A year ago, Screen's European Film Summit in Berlin was already focused on the dark clouds on the horizon - the terms 'credit crunch' and 'sub-prime' permeated almost all the discussions. Few, however, were predicting the abrupt ending of a credit boom would lead to the kind of downturn we are now seeing in economies.
The extent to which the wider global economic trends will impact European film will underpin much of this year's event on February 9 at the Canadian Embassy in Berlin. The conference will look at how much a liquidity crisis has added to and accelerated, rather than created, problems the independent industry was already facing - notably in the area of distribution.
The irony is that much of the public discussion about film is focused on how the industry is miraculously escaping the effects of the downturn. The notion of recession-proof cinema has a basis in truth - box-office revenues have remained robust and rose significantly in much of the continent in 2008 - albeit with a significant caveat.
In Spain, for example, the 12.5% year-on-year rise in receipts disguised an actual drop in admissions, with exchange-rate fluctuations accounting for the rise.
Nonetheless, European box office does not seem to be suffering from lack of demand. The Hollywood majors, of course, account for the lion's share of the takings but some countries, notably France, enjoyed a bumper year. Dany Boon's Welcome To The Sticks, for example, notched up an impressive 20.4 million visits and helped towards a 16% increase in French film exports.
The UK also had a strong year, with Mamma Mia! The Movie and Quantum Of Solace among UK-claimed successes. While an argument about what counts as a British film continues to dog the calculation of local success, no-one can deny that UK talent is hot this year, mopping up global awards as well as bringing in the customers with a 1.1% increase in admissions year on year in 2008 to 164.2 million.
From a film finance perspective, however, the issue is whether strong public demand for studio-dominated product translates into a solid base from which the whole business can benefit.
The inefficiencies of distribution, the collapse of television revenues and an outbreak of ultra-conservatism in banking are going to cause major problems for most European indies this year, even if there are still queues at the cinemas.
The European industry, nonetheless, will always be, to an extent, cocooned from the worst effects of the downturn, supported as it is by subsidies based on the idea of 'cultural exception'. As a result, one could argue that what is remarkable about the last year is how little has changed.
The end of a short-lived but dramatic hedge-fund boom that had pumped billions into film was a shock to the system for the studios and larger US independents. Yet slate finance never really made an impact in a fragmented independent European industry. Europe's relatively small film businesses supported by cultural subsidies may even be finding that small is beautiful compared to the studio situation of belonging to diversified multinational conglomerates.
The irony for much of Europe is that the financial collapse comes during a period when the tax breaks supporting film have finally reached a degree of stability after years of turmoil. While the UK has been suffering an alarming drop in co-productions, few argue that its tax credit has bedded down better than might have been expected.
The German Federal Film Fund (Dfff) - established after a painful collapse of local media funds - has had a particularly impressive opening. With an annual budget of $79m (EUR60m) and a reimbursement of 20 cents for each euro of German spend, up to a maximum of 80% of a film's total production costs, it has gone a long way to promoting local film production as well as the international competitiveness of the German industry and locations.
The Dfff has quickly become a popular funding source for international producers. By 2008, more than one third of the 99 projects supported were international co-productions. Stephen Frears' Cheri, Julie Delpy's The Countess, Christian Alvart's futuristic thriller Pandorum and James McTeigue's Ninja Assassin have all benefited. In total they received $37.8m (EUR28.7m) funding for German spend.
"The Dfff is a terrific system," says Robert Kulzer of Constantin Film, which received $4.9m (EUR3.7m) for the US-Germany co-production Pandorum. "They have really learned from other places like Canada, and what I like about the German system is that it is purely about the German spend, so they don't restrict you in terms of crew or the cast."
The Italians also saw approval at a European level this month for the bulk of its first tax-credit system.
As a result of this support, production levels in Europe have kept at a very high level historically. But therein lies a problem. While the number of films made has stayed high, distribution has been at best patchy and production has certainly not been tied to demand.
For the banks, there has been a sea change in attitudes over the last year.Banks which have historically been great supporters of film now talk about a necessary 'flight to quality' and the need for a 'track record'. In other words, they want to know that a film can make significant numbers at the box office before they sign anything over.
Speaking at the UK Film Finance Summit last year, Ian Hutchinson, associate director, film finance group, at the Bank of Ireland warned this is a time when track records are critical: "Track record has always been important and it's getting increasingly important as banks get more selective. It's quite difficult for first-time or inexperienced directors and producers to get financing."
And there is a clear sense of realism now. "It's obvious when a bank makes a loan that it wants its money back," says Antoine Virenque, secretary general of the International Federation of Film Distributors Associations. "If you have no TV pre-sale, no distributor pre-sales, then you have to find other ways to finance and not many producers are able to do so."
More generally, private investors are more risk-averse than ever - and the enthusiasm for film had waned anyway once the tasty loopholes provided by the UK sale-and-leaseback system, for example, disappeared.
There may be another attempt this year to find a hole in the UK's tax policy, allowing some form of so-called 'sideways loss relief', meaning the chance to offset tax against projected losses. But in the current climate it is even less likely to succeed than it has in the last two years, when such schemes were quickly kicked into touch by the UK Treasury.
The problem is that while demand is solid, the means to service that demand is more precarious. And banks want to know that when they lend money they have a chance to recoup that from sales.
One of the biggest problems has been a downturn in the money from television. Even before the credit crunch, television pre-sales were on the rack - victims of changing customer tastes but also of a shift to a non-linear model of multi-channel television.
In some countries, notably France, there is a degree of protection for local films, while public-sector broadcasting in others, such as the UK, adds a degree of security. But few distributors are convinced that life is going to be easy for independent productions.
Sara Frain, general manager for distribution at UK outfit Metrodome, sees a tough time ahead for independent productions and English-language titles in particular, which face direct competition from studio releases. "Moving forward it will definitely be tougher for the indies - they will really need to break out theatrically for them to stand a chance on TV," she says.
And then there is the reality of budget cuts at the major broadcasters, which is pushing them towards lower-cost programming, such as reality television.
"You can certainly say that pre-sales have been collapsing for a long time with regard to UK productions," says Stephen Kelliher, head of sales and marketing at the UK's Bankside Films. "It's very difficult to get financing if Channel 4 or the BBC are not involved, and their resources are finite. We are hearing that loud and clear at the moment. It's definitely a problem. I can't see any signs of it changing in the near future. It really is to do with resources as opposed to other factors."
More rational models
Stewart Till, CEO of Stadium Films and former head of PolyGram, says the system is unbalanced. "We need more rational and sophisticated business models," he has suggested. "You can't have all that size and muscle with the studios at one end of the scale and no muscle at all at the other." Filling the gap has been a problem since the demise of PolyGram, Till suggests, and that ambition underpins his acquisition of Icon's international operations.
It is an ambition he shares with competitors - at last year's Berlin conference, Tarak Ben Ammar announced plans for a pan-European distribution network. Based on an initial partnership with French, Italian, Scandinavian and German distributors, Ammar's goal is to market and distribute its films across all the territories simultaneously. "Our desire is to be an independent European distributor that offers the same quality as the majors," Ammar said at the time.
He acknowledged, however, that he is not alone in his vision - also in the mix were Canal Plus, Wild Bunch and Entertainment One among possible others. A renewed attempt to rewrite the rule book can be seen in recent developments at Universal Pictures and Focus Features International, most recently the deal with Italian production outfit Cattleya, aiming to marry local expertise with the benefits of an international operation.
As Focus Features International co-CEO Christian Grass says: "This is a win-win situation, where we can bring together local expertise and access to the international market. Local expertise in terms of Cattleya's local production and UPI's local distribution; and an international perspective in terms of potentially selling international rights on certain projects, providing opportunities for local talent to get international exposure, as well as remake possibilities."
What they all have in common is a shared recognition that distribution is now the critical issue for film.
European film has advantages over other areas of industry, such as car-manufacturing, in that it has recognised there is room for manoeuvre, albeit at a price.
One of the main areas, which has a largely indirect impact on production finance, is the advent of digital cinema. The arrival of 3D offers a way to refresh big studio content and potentially a new lease of life. The less publicised advantage of D-cinema is in finding new routes to the big screen for smaller independent film. The opportunity for much more varied programming ought to bring advantages.
The difficulty is that D-cinema continues to grow at a snail's pace. Indeed, as Screen has highlighted over the last year, there is even a genuine threat to much of Europe's arthouse structure, which cannot afford to make the digital switch yet sustains much of the box office for specialist film.
The second digital opportunity comes in new forms of distribution. While it may be difficult to reach audiences through traditional approaches to television and theatres, opportunities exist most obviously for online exploitation.
However, this potential new form of distribution still has some technical and legal hurdles to jump in Europe's fragmented continent before it can be fully exploited. In the meantime, digital still allows the industry the opportunity not just to revisit but to rethink radically its traditional channels to audiences.
Real innovation is a possibility here and while there have been few bold enough to make the leap to date, those who have are keen to point out the advantages. As Louisa Dent, managing director at UK distributor Artificial Eye, explains: "Our successful simultaneous theatrical releases of The Edge Of Heaven and Julia in cinemas and on BSkyB, which has nothing to do with TV pre-sales but with digital innovation, was a very positive thing. It meant that people from even the most remote places in the UK were able to see the films on the day of their cinematic release, for the same price."
Yet the key issue remains that the business model that allows video-on-demand, for example, to flourish is still seen widely as contradicting the best interests of the existing business.
It is that widespread reluctance to move towards new models that is problematic, particularly if the industry succumbs to the idea that it is recession-proof.
It is possible that as historical and even more recent sources of finance become less readily available - and the common sense of new developments in distribution such as Universal's move this week are thrown into relief by the economic crisis - those attitudes may change more quickly than has seemed likely.
However, current figures seem to bear out the theory that in more difficult economic times the public will continue to look to the cinema for diversion. That means that while in the short term production levels may undergo a correction, the European subsidy culture should ensure that certain films will continue to be made.
The long-term prospects for the European industry remain healthy, suggests Till, and it comes down to the fact the demand is still there. However, the parameters have changed and the long-term challenge for the industry will be to demonstrate to potential sources of finance that that demand can be fully exploited. As Till says: "We should not be seduced by the idea that film is recession-proof, but neither should we ignore it."
Additional reporting by Olia Hercules and Audrey Ward
Screen's european film finance summit
Screen International's European Film Finance Summit takes place at the Canadian Embassy in Berlin on Monday, February 9.
Among the speakers will be Ben Waisbren, president and CEO, Continental Entertainment Capital; Stewart Till, CEO, Stadium; Christian Grass, co-CEO, Focus Features International; Francis Boespflug, president, Warner Brothers France; Dr Carl Woebcken, president and CEO, Studio Babelsberg; Dirk Schurhoff, managing director, Beta Cinema; Anick Poirier, vice-president, international sales, Seville Pictures; Bill Lischak, COO, Odd Lot Entertainment; Alki David, chairman and CEO, Filmon.com and 111 Pictures; Ian Hutchinson, director, Bank of Ireland; Stephane Cordier, director-general, Cofiloisirs; Bernie Stampfer, senior vice-president, Expert Group Media - corporate and investment banking, Deutsche Bank AG; and Michael Gubbins, editor, Screen International.
The event will be chaired by Jonathan Olsberg of Olsberg SPI.