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» Report 2008
Part Two - ONCE UPON A TIME THERE WAS CELLULOID
WHICH ACTIVITIES AND RESOURCES
Chapter 3 - Regarding supply
Film Production
Preparatory to any investment there is, naturally, the creative phase of developing ideas, the elaboration first of subject matter then of screenplay, activity in which participate the writers and, in the majority of cases, those responsible for the production of the film. After the establishment of a financial plan and the obtainment of the necessary resources to cover it – by means of, as stated, the banking system, state contributions and, often, also the anticipated transfer of all or a determinate number of rights (for example of a television network) – the real production can begin with the editing of the work plan, the formation of a cast and the search for eventual settings necessary for the screenplay. In general this is the period in which the initiative involves the maximum plurality of subjects, of financers for production, of the director and his or her assistants and the most direct collaboration up until those responsible for casting and the screenplay.
The second phase regarding the filming is, on the other hand, that which involves contemporaneously the greatest number of individuals, however, almost all of these belong to the film crew and its various components (including the cast of principle and secondary actors), then there are the technicians who provide the set, equipment and technical means for filming, specialized vehicles for filming and other services and materials considered instrumental for production (by now no studio possesses, unlike in the past, all of the means of production).
Apart from being the first investors of the whole sector feeding the national market, the producers are, therefore, also those who give life to the creative ideas of the film makers. They constitute the principle and the base of the industry according to the process which in corporate research is defined as the sequence of operations which transform the primary materials into a finished product, later destined for the consumer. After being firstly developed as an idea and creation, the film in its final phases is marketed and promoted through distribution and then proposed to its users with business which represents the first act of circulation of the work – within the film’s life cycle – to reach the cinema going public.

BUDGET AND PROJECT COSTS

The production costs of a motion picture tend to correspond to the investments; in reality, however, it would be more correct to speak of project costs. This is because, by and large, film studios and film distributors do not coincide and, in these cases, the costs of promotion and circulation (beginning with the printing of copies) are not met by the producers but by the film distributors, despite being essential accompaniments to the product when it appears on the market, and therefore constituting marketing costs attributable to the film’s production..10
Budgets are traditionally imposed, therefore, on the so-called negative components of earnings, calculated by a definite system of job order cost accounting which comprises three categories of costs: of artistic production (above the line), technical production (below the line) and those of post-production, including insurance costs, costs of editing, dubbing and the registration of rights. Normally, the full costs of the project constitute a reference employed for the definition of the assignment expenses of the film and of the relative utility rights.11
The amount of production costs on the international market – meaning those properly called projects – reveals a typology of films according to a general classification:
  • Films of a low or limited budget with production costs less than 1 million dollars (approximately 750 thousand euro).
  • Films of medium budget with production costs comprising between 1 and 10 million dollars (from 750 thousand to 7.5 million euros).
  • Films of high budget, when costs are placed at between 10 and 40 million dollars (from 7.5 to 30 million euros).
  • So-called blockbuster films, with costs over 40 million dollars (30 million euros).
As can be ascertained from the average investments of recent years, the Italian cinema industry is largely placed between the first and the second categories above, both for national productions and co-productions. Together with Spain, Italian film productions are those most present in the second category, but with average values inferior to those of France and Germany and, above all, to those of the United Kingdom. In the third ‘high budget’ category, however, the Italian position is recovered placing itself behind the UK leadership, and, in comparison to the values of the other four principle European markets the Italian presence is also marked in the fourth ‘blockbuster’ category, where, for instance, Germany is practically absent and both France and, even more so Spain, can claim only sporadic inclusion.
Naturally, it is possible to produce film with a so-called zero budget, in other words, even with a few thousand euros, thanks to the free services of a technical and artistic cast and to ‘natural’ settings, without recourse to the preparation of an authentic set or in virtue of digital filming (High Definition Video or even digital cameras). Film festivals have indeed started to show no budget as opposed to low budget films. Making these titles appear in local cinemas, however, does create problems, both as a result of the technical ability required to reach an adequate standard (such post-production treatment of the required sort can cost an average of 150 thousand euros) as well as for the structure of the distribution market which, practically, leaves little room for independent or isolated artists who search, alternatively, to directly offer their work to single traders.12
An extraordinary example of this was obtained between 2008 and 2009 by “Il vento fa il suo giro” (no English translation as yet) by the director Giorgio Diritti, shot without state contributions and shown only at the ‘Cinema Mexico’ of Antonio Sancassani in Milan. Shortly afterwards it won the Bergamo Film Meeting award and totalled 40 thousand spectators over an extremely long tenure of 500 days promoted by word of mouth of its viewers.

OPERATING CAPITAL

It is difficult for any company to support itself with only investment capital, companies almost always draw on bank loans destined to be entirely used with the progressive undertaking of the project. From the moment that film studios – particularly those independent studios of medium to small size – organize the purchase and use of the necessary productive and technical resources through outsourcing in such a way that they are not obliged to sustain the maintenance or the substitution (as a result of the rapid outdating of technology in the sector)of those resources once filming has stopped and the resources are returned to the suppliers, the investments in fixed assets are indeed very few.
Furthermore, resources are necessary for the normal activity of the company – so-called ‘working capital’ – and in particular to acknowledge the fact that cost and revenue components are seen in relation to the availability of a product and not at the moment in which an engagement is undersigned. It is the case of the acquisition of rights for a subject matter, rather than a publication, from which derives film, very much in anticipation of its effective exploitation; or even of the production of a motion picture before its concrete diffusion on the market; or also of outlying credits in terms of distribution enterprises, businesses and of other diffusion channels, that can be practised only in the context of the real use of the film and which mature gradually on the basis of the period of concession.13
To this end the so-called operating capital is finalized (as well as capital assets) which depend on the level of material and non-material fixed assets obtained. Being, as stated earlier, materials of short duration, the investments in such non-material goods assume significance in the management of Italian film studios, principally identified by the utilization rights of the production. They are, in substance, constituted by the so-called film archives or, rather, by the film libraries and include the film titles upon which the film company can boast one or more property rights for economic use.
Given that the costs of every produced film include the utilization rights, such a library constitutes absolutely the most important asset of the company, defined as non-material given the lack of materiality of the rights connected to the property and to their connection with licensing, to the maturation of economic benefits over a period of further economic activity and to the quantification of the asset through production and acquisition costs (and not the eventual, effective commercial valuation).
The considerable lengthening of the life cycle of the film product, also in virtue of the multiplication of potential diffusion channels, entails that the value of the ‘library’ tends, in the majority of cases, to consistently disassociate from the so-called “book value”, in other words effectively from how much the film company has invested in the production of a film or its eventual purchase and from how much, as a consequence, has been contextually attributed to the budget in the first financial year of reference. Sometimes, the real capitalization becomes so manifestly elevated that it is necessary to request intervention in the revaluation budget (which also serves, however, in the opposite case in which supplementary resources must be found in order to face the eventuality of management crises or to resolve emergency situations).14
Also for this reason the ‘library’ takes on major relevance in the business plan, in general functioning as a guarantee for loans accessed in financial operations and in the assumption of debts in support of investment in new projects or in the case of eventual difficulties regarding unfortunate outcomes in the marketing of new productions. Furthermore, from the analyses of the financial records of the film studios clearly emerges the increase in the importance of non-material fixed assets with the growth of company sizes; the ever increasing presence of durable resources (net capital and medium to long term debts) in larger companies, as confirmation of the inferior financial solidity of the smaller companies; and also the superior capacity of self-financing and of recourse to the debts of the larger companies – guaranteeing a cash flow generated by the ownership of more famous titles. This indicator of the relationship between net borrowings and cash flow, defined by financial flexibility, varies in the grand groups between 1.8 and 4.0 whereas in those of smaller size it is generally placed at over 5 points.
Such a circumstance is also referable to a phenomenon subject to the relative consistency – due to the number of films in portfolio and of the respective values of their commercial use – of the ‘library’ according to corporate dimensions, or rather, to the fact that among the major players in the sector the ownership of productions is constantly maintained and, indeed, continuously fuelled also through acquisition investments, whereas in the small scale, independent film studios total or partial cessation operations of the film portfolio and of film rights are frequently registered.
The size of the ‘library’, furthermore, contributes to the consolidation of trademarks, something which until a few years ago was considered more or less of no influence in the activity of independent studios in the sense that trademarks did not characterize their productions as much as the individual producers, directors, and actors. If anything, their reputation was tied to their capacity to renew successes in terms of quality or of cassettes of a series of product titles. Nowadays, on the other hand, the company logo is enough to qualify an entire catalogue of home videos or all of the channels of pay television, rather than simple video on demand, and to transform them similarly into brand names..

REVENUE STRUCTURE

The evidence then is clear as to how the box office results do not faithfully represent the actual consistency of activity within the cinema sector and also of how the cinema takings are not sufficient indicators of the true efficiency and vitality of the production companies, which divide the amount between distribution companies and business circuits and which, in their own financial statements, therefore register the relative incidence on total turnover values.
The revenue structure of the production companies is closely connected to the management of the utilization rights of the production and conforms to the types of channel for their diffusion; among these channels primary channels are distinguished from secondary channels in economic terms due to the diverse calculations of the proceeds that originate from, and of the diverse contributions that result in, management economy. In general terms, by ‘primary channel’ the real business enterprise is intended, in as much as it constitutes the market for which the films are institutionally created and on which their representation has priority. ‘Secondary channels’, however, are considered as a separate form for the commercialization of distribution rights, which include:
  • The market for paid domestic viewing (home video purchases or rental and ‘pay-per-view’, or satellite channels, Digital Terrestrial Television or private cable television where viewers pay for single screenings in the formula VOD – video on demand);
  • Actual television (free television or free commercial television, pay television and licensed television, or digital terrestrial networks and satellite and cable television on subscription);
  • Internet channels through the various IPTV (internet providers) in terms of VOD – Video on demand in terms of direct connection or through downloading.
  • Mobile telephone networks with free viewing, in exchange for publicity or with fees (in other words VOD);
  • lPublicity in terms of ‘product placement’ (showing of products within the context of a film story), a technique by now widely employed, or, more rarely the direct sponsorship of films;
  • Merchandising of products, spin offs, and publications closely linked to the contents of the film;
  • The diffusion, onto the recording market, of the musical content that is included in the film as part of the soundtrack of the film.
These are markets which have been progressively open to the cinema over a period of time: starting from the 1950s, for example, as far as television is concerned and from 1976 with the development of the VHS standard created by Shizuo Takano, Vice-President of the Japanese JVC (Matsushita group) which gave the decisive impulse to the diffusion of domestic video-registration following years of uncertainty determined by the choices of the competition Sony to impose its own system of Betamax. Their growth has never been halted and since the 1990s the proceeds of primary channels, constituted by cinema takings, have been caused to decrease below the threshold of 50% the value of the total production registered on the financial statements of the company.

PUBLIC CONTRIBUTIONS

A further source of revenue for production companies consists in the contributions which the public administration, above all from the state and the regions, supply not to finance the investment in new productions (as previously seen) but rather to sustain – with more or less targeted interventions – determinate objectives of interest in the political tendencies and general development of the national or regional cinema. The state regulations which control the interventions of FUS-MIBAC define them as support directed towards the production representing a transfer of capital to the producers or to the authors of two types: prizes for quality and contributions to the takings. Regional funding, however, with its variegated management, takes on a very diversified appearance and it is not possible to approximate its quantification, even if the larger part of the subsidies reward activity which production companies, as indicated earlier, carry out within their field of competence in the production of a film.15
For a number of years the rewards for quality assigned by a ministerial evaluation commission have been 10 for an average unit amount of 250 thousand euros and are presented to authors (screenwriters and directors) and producers who have distinguished themselves in terms of “particular artistic and cultural qualities”. On the other hand, contributions to cinema takings are directly correlated to the success obtained in local cinemas and are founded (with a certain ambiguity as well as disputed) on the intention of establishing an incentive for film producers, with ample reference to the general public, to represent an alternative to the blockbusters of the major foreign film companies and also to have a larger appeal to the international market.
The total amount of resources paid out in 2007 amount to 19,638,887 euros, of which 60% was given to six individual companies and the remaining 40% to the other 23; even if in the general estimate of the available funds a quota of 1.18 million, equal to 6.1%, is destined for the ‘Banca nazionale del lavoro’ for the recuperation of part of the loans conceded – and still to be repaid – as well as to the companies that had initiated them (for the films “Alle luce del sole” (no English translation), “Il siero della verità” (no English translation), “La vita che vorrei”(no English translation), “Nessun mesaggio in segretaria” (no English translation), “Notte prima degli esami” (English: “Night Before the Exams”), and “Volevo solo dormirle addosso” (no English translation)), and the competencies owed to the SIAE (Società italiana degli autori ed editori), which receives a compensation equal to 0.96% inclusive of VAT for every single reward for the survey of the takings effected in the course of 18 months following the release of a title. As a matter of fact the 2007 contributions refer to films of the preceding two months.
The adjudication criteria fixed for this category of incentives do not refer to the global takings of every single motion picture but provide for four diverse box office income brackets – until 2.6 million euros, from 2.6 to 5.2 million euros, up until 10.3 to 20.7 million euros – to which four different contribution percentages are applied: 25%, 20% 10% and 7% respectively.



Source: General Direction for the cinema of MIBAC from “Relazione sull’utilizzazione del Fondo unico per lo spettacolo – anno 2007” edited by the Osservatorio dello spettacolo. * The sum of the percentage quota does not add up to 100%, as the total of available funds involves the restitution to the Banca nazionale del lavoro of 1,189,107 euros (6.1% of the total) and the competencies of SIAE (Società Italiana autori e editori) for the assessment of the takings equal to 185,749 euros (1.1%).



PRODUCT TYPOLOGIES

The statistics regarding national productions are generally concentrated on the film product. In reality such sector activity is a great deal more variegated and much more abundant than at first glance. A relative indicator emerges from the composition in terms of film genre of the works put into circulation, where films are characterized in terms of content together with the technical nature of the film on the basis of the probable assumption that animation films can be institutionally considered for younger viewers and scientific, popular or more generally informative documentaries.



Elaborated from data relative to the period 2000-2005 from “E’ tutto un altro film” by Francesco Casetti and Severino Salvemini (Egea, Milano 2007 edition) chapter “I film nelle sale” by Fabrizio Montanari, source Cinetel and “Giornale dello spettacolo” and for the years 2007 amd 2008 from “Il cinema italiano in numeri” edited by Ufficio studi Anica (Associazione nazionale industrie cinematografiche audiovisive e multimediali).

The animation productions and documentaries reported in the table in reality correspond to the – very few – titles shown (generally first showings) which compose the reference sample Cinetel for the daily survey of attendance and takings. Aside from the few animations (such as that of Disney) conceived and expressly produced for cinema screening, practically the entire sector of animations and documentaries – as, moreover, for the short films or series – are destined for home video and television channels, as well as, in part, education and didactic purposes16
Apart from their privileged diffusion channels this involves works of specific, technical characteristics and content, but which fully belong to cinema production nevertheless, and which combine to form a value of production for the entire sector equal to, at least, that generated by the distribution of films to local cinemas.

10 There are numerous ways and habits when it comes to the application of systems of amortization which principally depend on the length of these processes (on average, the investments referring to new productions are distributed and reported on balance for at least five years) and on the exploitation channels of the work whose life cycle is, more or less, long in connection with their circulation in the cinemas as opposed to home video circuits or those of the television. This involves essential technicalities for the representation – positive, more or less, - of the activity of a company, its accounts and, certainly, its general state of financial health, which there is no need to investigate in this report. If anything, it is opportune for signalling that the film does not necessarily find its distribution in the business in which its production was terminated and, on the contrary, it can remain unused for more storage companies rather than finding a commercial outlet. At the same time the circumstance that not always the first distribution is effected by the business of cinemas and it comes directly on other channels, such as that of the television..
11 “Il cinema e la misurazione della performance” by Giovanni Tomasi, study & research Egea Editions, Milan 2004.
12 Recent examples of films produced economically can be considered “Un altro pianeta” by Stefano Tummolini and presented to the Venice Film Festival, costing 970 euros and then “adopted” from Ripley’s film of Angelo Draicchio for cinema access, “Il maestro di lingue” by Federico Castagner, produced with 1,500 euros and “Italian Dream” by Sandro Baldoni (his third experience) costing a few thousand euros.
13 The treatment of cinema works in the balances of the production companies is controlled by the civil and fiscal laws of various nations. However, in Italy specific book keeping principles are not enforced and the balance charges observe the civil normatives (article 242 and following in the civil code) and those which are fiscal (TUIR), with particular reference to the relative regulation of the treatment of the creative work (article 68 of TUIR). Other national rules regard explicit and specific administrative principles, such as in the case of the United States and of SFAS – Standard Financial Accounting Set (number 139, December 2000)
14 As often occurs for certain material goods – those of real estate – the balance charge of the values of immaterial goods, such as those represented by the library, and by the values of amortization depend on diverse types of approach to book keeping; in particular by the counter position between the so-called approach to costs (the method of discounted cash flow, the method of royalty taxes, the method of real options).
15 This is revealed by the fact that Italy constitutes in the Europe an exception in the sense that it does not have a board dedicated at the central level nor of specific boards at the local level for the assignation and management of funds. In comparison to the limited role of MIBAC in the administration of FUS, other nations have organizations responsible for all support activity of the sector, the CNC (Centre nazionale de la cinematographie) in France, the Film Council in Great Britain, the FFA – Filmforderungsanstalt in Germany and the ICAA (Istituto de la cinematografia y de las artes audiovisuals) in Spain.
16 Cinetel is a survey company constituted equally by ANEC (Associazione nazionale esercenti cinema) and by ANICA (Associazione nazionale industrie cinematographiche audiovisive e multimediali).

 

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