Movie starved

Canada has paid millions to lure movie business. It's not working out.

In Toronto’s east end, behind flowerbed-adorned gates, rises Pinewood Toronto Studios. Home to seven sound stages, it’s air-conditioned and insulated with floor-to-ceiling noise-absorbing blankets. There’s a lounge for entertaining A-list talent, and an espresso bar in the lobby. Production offices boasts ergonomic Herman Miller furniture and natural light from wall-to-wall windows. The executive suites on the fourth floor have balconies. And then there’s the pièce de résistance: the 46,000-square-foot jumbo stage, the biggest of its kind in North America.

Indeed, the facility — originally dubbed Filmport — offers nearly everything the city’s converted warehouses and factories cannot. Foreign filmmakers, principally American, have shot in them for decades, putting up with leaky roofs and stifling temperatures during summers largely because it was cheap. But Pinewood Toronto aimed to compete on quality instead. Its target: big-budget Hollywood extravaganzas laden with special effects, with budgets often surpassing US$100 million. Transformers. G.I. Joe. Spider-Man.

But if visitors are not overwhelmed by the studio’s opulence, they’re certain to notice its other remarkable feature: silence. It’s not just the glass-wool insulation. A year after opening, Pinewood Toronto has yet to attract a single mega-production. Although five sound stages were occupied in late August, three were being used for TV commercials, which typically take a week or less to shoot. An entire wing of production offices sat empty, except, that is, for a dark meeting room, where a man was lying in the corner snoozing, with a baseball cap covering his face. Starved for business, the studio nearly ran out of cash earlier this year. City council recently voted to rescue it from the gaping jaws of insolvency. “I’ve never been involved in anything this bad, ever,” says Paul Bronfman, the only remaining original shareholder. “It has been a financial bloodbath, disaster, fiasco, whatever you want to call it. It has been horrific.”

Here’s the problem: Toronto isn’t the only city lusting after major motion pictures. With Vancouver, Montreal, New York and a host of other competitors jockeying to become low-cost production destinations, Toronto is learning just how hard it can be to stand apart. And this harsh lesson raises a pertinent question: Can Hollywood North ever be anything more than the real Hollywood’s bargain basement?

Canada has provided the backdrop for many blockbuster films over the years, including Oscar-winners like Titanic, Brokeback Mountain and Good Will Hunting. But for those in the industry, the ones that got away are almost as memorable. Take The Interpreter, a 2005 thriller starring Nicole Kidman as a United Nations translator who overhears an assassination plot against an African head of state. Industrial space in Toronto had been secured, and pre-production planning already begun, when New York swooped in and stole the show. “The State of New York, its two senators, the Mayor’s office all interceded with [U.N.] Secretary General Kofi Annan to allow for an unprecedented use of the General Assembly building for filming,” sniffed a report produced for the City of Toronto. “This kind of lobbying, which was essentially unheard of [before], was instrumental in moving that production out of Ontario to the U.S.”

Hollywood’s a fickle customer. A host of factors influence foreign producers when selecting sites, a process that can begin six months or more before filming begins. There are plenty of practical considerations, including the availability of qualified crews, adequate facilities, and appropriate sites for on-location shooting. And, of course, there’s cost. “In the end, a favourable combination of factors often tips the balance,” noted one Statistics Canada report.

For years, Canada played this game well. In the early 1990s, producers of foreign film and TV shows spent about $200 million in Canada on film crews, actors, equipment rentals, caterers and other costs. Hollywood execs liked the diverse shooting locations, such as British Columbia’s ski hills; Toronto can plausibly mimic New York, Chicago and other large American cities. Vancouver is in the same time zone as Los Angeles, and about three hours by plane. And nearly everybody speaks English.

The country’s greatest advantage, though, was cost. The loonie depreciated against the U.S. dollar during the mid-’90s. As with any other export, a weak currency proved a boon. For example, skilled Canadian film workers could be hired at wages markedly below those demanded by their American counterparts. Promoters of Canada’s film industry loudly trumpeted this exogenous benefit, aggressively courting foreign producers with primers on the descent of the Canadian buck.

But our national lust for film business didn’t stop there. In 1997, as annual foreign film revenues approached $1 billion, the federal government launched a tax credit designed to draw substantially more Hollywood money north. It refunded foreign producers a portion of their labour costs spent on Canadian residents. Ontario, B.C. and Quebec soon piled on their own tax incentives. This would prove to be the opening sequence in an epic game of one-upmanship.

For a time, these subsidies were highly successful. In 2003 and 2004, Canada brought in nearly $2 billion annually in foreign production revenue. The credits helped win blockbusters such as X-Men, The Day After Tomorrow and I, Robot. Eventually, even provinces not generally associated with the film business — Manitoba and Nova Scotia for example — began to attract substantial business.

But Canada’s good fortune did not go unnoticed. In the United States, “runaway pictures” (as Hollywood films shot abroad are known) had long been a touchy subject. As early as the late 1950s, one enterprising American film council demanded that Congress commence an investigation, claiming that “in most instances ‘runaway’ pictures made by American producers in foreign countries give employment to known Communists and thus give aid and comfort to the Communist conspiracy against the free world.” American unions were only slightly less bellicose in the late 1990s, when they lobbied for new legislations to stop productions from moving offshore.

Canada’s tax-credit regime came under fire throughout this decade as other jurisdictions copied it. Most U.S. states began with small incentives, but during the early 2000s some became more aggressive, notably Michigan and New York. So did offshore competitors like Australia, New Zealand and the United Kingdom. (Many jurisdictions adopted what they called “Canadian-style” tax credits.) The race to become the lowest-cost production centre had gone global. Meanwhile, in 2003, the Canadian dollar began strengthening on the back of the global commodity boom. According to one consultant’s report, once the loonie crossed 80¢US it had an “important psychological effect” on certain U.S. producers who focused almost exclusively on the exchange rate. Canada’s competitive advantage dwindled, and with it revenues from foreign films.

Hollywood North struggled to keep pace. The federal government boosted its tax credit in 2003, and after Ontario bumped its incentives the following year, other provinces followed. Yet the Canadian dollar continued rising. The incentives never quite seemed to bridge the gap, but that didn’t stop further escalation. B.C. boosted its film tax credit to 25% from 18% last year. Earlier this year, Quebec’s film commission called on the provincial government to sweeten the province’s film tax credit, using a 100-page document detailing financial incentives offered around the world. In June, Quebec announced its 25% cash-back incentive, which was previously applicable only to labour costs, would now extend to all expenditures paid to the province’s residents or companies. On its website, the Quebec Film and Television Council highlighted in capital letters that, combined with the federal film tax credit and an additional rebate on computer-generated imagery costs, “YOUR TOTAL EFFECTIVE TAX CREDIT COULD REACH 41.2%.”

Ontario matched Quebec’s incentive within weeks, a measure which will add $80 million per year to a tax credit that already totalled more than $30 million last year. Darcy McNeill, a spokesperson for the Ontario Ministry of Finance, claims the benefits will outweigh the costs several times over “in terms of the dollar value of productions we retain and attract to the province and in terms of jobs created.”

Industry veteran Bronfman, who benefits from such subsidies, concedes the one-upmanship has become “a bit silly.”

The results, so far, have been pretty uneven. Vancouver retains its status as one of North America’s top film production destinations — with annual revenue of about $1.2 billion in 2007–2008, it is not far off what it brought in during its heyday earlier this decade. Ontario, though, has lost considerable ground in recent years. “Other locations around the world have repeated the Ontario model and are beginning to out-compete the province,” noted one consultant’s study produced for the City of Toronto. Revenues from foreign productions totalled $350 million in 2007–08, down 38% from its peak in 2001–02. Quebec, meanwhile, has been particularly hurt by increased competition from U.S. states such as New York and countries ranging from Romania to Australia. More and more it seems Hollywood North is stuck in a losing game, a victim of its own tactics.

Filmport was intended to tip the balance of power back in Toronto’s favour.

In the late 1990s, the Toronto Economic Development Corp. (TEDCO) hired a Los Angeles–based consultant to produce a series of studies on the film industry and its commercial potential. In its first report in 1999, Economics Research Associates warned that “competing on the basis of price is not a sustainable long-term strategy.” There would always be other jurisdictions ready, willing and able to undercut. What the city really needed, ERA suggested, were purpose-built sound stages, which “would allow Ontario to be competitive in attracting high-cost, and therefore high value-added, international film feature productions.”

Other cities already had such facilities. In contrast with Hogtown’s often dilapidated stock, Vancouver already had six purpose-build sound stages at North Shore Studios. New facilities were also cropping up in Los Angeles and New York. Australia had built three in a short period; New Zealand, one. The consultants were quick to point out what many of these facilities had in common: aid from government, in one form or another.

In 2003, Toronto invited proposals for a world-class filmmaking showpiece. Rose Corp., a local merchant-banking firm that specialized in real estate, won the bid and took an 80% stake a year later. Comweb, the holding company for William F. White International, a supplier of camera cars, lighting, generators and other equipment to the entertainment production industry, took 20%. Toronto Film Studios, a long-time studio operator, would handle management. The city was, of course, also involved: TEDCO provided the 99-year lease on a 12-hectare plot in the city’s Port Lands district, an industrial wasteland in transition. The city paid $8 million to remediate the property, which was once an Imperial Oil storage facility.

But if the public tab seemed steep for fiscally challenged Toronto, much was promised in return: each year, $600 million of new economic activity for Ontario. There would be hundreds of new jobs created, not to mention more than $4 million in property taxes for the city.

Instead, Toronto got fiscal Armageddon. Plagued by delays, the studio was completed in August 2008 — nearly two years late and 25% over budget. The timing of its arrival was inopportune. A brutal recession was just beginning. The Canadian dollar hovered near parity with the U.S. dollar, erasing Canada’s foreign-exchange advantage. The Screen Actors Guild, a union representing actors in the U.S., was in the midst of a contract dispute with the Alliance of Motion Picture and Television Producers over royalties from DVD and online film and TV sales. Rose Corp. thought Filmport needed to attract three or four elephantine Hollywood productions each year to earn its keep; none materialized. “We were basically empty for seven months,” says Paul Bronfman, Comweb’s chairman and CEO, “and it just killed us.”

Ken Ferguson, former president of Rose Corp. subsidiary Toronto Film Studios, once confidently told reporters Rose would be “crazy” to walk away from its large investment in Filmport. If so, the studio’s early months evidently pushed the company over the edge. Rose sold its stake to Toronto’s ROI Capital, a wealth management company (which took 46%) and real estate developer Castlepoint Developments (14%). In a move billed as necessary to save the studio from insolvency, TEDCO picked up the remaining fifth for a reported $6.7 million.

The new investors demanded a change in management, and U.K.-based Pinewood Shepperton PLC (LSE: PWS), the leading supplier of studio and related services in Europe, was brought in to stem the bleeding. The facility was rebranded Pinewood Toronto Studios.

Bronfman, who stayed on as an investor rather than sell his stake for less than half its initial value, says many factors beyond anyone’s control have contributed to the studio’s struggle, but he admits the facility might have been “over-engineered.” It’s not as if the studio’s main customers, producers of big-budget Hollywood special-effects movies, stopped coming to Canada. Over the past year, Vancouver hosted Tron Legacy and Percy Jackson and the Olympians — the very sort of big-budget behemoths Filmport was built for.

“Filmport’s business model was flawed because producers don’t want to come to Toronto to pay Los Angeles rates for stages,” says Jim Mirkopoulos, vice-president of facility management at Cinespace Film Studios, a long-time studio operator in the city. Indeed, Pinewood’s price appears to be an issue among some of its potential customers. “Clients that we have, they just say, it’s too expensive and don’t want to discuss it any further,” says Peter Lukas, president and owner of Toronto’s Showline Studios.

Looking ahead, Pinewood Toronto Studios will benefit from Pinewood Shepperton’s marketing muscle. The latter boasts more than a 70-year history of housing movies, its more recent titles including The Dark Knight, The Bourne Ultimatum and Quantum of Solace. But it will be mainly up to Edith Myers, the managing director of Pinewood Toronto Studios, to make the facility a success.

A Montreal native, Myers has spent more than 20 years in the entertainment industry. As an investment banker, she helped broker director Ridley Scott’s purchase of Pinewood Studios in 1994. The British filmmaker was so impressed, he and his equally accomplished brother, director Tony Scott, hired her to be the chief operating officer of their businesses. Although Myers feels confident about her role at Pinewood Toronto Studios, she isn’t expecting an easy road. “This business is a very difficult one. The cost base is high. It’s going to take a long time for this business to be on a strong footing,” she says.

Her plan for Pinewood Toronto is simple: get the word out. Bring in as many Hollywood producers as possible to see the facility. Make a few trips each year to Los Angeles to drum up business. Keep track of films in development, and ensure their producers keep her studio in mind. Still, despite having a facility that “sells itself,” Myers has no illusions about the importance of cost. “Because it’s an international marketplace, other jurisdictions are bringing in tax credits all the time, and it’s becoming an increasingly important factor in determining where productions are made,” she says.

Bronfman agrees. The industry is price driven, he says, and if the dollar strengthens more, the government will need to step in yet again to keep Toronto competitive. “It’s all about economics,” he says. “People don’t care about good restaurants and good hotels and the CN Tower. They don’t care. They care about what it will cost.”

Still, he’s optimistic that given the recent boost to the Ontario tax credit, Hollywood will return to Toronto in force over the next year. He’s been down this road before. In the late ’80s, he and a partner built Vancouver’s North Shore Studios, which featured Canada’s first purpose-built sound stages. “The first three or four years were tough,” he recalls. “Then we got this show that we really didn’t think was going to last. It was called The X-Files, and this thing just put us on the map.” A few hit films could do the same for Pinewood Toronto. “Once they work in this place,” he predicts, “they’ll love it.”

There are early signs to justify that confidence. In late August, the Pennsylvania Film Office declared that director M. Night Shyamalan had abandoned plans to film his latest project, Devil, in the state. A twist ending of sorts, Shyamalan had filmed nearly all of his previous efforts in the Philadelphia area, but protracted uncertainty regarding the state’s tax credits swayed him to shoot outside the state. The Greater Philadelphia Film Office decried the lost jobs it said would result.

And Shyamalan’s destination? It’s Toronto. His producers confirmed they’ve already rented offices at Pinewood Toronto Studios, but were still shopping for sound stages at press time. One industry insider suspects Pinewood will win the shoot, too, since the city’s other studios are already booked. If so, the beleaguered studio (not to mention the city that has wagered millions on its success) may finally have a chance to prove it can stack up against its ever-expanding global competition.