Graham Hitchen is a specialist in the cultural and creative sector. He was the founding director of Creative London and is currently the chair of Creative Islington. This guest post is an edited version of an article originally published on Graham's website, Directional Thinking.
A recent pamphlet – which appears to be gaining currency among creative industry folk – seeks to argue that creative business is no more risky than other sectors of the economy. Risky Business, co-written by former Labour minister, Kitty Ussher, and Ed Vaizey’s former policy adviser, Helen Burrows, for the Demos think-tank (see this earlier blogpost), seeks to dispel a 'myth' that investing in creative industries is a high-risk activity.
As the blurb which prefaces the document states:
There is a persistent prejudice that the sector is inherently risky; that creative entrepreneurs are only in it due to their passion, not their business sense. This myth is dispelled in this pamphlet, which demonstrates that on average, creative enterprises are more likely to still be in existence after five years than other businesses.
But, sadly, this misunderstands the reality of creative business activity, in the sense that it tends to focus on certain sub-sectors where there is a more stable and consistent business model. For example, while businesses in some sectors (such as design and architecture) operate through an established model of ‘known demand’ – responding to client-need – others, notably music and film, do not. Investing in projects and, most difficult of all, businesses in these creative content sectors is a very high-risk exercise since it means investing in projects for which there is no ‘known demand’ at all.
When it comes to backing a film, a song, a band, a computer game, there is no tried-and-tested formula for knowing what will be a hit and what will be an almighty flop. Patrick McKenna, the CEO of Ingenious Media, one of Britain’s most important investors in media and entertainment companies, has written and spoken on this at some length. In his view, businesses in the creative content sectors are characterised by high sunk capital costs (to pay for making the film, the musical, the song and so on) in conditions where the demand for such products (the box office) cannot be tested in advance to give any reliable forecast of revenues. His experience suggests that the ratio of project failures to project success is as high as 10:1.
The real risk here is that Government follows the logic of the Demos report and starts unravelling some of the positive elements put in place over recent years to support R&D and incentivise risk-taking in the creative industries. Other countries – most notably Canada – have understood the risky nature of the creative industries and have put a range of measures in place, including direct support to businesses and infrastructure support.
We need to open up the debate and challenge some of the assumptions in the Demos report to ensure that Government understands more fully the nature of creative business investment, and to help realise the huge opportunities in this key growth sector.