Scoop Election 08: edited by Gordon Campbell

Gordon Campbell on The Hobbit countdown to D-Day

October 20th, 2010

the hobbit mgmAt his post Cabinet press conference last week, Prime Minister John Key was asked (by me) whether the government-convened talks to keep The Hobbit in this country had included the possibility of raising the level of film production subsidies available in New Zealand. “No,” Key replied, “that hasn’t been on the agenda.” Interesting. Offhand, I can’t recall any other negotiations where this country has had so much at stake, and where we have seemed quite so complacent about going into them at a trade disadvantage.

After all, it isn’t as Minister of Economic Development Gerry Brownlee isn’t aware of the benefits or major film productions to New Zealand – both now, when we’re offering a 15% rebate on the local spend by foreign film companies or later, if we chose to raise our bid slightly. Last year, Brownlee reportedly put the case for production subsidies this way – “Can anyone tell me what’s wrong when we put up 15% and they give us 85%?” Right. Yet surely, the same logic applies if the ratio is 20% to 80% – or even if we raised our subsidy level to the 25% that some parts of Eastern Europe are now offering, and settled for a 75% share of the bounty? That still sounds like a good deal to me. Why isn’t Spada – not to mention Sir Peter Jackson – putting on the table at least the possibility of the government sweetening our bid? After all, back in January, Spada’s Penelope Borland was saying publicly that “in fact New Zealand now has one of the more modest rebate schemes for international productions.” Exactly. So why is Spada (and everyone else) now choosing to ignore that reality?

Take Avatar as a case in point. For that film, the New Zealand Large Budget Screen Production Grants Scheme paid out $44.69 million to Avatar’s producers. Yet that rebate (do the math and the final sum comes out slightly below a 15% rate) was in return for a direct spend of $307 million within New Zealand. On top of that economic activity directly contributed by the production, there would have been multiplier effects downstream, with considerable amounts clawed back in tax. Now, if we were offering 20% rebates, the Avatar payback would have been at most, $61.4 million. At a 25% level, they would have topped out at $76.75 million. By any measure, that’s still a bargain for getting a $307 million direct spend, plus loads of additional intangible benefits from the association with James Cameron and his team. Again, why isn’t the government at least thinking about raising our production rebates, to keep us in this very lucrative game?

If such a response truly isn’t being considered by the Key government, this must mean either (a) The Hobbit production is already in the bag for New Zealand, thanks mainly to Jackson or (b) the location shoot is as good as lost, and the government will be more than happy to blame the unions for it. In either case, the government may as well come clean and change the name of the Large Budget Screen Production Grants Scheme to the Sir Peter Jackson Screen Production Grants Scheme because in future, it seems highly likely that only major productions either directly or indirectly linked to Weta will be coming to New Zealand. Disney’s pullout this year from the Waitakere studios looks like a sign of things to come.
The MGM Sale

As mentioned before, one of the factors holding up announcements about The Hobbit location shoot is the still unresolved MGM sale. Initially that was expected to be concluded on October 22, when creditors were due to respond to an offer all but agreed with Spyglass. This deal would put MGM into a chapter eleven bankruptcy – allowing the shedding of its $4 billion debt burden – from which it would emerge with creditors exchanging debt for a 95% equity stake in the newly-constituted company. Spyglass would own about 5% and its executives Roger Birnbaum and Gary Barber would be running the new MGM. The need for creditors to digest more details of this plan has now pushed D-Day back for a week until October 29, which also happens to be the day that MGM’s latest debt rollover expires. Journalists Nikki Finke and Mike Fleming have put the plusses and minuses of the Spyglass deal very succinctly here:

The Spyglass plan would transform MGM into a pure production company and close down its marketing and distribution divisions. That would certainly cut costs in the short run. Coupled with the equity that Spyglass would bring to the table, a streamlined MGM would lower its debt and have a shot at raising new funding to finance its own pictures. That would let Barber and Birnbaum do what they do best, which is to lower risk by making domestic and offshore distribution deals. On the other hand, MGM would have to pay others to distribute and market its films — and those fees could be comparable or higher than the monies saved on overhead.

That last sentence could be the deal breaker. Because, as I mentioned last week, Lionsgate have also re-emerged on the scene with a new offer of their own. What Lionsgate and its maverick shareholder Carl Icahn are offering is a 55% debt to equity swap for creditors, and the merging of MGM’s prized library with Lionsgate’ own considerable back catalogue and marketing savvy. To most commentators, the Spyglass deal offers higher short term gains from the initial savings on overhead, but a greater risk of MGM falling back into the same hole a year or two down the track. Arguably, a Lionsgate/MGM merger would offer a better and more sustainable fit, long term. However such a deal would also bring the quintessential corporate raider Carl Icahn on board at MGM – and judging by his track record, Icahn doesn’t seem the sort of investor who would be very interested in building MGM’s value over the long haul. Still, they could try casting him as Smaug the dragon.

How is the outcome of the MGM deal likely to impact on The Hobbit calculations? As mentioned, the Spyglass option means that MGM would shed its marketing and distribution arms, and there would be considerable costs downstream in contracting out those roles to say, Warners, their co-partner on The Hobbit. According to the Los Angeles Times, these arrangements are already being explored, presumably in the context of the Spyglass option:

MGM is expected to talk to potential funding sources, including other studios that could handle foreign distribution on its behalf. As a backup plan, Warner Bros. has agreed to loan MGM the money in exchange for additional rights to the picture beyond the domestic distribution it already controls.

Those are among the extra costs that the Warners/MGM bean counters will be running through their calculators, and they will be stacking them up against the higher production subsidies available elsewhere in the world. I can’t see how any final decision on these matters – or on The Hobbit – can be made at Warners before the MGM creditors finally choose their poison, come October 29.

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    1. 9 Responses to “Gordon Campbell on The Hobbit countdown to D-Day”

    2. By Travel NZ on Oct 20, 2010 | Reply

      Excellent work Gordon for keeping this story in the media.

      That’s a huge return on Avatar…didn’t know that.

      Ewen

    3. By Kate Lang on Oct 21, 2010 | Reply

      The National party only supports farmers, and doesn’t consider film an industry. By raising the subsidy to 25% they risk making NZ a magnet to film production, and create a reliable industry for many. But then, it’s not farming, and they have no interest in it.

      Kate

    4. By Draco T Bastard on Oct 21, 2010 | Reply

      Math fail

      If the government had given subsidies of 25% ($76.75m) to the Avatar production then the $307m that they spent would have been reduced to $274.94m (aprox.) as the prices didn’t magically go up. The ratio of who spent the money has changed but the total amount hasn’t.

    5. By Erica on Oct 21, 2010 | Reply

      Gordon,
      Thankyou for the voice of sanity in the rage – I have posted your link to this article on
      ‘Stuff’ in the hope that someone will stop long enough to try and grapple with the truth in its entirety, surrounding the complete issue of ‘attracting overseas mega productions’ to NZ and creating a sustainable future for our screen industry. We seem over the past 30 years to have spun our wheels on so many occasions and this is another episode.
      So thanks for your effort in gathering knowledge of the industry in the round. I hope the industry will take heed of the useful ‘general principles’ contained in the analysis.

    6. By Richard Foulkes Jnr on Oct 21, 2010 | Reply

      Gordon campbells sane articles have been alas largely ignored by Peter Jackson,govt Key & Brownlee, even Equity-Only Helen Kelly , Rpbin Malcolm appear to talk any sense.
      Its all abour UNION BASHING.If I were PM I would give 25% at least to film productions from LSPFS encourage Equity to join up as many members and work like a trojan to sell NZ as a major film location.Hey John your tourism minister what the f&&? Put up the 15% to 25% bro.And they will come.-to film,,,,get unions on side,SPADA in side -let Peter do what he does best MAKE FILMS.

    7. By eugene on Oct 21, 2010 | Reply

      PJ and Warner’s ought to be ashamed: I mean really…TWO films from a single, puny book thats the Reader’s Digest version of Lord of the Rings? PJ is just bitter that he’s been forced by WB to direct the films after G. del T. pulled out. Treading back 13 years in his career, it must feel pretty bad.

    8. By Gosman on Oct 22, 2010 | Reply

      So if this is all about the tax breaks as you make out Gordon how come Peter Jackson has categorically denied this? His appearance on the news last night doesn’t suggest he is a man who is unveiling a Machiavellian master plan in cahoots with Warner Bros for mor tax breaks. As far as I can tell he seems the sort of person if he wanted better tax relief from the government he would ask for it. Are you implying that he is being devious here?

    9. By Richard Foulkes Jnr on Oct 26, 2010 | Reply

      Enough of this National Party advert for “industrial reform-lets get down and dirty with reality-Key is in bed with Warners-same chosen economic
      right wing-Key wants to amend industrial law as a result of the “unions. actions”.what shit.Yes Jackson is devious who isnt?Stomach stapling must have affected his braindead feebles brain stem background. Peter forget about Tolkien
      we have Maori myths legends as big as that fella.Of course u may have to speak da lingo eh?I say hoohaa to key Brownlee and Sir Peta-they are liars,crooks,misers and should learn te reo Maori-act in a movie about the Maori Pakeha land wars=New Zealand Land wars-feature Sir Peter feature-be an Oscar winner-make no mistake,Film what you know bro…nothing more kiwi than NZ wars and land confiscation-this war affects tthe NZ economy today-go figure John Key-the past affects the present.” Return of the land”-directed by Sir Pita Jackson
      starring Hoani Kii Tiki Prownti Wiremu Engari Tama Iti Syd jackson et al lol….

    10. By Richard Foulkes Jnr on Oct 26, 2010 | Reply

      Oh I forgot Helen Clark successfully helped LOTR through to fruition
      now why cant John Key match her? I think the trouble with New Zealand pollies ii -they are afraid to speak Maori,give back confiiscated Maori Land-let alone admit we are a racist country.There is a huge potential for indigenous film industry here-I say kick Key out-bring in a Labour Green Maori Asian Polynesian multi culturally withit government.Right wing monohulls are out-Polynesianise the Eurocentisim of NZ politics.
      Lets focus on the unions strengths-Hollywood doesnt exist without em.

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