3.2 General background
 
Market overview
 
The market shares gathered from the European countries surveyed in Part 1 of the White Book show that the market share of US films has been steadily increasing everywhere. US productions account for a growing portion of total releases, and their share of total box office receipts has increased even faster. Table 36 shows how the box office was split between US, domestic and other European films in the last year. This table highlights the low performance of European productions (excluding domestic films) in the national markets: on average 7% of the total box office. Belgium and Spain are the two countries which significantly exceed the European average; the latter because of a national quota system to protect European films, the former because of the high incidence of French (and Dutch) films in the national market.
 
Table 36: 
Share of US, domestic and European films in European markets -1992
% of total box office
US
Domestic
Other European
Other 
Belgium
73
4
19
4
Denmark
78
15
3
4
France
58
35
4
3
Germany
83
10
6
1
Greece
93
2
3
2
Ireland
88
8
4
0
Italy
69
19
11
1
Netherlands
79
13
3
5
Portugal
85
1
9
5
Spain
77
9
13
1
UK
86
12
1
1
European total
74
17
7
2
Source: MEDIA Salles/LE/BIPE Conseil
 
The decline in importance of European films reflects the fact that these films too often fail to attract large young audiences, which make up for the majority of today's cinema-goers. Most European productions have a small non-commercial following, and are therefore more likely to be shown in cinemas outside the mainstream circuits.
 
The issues surrounding the distribution and release of European films are then often intertwined with those affecting non-commercial and art films in general.
 
 
Regulation and subsidies
 
The majority of European states have developed some measures to safeguard the existence of non-commercial cinemas, usually in the form of support for theatres whose programming responds to certain criteria. Spain has intervened in the commercial sector with a quota system to ensure the circulation of national and European films. In general, however, public support to cinemas follows three possible patterns: Table 37 summarises the level of public aid provided by the national governments throughout the EU, expressed in ECUs.
 
Table 37: 
Public aid to the exhibition sector (in ECUs)
Country
Aid for exhibition
Aid per screen
Aid for prints
Total
Belgium
400,000
928
0
400,000
Denmark
4,300,000
13,650
120,000
4,420,000
France
34,400,000
7,814
5,550,000
39,950,000
Germany
5,200,000
1,432
1,000,000
6,200,000
Greece
0
0
0
0
Ireland
0
0
0
0
Italy
3,750,000
1,242
0
3,750,000
Portugal
173,000
746
0
173,000
Spain
2,180,000
1,206
na
2,180,000
Netherlands
1,300,000
3,125
0
1,300,000
UK
1,000,000
569
0
1,000,000
Total 
52,703,000
3,174
6,670,000
59,373,000
Source: BIPE Conseil/MEDIA Salles
 
The table shows that France offers by far the largest contributions to a national exhibition sector. At the other end of the spectrum are Greece and Ireland, where no public support is available. In a brief overview we describe below the position of European films, art-houses and non commercial cinemas in each country.
 
 
Belgium

French films account for 18% of admissions in Belgium. In the country with the most sophisticated exhibition sector, US films yield about 73% of total admissions. The exhibition sector in Belgium is very concentrated, with the largest 3 players owning 60% of the market, but there is very little vertical integration between distribution and exhibition activities. There are about 15 art-houses, which are the cinemas giving more space to European films. The main distributor of European and art titles in Belgium, Cinélibre, is the only one to be vertically integrated. When one of its titles is also requested by the mainstream circuits, Cinélibre usually gives preferential treatment to art-houses. Art-houses can get public support if they offer a variety of cultural activities.
 
 
Denmark

In Denmark national films make up for 15% of total releases, while European productions have slipped from one-third to one-fifth of the total. In terms of share of box office, the decline of European films is even greater. Public support in Denmark is the second highest in the Europe in terms of public funding per screen (5,000 ECUs).
 
 
France

Very strong public support for production and exhibition in France may partly explain the lower proportion of admissions to films produced by the US. They account for only 58% of the total. In the exhibition sector, public money helps cinemas to upgrade their facilities and to obtain a greater number of prints for European films. Also, about a quarter of French cinemas are owned and managed by the local authority and their financial constraints are different from those facing the commercial sector. Art-houses, usually located in large towns, form a healthy segment of the French exhibition sector.
 
 
Germany

In Germany, art-houses show mainly first run films, as the repertory material is increasingly supplied by television and videos. Art-houses are defined as cinemas that show a varied selection of film types and publish their programmes well in advance. The 500 screens responding to that definition accounted for 16% of the national box office receipts in 1992. In addition, about 20 small town local authorities run public cinemas, which show non-commercial programmes. They are virtually the only ones to present films from small countries or low budget productions. Public help is offered to acquire additional prints (for cinemas in small towns) or for modernisation and improvements. Also, the government rewards cinemas which offer outstanding programmes.
 
 
Greece

There is no support of the cinema sector from the Greek government. The exhibition sector is often sponsored by private multinational companies to aid the modernisation process. Only the winter cinemas show new films - 93% of which from the US - while the summer cinemas show second runs. Summer cinemas are disappearing as the owners of the sites sell their estates to create more lucrative tourist developments. The share of domestic films, at 2%, is one of the lowest in Europe.
 
 
Ireland

European titles and art films are virtually absent from Irish cinemas, except for a few art-houses in Dublin. There is a good turnover of such films in the video rental sector, and more generally they are experiencing a bit of a renaissance, confirmed by the upgrading of some independent art-house cinemas in the capital. European films remain a niche market as long as they are not perceived as commercial films: big European hits have been played by mainstream cinemas. Beyond the public support of the Irish Film Centre there are no subsidies for exhibitors of European films.
 
 
Italy

Art-houses in Italy are also experiencing growing success, particularly among young audiences. This is interpreted as a reaction to the decrease in standards of quality of television programmes. The number of art-houses in Italy is not easily quantifiable, since the definition of art-house for public support purposes also includes cinemas that program art films only on some days of the week. Recent statistics(18) show that art-houses account for 9.3% of the national screens. Private capital is reportedly interested in investing in this segment of the exhibition sector.
(18) from the 1993 edition of the "European Cinema Yearbook", MEDIA Salles
 
 
Netherlands

Exhibition in the Netherlands is divided between a commercial and a subsidised circuit. The commercial distributors only deal with commercial exhibitors, but can deliver non-commercial films to the subsidised sector and vice-versa. Distinctions between the two segments are increasingly blurred, as some subsidised cinemas offer diversified, popular programming. Art-houses in this broader sense are evenly split between the two segments of the market. Their turnover totals 8 - 8.5 per cent of gross box office.
 
 
Portugal

The exhibition and distribution sectors in Portugal are dominated by one national firm, Lusomundo, and its allied US company, Warner. Access to screens is practically dictated by Lusomundo and there is no regulation in sight to correct possible distortions. Only niche strategies are possible for independents. They are confronted with a choice between second rate US films or European productions. European films are virtually absent from the scene. Atalanta is the most prominent distributor of European films, and has successfully revived the niche market by alternating old classics with contemporary quality films. The company's successful strategy is that of renting or buying public and/or local small cinemas (16 screens at present) that would have otherwise been lost, and show films from its distribution company. Atalanta also enjoys public support and some aid for exhibiting European films.
 
 
Spain

While other countries support European films via a system of subsidies for the distribution of European films and subsidies to cinemas dedicated to showing a large proportion of European films, Spain operates quotas compelling the distribution of European films. It is the only country in Europe where public intervention has not contributed to a separation of commercial circuits, mainly showing US films, and art-houses, showing non-mainstream quality films.
 
The Spanish quota system affects both distributors and exhibitors. Under the old system, which ran until the end of 1993, distributors were awarded a licence to dub a maximum of four non-European films for each Spanish film they distributed. The exact number of foreign films for which dubbing permission was granted depended on the box office receipts of the national film: a dubbing licence for one film was ensured at the start of the Spanish distribution contract, and up to three more were awarded as soon as the (Spanish) film obtained 30, 60 and 100 million pesetas in the box office. Between 1989 and 1993, each Spanish film on average generated 1.5 dubbed films.
 
Exhibitors had to alternate their programming of dubbed films with a set number of days of European films, varying from one day of European film for every 3 days of foreign films to one European day per foreign film, depending on the characteristics of the European film programmed.
 
Both distributors and exhibitors complained that the quota system depressed their revenues. However, the large distributors built up a stock of 179 dubbing licences to use, which suggests that the system did not hinder their distribution strategy as much as they claim.
 
To beat a deadline associated with the General Agreement on Trade and Tariffs (GATT), legislation was pushed through in December 1993 modifying the quotas. Effectively the quotas were tightened up with the aim, inter alia, of ending a practice where distributors acquired the rights to a Spanish film only to grant it the most limited release and, nevertheless, obtain a dubbing licence. Exhibitors responded with a one day strike.
 
This regulation has had the primary effect of ensuring that the mainstream circuits show national (and now European) productions in their theatres. Also, the combination of old fashioned strict rules on art-house programming and the quota system has caused the art-houses to disappear and be substituted by cinemas that show only subtitled films. These have created a niche market which seems destined to grow as more Spanish people become familiar with foreign languages. The quota system has resulted in 22% of total releases originating from Europe, of which 9% are domestic productions. These figures are among the highest ones in the European countries, where the share of European films has been progressively eroded by US productions.

 
United Kingdom

The size of the art-house market in the UK is very small, and non-English language films account for less than 2% of box office. This low figure takes into account European films that are often part of the mainstream programming in the continent. On the other hand, US films make up 62% of releases and 86% of box office (over 90% if three UK-registered films produced by US majors are included).
 
The UK exhibition sector is highly concentrated, with five companies operating approximately 63% of the screens. Mainstream films are released all over the country simultaneously, with a large number of prints. Since about half of the British repertory and art-houses are located in London, this is where non-commercial productions are first tested. Although the mainstream cinemas do some repertory, most of it is confined to art-houses and the Regional Film Theatres supported by the British Film Institute (see Case Study 2 - chapter 3.5).
 
 
Large budget European films
 
According to EFDO, 80 per cent of feature films produced in Europe have budgets less than 5 million ECUs. The preponderance of low-budget films, tending to have comparably low marketing (prints and advertising) budgets, goes a considerable way to explain the poor market position of European films relative to US films. But what of the higher budget European titles?

An analysis of 16 French films (including six co-productions) released between 1986 and 1993 was undertaken in November 1993 on behalf of the Atelier du Cinéma Européen (ACE).
 
The films in the sample were
 
· 1492 - Christopher Colombus                   · Indochine
· Le château de ma mère                             · Jean de Florette
· Cinema Paradiso                                       · La gloire de mon père
· Damage                                                      · Le mari de la coiffeuse
· Delicatessen                                               · Manon des sources
· La double vie de Véronique                       · Nikita
· Europa, Europa                                         · Toto le héros
· Tacones lejanos                                         · Subway
 
Results are set out in Table 38.
 

Table 38: 
Average Box Office in 10 European Countries for 16 French-produced and co-produced films, 
1986 - 1993
  

Country

Average Box Office
(in US$)
as a % of average box office for all releases in country
as a percentage of the European total (%)
Belgium
356,702
89%
1.42
Denmark
186,866
46%
0.74
Finland
88,292
35%
0.35
France
17,608,086
872%
70.15
Germany
975,986
47%
3.89
Italy
2,164,150
207%
8.62
Spain
1,632,961
149%
6.51
Sweden
393,950
59%
1.57
Switzerland
647,376
235%
2.58
United Kingdom
1,045,557
48%
4.17
Total
25,099,926
n.a.
100.00
Source: London Economics' analysis of Unifrance, CNC, EDI and Variety data/MEDIA Salles
 
All of the films in question were released in most European countries. On average, they grossed just over $25 million in ten countries. 70 per cent of this total was obtained in the French market. Italy accounted for 8.6 per cent, Spain for 6.5 per cent, the UK for 4.2 per cent and Germany for 3.9 per cent.
 
The implications of the factors underlying the success and failure of European films are explored in the rest of this paper. They relate to the importance of the "pipeline" in ensuring that films get onto screens, the impact of sufficient marketing expenditure on the films, and the importance of what might be termed "cultural education" to maintain an interest in what used to be termed "international cinema" (i.e. non-domestic and non-US).
 
 
Problems of definition
 
Any policy measure that seeks to favour the distribution or exhibition of European films over films originating from other countries is bound to create some problems. Not only is it difficult to establish what are the appropriate policy measures that will effectively support European film, but it may also be difficult to define what is a European film and what is not. It may seem rather trivial to be bothered about definitional issues. But, in fact, the problem is one of substance as well as of mechanics of implementation.
 
The question of defining the origin of a film for the purpose of devising a support system - be it a quota or a subsidy - must first ask what the policy is trying to achieve. It hardly makes sense to support only films that are 100 per cent European. The European film industry does not need to consist of films that have only European themes or stories as their basis, a European producer, a European financier, a European production crew, and are shot in Europe. Such a definition would be unduly restrictive and would lead to a rather narrow and parochial European film industry. Film making is more ambitious in both choice of subject matter and involvement of third party resources. Big budget films require a complex pattern of relationships between producers, distributors, scriptwriters and actors that varies from film to film. The only constant element in big budget film making is the involvement of an effective distribution organisation that is capable of guaranteeing that the film is professionally marketed and properly managed in terms of its release pattern.
 
The script may be based on a 19th century English novel, or a script that was specifically prepared from an original idea by a producer. Actors may be chosen to suit the story and because of their "brand value" and reputation with the core audience that the film targets. Similarly, directors are chosen because they are thought to be able to give a film a particular feel, or bring to the film the necessary degree of innovation. Small budget films, or specialist films serving niche markets, are less complex and often combine the role of writer and director, but still require an extensive collaboration between the essential elements of film making.
 
What a European film policy needs to achieve is an increased use of European inputs into mainstream films as well as specialist films, not an increase in 100 per cent European films with small budgets and little chance of popular success.
 
For mainstream film the primary objective is the opportunity for European talent to exploit its skills. This implies the need to ensure that these skills are maintained and that there is reinvestment in them. This objective is like the support of Airbus for the benefit of the European engineers who want to be employed in activities that they are good at and which are challenging their skills. It also means that it is necessary to ensure that the talent does not dry up and that there is a continuation of supply of highly skilled engineers who are capable of earning good money for challenging high value jobs. This is essentially an economic objective.
 
For mainstream film there is also the cultural objective of using European backdrops and themes in film. The Western is a very American genre, although these films have often been shot in Spain or Yugoslavia. James Bond movies are international productions, but still retain a certain Englishness about them. The Commitments is a European film, produced by a US major, that describes and deals with rock music. It is shot in an Irish setting and contains an Irish sense of humour. It is also based on a story by an Irish writer - never mind that most of the music is originally American 1960s!
 
If these are the objectives then we have to ask ourselves the question: what combination of measures would support European film-makers most effectively, and assist in the dissemination of European themes and genres? Two approaches to definition of origin of a film offer themselves:  Both these definitions are commonly used in the determination of origin of industrial goods, and are used when deciding whether a specific duty treatment applies to the importation of a good. The value-added definition measures the cost content of parts and labour that are sourced in Europe. 45-50 per cent is the criterion usually applied.
 
The last substantial transformation is the standard definition under the EU origin regulation 802/68 and suggests that a good is considered to originate from a country where its last substantial transformation from a combination of inputs happened. This definition has been used to decide, for example, the origin of typewriters assembled in the UK but where a large part of the parts were source from Japan.
 
 
Minimum value-added
 
Applied to films, the first criterion of minimum value added is reasonably straight forward. Taking the budget of a films before print, advertising and distribution costs this requires that there have to be minimum costs on European actors, crew or post-production of at least 45-50 per cent.
 
With such a definition several films produced by US majors in the EU would probably qualify as European, and under any quota or subsidy scheme, would qualify for preferential treatment. This may or may not be in the spirit of the EU MEDIA Programme, but under economic considerations the value of employing 50 per cent of a $25 million project amounts to a considerable investment in a European talent base. These resources may be employed in, for example, a German studio, a British post-production facility or using a Spanish crew on location.
 
The source of finance or the nationality of the producer would play a secondary role under the value added definition. Financing costs are of crucial importance to any film project, and cannot be ignored. In terms of value-added, they may constitute a three-year advance on royalties and need to be costed as a cost of capital for a film company providing these financial resources. For example, a 12 per cent cost of capital over three years amounts to a large resource-costs item and will influence the calculation of value-added. But it would, nevertheless, be wrong to judge the country of origin solely on the basis of the sources of finance.
 
 
Last substantial transformation
 
Applying the second definition of origin to European film is less clear cut. The concept of last substantial transformation is not without problems and has been subject to a number of cases in European courts. Nevertheless, it may still be relevant to the assessment of origin of a film. A film is produced over a number of distinct stages: There are only two serious candidates for consideration: Stage 4 (the filming) or Stage 5 (post-production). This is not the place to rehearse the legal and economic arguments that decide this question. Suffice it to say that the economic impact of post production on the development of a genuine European film industry is limited. If the country where the film is shot, either in a studio or on location, becomes the defining criterion, then the impact on the European film industry, and in particular the use of its production infrastructure, would be greater.
 
Again as in the case of the value added definition there is little room for consideration of the nationality of the producer or the sources of finance as the origin giving criterion.
 
These observations need to be borne in mind when assessing the tabulation of market shares of European film in European cinemas, and when considering the implementation of any policy measures designed to enhance the fortunes of the European film industry.