Virtual impasse

Digital cinemas now account for 87% of all screens in the UK and digitisation has brought a number of advantages. Distributors, for example, now benefit from a reduction in delivery costs, cleaner prints and supposed programming flexibility.

However, the virtual print fee (VPF), the subsidy paid by distributors towards the purchase of digital projection equipment, has long been controversial among smaller independents, and single-screen exhibitors. They point to a lack of consultation during the subsidy’s creation, the overtaxing payment structure and the difficulty negotiating with the four separate integrators — Arts Alliance Media, DCinex, DDL and Sony — which administer the fee on behalf of the exhibitors.

While the integrators offer different models from which distributors can choose, under the current model a film booking generally attracts a VPF fee comparable to, and often higher than, the cost of producing a 35mm print for the same film. In addition, the fee is multiplied when a film moves across exhibition circuits whose equipment is managed by different integrators.

A VPF can cost up to $800 (£500), with additional payments in subsequent play weeks; 35mm prints range from $480 (£300) to $3,200 (£2,000), but UK independent films are often priced between $480 and $800. Digital flexibility has also meant films are not guaranteed multiple showings and can be pulled for blockbusters.

“The model was developed for the multiplex-type release model,” says David Kerr, the former vice-president of international servicing for UIP, now working for the UK’s Film Distributors’ Association (FDA) as a broker between the integrators and the independents. “It works well with that machine. The issue is that it doesn’t cater as well for the smaller members of the business.”

“The VPF served a purpose when no-one could come up with a better model to finance the digital roll-out,” adds Alex Stolz, senior executive, distribution and exhibition at the BFI. “But it is clunky and bureaucratic. The effect on independents wasn’t properly thought out and while this wasn’t done maliciously, it has left them in a difficult spot.”

One UK distributor describes the model as “potentially crippling” to its business. The distributor claims a leading exhibitor has threatened not to play its films as the company has not signed the VPF contract issued by the integrator.

Even one executive at a studio admits “in hindsight you wish the model had been structured in a different way”.

The studios move first

Fiona Deans, COO of Arts Alliance Media, admits the consultation period did favour the bigger companies but the smaller distributors must bear some responsibility for this.

“We signed some of the studios first in 2007 after beginning discussions with them in 2005,” she explains. “We also went to see some independents in 2005 but I don’t think it was a priority for them at that point. We didn’t go to the 40 or so independents in the UK, we consulted with about 10.

“Some of them clearly feel they weren’t consulted but it’s a bit of a chicken-and-egg situation because until there was something in place they didn’t want to prioritise a hypothetical scheme. The studios are able to plan for the longer term.”

In March 2011, the European Commission dropped an antitrust investigation into the fairness of the UK’s VPF contracts after the US studio distributors agreed to revise the ‘most favoured nation’ clauses which required each studio distributor to be offered the most favourable terms agreed by integrators with any film distributor.

A number of independent distributors have since complained they have not seen sufficient benefits from the integrators’ freedom to offer them better terms. But at least one of the integrators insists the contracts have been modified: “I would say we have acted on the changes proposed by the majors,” says DCinex’s David Pope.

The UK government’s Department for Culture, Media and Sport (DCMS) waded into the complex market issue earlier this year. According to recommendation 13 of the DCMS-commissioned Film Policy Review, published in January 2012, the current mechanism, “if unchecked, [will] have a continuing and detrimental impact on independent distributors and smaller exhibition venues. It is already having a negative impact on their capacity to make available British and specialised films to audiences across the UK.”

The review’s independent panel called on “studios, third-party consolidators and exhibitors to find a new virtual print fee model that puts the independent distributor in an economic position which is as good as or better than the 35mm model.”

One distributor adds: “We need recommendation 13 to be given the full endorsement of the culture secretary, and we need to hear back from exhibition and the integrators on what steps they plan to take to comply with it.”

However, Deans for one, contests the suggestion AAM does not offer such models: “We have structures in our deals that mimic 35mm. I don’t think all the VPF mechanisms have that but we’ve had ours in place for some years, realising it could be an issue.”

She does, however, recognise there could be some revision of the mechanism regarding the fee incurred between circuits. “It is a priority for us to sort this out,” says Deans, “but it’s not a process we can drive ourselves due to competition regulations. It’s not something one VPF entity can resolve on its own. Maybe there are a few tweaks for certain distributors but at the end of the day there are significant advantages that they’re getting from the current system. We’re aware the FDA is chairing a meeting on this matter.”

That meeting is being brokered by Kerr. He is trying to bring the four integrators together, possibly with distributors, and a competition lawyer, to discuss potential tweaks to the mechanism: “I wrote to the integrators in spring 2012 and since the summer we’ve been trying to work out how that solution can be engineered,” Kerr explains. “It is a bit of a minefield and there has been some resistance but there has also been communication on the issue and I am hopeful of a resolution.”

“We have been contributing to the process of getting people together,” says Pope of DCinex. “It won’t be long getting us together but there are quite a few ideas around how we arrive at the flat fee [to replace a film’s repeat fee as it moves between integrators]. It could be weeks, it could be months. But I’m optimistic we can arrive at a solution.”