This is the transcript of a speech given by Jonathan Kestenbaum at the National Creative Industries Conference in London on 25 November 2009.
Imagine you're Sam, Jack and Harry Warner, at the beginning of 1926. It's your worst year ever for movie revenues and you have the big 5 studios in Hollywood trying to put you out of business.
You know 'what works' in terms of pulling audiences in but do you stick with the tried and tested formula or take a leap into the unknown?
You go against conventional wisdom and defy the advice of the world's biggest movie star, Charlie Chaplin. You take a gamble on untried and untested sound technology and release the Jazz Singer.
In so doing you change the movie world forever, delighting existing audiences and entrancing a whole new world of movie goers.
The risks these guys took were huge but the gains were greater: in two years they not only became the most successful studio in the world, they created more employment (hiring musicians) and gave birth to a whole new publishing empire called Warner Music.
This was not just a creative leap - it involved an entirely new way of doing business. This combination of creative vision and business innovation was ultimately the key to huge commercial success.
It will come as no surprise to this audience that we are facing a similar pivotal moment now: old business models are under threat, shaken to the roots by the digital technologies, abundant bandwidth and increasingly ubiquitous access to content.
And much like the pioneers who followed in Warner Brothers' footsteps, we face the challenge of innovating and transforming our sector in the teeth of a severe recession.
But innovating is tough enough for big corporations like Warner Bros so for many British creative businesses, which are minnows in comparison but who have huge growth potential, they can be so busy "running to stand still" that they lack the capacity to explore and experiment. Moreover, UK creative businesses too often focus on creative practise at the expense of, rather than alongside, their business sustainability.
So I'd like in my comments today to focus on what can be done to create the right conditions for this innovation, so that the UK can continue to host one of the world's most dynamic and inspiring creative sectors.
And as I say this will concentrate on those 3 key issues - new business models, risk capital and public policy.
But it's worth looking at the context in which these dilemmas sit, what there is to play for and what is at stake.
Up until now, the creative industries in the UK have enjoyed incredible success. They have historically grown at faster rates than the rest of the economy, and currently employ over a million people.
Equally important, is the growing evidence that creative businesses support innovation and growth in other sectors of the economy too. This success has enabled our country to re-invest in nurturing creative talent.
But despite our great reservoir of creative talent, this economic performance has been enabled by business models which are now under severe pressure.
Creative businesses in areas as wide ranging as television, design, software, music and games have learned that traditional revenue sources can dry up, in some cases very rapidly, in the face of overseas competition and ever-faster technological change.
If we don't face up to this threat, then we risk not just the loss of a world-class creative community, but also damaging our cultural identity which in part, comes from the consumption of original, UK-based content.
It's increasingly clear that future prosperity will come from the vanguard of the highest growth creative ventures. New research published today by NESTA today shows that if it hadn't been for 7.5% of high-growth creative businesses creative Britain would have shrunk not expanded.
Let's consider that figure.
That means that were it not for this small number of businesses, less than one in twelve, the creative industries as a whole would have shed jobs over the past decade.
It is these fast-growing businesses where the future success of our sector lies, creating new jobs and economic prosperity.
And it will come as no surprise to you that the same research showed that these businesses are more likely to be innovators, and that innovation is strongly linked to their ability to grow.
The question our work at NESTA has set out to address is how we ensure that these creative businesses have the best chance of growth in the future against a backdrop of extreme disruption?
Our work with growing creative businesses suggests that the two issues at the heart of the growth agenda are utterly clear -
New business models need to generate revenues which are more suited to the ways which audiences increasingly consume their creative content. And we need to facilitate extensive experimentation with these innovations.
Consider a couple of examples:
1. The film industry rapidly needs to develop legal distribution models to address piracy. Identifying where consumers will pay is a critical question.
To this end NESTA and the UK Film Council have been running a digital distribution pilot, called Take 12. One of the companies in this pilot, VOD Almighty, owns a catalogue of niche independent films. The web gives VOD Almighty cheap access to global audiences for such movies and a fantastic social network for promotion. We have enabled them to test the model that finds ways for audiences to pay for specialised content on demand.
It is through such tangible examples of innovation that whole industries are changed. The lessons from the Take 12 programme are stimulating a greater appetite for experimentation with online distribution models.
The £5m Innovation Fund proposed by the UK Film Council last week to fund further experiments with film business models is to be much welcomed because it is one way of providing creative firms with the capital they need to take risks.
2. My second example focuses on the games industry. Traditional console games developers in the UK have been slow to move on to the internet where users come to play together.
But a high-growth business like Jagex Limited has developed Runescape, the world's most successful browser-based game. The web has allowed Jagex to exploit a variety of different payment and advertising models. Now there are French, German and Asian versions, and last month there was a massive launch in India.
We need to back more Jagexes in the UK. I'd like to see a games industry that frees itself from the old model of developer/publisher to exploit direct relationships with consumers.
NESTA, in partnership with TIGA, the independent games developer's association, recently launched Creative Switch. This project encourages traditional games companies to work with a much broader range of creative businesses across film, TV and digital media in order to explore online revenue models.
Our role, in both Take 12 and Creative Switch allows small creative businesses, the lifeblood of the sector to experiment with new models and prepare for growth.
Access to capital is the second key challenge and the difficulty of financing creative businesses in a notoriously hit-driven sector is well-known.
Twin this with the widespread perception that many creative businesses are run by individuals with a passion for their creative practice, but might not have the skills to grow their business, and you see why creative ventures with even the strongest growth potential face a high cost of finance.
Even in the best of times the most promising creative venture finds it hard to access growth finance to trial new models fit for the digital world.
Venture Capital is ever scarcer let alone bank debt. Bank lending to businesses fell by £8.4 billion and Venture Capital is down 70% in 2008 and the number of VC deals for our sector has halved between 2008 and 2007. And we know that at a moment like this all eyes turn to enlightened public private funds which can absorb risk and encourage long term development.
But let me be clear this should be designed to incentivise and not subsidise growth. A creative ventures fund that makes use of private capital, investment expertise and the ability to lever in venture finance to back growth opportunities in the creative sectors is a promising one.
We must find ways to ensure that early-stage risk finance is available for the UK's most promising creative businesses.
So just a brief word on policy.
When it comes to risk capital there is often more heat than light. In some cases, risk capital can also be incentivised by amendments to existing R & D incentives. Some say that a games tax incentive, which rewards the development of new IP will help stimulate our games developers towards growth.
Indeed NESTA has undertaken research to show that this measure could halt the decline of our video games industry.
Government funds for creative ventures will bump up against the bankrupt public purse and we need to be realistic about that.
Policy also needs to provide a framework and data that is relevant to fast-changing business needs. It needs to understand the nature of the structural changes the sector is experiencing. A giant leap was made when the concept of the "creative industries" put creativity on the economic policy landscape. The fact that measures of economic output, employment and exports for the creative industries are available on a consistent and regular basis allows policymakers to benchmark economic performance over time.
But the industrial classifications that underpin current definitions of the creative industries are becoming increasingly obsolete. NESTA research shows for example that over 50% of creative specialists actually work outside the creative industries. Convergence is giving rise to entirely new sectors.
And the traditional emphasis on these creative sub-sectors. also downplays linkages between these sectors and beyond. NESTA research finds that creative businesses stimulate and support innovation in the wider economy through their B2B relationships with other sectors.
Public policy needs to be as agile as the agility it affects of the industry.
At this time more than any other we must foster the conditions for experimentation, risk finance, and enlightened public policy. NESTA has a distinctive role in this task and occupies a unique place in the creative economy.
Structured as an endowment, independent from government, and with a mission to experiment, we bring together research, practical programmes and policy development in one place.
Our focus on the creative industries stems, as I have discussed, from our view that it is one of the UK's future growth sectors. If the creative industries can identify successful business models, we project that they will contribute £85 billion in value added by 2013, employing 1.3 million, more than the financial services sector.
NESTA therefore trials experiments to support growth. Learning and sharing these lessons on how Britain's creative economy can thrive, informed by groundbreaking research and tested by experimenting directly with creative organisations is our unique contribution to the UK's innovation system:
- One of our flagship pilots in this area is Creative Credits a voucher scheme which aims to encourage innovation by building new relationships between creative and non-creative businesses.
- In the cultural space, we have supported the National Theatre to pilot NT Live, broadcasting live performances to digital cinemas around the world in order to reach new audiences and test the sustainability of a new business model for live theatre.
Our goals from all this work are to demonstrate ways of expanding those critical 7.5% of high-growth creative businesses, to increase the appetite for testing new business models, and to provide policymakers with better data to make informed choices.
If we get this right, we'll have a diverse pool of creative businesses with a mindset open to new ways of working and thinking which exploit cutting-edge technologies and keep up with evolving consumer needs. We'll have broader and more intelligent sources of risk capital for financing investment in the most innovative and high growth potential businesses in the creative industries. And we'll have an evolving research-based policy framework that supports the UK's creative economy.
For many decades, the UK has punched above its weight in the creative industries.
The creative industries have the potential to grow the UK out of recession. But the rules of the game are changing fast. What made the UK's creative businesses successful in the past will not keep them at the top in the future.
For industry this means adapting quickly to capture value in digital markets. Not to look back to the way things used to be before, but to seize the digital future.
For Government this means creating an environment where creative firms have access to the resources they need to innovate and grow. This will require improving access to skills and finance for high growth creative firms.
NESTA will continue to work in the important space between industry and government, producing robust evidence to inform the formulation of creative industry policy, and demonstrating the value of initiatives to support the activities of innovative creative businesses.
T +44 (0)20 7438 2500
F +44 (0)20 7438 2501
Nesta Operating Company, a company limited by guarantee registered in England and Wales with company number 7706036 and charity number 1144091. Registered as a charity in Scotland number SC042833.
