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Environment and Communications Legislation Committee

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HOWARD, Mr Scott, Chief Operating Officer, Endemol Shine Australia [by video link]

KAVANAGH, Ms Nerissa, Managing Director, Blackbird VFX [by video link]

SAVAGE, Mr Roger, Chief Executive Officer, Soundfirm [by video link]


CHAIR: Welcome. I invite you to make an opening statement and then we will go to questions.

Mr Howard : Thank you very much. We're one of Australia's largest content producers. We produce about 350 hours of screen content annually, encompassing unscripted shows like MasterChef Australia, Gogglebox, Australian Survivor and Old People's Home for 4 Year Olds, and also scripted shows like the current series of RFDS on the Seven Network, produced with the Royal Flying Doctor Service. We have a long history of scripted productions across multiple companies that now sit underneath the Endemol Shine umbrella, including Shine, Endemol, Southern Star and Screentime. We engage about 3,500 people a year across our scripted and unscripted productions, which we make for all of the Australian commissioning broadcasters and some of the international streaming services too.

Our interest lies in relation to schedule 1 of the bill, relating to tax offsets for screen and postproduction. We're strongly supportive of the increase to 30 per cent that the bill will introduce for television productions. We think the increase is timely and essential. It reflects a worldwide shift towards television. The increase will apply to productions starting on or about 1 July. Of course, there are many productions which have been budgeted and financed not just by us but by a variety of producers on the basis of receiving the offset, so any failure to implement it could create substantial financial problems for productions—and broadcasters, for that matter.

We're very supportive of the measures to remove the 65-hour cap for scripted content. Quite often, that has operated to stop really successful shows in their prime, whereas they could have carried on quite successfully if it had not been there.

On the question of eligibility level changes, I would observe that the post, digital and video effects offset is a critical part of the unscripted sector of the industry. Endemol Shine Australia operates one of the largest postproduction operations in Australia. In the next year, starting in January, we will also be conducting extensive training for entrants into this sector of the industry and retraining for existing industry people looking to move into this sector. We wouldn't be able to do this without the benefit of the offset. The increase in threshold to $1 million, however, will adversely impact many smaller productions and producers and potentially threaten jobs and investment, no matter the quality of the work involved.

Unscripted production, of which we do a lot, is roughly half of a multibillion-dollar Australian industry of over 40,000 heads. It's the often-ignored sibling of scripted production and the unsung hero of the industry for consistent year-on-year employment and industry revenue generation. We would support greater investment, not less, into the industry, including obligations on streamers operating in Australia for a minimum spend of between 20 per cent and 30 per cent of their Australian revenue to generate a commitment of between $300 million and $400 million, with about 13,000 jobs and about 300 to 400 hours of Australian content.

Australia has an abundance of talent both in front of and behind the cameras for screen content. What we think we need is the right infrastructure and support for Australia to succeed as well in this industry as we do in the Olympic medal table. Thank you.

CHAIR: Thank you. Ms Kavanagh?

Ms Kavanagh : Thank you. I'm the owner of Blackbird, a visual effects company based in Sydney. We started our company eight years ago, and it's been eight years of sacrifice to get this family business off the ground. We made the decision at the start to invest our hard-saved home deposit into Blackbird. We still don't own that home today. We do now employ over 25 people and compete on the world stage for visual effects work. These are highly skilled artists and technicians, and our competitive advantage is because of them. This success is due largely to supportive government settings that have attracted more visual effects work to Australia. We are currently finalising our first international long-form show. It's a huge step for us.

The plan to raise the PDV threshold threatens this investment because it rules out all projects that are less than $1 million. The projects we can attract between $500,000 and $1 million are absolutely essential to growing our business. To be really clear: we made a plan to grow our business based on the certainty that we would be able to promise that our clients could access the PDV offset. If they can't, that's our investment, our employees and our training opportunities gone. The proposed threshold increase opposes the government's intent to assist in the growth of our PDV sector. It will do exactly the opposite and only benefit companies already of scale, and stop those like us realising their growth potential. To enable this sector, with its enviable reputation for excellence, to survive and thrive, I ask the committee to recommend that the threshold not be increased.

Mr Savage : I'm the owner of Soundfirm, an Australian film and television company that was established in 1983 and operates facilities in Melbourne, Sydney and Beijing. We've been responsible for the post-production work on six of the 10 most successful Australian films of all time and we have won many local and international awards—including an Oscar for best sound, for Hacksaw Ridge.

Our industry is basically divided into three areas—production, post-production and visual effects. Production has been benefiting from many overseas companies choosing to shoot in Australia, but there's no direct incentive for them to stay and post. The upshot is that Australian post-production houses have not been sharing in this bonanza.

The PDV offset is specifically designed to attract post-production and visual effects work from overseas companies. This has been hugely successful for large visual effects companies which are generally foreign owned and work on much bigger budgets, so they'll not be concerned by this increase in the threshold. However, if this threshold were raised to $1 million, as intended, it would be nigh on impossible for smaller local companies to attract any of that work at all. In the past we've been struggling to benefit from the PDV offset, because in post-production the director of the project has been needed to attend during key parts of the process such as colour grading and mixing. Directors are usually time-poor during this period, and it's been difficult to get them to commit ahead of time to be in another country, Australia, when needed.

But this is no longer an impediment. One good thing to come out of the pandemic is the extraordinary development of cloud technology, which has enabled various post-production processes to be conducted remotely. Not only is it a safer way to work in COVID times; it's also cost-effective. Globally, this is the way post-production is now typically being handled. This gives us a great new opportunity to grow our local industry. At this crucial time, raising the PDV offset will crush the potential for many local firms to work on foreign productions that bring in foreign earnings. Such an opportunity is too important to lose.

CHAIR: Thank you very much. We will now go to questions.

Senator GREEN: Thanks very much to the production companies we've got on the line, Blackbird and Soundfirm, and thank you both for your submissions. In terms of the PDV offset, we've heard a lot from our previous witnesses about the impact to their industry. How will it impact your businesses in terms of turnover or the amount of people you employ? And what does it mean in terms of the business you get from overseas or domestically?

Ms Kavanagh : It's significant for us. The reality is that the majority of projects that we bid internationally are in that sweet spot between $500,000 and $1 million. Going up to a threshold of $1 million puts us out of that conversation and puts us out of the game. I can speak on behalf of most of the businesses; small to medium-sized, locally owned and Australian owned businesses would all be in that same position.

Mr Savage : We're not a visual effects house as such, so our situation is slightly different. In the past we have done some PDV between China and Australia, but the problem, as I mentioned, is that getting the director into the country during that post period has often been difficult. So this is a new opportunity to expand our revenue on the PDV line because of this new technology of not having to be all in the same place. We were getting very excited about doing this, because we've already done remote grading for films that have come here, and we've invested in cloud technology to be able to do that. Now the threshold is potentially going up, and it basically cuts us out, because we're not into larger budgets.

Senator GREEN: Just picking up on that point, I guess there are a lot of businesses and a lot of industries that are really struggling through the pandemic. Different parts of the screen industry have struggled. Your businesses, as I understand, have grown because of the increased use of remote services and that technology that you've invested in. Are you worried about these changes undoing that good work that you've managed to do during the pandemic?

Ms Kavanagh : Absolutely. We've made huge levels of investment in infrastructure to support the growth. We've invested in what we call our security accreditation, which is how you are able to work with some of those studios. You have to meet certain security credentials. We've spent tens of thousands of dollars to qualify for that. There's employment of people that we've brought on. I think a key role that we play is that I've got five employees directly out of tertiary education. For a lot of the small businesses, that's a role that we play: we take them young and we train them up. So you're looking at a huge impact. I've calculated that in the last three years we've probably invested about $170,000 in our export strategy, and that would all be gone because our export relevance sits between $500,000 and $1 million in budgets.

Senator GREEN: Thanks for that.

Mr Howard : Can I add something in response?

Senator GREEN: Of course.

Mr Howard : I think it's important to understand that from our perspective we have a lot of big productions but we operate smaller productions as well, and they're a really important part of the ecosystem of the industry. They're important for training people. They're important for the nature of the content itself. Not every production has to be big. Some really important ones are a lot smaller, but they're really important for the industry generally. If we were to cut those out, that would be an incredibly difficult thing for the industry to swallow, and it would adversely impact that training ground for individuals. We're already short of postproduction operatives generally within Australia. We need to bring on more people. We need smaller productions in that ecosystem.

Senator GREEN: Thanks. I have just one more question. Thanks, Mr Howard, for adding that. You mentioned Australian content quotas on streaming services. Why do you think that's important for the local industry?

Mr Howard : I think it's really important for a whole variety of reasons. I think they are inherently part of the system now. They're taking about $2 billion of revenue out of Australia, which is about the combined total of content spending of all the free-to-air networks. Even using their own figures, which I don't think are entirely accurate, they're putting back in about $230-odd million, which is not a significant amount. They're an important part of the system here. As we understand it, there is intent to sell up studios here for the international streamers. That will take away work for the independent production sector. They're part of the system here. There's a huge uptake of audiences watching the streamers now. It's incredibly important to have Australian content on those services and to have it specifically commissioned. The volume of content that the free-to-air networks are able to commission now, as their revenue declines, is reducing, and the pick-up in audiences has been taken by the streamers. So, if we want to have Australian content, we have to have serious commitments by the streamers to commission Australian content from the independent sector.

Senator GREEN: Thank you very much.

Senator McMAHON: My questions are primarily to Mr Howard. Could you give me a rough run-down very quickly of which of your productions would be affected by these changes and how they would be affected?

Mr Howard : Which particular changes ? There are a lot . In terms of our particular slate, the change to the offset would affect our drama productions in particular, and some of our documentary ones too. The revenue model, in terms of factual and documentary production, is ever more critical as revenue declines for all the Australian commissioning networks—free - to - air and public service broadcasters—and so this will make a critical difference to whether those factual and documentary shows can actually get made. That's a real live thing right now.

In terms of drama, I put the question back: how many Australian dramas have you seen on free-to-air television in the last year? There is a dearth of commissioning for a whole variety of reasons and an a limit on drama. This will help stimulate the industry to produce more Australian content dramas very significantly . The balancing up a little bit in terms of film will hopefully make a significant difference to getting more dramas commissioned. I think it has to be part and parcel of those obligations on the streamers , though , for it to have any great substance.

As I say, the 65-hour cap—we made a show called Offspring for many years. One of the principal reasons that's no longer on screen is that nobody could afford to make it anymore after Screen Australia couldn't afford to fund it. That's an example. I talked a bit in my introductory remarks about the impact of the PDV offset. It's an absolutely critical part of every finance plan for every show, with hundreds and hundreds of people employed across our productions every year and year on year. Without that, it w ould have a significant impact.

The change in the threshold level will not impact us directly. We're one of the largest producers in the country. The concern is more, as I say, for smaller productions, and certainly smaller production companies would be much more adversely affected than us. As I say, they're really important for the ecosystem to have people coming through, to have people trade and to have Australian content produced.

Senator McMAHON: From your perspective for your particular company, would the overall effects of this bill be positive for you?

Mr Howard : Yes, I'd say so. There are some things we'd challenge, but I would happily take the bill as it is more than not. I think it's critical for two important areas , in terms of scripted and documentary and that 30 per cent rate of offset. But the other points are still important.

Senator McMAHON: Yes, but you made the point that you're a bigger operation, and that it would be the smaller ones that would be more adversely affected—is that correct?

Mr Howard : That's right.

Senator McMAHON: How many productions would you say wouldn't proceed without the 20 to 30 per cent increase?

Mr Howard : Even in our case, I would say there are four to six productions that have been in discussion in the last year and a half where there has been great difficulty in trying to get them over the line and where this will make a fundamental difference. And that's just with us in the last year and a half.

Senator McMAHON: Is this increase likely to allow Australian producers to succeed in a global market?

Mr Howard : Absolutely. There's a great demand for good Australian content out there. I think we should be trying to stimulate as much production as possible. There's no dearth of talent, ability or great ideas within Australia. There's just not enough content being made to challenge the dominance of the bigger English-speaking countries. But we absolutely have the talent, the ability and the concept to do that; we just need more of it.

Senator McMAHON: Finally, could you detail how production costs have changed over the past ten years and how the global content market has changed?

Mr Howard : That's a very big question. I'm not sure I can answer that in a few minutes, but I'll try give a basic answer from our perspective. Certainly within this particular market, funding any production has got more and more difficult. The principal costs of production are people and places , by and large. You can add digital effects and those other elements, too, but those are the two principal costs. Those keep rising every year. The revenue available to most Australian commissioners has reduced year on year, taken away by the bigger American companies in terms of advertising revenue. The money available to public service broadcasters is challenged every year. The available revenue has declined and the costs have only increased. In addition, I would say there's a lot more money spent on productions now to cover things like duty of care and COVID costs . We are in the throes of huge amounts of effort and money being spent right now to try protect every production that we make , and every producer makes currently , to make it as safe as possible and to run very rigorous COVID regimes. That costs a fortune.

Part of the issue is that the market has become a world market in many senses because of the impact and the influence of the international streaming companies. I think it's important not to lose sight of that and its impact on the market here. Those streaming companies are incredibly important to the international industry. Without obligations on them, not only will they be able to pick and choose , and pay lip service to some extent or invest whatever they feel like at the time ; their ability to dictate terms is not measured in any particular way. I think there is a great avenue for the creation of a degree of competition, that including obligations within a particular territory could provide, to help stimulate the market here and stimulate the ability to create Australian IP and retain it here as part as part and parcel of trying to secure additional Australian content commissions.

Senator McMAHON: Thank you very much, Mr Howard. That's all from me, Chair.

CHAIR: Senator Hanson» - «Young» ?

Senator «HANSON» - «YOUNG» : I think we've covered most of the issues, Chair. Thank you.

CHAIR: Okay. Terrific. Can I say thank you to each of the witnesses for your submission and evidence here today. If you have been asked to take any additional questions, please have the responses back to the secretariat by close of business on Tuesday 4 August. That would be much appreciated.