Economic review undertaken by the BFI reveals critical pressures for UK independent film

A new report, An Economic Review of UK Independent Film, has been published today examining the significant and rapidly increasing challenges being faced by UK independent films. The research and analysis detailed in the review, which has been undertaken by independent research company Alma Economics and published by the BFI, reveals high levels of fragility for UK independent film, from the production stage through to distribution and exhibition to audiences. The review suggests that these are now so significant that the sector’s viability is inhibited to the point of market failure. 

UK independent films are a powerful and vibrant contributor to our cultural lives, a place where creative risks are taken and stories are told that reflect our lives and experiences, often giving a voice to underrepresented people. Over decades, films from Kind Hearts and Coronets to Kes, Educating Rita, Burning an Illusion, If, My Beautiful Laundrette, Naked, Bullet Boy, The Full Monty, Attack the Block, This Is England and Bend It like Beckham, and more recently The Favourite, Blue Story, God’s Own Country and Bait have become integral to our culture lives and the way the world sees us. Independent films are also a vital talent incubator with some of the UK’s most successful filmmakers from Mike Leigh, Ken Loach and Danny Boyle to John Akomfrah, Andrea Arnold, Clio Barnard, Gurinder Chadha, Terence Davies, Sarah Gavron, Andrew Haigh, Joanna Hogg, Paul King, Shane Meadows, Edgar Wright and Joe Wright starting or developing their careers in independent film. The independent sector also enables crews, technicians and craftspeople to develop their creative and technical skills, keeping the UK at the forefront of filmmaking globally.

The UK’s film and screen industries are vital contributors to the UK economy achieving unprecedented growth in production spend and revenue generation. In terms of size and scale, the UK production sector is unrecognisable from even five years ago, with film and high-end television production spend alone reaching record levels in 2021 at £5.64 billion, a rise of 63% (£2.19 billion) since 2017. 

The review’s findings are that the speed and volume of this growth has exacerbated the strain on the independent sector, which cannot compete with larger budget international productions on a variety of levels from accommodating the rising cost of production to securing cast and crew and ultimately to reaching audiences. The sustainability of the sector has been under review since the BFI Commission on UK Independent Film report in 2017/2018, which looked at how seismic changes in the wider screen landscape were creating significant challenges for independent film. Since then, those challenges have only grown more acute.

The BFI’s recently published Skills Review highlighted that crew shortages at all levels is especially threatening the UK’s independent film sector, which is struggling to compete for crew as well as putting additional pressure on already very stretched budgets. Covid protocols have reportedly added 10 to 20% to production budgets and for independent films with already tight and limited finances, that impact is acute to the point of being insurmountable.

At the same time that UK independent film is struggling with higher production costs and flat-lining or declining budgets, it is also experiencing a decline in revenues. This has a knock-on effect by inhibiting investment in new films, largely as a result of stagnating box office and a sharp decline in global sales of of packaged media (eg DVD and Blu-ray).   

Inflation-adjusted revenues from digital media have increased significantly through the past decade and accelerated through the Covid-19 pandemic (over 50% of overall UK independent film revenue by 2021), however, they have not been enough to reverse the wider trend of decline. Inflation-adjusted global box office revenue has been on a gradual downward trajectory since 2010, with total box office revenue having fallen from generating nearly 60% of independent film income in 2010 to around 50% by 2018. In some years the downward trend has been masked by a small number of very successful commercial hits (eg Belfast, The Favourite, The Best Exotic Marigold Hotel, The Imitation Game and The Inbetweeners 2), highlighting benefits for production companies in diversifying across a slate of films consisting of potential winners and losers from a commercial perspective. 

Despite existing support measures for UK independent film including the significant role of the BFI, BBC Film and Film4 as key funders, the Film Tax Relief (FTR), the new UK Global Screen Fund (UKGSF), which has just entered its second year in supporting the promotion and export of UK independent film, and regional and national funds, and the government’s Culture Recovery Fund, which has ensured that independent cinemas have survived the pandemic thus far – the review has found that market challenges have put independent film activity on a downward trend, raising concern about the long-term viability as a sector.

The review finds that the four key challenges facing UK independent film which need to be addressed.

• A long term trend of stagnating revenues for the independent sector with increased sales from digital media not fully replacing falling revenue from traditional sources (eg DVD).
• Significant inflation in the costs of key areas of production, including cast, crew and studio space and unable to secure skilled workforce due to skills shortages.
• Increased uncertainty as the sector emerges from the Covid pandemic including whether exhibition revenues will recover to their pre-pandemic levels plus no indication pandemic induced cost inflation will be reversed.
• The combination of these pressures are making it more challenging for investors to recoup their investments and generate a return reducing financing options for independent film.

The review recommends four interventions to be modelled and explored further as offering potential solutions to address these challenges. These prioritise support directly to producers of UK independent films and options for supporting independent films reaching audiences.

• An increase in film tax relief for all films (up to a budget cap), incentivising investment but which  could also include a budget floor, limiting the relief to films assessed as ‘independent’. A portion of the uplift could be linked to shooting location to support UK-wide screen sector development.
• An extended film tax relief to include Prints & Advertising (P&A)  for small films and/or UK independent films, making them more marketable in domestic and international markets.
• The introduction of a new zero rate of VAT on the exhibition of UK independent films, incentivising exhibitors to showcase films, thus exposing them to a wider audience and larger income streams.
• An increase in the financial contribution from large streaming services to UK independent films (including SVoD, AVoD, and potentially television broadcasters), either through a voluntary commitment or a requirement for large streaming services to make a modest contribution to a pot of funding that they can reclaim for creatively driven UK filmmaking (subject to a budget cap).

The review recommendation to look into the film tax relief suggests that modelling 20% to tax relief for films within a relatively low budget range would have a low impact on tax relief paid out compared to the total cost of film tax relief.   For example, in 2018, total film budgets in the range up to to £10m represented only 16% of total budgets for UK-based films. Support could be provided to producers through increasing the proportion of qualifying expenditure against which tax relief is applicable (such as an increase from 80% to 100% of UK core spend).  Industry organisation Pact is exploring further how tax relief modelling could be more supportive to independent filmmaking.

The review finds that increases in the cost of production — including crew, cast, and studio-space – have been putting significant pressure on UK independent film production budgets. Cost inflation is reportedly driven by significant increases in internationally financed UK screen content (including film and HETV) which has accelerated demand for skilled crew and filmmaking services. Social distancing and health and safety measures required to continue film production through the pandemic have also been inflationary, with some producers reporting cost increases of as much as 10-20% from such measures. It is unclear to what extent these added costs may persist as the industry emerges from the pandemic.  At at the same time budgets for independent films has been flat or slightly declining. The overall impact of this inflationary environment means production budgets are effectively reduced for UK independent films which at the same time are increasingly challenged to compete with studio-backed films for audiences, whose budgets have risen substantially through the 2010s.

Some industry stakeholders who contributed to the research reported very low incomes for independent filmmakers, with relatively low producer fees for many productions and a large number of films failing to recoup. In order to supplement their income from film, some independent filmmakers have reported moving into other areas of screen content production such as high-end television, to earn a sufficient income creating a talent drain for independent film.

Some UK independent films in recent years have been able to secure exclusive streamer buy-outs, guaranteeing a  financial return for investors in a market where returns are often speculative. However, the review highlights that these deal structures mean that all of a film’s rights are typically bought out by a SVoD platform, preventing filmmakers from benefiting directly from any upside of success with audiences (funding which could support subsequent works). In some cases, filmmakers can benefit indirectly from establishing relationships with streamers, such as through investment in subsequent productions (eg prequels and sequels), although this more common for studio-backed films.

Financing independent films in the UK is a highly complex process, involving a large and varied range of financiers. Investors in the production of independent films in the UK can include regional and national funding (eg BFI and other regional/national agencies); publicly owned national broadcasters and their film arms (eg BBC Film and Film4); fiscal measures (including the Film Tax Relief and the new UK Global Screen Fund – co-production funding); and private investors and other collaborators. Due to the significant risks and challenges involved in the production process for UK independent film, these channels are increasingly unable to sufficiently fully finance a production.  

Release strategies have become more adaptable in recent years with distributors increasingly experimenting with sequencing, the length of windows, and pricing. 

Developments in technology have resulted in persistent changes to how audiences can choose to consume screen content. Many of these trends have accelerated as audiences and the film industry have adapted to the social restrictions imposed by the Covid-19 pandemic. 

Distribution of independent film in the UK is therefore occurring in an evolving marketplace which poses significant risk and challenges to distributors. These risks include the high cost of successfully distributing film content both in the UK and internationally and increasing competition for ‘screen time’ with releases from major studios and streaming platforms. However, digital marketing channels, including social media, can also make it more cost effective to market a film. 

Inflation-adjusted global box office revenue has been on a gradual downward trajectory since 2010.  The review’s analysis suggests that independent film has benefited from increased revenue from digital media (including VoD and pay-TV), which estimated to have increased to over 50% of the total by 2021, partially offsetting the reduction in revenue experienced in other distribution channels (including cinema box office, DVD and free TV). 

Revenue from UK free-TV licences has historically represented a small but relatively stable share of the total revenue mix for independent films. Industry insights reported in the review say that the commercial value of these licences has been in decline through the previous decade. Stakeholders have reported that the reduction in free-TV licence revenues was the result of PSBs receiving the rights later in a film’s life cycle; the addition of VoD channels to the value chain; as well as declining viewership of terrestrial television channels. PSBs have adapted to these developments by expanding catch-up programmes and on-demand services, whilst some can also generate revenue from advertising and through monetising their own streaming services (eg All 4). However, the reported decline in licence values raise some doubt over the ability of independent films to sustain levels of income from free-TV licences.

Despite support provided to producers, through the UK government’s new UK Global Screen Fund (now in its second year and the Film & TV Production Restart Scheme (now closed), as well as the Culture Recovery Fund (also now closed) for independent exhibitors, the pandemic has had a profound impact on the value chain for UK independent film, putting pressure on revenue, costs, and returns on investment. 

The importance of digital media to overall independent film revenue accelerated significantly through the pandemic. Digital media revenue is estimated to have increased to over 50% of the total by 2021, with the closure of cinemas for much of 2020 and 2021 accelerating this trend. Sales through digital channels may have benefited from increased experimentation with alternative release strategies by distributors through this period, with audiences often able to access films through PVoD closer to the release date of the film

Pre-pandemic trends show that, if historical trends continue, the independent film sector will continue to experience a slow decline in revenue in the short to medium-term. Sector revenues are projected to be over £100m lower should market revenue for independent films only revert to 75% of pre-pandemic levels.

UK independent films are a vibrant and powerful contributor to our cultural identity and screen culture with stories that excite the imagination, inform and inspire us. They create worlds we recognise and offer new discoveries, often capturing and documenting lived experiences and historical events.   

From Kind Hearts and Coronets to Kes, Educating Rita, Chariots of Fire, Burning an Illusion, My Beautiful Laundrette, The Full Monty, This Is England, Bend It like Beckham, The Favourite, Blue Story and God’s Own Country, they have become part of us.

The UK independent film sector is also an integral part of the wider screen ecosystem through its role as an incubator of talent, both on and behind the camera. Craft and technical skills developed through working on independent film feed the success of the UK screen sectors in making bigger budget films and high-end television productions. Independent film has an essential role in positioning the UK as a world leader in a fast-growing global industry.

This Economic Review of Independent Film was commissioned by the BFI in order to better understand the sustainability of this vital artform at a time of great change. There is no doubt that changes in technology, markets and audience fragmentation can result in innovation and be to the long-term benefit of the artform. But that does not mean that we should turn a blind eye when the fundamental incentives to create independent film are degraded to a point where significant creative and public value is lost.

This analysis from Alma Economics establishes that the threats to independent film are indeed considerable and concerning. The numbers show that the model of independent production is being shaken, at its foundations, in three critical areas: budgets are not growing at a market rate, revenues are showing signs of stagnation and costs are escalating. Taken together, far from driving innovation, these threats are likely to draw away investment and the ability for producers to sustain their creative risk-taking.

It is true that investors and producers of independent film have always needed to deal with risk and sometimes with challenging market conditions. What is changing, this report indicates, is that the ‘upsides’ generated when independent films succeed are now reduced, while at the same time costs are escalating. For now, there is not a measurable decline in the number of independent films being produced, an indication that the cultural relevance of the artform is as strong as ever. It’s also true that creative and successful films are still being made, often supported by public funders. But the imbalance of the independent film model, with flatlining of budgets and decline in revenues, points to a future where the full diversity, range and success of independent film will not endure.

For all these reasons, we recognise the need for action. With a projected sector revenue gap of £100m a year, rising costs and an economy that is still recovering post-Covid it is likely that solutions will need to be multi-faceted and inventive. It is also important to retain a positive vision for independent film – rather than seek to recreate conditions of the past we must aim to support the sector in reaching for the future. Independent film in cinemas can create moments of shared experience, inspiration and reflection, while audience appetite for streaming could become a valuable way for audiences to find independent film that speaks to them directly.

This review sets the stage for action in three clear ways. Firstly, it establishes the strong case for UK independent film to receive specific policy attention. It provides evidence that, despite measures from government and public funders introduced in the last few years and an unprecedented production boom, there is a danger of stagnation and market failure. This precarious position is not caused by any specific failure of the artform, which remains culturally strong, and instead appears to be caused by the effects of changes in the wider UK film and TV value chain, which supports the call for policy intervention, as long as it is based on proper policy modelling.

Secondly, the review highlights that every stage of the film value chain is important in creating a more viable market for independent film. In the models established in this report, exhibition and distribution are essential in establishing routes to market and unlocking better flows of revenue that can establish a sustainable business model. Equally, the biggest spending organisations currently driving most of the production in the UK have a part to play in helping alleviate the very significant cost challenges that are particularly affecting the independent sector. Financial support is crucial but can only be effective if the industry agrees to work together to support the independent film art form.

Thirdly, the review highlights the importance of public funders of film. While public funders cannot carry the whole burden of driving the economic model for the artform, at times of potential market failure such as this it is right for funders to look again at the distribution and prioritisation of their available resources, as well as their processes to offer effective support – this includes our National Lottery funding and the UK Global Screen Fund that we administer on behalf of DCMS.

As a public funder of UK film and with a mandate to ensure film is accessible for everyone to enjoy and engage with, we welcome the detailed analysis of this report.

The review proposes looking at four measures as preliminary recommendations for policy intervention which could be implemented to reverse the negative trends identified. The recommendations in the report are indicative and not fully modelled policy proposals. They merit and require further consideration. There is work still required to absorb, validate, and gain buy-in to a more clearly modelled plan for independent film. However, we recognise that there is a need for energy and forward momentum and the BFI is able to make the following commitments focusing on the four headline areas of recommendation from the review.

The Economic Review proposes that an increase in Film Tax Relief, specifically for independent film, would have significant positive impact and would be likely to generate positive returns, due to the incubator effect. In addition, it is proposed that public funders consider how existing funding mechanisms can be better structured to support independent film producers.

• The BFI commits to working with Film4 and BBC Film to review processes and support for independent film production, and publish our review and any changes made before the end of 2022
• The BFI will use the models and evidence revealed in this report in creating our 10 year Corporate and National Lottery strategies and, within funding limitations, seek to create ways to support better long-term sustainability for film producers and communicate these when the strategy is launched later this year
• In addition, industry trade body Pact has confirmed to the BFI that, based on the evidence within the Economic Review of UK Independent Film, it will undertake activity to model potential changes to tax relief

The review proposes that increased tax relief for distribution is an option with favourable economic outcomes, while cautioning that support for distribution might not be as effective as other measures.

• The BFI will open discussions with the Film Distributors’ Association to explore how support for distribution could bolster independent film, including both public policy and industry-led measures

3. Increasing support for the exhibition of independent films

The review also indicates a clear and important role for exhibition in reaching audiences and overcoming the disadvantage of relatively low marketing budgets.

• The BFI will open discussions with UK Cinema Association to explore the best measures to support the exhibition of independent film, including, including both public policy and industry-led measures
• The BFI will, within funding limitations, consider measures to support exhibition of independent films, and communicate these when our 10 year Corporate and National Lottery strategies are launched later this year

The review notes that streaming is an area of potential benefit to independent film, but that currently the positive contribution of streaming is ambiguous. The review associated streaming with new financial models which can ensure valuable ‘cost-plus’ financing upfront, but also notes that ‘cost-plus’ deals can also exclude film producers from exploiting financial commercial upside. Finding the right formula for success in this fast-growing and impactful area is a complex task that will evolve over time, but the BFI can commit to being immediately proactive in the following ways.

• Through our ongoing discussions with the streamers, the BFI will establish the intentions of the streamers in terms of their support for independent producers, question how the gaps identified in this report can be closed and discuss industry-led and policy solutions
• The BFI Skills Review 2022 proposes that industry commits 1% of production spend into training and workforce development. The BFI will ensure that as the response to the review is considered by government and industry, it includes appropriate and significant consideration for the needs of the independent sector

We thank Alma Economics, the project steering group and industry representatives for giving their time and sharing their data and insights in informing this review.

– Ben Roberts, BFI chief executive