Could Hollywood lose its grip on the movie industry? The unthinkable could come to pass if film productions continue to flee the country at the current rate, Tinseltown leaders are warning.
They say what Hollywood needs is a tax break, though they acknowledge Congress may not be in the mood for that.
A new study designed to quantify the problem estimates that the U.S. economy suffered a direct loss of $2.8 billion last year because of so-called runaway film and television production. That number is more than five times what it was in 1990, when the figure was $500 million, according to the research, conducted by the Monitor group for the Screen Actors Guild and the Directors Guild of America.
What has happened? According to the study, countries like Canada and Australia have been aggressively using tax incentives and favorable exchange rates to lure increasing numbers of big-budget, small-budget and television movie productions away from the United States. Major films like the recent release "The Matrix" are being filmed in Australia instead of Hollywood, as is the coming action sequel "Mission: Impossible II." Recent telefilms like "Dash and Lilly," "Thanks of a Grateful Nation" and "Hiroshima" were shot in Canada, though the stories were all set in the United States, and prime-time series like "The Outer Limits," "La Femme Nikita" and "Harsh Realm" are now being made in Canada.
The trend is ominous for what has always been considered a characteristically American industry. "The concept we have that this industry is ours and has a loyalty to this country is crazy," said Screen Actors Guild President Richard Masur at a briefing. Studios "will go anywhere they need to go. The U.S. film producers will turn their studio real estate into theme parks and make their movies somewhere else. The chances of having a long-term, permanent rupture of what has been a U.S.-based industry since its inception is really real."
According to the study, of the 1,075 film and television productions released in the United States last year, 27 percent were produced abroad for economic reasons, an increase of nearly four times over 1990. Twenty-four of those productions were big-budget films--up from zero in 1990--another growing trend that has alarmed Hollywood.
"A great number of these should have and could have been shot in Hollywood," said Jack Shea, president of the Directors Guild of America. "This is practically in our back yard, and there's no question that it's the economics that are sending them over there."
Masur insisted this is not only Hollywood's problem. "This is a national industry. North Carolina is getting beat up, Texas is getting beat up. People are losing jobs all over the country because we're not competing on a level playing field, because other countries are aggressively wooing our productions."
The bulk of "runaway" productions--about 81 percent--have been fleeing to Canada; the number of U.S.-based productions there jumped from 63 in 1990 to 232 in 1998. Government incentives to producers are hard to resist: Tax credits offered by the Canadian government and provinces usually add up to about 22 percent savings on labor costs. Australia has been following a similar model.
For studios, the economics of moving production overseas are tempting. " 'The Matrix' cost us 30 percent less than it would have if we shot in the United States," said Lorenzo di Bonaventura, the Warner Bros. president of production. "The rate of exchange is 62 cents on the dollar. Labor costs, construction materials are all lower. And they want us more. They are very embracing when we come to them." Di Bonaventura said he gained as much as $12 million in tax incentives on "The Matrix," which cost about $62 million to make.
The economic impact of this flight, according to the study, is vast. The direct loss to the American economy in 1998 from runaway production was $2.8 billion, a figure that calculated production budgets and adjusted for revenue that flowed back into the United States, such as leading actors' salaries. But the study said that when calculated with the multiplier effect--the ripple that a dollar spent here sends through the economy--the impact could be as much as $10.3 billion, affecting such diverse industries such as real estate, restaurants, clothing and hotels. The study estimated that 20,000 jobs were lost in 1998 because of runaways, everything from jobs for supporting actors to stage managers to costume designers to caterers.
For years independent movie producers have pinched pennies by shooting in Canada. Even in Hollywood, studios often choose not to shoot on their own lots because of the high cost of sound stages and production equipment, opting instead to rent cheaper raw space elsewhere or shoot on location. It is not that surprising, then, that as movie budgets have ballooned, studios have begun to invest in production facilities abroad. In October 1996 Disney bought a 12,000-square-foot studio in British Columbia for its productions. In 1997 Paramount sank $10 million in four sound stages and production space in Vancouver. In 1998 Fox Studios Australia opened its doors in Sydney. This investment by the studios has swiftly helped to compensate for Canada's initial lack of technical expertise in the movie business.
"We feel the federal government needs to take a serious look at the tax structure. We need some kind of incentive tax breaks to allow producers to make more money on their pictures," Shea said.
Labor costs can also be a factor.
But Masur said that even if the guilds accepted cuts in salary, it would not greatly affect the savings percentage, since it is the leading actors who are the largest expense. "If you factor out the high-over-scale actors, there's such a minimal savings off the total budget that this can't touch the approach of tax incentives."
The prospect of Congress voting tax breaks for Hollywood at a time when the government has been spending much of its time criticizing the entertainment industry for promoting violence may be particularly difficult, the guilds acknowledged. But Shea said the economic issue is far graver. "We're being distracted by the whole violence issue. Congress doesn't know what to talk about except that. We have to get people focused on what is going on and begin to look at crafting solutions."
There is some irony in warnings that the movie industry needs to be protected from competitors abroad; both Canada and France have long been in the forefront of complaints that Hollywood crushes any potential competition by refusing to release foreign films in this country--an argument that largely contributed to a "cultural exception" in the provisions of the international General Agreement on Tariffs and Trade ratified earlier this decade.
CAPTION: Keanu Reeves and Hugo Weaving have it out in "The Matrix," which was filmed in Australia, not Hollywood.
CAPTION: (Photo ran in an earlier edition) "Runaway" trend: The prime-time TV series "La Femme Nikita," with Peta Wilson and Roy Dupuis, is made in Canada.