[Congressional Record (Bound Edition), Volume 147 (2001), Part 11]
[Extensions of Remarks]
[Pages 16015-16017]
[From the U.S. Government Publishing Office, www.gpo.gov]



            ARTICLE BY LANCE SIMMENS AND PAMELA CONLEY ULICH

                                 ______
                                 

                         HON. JOHN CONYERS, JR.

                              of michigan

                    in the house of representatives

                       Wednesday, August 1, 2001

  Mr. CONYERS. Mr. Speaker, I submit the following insightful and 
poignant article, by Lance Simmens and Pamela Conley Ulich, from the 
Loyola of of Los Angeles Entertainment Law Review, for publication in 
the Congressional Record.


     ``Bye, Bye Miss American pic, drove my Daimler to the movies 
           to see a foreign- made flic; And good old actors were 
           drinking whiskey and beer, singing this is the day 
           we're unemployed here, this will be the day we're 
           unemployed here.''

                            I. Introduction

       Globalization profoundly impacts traditional ways of 
     conducting business, and the entertainment industry is not 
     immune from the new economics drastically changing the world. 
     Could Hollywood become ``Hollyhasbeen''? Will television and 
     theatrical motion pictures shot in the United States go the 
     way of the American car and American-made clothing?
       Runaway production has caused serious labor issues, 
     including the dislocation of thousands of workers and jobs. 
     In 1998, twenty-seven percent of films released in the United 
     States were produced abroad, and an estimated 20,000 jobs 
     were lost to foreign countries. Lower exchange rates, direct 
     government subsidies and lower labor wages enticed American 
     production companies to film in foreign locales. In 1998, the 
     direct economic loss of runaway production was $2.8 billion. 
     When coupled with the loss of ancillary business, the losses 
     likely totaled $10.3 billion for 1998 alone. These loses 
     juxtapose with the issues of free trade versus fair trade in 
     an uneasy balance.
       This article considers why many television and theatrical 
     motion pictures targeted primarily at U.S. audiences are not 
     made in America. It also examines the economic impact 
     resulting from the flight of such productions. Finally, it 
     considers possible solutions in an effort to reverse the 
     trend.

               II. The History of ``Runaway Production''

       Runaway production is not a new phenomenon. In December 
     1957, the Hollywood American Federation of Labor (``AFL'') 
     Film Council, an organization of twenty-eight AFL-CIO unions, 
     prepared a report entitled ``Hollywood at the Crossroads: An 
     Economic Study of the Motion Picture Industry.'' This report 
     addressed runaway production and indicated that prior to 
     1949, there were an ``insignificant'' number of American-
     interest features made abroad. However, the report indicated 
     a drastic increase in productions shot abroad between 1949 
     and 1957. At that time four major studios--Columbia Pictures, 
     Inc. (``Columbia''), Twentieth-Century Fox, Inc. (``Fox''), 
     Metro-Goldwyn-Mayer (``MGM'') and United Artists, Inc. 
     (``United Artists'')--produced 314 films. Of these films, 
     159, or 50.6 percent, were shot outside the United States. It 
     also revealed runaway films were shot primarily in the United 
     Kingdom, Italy, Mexico, France and Germany. The report 
     further identified factors that led producer to shoot abroad: 
     1) authentic locale; 2) lower labor costs; 3) blocked 
     currencies; 40 tax advantages and 50 easy money and/or 
     subsidies.
       On December 1, 1961, H. O'Neil Shanks, John Lehners and 
     Robert Gilbert of the Hollywood AFL Film Council testified 
     regarding runaway productions before the Education and Labor 
     Subcommittee on the Impact of Imports and Exports on American 
     Employment. Shanks explained to the subcommittee: ``Apart 
     from the fact that thousands of job opportunities for motion 
     picture technicians, musicians, and players are being 
     ``exported'' to other countries at the expense of American 
     citizens residing in the State of California, the State of 
     New York, and in other States because of runaway production 
     this unfortunate trend . . . threatens to destroy a valuable 
     national asset in the field of world-wide mass 
     communications, which is vital to our national interest and 
     security. If Hollywood is thus permitted to become ``obsolete 
     as a production center'' and the United States voluntarily 
     surrenders its position of world leadership in the field of 
     theatrical motion pictures, the chance to present a more 
     favorable American image on the movie screens of non-
     Communist countries in reply to the cold war attacks of our 
     Soviet adversaries will be lost forever.''
       John ``Jack'' L. Dales, Executive Secretary of the Screen 
     Actors Guild (``SAG''), and actor Charlton Heston also 
     testified before this subcommittee. Dales stated: ``We 
     examined and laid out, without evasion, all the causes [of 
     runaway production] we knew. Included as impelling foreign 
     production were foreign financial subsidies, tax avoidance, 
     lower production costs, popularity of authentic locale, 
     frozen funds--all complex reasons. We urged Congressional 
     action in two primary areas: 1) fight subsidy with subsidy. 
     Use the present 10 percent admissions tax to create a 
     domestic subsidy; 2) taxes . . . We proposed consideration of 
     a spread of five or seven years over which tax would be paid 
     on the average, not on the highest, income for those years.''
       Despite these impassioned pleas, runaway production has 
     continued to grow in importance, scope and visibility. Today 
     it ranks among the most critical issues confronting the 
     entertainment industry. The issue received increased 
     attention in June 1999, when SAG and the Directors Guild of 
     America (``DGA'') commissioned a Monitor Company report, 
     ``The Economic Impact of U.S. Film and Television Runaway 
     Production'' (``Monitor Report''), that analyzed the quantity 
     of motion pictures shot abroad and resulting losses to the 
     American economy. In January 2001, concerns over runaway 
     production were addressed in a report prepared by the United 
     States Department of Commerce. The eighty-eight page document 
     (``Department of Commerce Report'') was produced at the 
     request of a bipartisan congressional group. Like the Monitor 
     Report, the Department of Commerce Report acknowledged the 
     ``flight of U.S. television and cinematic film production to 
     foreign shores.'' Both reports quantify the nature and depth 
     of the problem and warn of further proliferation if left 
     unchecked.
       Additionally, the media is bringing the issue of runaway 
     production to the attention of the general public. Numerous 
     newspaper articles have focused on the concerns cited in the 
     Monitor Report.
       For example, in The Washington Post, Lorenzo di 
     Bonaventura, Warner Bros. president of production, explained 
     the runaway production issue as follows: ``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. . . . 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 indicated Warner Bros. received $12 million 
     in tax incentives for filming The Matrix in Australia. This 
     is a significant savings for a film that cost approximately 
     $62 million to produce.

                   III. Causes of Runaway Production

       In the Department of Commerce Report, the government 
     delineated factors leading to runaway film and television 
     production. These factors have contributed to the 
     ``substantial transformation of what used to be a traditional 
     and quintessentially American industry into an increasingly 
     dispersed global industry.''


                 A. Vertical Integration: Globalization

       Vertical integration is defined by the International 
     Monetary Fund as ``the increasing integration of economics 
     around the world, particularly through trade and financial 
     flows.'' The term may also refer to ``the movement of people 
     (labor) and knowledge (technology) across international 
     borders.''
       Consequently, companies must now be productive and 
     international in order to profit. Because companies are 
     generally more interested in profits than in people, 
     companies are often not loyal to communities in which they 
     have flourished. Instead, they solely consider the bottom 
     line in the process of making business decisions.
       Columbia is an excellent example of the conversion from a 
     traditional U.S.-based company to a global enterprise. 
     Columbia began in 1918 when independent producer Harry Cohn, 
     his brother Jack and their associate Joe Brandt, started the 
     company with a $100,000 loan. In 1926, Columbia purchased a 
     small lot on Gower Street in Hollywood, California, with just 
     two sound stages and a small office building. In 1929, 
     Columbia's success began when it produced its first 
     ``talkie'' feature, The Donovan Affair, directed by Frank 
     Capra, who would become an important asset to Columbia. Capra 
     went on to produce other box office successes for Columbia 
     such as You Can't Take It With You and Mr. Smith Goes to 
     Washington.
       In 1966, Columbia faced a takeover attempt by the Banque de 
     Pan's et de Pays-Bas, owner of twenty percent of Columbia, 
     and Maurice Clairmont, a well-known corporate raider. The 
     Communications Act of 1934 prohibited foreign ownership of 
     more than one-fifth of an American company with broadcast 
     holdings. The Banque de Pan's could not legally take over 
     Columbia because one of Columbia's subsidiaries, Screen Gems, 
     held a number of television stations. In 1982, the Coca-Cola 
     Company purchased Columbia.

[[Page 16016]]

       In 1988, Columbia's share of domestic box office receipts 
     fell to 3.5 percent and Columbia registered a $104 million 
     loss. In late 1989, Columbia entered into an agreement with 
     Sony USA, Inc., a subsidiary of Japan's Sony Corporation, for 
     the purchase of all of Columbia's outstanding stock. This 
     acquisition apparently did not violate the amended 
     Communications Act.
       Following in Columbia's footsteps, other studios have 
     globalized through foreign ownership. Universal Studios, Inc. 
     (``Universal''), previously the Music Corporation of America, 
     was acquired by the Japanese electronics company Matsushita 
     in 1991, and four years later was purchased by Seagram, a 
     Canadian company headquartered in Montreal. In 1985, 
     Australian media mogul Rupert Murdoch acquired a controlling 
     interest in Fox, and Time, Inc., a publishing and cable 
     television giant, acquired Warner Bros. in 1989.
       As studios become multinational, their loyalty to the 
     community or country in which they were born wanes. The 
     international corporations are no longer concerned with the 
     ramifications of moving production outside of their community 
     or country; they are instead concerned only with bottom-line 
     profits, Columbia exemplifies globalization. Columbia no 
     longer owns a studio lot, let alone its humble beginnings on 
     Gower Street. The Studio simply rents office space in a 
     building in Culver City, California. Not surprisingly, global 
     corporations think globally, not locally. Shooting abroad is 
     not only acceptable, but preferable to companies who are not 
     loyal to any one country.


   B. Rising Production and Distribution Costs and Decreasing Profits

       By the end of the 1990s, studio executives began to alter 
     their business methods. Despite aggressive cost-cutting, 
     layoffs, strategic joint ventures and movement of production 
     to foreign shores, rising production and distribution costs 
     have consumed profits over the last decade. Production costs 
     rose from an average of $26.8 million to $51.5 million. 
     Distribution costs for new feature films more than doubled. 
     In 1990, the average motion picture cost $11.97 million to 
     distribute, and by 1999, the costs rose to $24.53 million. At 
     the same time, profit margins dropped. For example, Disney 
     Studio's profits decreased from 25 percent in 1987 to 19 
     percent in 1997, and Viacom's profits dropped from 13 percent 
     in 1987 to less than 6.5 percent in 1997. Additionally, both 
     Time Warner and News Corporation, parent of Fox, showed 
     declining profits as well.


                       C. Technological Advances

       According to the Department of Commerce Report, ``New 
     technologies and tools may well be contributing to the 
     increase in the amount of foreign production of U.S. 
     entertainment programming.'' Ten years ago, even if a foreign 
     country had lower labor costs, it would have been 
     prohibitively expensive to transport equipment and qualified 
     technicians to produce a quality picture abroad. However, new 
     technology is defeating that obstacle. Scenes shot on film 
     must be transferred or scanned into a videotape format; this 
     process creates what is referred to as dailies. However, many 
     foreign production centers are unable to instantaneously 
     produce dailies from film. Nevertheless, technological 
     advancement has led to the creation of high definition video, 
     which, like dailies, offers immediate viewing capabilities 
     aproximating the visual quality of film. As the quality of 
     high definition video continues to improve, producers will be 
     free to shoot abroad regardless of whether the country offers 
     film processing centers.


                        D. Government Sweeteners

       Canada is extremely aggressive in its application of both 
     Federal and provincial subsidies to entice production north 
     of the border: At the federal level, the Canadian government 
     offers tax credits to compensate for salary and wages, 
     provides funding for equity investment, and provides working 
     capital loans. At the provincial level, similar tax credits 
     are offered, as well as incentives through the waiving of 
     fees for parking, permits, location, and other local costs.
       These enticements equal a sizeable economic benefit. 
     According to the Monitor Report, ``U.S.-developed productions 
     located in Canada have been able to realize total savings, 
     including incentives and other cost reducing characteristics 
     of producing in Canada, of up to twenty-six percent.'' The 
     Department of Commerce Report carefully delineates a plethora 
     of incentives employed by a host of countries. It concludes 
     the undeniable impact of these programs is to weaken the 
     market position of the U.S. film-making industry and those 
     who depend on the industry for employment.


                           E. Exchange Rates

       Because the U.S. dollar is stronger than Canadian, 
     Australian and U.K. currencies, American producers have more 
     purchase power when they opt to film abroad. As a result, 
     producers are tempted to locate where the dollar has the most 
     value. The Canadian, Australian and U.K. currencies have all 
     declined by fifteen to twenty-three percent, relative to the 
     U.S. dollar, since 1990.


                  IV. The Impact of Runaway Production

                         A. The Economic Impact

       In total, U.S. workers and the government lost $10.3 
     billion to economic runaways in 1998. According to the 
     Monitor Report, ``$2.8 billion in direct expenditures were 
     lost to the United States in 1998 from both theatrical films 
     and television economic runaways.'' For example, if a 
     theatrical picture is shot in New York, then carpenters are 
     employed to make the set, caterers are employed to prepare 
     and serve food, and costume designers are hired to provide 
     wardrobe. As the Department of Commerce Report explains, 
     ``Behind the polished, finished film product there are tens 
     of thousands of technicians, less well-known actors, 
     assistant directors and unit production managers, artists, 
     specialists, post-production workers, set movers, extras, 
     construction workers, and other workers in fields too 
     numerous to mention.''
       This fiscal loss ripples through the economy affecting 
     peripheral industries. In addition to the direct economic 
     loss discussed above, the Monitor Report calculated an 
     additional $5.6 billion lost in indirect expenditures. 
     Indirect expenditures include real estate, restaurants, 
     clothing and hotel revenues, which are not realized. In 
     addition to these private industry losses, the govenment lost 
     $1.9 billion in taxes to runaway production. As opposed to 
     the $10.3 billion lost in 1998, the study estimated those 
     figures will be between $13 and $15 billion in 2001.


                     B. The U.S. Production Drought

       The Monitor Report stated that between 1990 and 1998, U.S. 
     film production growth fell sharply behind the growth 
     occurring in the top U.S. runaway production locations of 
     Canada, Australia and the U.K. It stated that Australia ``is 
     growing 26.4 percent annually in production of U.S.-developed 
     feature films, or more than three times the U.S. growth 
     rate.'' Similarly, ``Canada is growing at 18.2 percent 
     annually in production of U.S.-developed television projects, 
     more than double the U.S. rate.'' During the same period, 
     annual growth rates in the United States were 8.2 percent for 
     feature films, and 2.6 percent for television.


                              C. Job Loss

       Runaway production also impacts the U.S. labor market. It 
     is estimated there are 270,000 jobs directly tied to film 
     production. It is further estimated that 20,000 jobs were 
     lost in 1998 alone due to runaway production. However, these 
     statistics do not fully reflect the impact of economic 
     runaway production on employment. They fail to account for 
     spin-off employment that accompanies film production. It is 
     estimated by the Commerce Department that the ripple effect 
     of secondary and tertiary jobs associated with the industry 
     might easily double or triple the number of jobs dependent 
     upon the industry.
       Regardless of the understated nature of the economic 
     impact, the Commerce Department acknowledges that at least 
     $18 billion in direct and indirect export revenues and $20 
     billion in economic activity are generated by the industry 
     annually.


                 D. Loss of Pension and Health Benefits

       Performers and others who work on foreign productions may 
     lose valuable pension and health benefits. As provided in the 
     SAG collective bargaining agreements, performers are entitled 
     to receive pension and health contributions made to the plans 
     on behalf of performers when they work on productions. 
     Although SAG does allow for some pension and health 
     reciprocity with the Canadian performers union, performers 
     must negotiate this term into their contracts. More often 
     than not, performers are unable to negotiate this benefit for 
     work performed in Canada.


                          E. Cultural Identity

       In 1961, Congress was warned that the trend of runaway 
     production threatened to destroy a valuable ``national 
     asset'' in the field of worldwide mass communications. As H. 
     O'Neil Shanks, John Lehners and Robert Gilbert of the 
     Hollywood AFL Film Council testified in 1961, if Hollywood 
     became ``obsolete as a production center'' and the United 
     States voluntarily surrendered its positon of leadership in 
     the field of theatrical motion pictures, the chance to 
     present a more favorable American image on the movie screen 
     would be forever lost. Although the Cold War is no longer a 
     reason to protect cultural identity, today U.S.-produced 
     pictures are still a conduit through which our values, such 
     as democracy and freedom, are promoted.

                              V. Solutions


                  A. The Film California First Program

       California remains a leading force in the industry, and 
     last year took a legislative step to remedy the problem of 
     runaway production. The state passed a three-year, $45 
     million program aimed at reimbursing film costs incurred on 
     public property. The Film California First (``FCF'') program 
     is specifically geared toward increasing the state's 
     competitive edge in attracting and retaining film projects. 
     To accomplish this goal, the legislation provides various 
     subsidies to production companies for filming in California, 
     including offering property leases at below-market rates. 
     This legislation should serve as a model for other states, as 
     they too struggle with an issue of increasing economic 
     importance.


                        B. Wage-Based Tax Credit

       A possible solution could be patterned after a legislative 
     proposal offered, but never

[[Page 16017]]

     advanced, in the 106th Congress. Specifically, this proposal 
     called for a wage-based tax credit for targeted productions 
     and provided: (1) a general business tax credit that would be 
     a dollar-for-dollar offset against any federal income tax 
     liability; (2) a credit cap at twenty-five percent of the 
     first $25,000 in wages and salaries paid to any employee 
     whose work is in connection with a film or television program 
     substantially produced in the United States and (3) 
     availability of credit only to targeted film and television 
     productions with costs of more than $500,000 and less than 
     $10 million.


                          C. Future Solutions

       To rectify the problems of runaway productions, legislation 
     at the local, state and federal levels is paramount. Over the 
     past thirty years, the film industry has expanded beyond 
     California to become a major engine of economic growth in 
     states such as New York, Texas, Florida, Illinois and North 
     Carolina. To achieve effective legislative remedies, it is 
     critical to examine the successful programs implemented by 
     other nations.
       Maybe it is the inexorable result of a changing world. 
     Regardless, the proliferation of foreign subsidies for U.S. 
     film production, which is occurring at an increasing rate 
     worldwide, raises troubling questions of fairness and equity. 
     From a competitive standpoint, it appears as though the deck 
     is stacked against a class of workers who seek to derive 
     their livelihood from this industry but find their jobs have 
     moved overseas. It is understandable that producers will take 
     the opportunity to film abroad when the reduction in costs is 
     as much as twenty-five percent. Consequently, the only remedy 
     for America's workforce is to pass legislation that provides 
     commensurate benefits in the United States.
       It is apparent that a laissez-faire, market-oriented 
     approach has failed the American worker. Unemployment is 
     extraordinarily high within the creative community, leading 
     to seventy percent of SAG's 100,000 plus members earning less 
     than $ 7,500 annually. This economic hardship is exacerbated 
     by runaway production. Thus, it is abundantly clear that 
     legislative remedies attempting to more adequately level the 
     playing field must be pursued. Amid encouraging signs that a 
     tax bill of significant consequence is likely to pass 
     Congress in the coming months, it is imperative that the 
     creative community take a proactive position to ensure that 
     the tax bill provides incentives for domestic film 
     production. It must use all resources to cure the concerns 
     presented in the two reports outlined in this Article. 
     Organizations, such as SAG, must work with Congress to 
     develop a proposal that is acceptable in terms of cost and 
     other political considerations.
       While it seems unlikely that there is the political will or 
     desire to match the incentives offered by many of our 
     competitors, it is conceivable to the authors that an 
     effective approach can be designed to substantially close the 
     gap on cost savings without eliminating them. Thus, the 
     approach advocated involves identifying the level where cost 
     savings of filming abroad are minimized so as not to be the 
     determinative location factor. An appropriate level may be in 
     the range of ten percent cost savings versus the twenty-six 
     percent cost savings now common in some Canadian locations.
       It is important to note the strategy used to fashion a 
     remedy is just as important as the relief sought. The 
     industry should be willing to approach the tax-writing 
     committee staff with the afore-mentioned concept and work 
     closely with them in designing a legislative remedy. This 
     strategy represents a holistic approach to a global problem. 
     It is important to remember the United States risks losing 
     its economic advantage in a vital industry which carries with 
     it enormous economic consequences. As noted in the Department 
     of Commerce Report:
       If the most rapid growth in the most dynamic area of film 
     production is occurring outside the United States, then 
     employment, infrastructure, and technical skills will also 
     grow more rapidly outside the United States, and the country 
     could lose its competitive edge in important segments of the 
     film industry.

                             VI. Conclusion

       Politics represents the art of the possible. The approach 
     advocated in this Article should find a receptive ear in the 
     halls of Congress if for nothing else than its simplicity. 
     Timing is crucial. Left unchecked, the only certainty is 
     continuing runaway production with the attendant economic 
     costs, lost jobs, and diminished tax revenues at all levels 
     of government. In a time of waning economic growth and 
     warning signs of dwindling surpluses and future economic 
     weakness, including production incentives into any upcoming 
     tax relief is essential to preserving the U.S. workforce in 
     the American entertainment industry.

     

                          ____________________