UNREVISED PROOF COPY Ev 1

HOUSE OF LORDS

MINUTES OF EVIDENCE

TAKEN BEFORE

THE SELECT COMMITTEE ON COMMUNICATIONS

UK FILM AND TELEVISION INDUSTRIES

WEDNESDAY 18 MARCH 2009

MS TESSA ROSS and MR PAUL GRINDEY

Evidence heard in Public Questions 1 - 73

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WEDNESDAY 18 MARCH 2009

______

Present

Bonham-Carter of Yarnbury, B Eccles of Moulton, B Fowler, L (Chairman) Hastings of Scarisbrick, L Howe of Idlicote, B Inglewood, L King of Bridgwater, L Macdonald of Tradeston, L Manchester, Bp Maxton, L McIntosh of Hudnall, B ______

Witnesses: Ms Tessa Ross, Controller of Films and Drama, and Mr Paul Grindey, Head of

Business Affairs, Scripted Content, Channel 4, examined.

Q1 Chairman: Thank you very much for coming; welcome. This is the first meeting of a new inquiry on the British film and television industries and basically what the inquiry is about is we are trying to focus on how the film and broadcasting industries are supporting the

United Kingdom economy, including jobs, promoting UK culture and talent, whether there is scope for them to make a greater contribution and, basically, what more can be done by government and other parties to help. That is the very broad remit that we have got and it seemed entirely appropriate that Film4 should give the first evidence following your great success with Slumdog Millionaire on which we very much congratulate you. Perhaps I could start and, just to get us focused and taking, perhaps, Slumdog Millionaire as an example, could you take us briefly through the process by which the story actually reached the screen and obviously the part that Film4 played in this.

Ms Ross: Thank you very much, it is lovely to meet you all. I take some credit for starting

Slumdog Millionaire off. Film4, which I am sure we will go on to discuss later, spends quite

2 a large percentage of its budget developing projects, most of which we develop in conjunction with production companies and producers, but we also seek out material and ideas wherever possible. In this instance a very talented book scout whom we worked with and my head of development called me urgently and said “We have just come across the most wonderful manuscript, will you read it now?” which I did. I very quickly met the agent, having falling in love with the material, which was yet to be published, and we agreed an option on the material which was actually granted us because of what we had previously done. The agent and the writer of the book, Vikas Swarup, understood that Film4 stood for innovation and ambition and had previously been involved in films by, for example, Vira Nair who had done

Salaam Bombay – just as an example of how they understood where we might be prepared to go with the development and production of the film to be made. I obviously have a huge number of relationships with writers and directors and one of these was Simon Beaufoy, to whom I pitched the novel very early on and said “You will love this”, which he did, but needed to obviously go and discover the country and how he might tell the story in India.

Film4 was in the fortunate position of being able to send him as part of the development process to India to learn about the country and to see how he might incorporate the plot of the book into a screenplay. After a couple of drafts he asked me the question, “Do I get the rights to the game Who Wants to be a Millionaire or do I have to make up my own game?” I had previously worked with Christian Colson who was currently running Celador Films and said to him “I have a screenplay that I love and I have a problem I would like you to help with”, to which, having read the screenplay, he replied, “I absolutely love the screenplay, I would like to produce it for you and I can help you clear the rights to the game.”

Q2 Chairman: He was the producer.

Ms Ross: He became the producer.

3 Q3 Chairman: We have gone now from the stage where you have got the book, you have now in a sense handed it on to the producer.

Ms Ross: Yes, and we then agreed a deal with Celador Productions to co-finance the film with Film4 and to clear the rights to the game, and we both then agreed that Danny Boyle was our first choice director and the story goes from there really to what you have today, which is really the vision of a brilliant writer, an extremely talented producer and a visionary director.

Q4 Chairman: Just so we are clear, you originated the whole project. What is the stake that

Film4 actually has in the film?

Ms Ross: Apart from the early stages of development we then agreed with Celador, who were fortunate enough to have their own capital to invest in film production, that we together with them would co-finance the film, and because our budget at the time was limited to £10 million a year it was important for us ---

Q5 Chairman: For all films.

Ms Ross: For all films – for us to invest that money across a number of films; it would be foolish for us to finance two, say, with that investment. Celador were actually prepared to risk a lot more than we were, given that they were happy to make two films a year, probably, so our investment capped at £1.5 million and Celador invested the rest and together we were able to green-light the film. The film was effectively in pre-production before any other third parties came in to play.

Q6 Chairman: That presumably also meant that on the basis you had only put in £1.5 million and they put in £8 million the profit on the film goes to the production company, or the massive profit goes to the production company, is that right?

4 Ms Ross: My Head of Business Affairs, Paul Grindey, will explain this, but just very broadly it is absolutely proportionately fair, but because our investment represents both licence fee, i.e. the rights to play the film on television, and equity – which is what you would call the risk money, the gambling money – we make the proportion of gambling money back, plus whatever profit we are due. But of course the distributors in this case will make the profit, or a large proportion of the profit. Would you like to take over?

Mr Grindey: Yes. The way to make money in film is either to invest huge amounts of equity into production so you can dominate the profit plans or you own the distribution machine that takes the DVD sales, the box office receipts directly from the consumer. In the case of

Slumdog it will be the worldwide distributors who make the most money, but Celador will still, as the majority financier, also make a very handsome return, as will we, but our return has to be set against the limited equity investment we were able to make in the film in the first place. Whilst it is a nice balance sheet item it is not something that transforms our prospects going forward.

Q7 Chairman: The real profit-maker out of all this has been the distributor, has it, or will be the distributor?

Mr Grindey: The distributor and Celador as well. Generally the film ecology – and I am sorry for using words like that, I know I am not supposed to any more – benefits as a whole from a film such as this. Not only are there benefits for the companies that are actually involved in distributing, marketing and selling the film, there is also a general perception of what is now possible in terms of independent film-making, a British film that was shot overseas and also has huge critical and award success in America. That will change audience attitudes to that kind of film and you may find in the future that US distributors are more receptive to this kind of film-making than previously.

5 Ms Ross: The important thing for as well was that the American distributor in this instance bought the film having seen it, so the issue is that where we are in early and in order for us to be able to spread our risk across a number of films, we want to stand by talent and projects early on in cases where, for the most part the market, i.e. the distribution market, will not see the value and the risk early on. Of course we hope that the success of Slumdog means that they may come in earlier and help is finance these films but truthfully they are mostly taking the least risk at the latest possible point in order to make the most profit, and that is very much the way their model works.

Q8 Chairman: The film itself was financed in the UK; you had no difficulty on that?

Ms Ross: We had absolutely no difficulty in that having set up the film with Celador we were able to green-light the film with a company that had its own finances.

Q9 Lord King of Bridgwater: How representative of other films that you have made is this sort of financing structure? In other words was that pattern that you had for Slumdog pretty much replicated with the other films you have made?

Ms Ross: No, it is very particular and very unusual to be able to work with a production company who could invest their own cash. For the most part our films are made with many more partners, often with distribution investment from the UK if not from the US, together with the UK Film Council for example. This was a very unusual situation, not least because once Danny Boyle was on board there was a huge confidence worldwide in the film.

Q10 Lord King of Bridgwater: Do you get much private investment, like you get in theatres, people who back shows?

6 Ms Ross: There are not individuals. There are individuals through tax schemes but obviously these have become much more complicated recently and the tax credit has become the most regular form of tax support for film production.

Q11 Chairman: We will come on to tax credits – there are more questions about the financing and we might come on to that. Just tell me a little more about rights, could you? I am getting the vague picture, but what are the rights that are being sold at the same time as all this process is going forward?

Mr Grindey: Basically the right to distribute the film across a variety of media, whether it is the cinemas, on DVD, on television – pay and free – and also an aspect of this film was the soundtrack deal. Because we are using a very well-known composer we thought this soundtrack would have a particular value, so again the soundtrack we sold separately. In all these deals one tries to create as many profit centres as possible and to find the right partner who can give a decent push behind the film to get it made. In the case of Slumdog because we had agreed the film between us and Celador we were able to say with a high degree of confidence to the rest of the industry, to the distribution community, that this film was green- lit and going ahead and if you want to join the party then give us your best offer, which in this case took quite a lot of leverage from the distribution community because our film was not dependent on any particular negotiation coming good. It was not a blind decision, we knew approximately how much we would be able to close deals for but that sense of boldness and confidence allowed us to get better deals, I think, than we would otherwise have enjoyed.

Q12 Lord King of Bridgwater: What is the normal breakdown in films between cinema attendance and DVD and later income, replays and all that?

Mr Grindey: It is a difficult concept because the film industry is very good at hiking up the last possible number, so the box office is the number that is usually quoted. The box office is

7 a high of which half goes to the exhibitor and of the remaining amount half goes to the distributor, so the actual financiers get anything between 15 and 25 per cent of the final box office. In terms of the overall retail value of a film I would say box office is about 25 per cent of the film’s value, DVD is 45 per cent and the rest is television, and in terms of value to the film financiers, the film financiers rarely make money on box office.

Q13 Lord King of Bridgwater: 20, 45, 30.

Mr Grindey: Approximately; it varies film by film.

Q14 Baroness Eccles of Moulton: Could I just ask you a quick question about the origins of the script? I know that it was found by a scout and it had not been published; did it ever actually get published as a book or was it immediately part of your system and did not get published as a book?

Ms Ross: No, to everybody’s advantage it got published as a book under the name of Q and A and it has just been republished under the name of Slumdog Millionaire. It absolutely enjoyed a great deal of success and sold very well on an audio book as well and a lot of people heard it on the radio where it was adapted for radio. Vikas enjoyed a lot of success and what is wonderful when a film is successful is that it then only enhances the value of the book when it is back in bookshops.

Q15 Baroness Eccles of Moulton: Has the author done well out of it?

Ms Ross: Yes, the author has done well and the author has hugely enjoyed the transformation because of course the film is quite different from the book, but he has been both generous and excited about the changes that were made by the screenwriter and by the director and by the way in which the spirit of his book has been enhanced by what has been in the film.

8 Q16 Chairman: You were quite fortunate in this book, were you not, because I was reading a rather sad tale of a very good book, Sebastian Faulks’ Birdsong which apparently has taken now 16 years and still has not been released.

Ms Ross: We were very fortunate, and although we say four years, four years is pretty quick in the life of film-making. The Last King of Scotland which was a film we made three years ago was in development for seven years and underwent a change of writer and director throughout that time, and our ability to stay with projects which we believe have value and we believe will resonate with an audience when we get them right is obviously a huge part of our commitment to quality.

Q17 Lord Maxton: Could I just come back to these rights because it seems to me that the distributor takes all the rights basically, does he?

Mr Grindey: Yes.

Q18 Lord Maxton: But you of course are part of and linked to a TV channel. I always assumed that one of the deals you had when you made a film was that Channel 4 had the right to show the film before anybody else.

Mr Grindey: We carve that out from our UK distribution deal, that Channel 4 will have the

TV premiere. In a lot of cases we do allow a prior Sky window because the Sky Pay TV deal is worth a lot to UK distributors and without that prospect of a big Sky Pay TV sale they will not put as much money behind the marketing of the film as we would otherwise like.

Q19 Lord Maxton: Once you have shown it it is the distributor that has the Sky money.

Mr Grindey: The distributor would go first with theatrics and video, then Pay TV and then usually Channel 4 comes in after the Pay TV window with its free TV premiere. For some films we take all television but given our limited investment power and the need to have films

9 promoted to the marketplace with as much prospect of sale as possible for the distributor we often allow a prior Sky window. It is not something we particularly enjoy doing but it is necessary.

Q20 Lord Inglewood: If I might just ask one rather general question, which you may say you cannot really answer, which is that the money that is made from any film, some of it is divvied up to the people who actually make it and some of it goes to the distributors. Is there a kind of industry norm as to where you start from in thinking about that, say the distributors get two-thirds and the manufacturers one-third, or is every one a different deal?

Mr Grindey: It is a very good question in the sense that there has been a set industry convention for a long time which is basically what gets recouped first is the distribution cost and the distribution fee, so there is a waterfall of revenue and the producers and financiers sit at the bottom of that after the distribution and sales community take their fees and costs out first. One of the things we do at Film4 is we look for ways to build our partners, and very important to all Channel 4’s activities is its relationship with independent producers. So we have very little power to experiment but within our limited power we do try and experiment with different forms of distribution and different financial models, so we for example pay a share of our equity return to the production company that we work with, and that is because the position of producers in most film revenue plans is so terrible that they actually rarely see more than their upfront fee, and what we need to do, what we want to do, is to create a climate where producers are invested in the profitability of their films so they can be made for lower budgets and in a more stable manner because if you only reward producers with an upfront production fee then they are less concerned with making films at the right cost. That is one of the key things, that films should be made at the right cost relative to their market value.

10 Q21 Lord Inglewood: If I can take it a tiny bit further, if you are looking at film and the money that is derived from it, an awful lot of it goes to the distributors who come in at the last minute and as it were sweep off the cream. Is that right?

Mr Grindey: That is right, but what they have done, which we must not forget, is they have usually spent several billion dollars setting up a distribution machine that can release those films and which can take profits and market to the video wholesalers and to the theatrical chains. So they have already made a huge investment in distribution – those machines are very hard to replicate and there is a scarcity of those sorts of machines. If you get a studio distribution you are pretty lucky, so they extract a price accordingly. I do think that over the next five years we are going to enter a period of experimentation where there are opportunities for more independently-minded companies to construct new distribution models. What we have now in film exhibition is a system which was really designed for analogue distribution, i.e. sequential windows based on a quality of viewing experience that is at its peak in theatric and it goes down to DVD and down to television et cetera. In the future with digitisation it is possible for the quality of experience to be the same everywhere – you can download something onto your mobile phone and link it up to a big screen, so that it becomes a high quality experience. The whole model is ripe for re-conception and there is an opportunity for independent companies to effect structural change in a way that they have not been able to do in the past because the studios have been so powerful.

Q22 Lord Maxton: Is piracy a problem in all of that?

Mr Grindey: It is a huge problem. All recorded media industries have this problem. In terms of the theatrical admissions it is not a problem – it is a problem but it is not transformative because essentially the theatric live experience is not something you can duplicate easily, but for DVD and for television it is a problem, and it is one of the reasons why it is very important to manage costs in the film industry, and one sees a deal shifting so that upfront

11 costs often become lower and revenue reporting becomes more transparent because no one knows what the distribution landscape is going to be like in a few years time.

Q23 Bishop of Manchester: If I could address Tessa Ross on this, a few moments ago you used, I think in the space of about one minute, the word “success” at least three times. I was going to ask this later but I want to keep the momentum from what you were saying earlier.

How, from your perspective on Film4, do you assess the success of a project? We have been talking about Slumdog Millionaire but of course there are lots of other things which I am sure you feel are successful, but may not necessarily be successful in your terms because of their financial comeback to you. It would be helpful to us if you could define what in your terms a successful project is, and also perhaps the reverse of that, an unsuccessful project. Then perhaps you could give us an assessment of the balance between how many unsuccessful projects actually have to be carried by one successful project.

Ms Ross: Of course. In order to explain that clearly I would have to describe how we set our remit, where the ambition is set for Film4. Film4 is a very small part of a broadcasting organisation which has defined itself particularly clearly over the last five years, say, by its relationship with that broadcasting organisation and seeing its job to support the development and production of films and talent that relate wholeheartedly to what that broadcaster stands for. So we see as an end user our channel and we stand by it by saying – here is the language

I would use: I would say that we are ambitious and we are curious and we look for contemporary resonance in everything that we do. We are interested in new talent, we are interested in seeding the next generation of Danny Boyles and not just hanging on to the existing ones, but we want to create a home for those film-makers that we know are great and we want to make sure that we are continually searching for those that we do not know yet.

That means that development is a huge part of it, as I said before, and making short films and first films and launching new talent into the marketplace is a large part of where we would

12 judge our success. For example, we made a short film with a playwright, Martin McDonagh, who went on to win an Oscar with it and then made his first feature film, but we have also made other short films which, you know, have won either one or two prizes or no prizes but have probably launched their career less successfully with people who learnt not to do it, how not to do it or that they do not want to do it, or that they have learnt exactly how to do it again. That is a very important part of success and not success. The other thing I think is that the resonance of the tone of our work, it sitting on the channel, is how we judge success, so stories that we feel other people may not tell, journeys that other people may not take, launching projects and making them happen where other money might not is a huge part of where we judge our own success. The Last King of Scotland was a very successful film, a difficult film when conceived and when described to other financiers, but very successful because it went on to win an Oscar for its star and launched absolutely in mainstream drama film-making the career of its director. I would say that there are other films which have been hugely ambitious and on the edge of experience which are less well-known, and although they may have got into film festivals they probably have not had huge success theatrically but more on DVD. When we boil it down and we boil it down to aiming at quality above all else, so aiming at the sustaining vision of real talent delivering high-quality film-making, we judge that primarily I would say critically and financially. When those split – and they do often obviously, critical success can often not lead to financial success – we still feel if we have done it at the right price that we have launched careers successfully and we have made visible film-makers who would otherwise not have been made visible.

Q24 Bishop of Manchester: It would be interesting to have an example of a film that you have done on Film4 which you feel by many of the criteria you have just been describing was a success but actually did not make much money and perhaps did not even get very strong viewing figures. Is there something in that category that you can say “Well, from our point of

13 view theatrically, launching people’s careers and whatnot it was a success, but frankly did not really get the audiences and we did not make money out of it”?

Ms Ross: This is a known director and Paul has just brought up Dead Man’s Shoes which was the return of Shane Meadows to low-budget film-making. Shane had had an experience of making a larger budget film with a known cast and, quite early on when I started at Film4, he came to me and said “I have an idea, I want to experiment – it is a comedy. It is very funny and it is the story of a man and a mistake, let me go away and experiment and workshop it with my friend, Paddy Considine”, which he did. As the weeks went on he said “Well, it is not so funny any more” but he started to evolve a story which was very personal to him and which became the story of revenge that was Dead Man’s Shoes. It was very tightly budgeted, at very low cost, and actually went on to be critically very successful for Shane and gave him a huge amount of confidence and being able to go on and make This is England, which I would say became a much greater success and a visible theatrical success. Dead Man’s Shoes was far more a DVD success than it was a theatrical success, but I would go back to Dead

Man’s Shoes as the creation of a very strong relationship with that talent and with a way of making it work. In fact, Dead Man’s Shoes led to the creation of WarpX with Warp, the production company. We produced that film and WarpX has become a very creative way of our making low-budget features for first time film-makers and delivering, I think against a lower expectation of theatric success, the opportunity for new talent to come through and make their first feature film.

Q25 Chairman: Just following that up for a moment, would it be fair to say that Slumdog

Millionaire you have basically said is not going to be a financially transforming position as far as your company is concerned. It is going to make a profit, but it is not going to make a fantastic profit. Would that be true about all the successes that you have? Some of them make a profit but never a financially transforming profit.

14 Ms Ross: That is absolutely the case. Unless we were take our small budget and invest it in very few films, i.e. huge investments in films that were built primarily to deliver profit to that equity investment, we will always see a good, a fair, but a small return on our investment.

Q26 Baroness McIntosh of Hudnall: Good morning. The Bishop of Manchester has largely shot my fox, so what I am going to try and do is just pull a couple of things out of what you have already said to us if I may. Firstly, can you tie these measures of success that you have just talked about that you apply to your own work back into the remit of Channel 4 as a whole? You did touch on that.

Ms Ross: Yes.

Q27 Baroness McIntosh of Hudnall: Specifically, could you just tell us a bit about how your films relate to all the other elements of Channel 4’s output and can you build into that a little bit about how you see your work contributing to Channel 4’s public service broadcast remit, because I think that you do but at the same time it is not part of the statutory obligation that Channel 4 has that those films should contribute to it. Could you talk a bit about that, but can I just ask you one other thing which is that you have talked about development as being an extremely important part of what you do, which clearly it is. Firstly, that £1.5 million that was invested in Slumdog Millionaire which, by the way, we can see is not typical of the way that your films generally get made – that is quite important to recognise, all the money coming from one other producer, very untypical, yes?

Ms Ross: Yes.

Q28 Baroness McIntosh of Hudnall: However, was your £1.5 million in effect the aggregate of what you had spent on development or was it everything you had spent on

15 development and then some? Can you talk about development and how it fits into the overall finance?

Ms Ross: Yes, and I will come on to the Slumdog question as well. You are absolutely right that the way I test myself would be to say how public service is this – I may not use those words, I might say “Can we live with this decision whether it works out well or not, given that every decision we take creatively is hugely risky?” As long as we have investigated our every which way reasons for doing a project and supporting a particular writer or director or producer I feel that we can stand by the failure or success of each project, and that seems to me hugely important when we are spending £10 million a year, a huge amount of money, albeit a small proportion of the overall budget. Really in order to do that I have to ask myself what I stand for and what the place I work for stands for, and it seems to me that we are a microcosm but very representative of what the place stands for: the support of the future, the testing of the edges in order to deliver to the future mainstream – I would say, for example, that the development and production of a series like Shameless which, in my role as Head of

Drama, I developed and commissioned – a tone of voice, a writer, a very long-running series which is now in its sixth or seventh series, has hugely changed the ability of certain mainstream television to speak in a certain voice for example. Secondly, the questioning nature of Channel 4 as a broadcaster is very much represented in the kind of choices we make at Film4. Thirdly, and most importantly, taking away all the adjectives of what I feel we stand for in terms of adventure and risk-taking, our relationships with talent and therefore with the other departments as a commissioning body and within Channel 4 are hugely important. If you think of Channel 4 as one big door where film-makers and programme- makers can come in and we can say to them, “Look, from this tiny, three-minute documentary to this huge feature film everything here is possible, we do it all, you talent can come in and tell your stories to our audience whom we recognise and whom we believe we know, through

16 any one of these doors, equally in any one these forms – through documentary, through history programming, through drama, through comedy.” At the moment my job is Controller of Film and Dramas because I strongly believe that the relationship between film and drama television in this country is fundamental. So much of our talent has come through theatre and television and it would be ridiculous and foolish not to understand that that small and hopefully growing pool of talent needs the possibility of experimenting across all forms of story telling. But we have not just worked with drama talent, we have developed projects that may have grown from one into the other, from say television into film, or from film and been able to be green-lit as television.

Q29 Baroness McIntosh of Hudnall: Can I stop you there for a moment because I just want to try and pin down this issue about PSB, which I am sure you are coming on to. Would you, where you sit, find it helpful or not helpful or neutral were your output to be specifically included in what Channel 4 is statutorily obliged to provide for the public money that it gets?

The point is that you are vulnerable, are you not, to the challenge that public money is in effect being spent without that public service remit being contributed to?

Ms Ross: Yes.

Q30 Baroness McIntosh of Hudnall: On producing films which is basically a commercial activity, or is thought to be.

Ms Ross: You ask a hugely helpful question to allow me to say this, but inevitably engaging both the industry in needing Film4 and the channel in needing Film4 is a huge part of my job, and therefore were it enshrined – it has been part of Channel 4’s DNA since its inception in that fiction on Channel 4 was always Film on Four, so created very much early on by David

Rose this notion that film was what Channel 4 did in its fiction ambition. I absolutely agree with you that more than anything we would like it protected in the future remit of the channel.

17 In terms of how else I judge public service I judge it in my ability to take risks, to ask incredibly difficult questions and to start projects and stand by them in the financing of them with money that other money would not. It seems to me hugely important to say that most of the films we make – a lot of which we would sit in this room and say have pleased a lot of people and have pleased both theatrical audiences and television audiences, and not just thrown new talent abroad to a market but have actually been hugely successful in themselves

– are all about taking the risk at the beginning and would not have happened in a market- driven industry. That seems to be where public service is played out. I am sorry, I do not want to go on too long but the relationship with other departments is hugely important to a broadcaster, an end-user engaged in film because what that end-user can do is define the tone and type of film and the type of talent that it will support through to that medium. That means for example that our documentary department have stood by and commissioned feature films

– we have helped them inevitably – our comedy department has, our history department has with a documentary called Deep Water. In all areas we have been able to grow relationships between commissioners and their talent through to film, which is hugely valuable within a broadcaster and a flexible broadcaster.

Q31 Lord Macdonald of Tradeston: Sky recently have said that Channel 4 has lost over

£200 million on ventures outside its basic remit of its public service channel. Since you are outside that remit it seems to me unfortunate that we no longer have any separate figures for

Film4 after 2006, it seems to be difficult to find out what your profit or loss might be. But just looking at the figures we do have it looks as though – if I take the £10 million a year that you mentioned – you might have lost about £25 million of that in the years reported from

2000 to 2005, so it is a big subsidy going towards an industry which, as Lady McIntosh says, is a commercial industry, and you would not need a strong rationale for doing that because the accounting of American distributors, to be euphemistic, is notoriously opaque and, indeed,

18 you know that the sums that can be earned in the film industry are often quite high. Should you not be more upfront about the cost of this and indeed the rationale for it because in the end it seems to be coming out of a public service pot and in some way subsidised by taxpayers.

Ms Ross: Yes, I believe personally that I am completely upfront about it and I would say that the £10 million invested in Film4 is seen as part of the commissioning budget for the channel.

With a £550 million spend on production of content in the UK £10 million invested in the development and creation of films which come back to play on the channel as programmes is a programme budget, but it has a life outside of that programme budget beforehand, and the decisions we take on how we invest that money, at what level we invest that money and with whom we invest that money are hugely related to the public service remit of the whole channel. I understand your question but given that our ambition is absolutely a priority for quality and films that will play on our channel and stand by the reasons we are there, the purpose we are there for, I would not describe it as loss, I would see it as investment in programming.

Q32 Lord Macdonald of Tradeston: Indeed, but you have got a portfolio which is uncommonly long, it goes back 25 years, and you would have thought that over time you might at least have managed to achieve breakeven. I am a great admirer of what has been done in that 25 years but it just is sad that it seems always to require subsidy and it does seem again odd that over those 25 years with a whole number of successful films in there that you have not managed to balance the books as it were. Is it a deliberate decision to accept the loss?

Mr Grindey: Within that global figure – I do not know if they broke down any components of that global figure – you are dealing with investment return across films which were made 27 years ago, you are also dealing with the cost of establishment of the Film4 mini-studio, which

19 was an in-house UK distribution company and international sales company, and then the cost of shutting that down. You are also dealing with a variable calculation of equity return and transmission value. It is not that we are not upfront about the figures, it is just that it is difficult to quantify. We see our position as priming the pump to attract investment: for every pound we invest in film we attract between £5 and £6 from third parties into our films, often from companies based outside the UK. As Tessa touched on earlier the strategy to make money in film is either to own a distribution machine or to invest huge amounts of equity but that is a game that is too rich for Channel 4 to play. When FilmFour Limited, which I was part of back in 2002, was established it was a professionally-run company but ultimately

Channel 4 did not have deep enough pockets to play the international distribution and sales game that would require to start making more money commercially. When we talk therefore about the value to Channel 4 we look at equity return, we look at transmission value and generally from the analysis that we have done we are not in profit, but taking into account transmission value, equity return, promotion of the Film4 brand, the general reputation of

Channel 4 and its public value story, we deliver a return that is adequate. You must also think about Film4 investments given that we do attract so much third party money into our productions and we stimulate so much activity both amongst distributors, sales companies, producers, writers and directors that the bottom line benefit if you like is much more to the independent film ecology in the UK as a whole and less to the individual Channel 4 bottom line. That is one of the reasons why the public service aspect of what we do is actually very valuable because it allows us to look outwards in terms of the giving of benefit from our investments as well as looking inwards.

Q33 Lord Macdonald of Tradeston: You will come under increasing scrutiny, obviously, because the commercial pressures are on you and the way perhaps to deal with that would be to go back to being more open about the detail of your business. As I say, I am in principle

20 very supportive of it but would it not be best to go back to reporting in more detail and also try to list and quantify the benefits that you have been describing and how they might be set against what would be on the surface a constant loss?

Mr Grindey: How Channel 4’s financial model is presented is clearly something under enormous debate and scrutiny at the moment and therefore the way in which Film4’s activities are presented is the same way in which other public service aspects of Channel 4’s activities will be presented, and that is under debate at the moment.

Q34 Baroness McIntosh of Hudnall: Could we just go back to the development point so we do not have to return to it later, but it also does tie in I think to what one was asking about because that investment example in Slumdog of £1.5 million is quite a small part of the budget overall, but in terms of what it gives rise to it probably delivers quite a big bang for each buck that you invest.

Ms Ross: Truly when looking at facts and figures and bottom lines one cannot really talk about instinct, passion, belief and talent, but the truth is that the investment we made in

Slumdog, when you asked about whether £1.5 million represented the scale of our development, no it was expressed in a very small development truly, probably in the hundreds of thousands but not very much more than two I would have thought. But our investment represented the first money in, as it does almost all of the time, so what we are trying to do is identify those projects which we believe must happen because of their quality, because of the talent involved, because we believe they will enhance both the reputation of Channel 4, the career of the talent engaged in those films and the British film industry. Because we are so engaged in the British film industry and we have given ourselves a particular brief of supporting British production companies, British writers and British directors – because we believe we come with our money, we are not rich enough not to come with our money – and therefore our ability to understand the stories, the telling of those stories and the audiences to

21 whom those stories will be told is very much part of how we invest. The value of the development that Film4 does, given that it is also related to the possibility of green-lighting the film, and the fact that our reputation in green-lighting quality films comes with our early and first investment in those films, is seen as a huge advantage to the production community in raising the rest of their money.

Q35 Baroness McIntosh of Hudnall: The last point on that then, for the investment that you make what degree of control are you able to exercise on the end product? You have talked a lot about quality; we all know the stories about who gets the final cut, but who does get the final cut on films where you have put in the first money?

Ms Ross: Often the directors get the final cut. We are very happy to support that if we have a relationship with a director where we feel we can influence and support them through the process. There are times when we have invested more money in order to protect our relationship with a director going through a very particular experience in the studio who might need our support in final cut, and we are very careful not to invest where we can have no influence because we have become like an acquisition department.

Q36 Baroness Howe of Idlicote: You have made it very clear how committed you are to helping the British film industry generally and indeed, I would have thought, in some of the ways you describe in contributing hugely to public service broadcasting generally. You have mentioned the business of uncovering, nurturing and funding new talent – you have mentioned a couple of times the work of WarpX, which you do in collaboration with the UK

Film Council. I am just wondering about that; are there other enterprises that have skill sets and people like that that you get involved with in doing the same sort of thing. Also, how do you decide how much of your budget is spent – I am not asking for pounds, shillings and

22 pence but how important is it in terms of the proportion that you spend of whatever it is you have to spend overall, thinking of its long term benefit right across the board?

Ms Ross: Our development budget usually forms between 15 and 20 per cent of our overall budget and we, as part of that development, co-finance short films with the Film Council, for example, and that will cost us £150,000 a year, matching their money, where we will co- finance five short films. From time to time we will invest a further £30,000 in another film- maker’s short film whom we wish to support in making their first feature film, so in order for that director to get experience behind a camera, working with an editor, a designer, we will make a further short film. With the UK Film Council apart from WarpX we also do co- develop, so they have been consistently good partners for us in match funding so that we were able to broaden the scope of our development slate and often pay more commercial writers or option more commercial products to grow the possibility of larger films in this country, which seems to be part of the ambition that we all share to make more visible films as well as taking risks on the lower budget area. WarpX is an investment of half a million pounds a year; it is actually a very small investment to deliver three to four low-budget films a year and to get a number – at least three – first time film-makers making at the moment primarily genre films which have been seen to be pretty visible and actually, for the most part, very successful commercially – for the talent anyway.

Q37 Baroness Howe of Idlicote: You are really helping with the way in which the talent that you have jointly uncovered with others has fed firmly into all the departments, as well as your own, the redirection as it were. Can you do better?

Ms Ross: We can always do better; I would never say I was completely happy at all. It has been a very nice few weeks and months to be congratulated on the success of a few films, but it would be very foolish to sit back and say it was all fine. It is never fine and it is always difficult. To look at the processes of engaging with new talent, of low-budget film-making, to

23 question whether it is low enough, to look at ways we might spread our money in other areas and grow other larger scale and smaller scale films is hugely important to us. We investigate change all the time truthfully.

Q38 Baroness Howe of Idlicote: Thinking again of some of the plans that are under discussion at the moment, with perhaps possible mergers and BBC Worldwide and so on, what benefit frankly would that be to enhancing the value of Film4 films. Is it not all pretty well maximised, the amount of profit you think you can make, or do you think there really is more to be made?

Ms Ross: The issue is not so much specific to Film4 as it is to Channel 4. We are part of an organisation that is facing a huge advertising downturn and a change in the structure of television in a way that is unknown, and therefore the kind of future that we look at at the moment is one of a continually smaller pot for all areas of the broadcasting organisation, not least us. The conversations with Worldwide as I understand it are ongoing and form part of an ambition to find a way of sharing with another public service broadcaster a growing pot between the two which might deliver benefit to both.

Chairman: We have gone down this road; that was our last inquiry. We have actually heard your case put very well. Let me go on; Lord Inglewood.

Q39 Lord Inglewood: What I would like to do is come back to some points that have come out particularly in the exchange between Lord Macdonald and yourselves, but just so we clarify matters in 2001 Film4 – which was spelled differently then – almost collapsed.

Ms Ross: Yes.

Q40 Lord Inglewood: There was something that you said which suggested that basically you were trying to do too much, is that right, and then the money haemorrhaged.

24 Mr Grindey: It was a mini-studio and it was set up with a separate set of accounts as a stand- alone subsidiary, with a brief to make money. It was a well-run company, but there was a fundamental problem with that brief because it did not have quite enough investment power to make real money. It had enough to play the game but not necessarily successfully, and the other problem with it was that a standalone company which has a machine to feed therefore has a slightly different editorial imperative when rewriting films, so if a film did not work commercially through that mini studio it often did not really sit on the channel well either so the rationale for its activities was very much less.

Q41 Lord Inglewood: Anyway, it lost money.

Mr Grindey: It lost money.

Q42 Lord Inglewood: And that was the end of that.

Mr Grindey: That is right.

Q43 Lord Inglewood: Then you renamed yourself almost the same as you are now. In financial terms – forget about the talent side of it which is important – in spending money terms you think that this is a model which is sustainable financially.

Ms Ross: If the future of Channel 4 is sustainable and Film4 is protected as part of its remit, as part of its activity, then yes, the ideal is to create a pot of money for the investment and creation of a British film related to the ambitions of that channel which, through good and bad times, one could always afford do because, truly, films take a very long time and the idea that we go up and down in our investment ability is the single most hurtful thing to the film industry. What you need to know when you are going into this business is that however long it takes you to develop your two, three, five, ten projects there is a known pot in this industry

25 which you will be able to talk to, and of course when we are growing and seeding projects we are growing them because in three years time we expect them to be the next Slumdog.

Q44 Lord Inglewood: If I could just describe it, you said – and I paraphrase but I hope fairly

– that what you felt you were doing was providing a modest but fair return for your investors, i.e. Channel 4.

Ms Ross: Yes.

Q45 Lord Inglewood: At the same time you said that actually if you add all the figures up at the end of the year there is probably a deficit – you did not put it in quite those words – and then you said that of course part of what we are doing is providing material for the television side. Is that counted in the figures that you gave us or is that something that as it were is an intangible bolt-on?

Ms Ross: It is not entirely intangible because of course one can look at how many times a film will play at a certain time of night and where you might spend that money on other programming and what it might cost you, so we can put a very vague figure on it and it will change depending on what we can afford to play and everything else.

Q46 Lord Inglewood: Of course, I appreciate that.

Ms Ross: But the truth is we are valuable while not profit-making.

Q47 Lord Inglewood: That is fine; that has answered the question, thank you. I have got to say this: I understand that a report in the Hindustani Times has said that your Sue Bruce has commented that there is a real chance because of the slump and the crisis that Film4 may not go on. Are you sanguine about the consequences of recent things and being able to proceed as you have done before for the immediate future?

26 Ms Ross: We are aware, as I think all our colleagues are across the other areas of commissioning, that the choices that will be forced on the channel if there is no solution to what it presently faces will mean that it will have to stop doing some things. What those things are I do not know.

Lord Inglewood: Again, that is entirely fair. Finally, the perspective that you put on the industry you are involved in is that if you are trying to do what you have described in quite a neat shorthand way as public service broadcasting quality films you are never going to make much money at it, so is it an industry which meets Groucho Marx’s proposition that nobody ever lost money by under-estimating public taste?

Q48 Chairman: A lovely quote.

Ms Ross: I wish I was as clever as Groucho Marx. It is probably a hubris to believe that by believing that the talented, the writers and directors and producers that we work with, are cleverer than ourselves and by allowing them the space to find out what stories it is they want to tell we will end up being taken on better journeys and telling better stories. But there is something humble in that as well and that is that we do not know anything other than we believe over a period of time we have begun to recognise the huge pool of talent that this country has and we want to be able, where it sits well with the channel that we sit in, to liberate that talent.

Chairman: Any more quotes for Groucho? No. Lady Eccles.

Q49 Baroness Eccles of Moulton: My Lord Chairman, my question has been pretty well answered because it was connected very much with Channel 4 and what is going to happen with it and also some of your views for the future, and I really think you have covered that but if there is anything you want to add on that particular theme then this is the moment.

Ms Ross: All I can add is to say we would be foolish not to be worried.

27 Q50 Baroness Bonham-Carter of Yarnbury: I just want to come back to something you mentioned right at the beginning of this session, tax credits, where we have some understanding of the system. I wanted to ask two questions. One, I believe Mr Colson managed to convince the Government to provide a tax credit for Slumdog. It was all about

Britishness; can you explain how he managed to succeed in that argument?

Mr Grindey: The cultural test which films must pass to qualify for the tax credit, Slumdog passed it with a fine margin of error. The cultural test – you are probably all familiar with it – is the nationality of the production company, the nationality of many of the key crew; the director was sufficient and the relevance of the story, if you like, was sufficient for it to pass.

It was a tight squeeze and we certainly, when we were setting up the financing of the film, had a plan B in case it did not pass, but it did.

Q51 Baroness Bonham-Carter of Yarnbury: When you say it was a tight squeeze do you think there is a greater flexibility than when it was first introduced because I seem to remember reading that The Constant Gardener, for instance, failed to get tax credit, largely because it was filmed in Africa.

Mr Grindey: Probably the difference there was the nationality of the director actually and that probably just sent it under the threshold. The tax credit rules, the cultural test rules, were changed. We thought they were going to be more heavily emphasising industrial activity rather than creative origination and they were changed to make it more of a pure cultural test after negotiation with the European Commission. It is about right actually; it is right that

Slumdog, if it passed, only passed with a slim margin and we would not have particularly complained if it failed. It is set about right.

Q52 Lord Macdonald of Tradeston: How much is it worth?

28 Mr Grindey: The tax credit is worth about 20 per cent of the budget of the film if the spend is all in the UK but for Slumdog it was worth about five per cent of the budget of the film because most of our spend was outside.

Q53 Baroness Bonham-Carter of Yarnbury: Can I ask Tessa, do you think it is actually benefiting the British film industry?

Ms Ross: Absolutely.

Q54 Baroness Bonham-Carter of Yarnbury: You do; despite the fact that there appear to be problems about co-productions, that there is a penalty.

Mr Grindey: I would not say it is a penalty, I would say that the previous system almost made it too easy to do co-productions because under the previous system the contribution to the budget of the film did not depend on local spend, which meant that you could set up co- productions where the minority of spend was in the UK but you get the full contribution from the UK and then if the co-producing partner was Canada, which had a spend-base test, you could maximise your subsidy that way. As it stands now the philosophy behind the tax credit in co-productions, where the benefit is based on actual local spend, is in line with most other jurisdictions, so what it has meant is that the UK is treated in the same way as any other jurisdictions. Is that an overall disadvantage? There are other factors to bring into play: there is the cost of shooting in the UK which is often much higher than in other jurisdictions, but the weakness of the pound has meant that that cost has come down. There are a lot of other factors that actually affect the viability of co-productions, be they majority or minority co- productions. There are probably things that one can do in terms of co-production: recognising national spend, and there are tweaks at the margins, but as a whole the current system is philosophically in line with most other jurisdictions.

29 Q55 Baroness Bonham-Carter of Yarnbury: The argument that has been put is that this is affecting the amount of co-production money you have access to.

Mr Grindey: It has affected that, but what I am saying is I think the previous regime where the value of the benefit did not depend on local spend, led to too much tension in the system.

There may be other ways of adjusting it, but going back purely to that way of working is not the right way.

Q56 Baroness Bonham-Carter of Yarnbury: From the creative perspective, Tessa, would you like to see a rebalancing?

Ms Ross: The point for us at the moment is that it is very clear and very sustained and we know what we can expect, the rules are very clear. That is fundamentally the most valuable thing about it.

Q57 Chairman: You find the rules clear; from the outside people make jokes about writing essays and the rest about the Britishness test and all that. It does not sound to me exactly clear.

Ms Ross: Clear in terms of filming outside the country, maybe not, and that is why the fine line that Paul described on Slumdog is very particular. In terms of British production and

British spend it is pretty clear what one can expect.

Q58 Chairman: Does it influence where films are made, does it influence people like yourselves or producers actually locating films inside the UK?

Ms Ross: In budgeting films people look at a number of options, if there are options available to the kind of film it is, so the benefits of a number of different locations will be judged in the best way of maximising the budget.

30 Q59 Lord Inglewood: We have a system of supporting films through the tax credit system; you also intimated that most other countries have equivalent but no doubt different systems so that the effect of eliminating the system in this country would be in practice to put us at an unfair competitive disadvantage to others, is that right?

Mr Grindey: Absolutely. Most countries that have an equivalent system actually have a greater level of benefit than is enjoyed in the UK, so for us to make any cut would be …

Q60 Lord Inglewood: The only way you would retain the even playing field would be for everybody around the globe to cut.

Mr Grindey: Yes.

Q61 Chairman: Have you got figures on that, incidentally, what happens in France, what happens in Germany, what happens in the United States?

Mr Grindey: I do not have figures to hand.

Q62 Chairman: But are they findable?

Mr Grindey: They are findable from the Film Council, yes.

Chairman: We are seeing them next week so that is fine.

Q63 Lord King of Bridgwater: Is there any EU rule that says there has got to be harmonisation or elimination of competition?

Ms Ross: No.

Q64 Lord King of Bridgwater: The most dramatic thing that has happened recently is the fall in the value of sterling; can you see signs more widely that this is attracting producers and directors to operate in this country? Suddenly the cost of crews and everything else has got a lot cheaper.

31 Ms Ross: It has definitely enabled American production to come back to the UK in a way that it felt unable to when the dollar was weak against sterling.

Q65 Lord King of Bridgwater: Even with the state of the world economy and all countries minding their budgets you are seeing in the industry more activity in this country.

Ms Ross: The possibility of that activity given that, as you say, the state of the economy around the world has put pressure on all activity and film production.

Q66 Baroness Bonham-Carter of Yarnbury: There was something you said earlier on, that you regarded your remit was to cover British stories and encourage British talent. What we are looking into is British production. Would you always go for British directors, for instance, in your projects?

Ms Ross: No, we would not always go for British directors but I would always find in any project the Britishness, if I can put it that way – a British production company, a British writer, a British story, because otherwise I would feel I was investing with no relationship to any part of the production. We have often built projects, and are doing so currently, with

British writers and British production companies where actually a foreign director is the ideal creative way forward but I feel I am supporting British production.

Q67 Baroness Bonham-Carter of Yarnbury: This also feeds into your ability not to lose control over the production despite the fact that you actually are not the biggest investor.

Ms Ross: Yes. The bottom line is how can we have the biggest possible effect for good with the small amount of money that we have.

Lord Maxton: Let me go back some time to that historically awful film Braveheart.

Baroness Bonham-Carter of Yarnbury: He is speaking as a Scot!

32 Q68 Lord Maxton: But it of course was not a British film and yet its impact on Scotland was quite considerable in terms of the tourism impact, which was very considerable. One of the complaints, and one of the reasons why it was made very largely in Ireland was the availability of a studio facility in Ireland which was not available in Scotland. Is that a problem, do you think, in making British films generally outside of the M25?

Ms Ross: It is not a problem for the kind of films we make. It is extremely difficult for me to judge for the kind of film Braveheart was how they, i.e. American investment, are interested in different studios over here, but I suspect the studios are fairly available to that level of production because people book very far ahead, do they not?

Q69 Lord Maxton: Sean Connery has always been promising to finance one in Scotland but he has never got round to doing it.

Ms Ross: A studio, yes, although there is a great base in Scotland and great crew in Scotland, for example, so shooting in Scotland can be enhanced in many other ways.

Q70 Chairman: You have been very patient. If you were going to sum up it sounds to me as though you are saying that you are never going to make any very great profits from your film production and I have a quote here which I think means that you regard staying in low budget

British films as really being the future as far as Film4 is concerned, would that be fair?

Ms Ross: It is a large part of our future. What I would hate to do is to limit the ambition of some of our directors to build larger scale films and certainly some of our current projects are very much those sorts of projects. Large scale for us, where we can have a meaningful relationship to production, has to be set at a very particular level because otherwise we will not have enough money to be at the large table with the big boys. It is important that we are able to grow the possibility of large scale film whilst protecting, as a large part of our production activity, a lower budget British film.

33 Q71 Chairman: And your concern as far as the future is concerned is really about the future of Channel 4.

Ms Ross: Our concern is that we, Film4, as part of the future of the channel, are protected and are able to see a long term future as part of that organisation.

Q72 Chairman: If you had one proposal to make to secure your future is there anything else that you would add to that?

Ms Ross: It has been put very clearly the suggestion that it be put into the remit as Channel

4’s remit may be up for rewriting. That would secure it as long as the financial upholding of that organisation was protected.

Q73 Chairman: Thank you both; you have been very patient and we have gone over our time. It has been very fascinating and a very interesting first meeting and I thank you very much for coming.

Ms Ross: Thank you very much for having us.

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