Tax Incentives Won’t Solve Hollywood’s Problems

Content Insider #901 – Paid Up

“Taking the wrong boy was a lucky break. In other words, this doesn’t count. But you have to pay anyway. You’re a fool to pay, but pay you must.” Ginjiro Takeuchi, “High and Low,” Toho Studios, 1963

California, or more specifically LA (Los Angeles), or even more specifically Hollywood, has been the center of the video content industry since C.B. DeMille directed/shot the first feature-length movie in the area in 1913.

It took ten years before city fathers christened the area with its now famous (infamous) Hollywood sign (originally Hollywoodland but…).

Since then, the town has been the self-anointed movie/show capital of the world.

For years, it did an outstanding job of hiding secrets and hyping the “overnight success” of stars, directors/producers, production crew members and post-production magicians who stuck it out and survived.

TV was going to be the movie industry’s demise, but it only boosted the industry.

The networks needed content to fill their weekly schedules with scripted/unscripted series, talk/game shows, ad work, movies, stuff.

Nearly everyone with talent, expertise and ability was working.

The town was running on all cylinders and quickly became the center of the creative content industry while controlling as much as 40 percent of the world’s video content.

People stood in lines to get their seats in theater seats. Other folks turned on their sets the minute they got home and watched whatever was on until they dragged themselves into their beds.

What no studio head would tell Wall Street, his (yes, it was usually a male) shareholders or the public at large is that it is at best a marginally profitable business.

Coin Flip – The content industry promotes its major hits (moneymakers) like crazy while quickly overlooking the red ink projects but it’s about a 50/50 chance of a film/show making money.

People cost money. Equipment costs money. Studio/location shoots cost money. Sets/lighting/electrical cost money. Feeding folks costs money. Hyping the shows/movies costs money. Money costs money.

It’s only because studios have some of the most creative accountants who do things with numbers, columns, rules and regulations that enable them to make Wall Street/shareholders happy and keep their bosses out of jail.

The studio heads were free to hob nob with the rich, famous, politically connected people who like to associate with folks in the fun, profitable business.

Okay, maybe just a kinda’ fun business, but it’s the best paying job studio execs could find.

None of them gave much thought to the guy in Silicon Valley who determined he could sign people up to download shows/movies from the internet so they could watch the stuff when they wanted, where they wanted and on the screen they wanted.

In fact, when Reed Hastings switched from sending discs to subscribers in red envelopes to streaming, they probably said, “Sure we’ll license our stuff to his little company and make even more money because…folks want it, we got it. After all, we rule the creative universe!”

Under Hastings and Ted Sarandos and later Sarandos/Greg Peters, home entertainment changed.

As FX’s CEO, Fred Landgraf, has said they marked the beginning of the slow demise of peak TV.

With that modest beginning, Netflix had more than a decade to spend at a loss, build scale (capturing an estimated 80 percent of households in the Americas and then move internationally) and achieve profitability.

Studios and networks had become masters of theatrical distribution, syndication sales/channel programming.

But those channels are different from building a streaming platform and making it work efficiently, effectively.

At the same time, they often had to do it to the detriment of their proven money sources.

Despite the streaming red ink, they were learning rapidly, painfully and making inroads until the year-long pandemic.

Then they were hit with the six-month plus strikes of the WGA (Writers Guild of America), SAG/AFTRA (Screen Actors Guild/American Federation of Television and Radio Artists) and associated trade unions.

The strikes delivered major concessions/agreements for the working stiffs and the union leaders about their victories and were ready for people to go back to work.

The problem is … the world has changed over the years and most rapidly in recent times.

Global Entertainment – Probably from the outset, Netflix set its goal of being not just a video service for people in the Americas but for folks around the world. They knew great films/shows ignore country borders.

As quickly as two years after Netflix began streaming services in the Americas, they made it known they were going to be a global streaming video service.

They left few countries off their map – Syria, China, North Korea – and shortly after that the Russians found it “difficult” to watch their films/shows.

Today, they have 84.8M subscribers in the Americas and more than 283M globally.

One of the key agreements to deliver entertainment in the 190 countries was that 30-40 percent of the projects had to be created/produced locally.

No prob!

Global Facilities – In countries and cities around the globe, new modern film studios are being built incorporating advanced technologies. At the same time, countries are training their citizens in the latest creative/production techniques to attract projects such as Hungary’s Korda Studios (l) and Dubai Studio City.

While studios and networks had focused on investing in projects, not facilities, many of the studios/sets were showing their age.

However, organizations and governments had been busy building new state-of-the-art facilities in England, France, Poland, the Middle East, Southeast Asia, Korea, Japan, Latin America, Africa, Australia, New Zealand … everywhere!

At the same time, the countries had been heavily investing in educating and training folks in the latest techniques and technologies demanded by project owners and producers to deliver world-class films/shows.

This included the development of virtual set facilities and behind the scenes crafts that would enable a project created in Nairobi or Berlin to “feel” as though it was shot in midtown Manhattan, Santa Ana, Mexico City, Tokyo, the sprawling cattle lands of Montana, the harsh dunes of the Sahara, Mars or beyond.

The facilities reduced the need to do expensive, time-consuming and sometimes dangerous location shoots in the jungles of the Amazon or Indonesia or Canada’s Northern Territory.

Thanks in a large part to the advanced work by ILM (Industrial Light &Magic) in the refinement of LED screens and advanced virtual camera systems driven by Nvidia’s GPUs (graphic processing units) and Unity’s real-time engine, creative folks were able to duplicate any location and even develop locations that only existed in the production team’s minds.

And, they could do it without leaving their studio and theoretically being able to get home in time for dinner with the family.

It’s theoretical because for below-the-line crew members working 12-hour days with “a little” time in between and moving from one project to another with minimal downtime is still a reality.

It’s what leads to exhaustion, reshoots, accidents and worse.

We digress, but it’s a fact/issue the industry around the globe has to address.

The expansion of film/show facilities and services outside of Hollywood isn’t limited to other countries.

Directions – Tyler Perry Studios has become so important to Atlanta’s film production industry that they gave folks a highway sign so they could get there quickly. Kinda’ a big deal.

States and cities across the US are enticing individuals, organizations and services to develop film/show production facilities in their areas.

Actor, filmmaker, playwright Tyler Perry founded Tyler Perry Studios in 2006 joining a number of other organizations to offer production facilities and supportive services in Atlanta, GA and surrounding areas.

Why?

Probably for a number of personal reasons, but also for a very practical business reason. For example, displaying the Georgia peach at the end of a show or film is worth a 10 percent tax credit incentive to the project owners, which is nothing to sneeze at.

This is just one minor reason why California’s governor Gavin Newsom signed an agreement that would more than double the state’s cap on tax relief for films/shows produced in the state.

Following the union/trade contract agreements, union officials and members rejoiced and expected film and show production – and employment – to immediately return but…

A number of soundstages have been vacant for a long time with Paramount and other studios shuttering their local operations as production in Hollywood declined and projects moved to other cities and states in the Americas as well as other global production locations.

Steady Investment – All of the content streaming services are maintaining a strong budget to create new projects for their growing national and international audiences.

Studios, networks and streamers haven’t reduced their investment in new films/shows.

In fact, according to Ampere, their investment has steadily increased both domestically and internationally.

Routine – Every country, state and city on the globe offers film/show tax incentives to content owners to stage their project in their location. The incentives pour back into the location with more local people working on the project and all of the support money they spend while they’re there.

As the SVoD players expand geographically and continue to make high-production value titles in a multitude of global markets, the demand for overseas-produced content is expected to increase.

And typical of most government officials, the answer is to throw more money at the situation.

Win/Lose – Creative unions and organizations obtained meaningful salary/retirement increases along with other concessions for creative, production and post folks but the projects haven’t returned to Hollywood because of “other” issues.

It didn’t have much of an effect on returning Hollywood to its days as the center of the video story universe.

The reason is simple…Newark increases their incentives. Tucson increases their incentives. Berlin increases their incentives. Mumbai increases their incentives. Osaka increases their incentives. Sao Paulo increases their incentives.

International production will expand as the global subscriber base grows because folks like new, different stuff.

People like to momentarily “revisit” locations they’ve experienced before.

They like to visit new cities, new backroads, new flavors.

Take Netflix’s introduction of Territory last year.

We loved the series, not because it was a western (not really fond of them) but because we really enjoy Australia, especially the outback.

That could be because we spent time with a guy there who owned a “small” station – around 2,000 hectares roughly 5,000 acres – and the self-sufficiency folks in the Northern Territory seemed to have.

We felt the land was really there to kill you and the series took us back to that raw experience.

And it was typical of a lot of international films/shows we’ve watched and enjoyed revisiting areas/cities/people if only for an hour or two.

Of course, Sarandos/Peters shelved the project just at its height and we said … DAMN!

But that isn’t the point.

Here’s what happens when you decide to do a project in Hollywood.

After going through a vast number of approval hoops, you get a nice set of tax incentives which “helps.”

It can result in a lot of work for a lot of below-the-line folks.

But it also means you face a myriad of hurdles/expenses before the shoot begins. Street permits, building permits, emergency personnel rental, casual staffing investment/management, etc., etc., etc.

Every LA county/city department, support/service organization and business that surrounds the film/show creation/production/delivery industry make it difficult and expensive to do a project in the town compared to many locations across the Americas and especially internationally.

The country of origin of a project is important for streamers to meet their “quota” requirements with governments but networks, studios, streamers also have to consider the total cost of each project and total audience interests to determine where it will be produced.

An Americas-centric film/show can be produced anywhere thanks to virtual studios and the increasing availability of production/post talent everywhere.

The growing use of low-cost AI-enabled localization lets subscribers/viewers feel like the creative endeavor was home-grown.

Increasingly, the film/show industry exists in a globalized local world.

Historically, the US – more specifically Hollywood – has tended to dominate the global screens but that is changing.

The audience’s tastes and preferences have changed.

The only thing that hasn’t changed is national/state/local government thinking and the time/cost/hassle project owners have to climb over and through to determine where they will create/produce/post the film/show with local craft people to deliver audiences local content.

That is where the real change has to begin.

Things have to change in and around the creative content industry just because some people like to maintain status quo by repeating what Kingo Gondo said in High and Low, “Don’t worry. You wouldn’t understand. It’s business.”

As Reiko Gondo countered, “Success isn’t worth losing your humanity.”

The video content industry is no longer limited to one town, one country.

It’s a vast number of men/women everywhere working to create, produce and deliver great shows/movies for friends, family and others–wherever they live–to enjoy.

Andy Marken – andy@markencom.com – is an author of more than 800 articles on management, marketing, communications, industry trends in media & entertainment, consumer electronics, software and applications. An internationally recognized marketing/communications consultant with a broad range of technical and industry expertise especially in storage, storage management and film/video production fields. Extended range of relationships with business, industry trade press, online media and industry analysts/consultants.