A no-holds barred conversation with Luke Johnson, Chairman of private equity house Risk Capital Partners Ltd and former Chair of Channel 4, was the highlight of the British Video Association’s Annual General Meeting that brought 150 of the Who’s Whos of the video industry in London, co-sponsored by DVD Intelligence.

In a fireside chat with Lavinia Carey, the BVA’s Director General (below is an edited transcript), Johnson stressed the importance of ensuring that video entertainment continues to deliver the revenues needed to invest in new productions, as well as protecting the video industry from IP theft and other business models which do not allow content creators to get a fair price for their products.

Discussing the BVA’s role in 2011, Carey said that, as the industry evolves, the organisation has repositioned video entertainment this year to ensure it is not just seen as a physical product but also an online proposition, whether to stream or download to own.

In addition, the BVA has sought to encourage the media and politicians to recognise that physical and digital content are not in competition with each other but rather co-exist, “delivering video entertainment to viewers in ways that suit their lifestyles both at home and on the move.”

A research the BVA commissioned Oxford Economics into the value of the video entertainment industry to the British economy found that video entertainment generates on average 47% of film revenues and a third of the revenues for TV drama series. “We used this research to emphasise to policy makers why copyright theft, which costs the audiovisual sector more than £500 million in annual losses, is a considerable threat to the industry’s eco-system,” said Carey.

Lavinia Carey: Now that you are on the outside, what are your general comments on what’s happening in the audio-visual sector?

Luke Johnson: Well, I think firstly that the whole of the media, or the legacy bit as you might call it, is faced with significant structural change which is relentless and irreversible and probably accelerating. And I don’t think there are any simple or easy answers as to how this transition will take place so that you can replicate revenues that the industry has traditionally enjoyed.

The demand for all sorts of entertainment content will persist. Obviously the legacy products will carry on remaining important and profitable for some time to come, but over time platforms change and human behaviour changes and the industry must reinvent itself like radio, television, magazines and so forth.

Interestingly in the last two years, for example, the book industry has suddenly woken up to the fact that things have started changing because e-books have suddenly started catching on in an extraordinarily dramatic fashion. I’ve had my own violent experience of how tough it can be when there are underlying structural changes, particularly in the middle of a recession. I bought Borders in this country thinking it would be a cheap turn around and it was nothing of the kind. It was a failing business.

The key to all this is to make sure that your companies are doing this: moving quickly enough, but perhaps not too quickly, to ensure that you can maintain margins and profit and cash flow.

I think good work is being done because the IP Trust is already ensuring that piracy is prevented in a big way, and that’s a crucial step because you don’t want to go down the road that the music industry did where essentially the consumer got used to free content.

Obviously, consumption is still actually expanding in terms of people watching more video, which suggests that there’s still consumer demand. If people stay at home and watch more entertainment during tough times, that’s helpful too.

But clearly the wheel is turning. Distributors shut down and the already dominant on-line players like Apple and Amazon become ever more powerful. That creates its own, new, different sorts of challenges for the industry and I don’t think there are any easy solutions. If there were, other media groups would have found them by now.

Are there any other factors or pre-conditions, which you feel, would improve opportunities for the industry? For example, Ed Vaizey [Minister for Culture, Communications and the Creative Industries] talks about superfast broadband.

I think it is been very helpful for your industry that downloading a 2-hour movie for most people has taken too long because of the slow bandwidth. With faster speed videos would have been pirated to death by now. So, I think it’s a good thing that superfast broadband hasn’t been available.

I quite agree with that because we would not have had a Digital Economy Act to create the stick that’s needed. Look what happens in South Korea. Do you think the Government is doing enough here?

On piracy and protection of intellectual property, I was disappointed by Hargreaves’ report and I’m afraid to say that the Government has been influenced by outside forces.

What are you referring to, the author of that report?

It is an illusory idea to state that if you make all intellectual property free, patents, copyright and everything else, that will unleash an extraordinary entrepreneurial explosion, replicating Silicon Valley, creating jobs and wealth.

Britain is an extraordinarily creative nation. We outperform magnificently everyone in terms of our outputs in the creative industries, particularly in areas like video. A fact, we are responsible for three out of four of the great film franchises of all time: James Bond, Harry Potter and Lord of the Rings. Through not in every aspect, but without the Brits they wouldn’t exist. And considering how small we are and with a broken economy, that in itself tells you just how important we are. All the giant digital businesses like Amazon, Apple and Google are all based on the West Coast of the US not here and none of them to any great extent invest in content.

They undermine the current economic model through either siphoning away advertising, or, implicitly, encouraging piracy or by taking a big slice of the revenues and becoming monopolistic in terms of how that happens. Amazon accounts for well over 50% of all income, it’s pretty scary. One of the more extraordinary phenomena of the Internet is that you would have thought that with new and low barrier entry to this industry, there market would be highly fragmented and unusually competitive. But in certain respects, I don’t think it is at all.

I think it is most unfortunate, for example, that Google controls an almost higher market share in terms of search in this country than in any other country in the world. I think it is a parasitic organisation that lives off the content paid for by others. Therefore, from the point of view of the UK economy it’s a disaster, and I do worry that certain people in Government are under the illusion that we will somehow create the equivalent players, and that the way to embrace the digital economy is to make life easy for those enormous companies.

Well, a lot of people here are involved in trying to persuade the Government of that.

I do my bit by writing and attending events like this. I have no vested financial or economic interest in this whatsoever, I am simply astounded that so many people across the media industry are so complacent, so cowardly and not willing to speak up more.

[…] I’m amazed that the media, newspaper, radio and other industries, have not already got together in a room one day and fund the relevant work to try and tackle these issues. As a nation, as an economy, we are uniquely vulnerable to the fact that we punch wildly above our weight in these creative industries. Google have a disproportionate market share and search, and therefore power, and we have some incredibly successful advertising-funded industries. If you look at Channel 4, for example, which I do know about, it funds film, funds independent production directly and indirectly. Why do you think that they’re now only willing to pay three quarters of a million pounds per hour for our drama, £600,000 next year, £500,000 the year after? That’s because the advertising revenues are falling, and where is the advertising going? It’s going to Google’s Headquarters.

It’s an incredibly simple little graph. And why more people aren’t shouting about this? You would think that the strength and capacity of the cultural and artistic industry in public life is such that all the big names would be out there on the telly, in the newspapers and magazines every day, causing a fuss. Instead, they all want to go to that Google festival.

Now that Jeremy Hunt [Secretary of State for Culture, Olympics, Media and Sport] has said publicly that advertising on pirate sites should be dealt with, do you think we can persuade him to do something to get the likes of Google to play their part? What do you think Google should be doing?

I think Google should be paying more tax. I employ three times more people in this country than Google. I think they should be investing more in the UK creative industries and I think they should probably pay some sort of levy on content from which they gain advertising revenues, on YouTube alone. They’re like a bigger, posher version of Pirate Bay, really.

I think if people don’t gang up on them, as you say, is perhaps because it hasn’t been very cool to sound like you are anti technology.

I’m incredibly pro-technology, we all are. Content creators are not getting their fair reward for their efforts, and the idea that an amateur will create a wonderful 2-hour movie is not going to happen.

Charles Stewart-Smith [Associate, Luther Pendragon]: As an investor, where would you be investing in the creative industries at the moment? Or perhaps where are you?

Well, I do in a tiny way, I run small businesses that are a fraction of the size of the ones we have been talking, so I tend to look at the macro economy, basically. I look at businesses that I think have outstanding management and have an impressive track record and are growing. I don’t mind investing in an industry that is static as long as the business I am investing in is outperforming.

Take the hospitality industry, which I know very well. I continue investing even though parts of it are suffering, and is constrained by consumer spending. But I think that there are always winners and it’s about your industries. Clearly, those companies that are at the leading edge, but not too far ahead, in terms of HD and 3D and all the other clever innovations, will, continue to excite consumers and drive sales.

I suppose I am a little old-fashioned in that I think physical ownership of books, DVDs and so forth will remain attractive for quite a proportion of the population. I’ve always taken a view that, given the amount of sales that are gifted at Christmas, somehow a download as a present does not feel quite the same as a physical object that you get to unwrap on Christmas Day. You know, there is plenty of life in the old dog yet.

I was talking to a book publisher the other day that is actually managing to maintain the price of e-books, even though they are fantastically cheaper to deliver. And because, in my opinion, book publishers are not being overly generous in terms of the royalties they pay authors, e-books are actually more profitable for them.

Some book publishers already reckon they are seeing some sort of Nirvana where they no longer print books, they only deliver them electronically, they maintain the price structure and, thus, it becomes a dramatically more profitable industry. I think that is an illusion because the public won’t stomach quite the same price structure for digital products. But I think an industry you haven’t got all this stock, you haven’t got returns and you haven’t got retailers like Woolworths going bust and not paying you, must be a profitable industry.

Any concluding thought?

How video entertainment, films and TV programmes are made is an important cultural and economic part of the UK infrastructure. The strength and vibrancy of our media industry is not just an economic argument, it’s an incredibly important argument about our influence and our importance in the world. Countries like Britain are influential in part because culturally and artistically we punch well above our weight thanks to lots of organisations like the BBC, Channel 4 and all the film studios that use and work with talents here – everything from theatre through to our newspapers and magazines.

And so, to give away the whole model, to destroy the model by undermining it would, I think, be a tragedy, and it’s not necessary. Thanks to the fact that we do still, I am glad to say, control our own laws, it is within our power, as a nation, to decide whether we want to maintain sufficient levels of profits and revenue generation capacity, so that those who put the effort are rewarded. Otherwise, the quality would surely diminish and our thatched stature and status will decline. And we as a nation will be losers. I cannot see any of the upside that people talk about, from not defending what is incredibly important for us.

(Interview transcription courtesy of Luther Pandragon; abridged and edited by DVD Intelligence)

Story filed 10.11.11