. The BC government investedC$3.5 million.

l October, 1996 — Disney purchases a 12,600-square-foot multimedia studio in Victoria, BritishColumbia

l December, 1996 — Walt Disney Animation Canadaopens a 17,000-square-foot studio in Vancouver

l June, 1997 — Paramount Studiosinvests over $10 M to construct foursound stages and production officespace in Vancouver. The facility is166,000 square feet.

l 1988 Warner Roadshow studio opens inQueensland, Australia (76,347 sq. ft)

l June, 1994 — Viacom establishes Viacom Canada, which will spend$1 million a year over five years on “Canadian culture.” It is rumoredthe investment was a “sweetener” to encourage the government topass the CAVCO tax credit.

l September, 1995 — Paramount opens production supportcompanies in Vancouver and Toronto to service the equipmentrental needs for Paramount and other Viacom holdings

l Fox StudiosAustralia opens inSydney, valued at$130.5M

Source: Annual Reports; Variety; Screen Digest; Film Commissions

l Fox builds $125M water-tank-based studio in RosaritoBeach, Mexico.

At least 4 of 9 major studios have publicly stated their intention to increase production abroad; the increasedglobalization of entertainment companies is likely to stimulate further runaway production

At least 4 of 9 major studios have publicly stated their intention to increase production abroad; the increasedglobalization of entertainment companies is likely to stimulate further runaway production

U.S. Studio 1994 1995 1996 1997 1998

Viacom(Paramount)

Disney

MGM

WarnerBrothers

Fox

l May, 1997 — MGM and Bridge Studios jointlyopen 25,000-square-foot Studio 5/6 inVancouver. The BC government investedC$3.5 million

l October, 1996 — Disney purchases a 12,600-square-foot multimedia studio in Victoria, BritishColumbia

l December, 1996 — Walt Disney Animation Canadaopens a 17,000-square-foot studio in Vancouver

l June, 1997 — Paramount Studiosinvests over $10 M to construct foursound stages and production officespace in Vancouver. The facility is166,000 square feet

l 1988 Warner Roadshow studio opens inQueensland, Australia (76,347 sq. ft)

l June, 1994 — Viacom establishes Viacom Canada, which will spend$1 million a year over five years on “Canadian culture.” It is rumoredthe investment was a “sweetener” to encourage the government topass the CAVCO tax credit

l September, 1995 — Paramount opens production supportcompanies in Vancouver and Toronto to service the equipmentrental needs for Paramount and other Viacom holdings

l Fox StudiosAustralia opens inSydney, valued at$130.5M

l Fox builds $125M water-tank-based studio in RosaritoBeach, Mexico

Several studios have publicly stated their intention to increase production abroad; the increased globalization ofentertainment companies is likely to stimulate further runaway production

Several studios have publicly stated their intention to increase production abroad; the increased globalization ofentertainment companies is likely to stimulate further runaway production


25

creates qualifying requirements for those incentivesthat stimulate hiring of local personnel. As a result,local production crews, actors and productionmanagers gain valuable experience and training andare therefore more capable and attractive to other

producers. At the same time, investments inphysical infrastructure are sought so that more andmore productions can be accommodated. As theseproduction capabilities expand, other tax incentivessuch as those for local labor expenditures are

IndustryUndeveloped

IndustryUndeveloped

ServiceCapabilities

Grow

ServiceCapabilities

GrowIndustry MaturesIndustry Matures Industry Holds

Major PositionIndustry HoldsMajor Position

• Goal: growCanadian filmproduction andstimulate indigenousfilm industry

• U.S. productions thatshoot in Canadaimport most of thekey crew members

• National investmenttax credit employedto encourage filmand televisionproduction

• Facilities, equipmentsupply, and servicecompanies grow tosupport production

• U.S. studios buildsound stages andopen offices in BCand Ontario

• U.S. productionsare able to hiremost key crewfrom local laborpool

• Governmentinstitutes workrestrictions thatlimit the import ofbelow the line crewmembers

• Industry configuresto serve U.S.location production

• Post-productioncapabilities grow

• Industry achievescritical mass andaccess to/influenceover governmentdecision-makers

• Labor tax credits onforeign production areinitiated in 1997 tofurther encourageemployment

• Canadian provincescompete with eachother for U.S. businessby offering provincialtax credits

20001980The Integrated Approach

Ind

ust

ryU

nd

evel

op

ed In

du

stry

Un

dev

elo

ped

Ser

vice

Cap

abili

ties

Gro

w

Ser

vice

Cap

abili

ties

Gro

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Cumulative Production Experience

New ZealandNew Zealand

California,New YorkCalifornia,New York

NorthCarolina,Florida

NorthCarolina,Florida

AustraliaAustralia

IrelandIreland

MexicoMexico

UK,Canada

UK,Canada

IllustrativeIllustrative



26

offered to further stimulate demand for localproduction resources. Ominously, this approach tocapture productions is readily replicable by othercountries; in fact, Australia is moving along a verysimilar path to that pursued by Canada (see Exhibit27).

How Large Is The Gap To Be Closed?How Large Is The Gap To Be Closed?

Clearly the U.S. faces major challenges in stemmingthe tide of runaway production. The solutions willnot be simple because the causes are several and verycomplex. However, the cost gap to be closed toretain production in the U.S. may not be the entire25% production cost disadvantage. Severalproducers interviewed mentioned that if thebudgets for U.S. productions were brought towithin 10% to 15% of costs in Canada, then theywould make the argument to keep that productionin the U.S. Producers generally want to work wherethey live, and most live in the U.S. productionclusters. Furthermore, these clusters contain all theresources required, as well as access to financing,development, and distribution resources, whichprovide a distinct advantage to producers.Obviously, certain productions cannot afford even a10% cost disadvantage; recapturing theseproductions will be the greatest challenge.

It is important to note that U.S. film and televisioneconomic runaway activity is at a high level, andthat large productions are running away. Thesignificantly lower total production costs achievableabroad are compelling to producers. The experiencethat foreign production crews, actors and directorshave gained in filming U.S. runaway productionsrepresents an ongoing source of advantage that forthese producing locations. Similarly, infrastructureinvestments abroad represent permanentimprovements that will continue to drawproductions out of the U.S. Without a meaningfulresponse (or some unforeseen development abroad),production employment opportunities andassociated economic benefits will continue to leavethe U.S. at a significant rate.

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IV – STUDY METHODOLOGY AND KEYIV – STUDY METHODOLOGY AND KEYTERMSTERMS

Study MethodologyStudy Methodology

The U.S. Runaway Production Study wasconducted from February 1999 to the end of May1999; the study’s key activities included:

• The development of a feature-length andtelevision program database for all U.S.-developed productions since 1990, to quantifythe scope of U.S. runaway production. For thisanalysis, Monitor Company used a broad rangeof sources (Hollywood Reporter, Variety,Baseline, SAG/DGA databases, Internet MovieData Base (IMDB)) to understand whichentities were involved in the production andwhere it was filmed, as well as budgetinformation where available. Monitor used anumber of sequential criteria to determine therunaway status of productions, for example:Did the production involve a U.S. productioncompany and/or have an English language title,use English-language directors/actors, have anAmerican writer and/or American producer,have its first release in the U.S.? Monitor usedsetting/plot information or input fromproducers to determine whether the productionwas a creative as opposed to economic runaway.

• More than 70 interviews with a cross-section ofproduction industry participants (producers,Guild members and executives, filmcommissioners, etc.) to discuss current U.S.runaway situation and causes.

• Calculation of total U.S. economic impact.Actual or estimated budgets for eachproduction were used to define productionexpenditures. Once Monitor quantified theproduction expenditures, expenditures oneconomic runaways were totaled and certaincomponents multiplied using Bureau ofEconomic Analysis (BEA) multipliers tocalculate total impact. Monitor Company alsoused average actual tax rates to calculate the tax

revenue effects of lost direct productionexpenditures and multiplier effects.

• Creation of forecasts for production volumes,expenditures and impacts. Monitor analyzedhistorical production volumes and identifiedsome explanatory variables. Monitor then usedavailable forecasts for those variables to projectproduction volumes under various scenarios.

• Full-time equivalent positions were derived bydividing the number of runaway productions bythe average number of projects a director,production manager, artist or craftsperson, etc.completes in a year. SAG full-time equivalentpositions, on the other hand, were based on anaverage annual utilized member income.

Monitor Company, Directors Guild of America andScreen Actors Guild would like to extend theirsincere appreciation to the many individuals andgroups who contributed their time, experience andperspective to this study: directors, actors,producers, executives, film commissioners, andvarious industry associations. Many thanks also tothe SAG-Producers Industry Advancement &Cooperative Fund for the grant that partiallyfunded this study.

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Definitions of Key TermsDefinitions of Key Terms

Following are some key terms used in this reportand their definitions:

U.S. Runaway Production (Film): A runawayproduction is any feature-length film intended forU.S. initial theatrical release and developed in theU.S. but filmed in another country by either a U.S.or foreign-based production company.

U.S. Runaway Production (Television): A runawayproduction is any TV show, series or television filmfirst intended for exhibition in the U.S. but filmedin another country by either a U.S. or foreign-basedproduction company under license agreements withbroadcast networks, basic/pay cable, networks,syndicators, etc.

U.S. Economic Runaway: A U.S.-developedfeature-length film or TV show, series or televisionfilm which is filmed in another country foreconomic (cost reduction) versus creative(primarily setting) reasons.

U.S. Creative Runaway: A U.S.-developed feature-length film or TV show, series or television filmwhich is filmed in another country for creative(setting, director/actor/producer preference)reasons.

Above The Line: The portion of a film’s budgetwhich covers major creative elements and personnel,i.e., those which are creatively unique andindividually identifiable. These are primarily story,acquisition, screenplay rights, script development,writer, executive producer, producer, director andprincipal members of the cast. The phrase “above-the-line” refers to the location on the film budgetof the specific expense items/person. (from Cones,John W. Film Finance and Distribution: ADictionary of Terms)

Below The Line: Film budget items relating to thetechnical expenses and labor (other than above-the-line) involved in producing a film, i.e., relating tomechanical, crew, extras, art, sets, camera, electrical,wardrobe, transportation, raw film stock, printingand post-production. Below-the-line personnelinclude the production manager, cinematographer,set designer, special effects persons, wardrobeperson, and make-up artist. The phrase “below-the-line” refers to the location of the specific expenseitems/person on the budget. (from Cones, John W.Film Finance and Distribution: A Dictionary ofTerms)

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V. ABOUT MONITOR COMPANYV. ABOUT MONITOR COMPANY

Founded in 1983 by Professor Michael Porter andcolleagues at Harvard Business School, MonitorCompany is a leading global management consultingfirm of more than 900 consultants in 25 officesaround the world. Since its founding, MonitorCompany has remained focused on a core mission:combining leading-edge analysis with proprietaryprocesses to help its clients define robust,compelling strategies, as well as take the necessaryactions to transform these strategies intosustainable competitive advantage. Monitor workswith private- and public-sector clients. MonitorCompany is headquartered in Cambridge,Massachusetts; the U.S. Runaway Film andTelevision Production Study team is from thefirm’s Santa Monica, California office.

Documents

U.S. RUNAWAY FILM AND TELEVISION PRODUCTION STUDY …/media/Files/Press... · film and television productions in the scope of the study. There have been notable regional impacts as