Amazon is coming to New Zealand in a deal that will see hundreds of millions of dollars in film subsidies paid out to one of the world's biggest companies. But how did the deal come about? Take a journey behind the scenes of fancy dinners, tough negotiations and fears of Middle Earth moving overseas.
On the first of March 2020, a group of senior civil servants, from Tourism New Zealand, the Film Commission, and MBIE were on Waiheke Island.
Their guests were a group of Americans from one of the world's largest companies, Amazon, founded and run by Jeff Bezos, who was the world's richest man during the period the deal was negotiated.
The New Zealanders' goal was to show them a good time. Sunday was spent exploring Waiheke Island while the group dined at top Auckland restaurants Amano and Odettes Eatery.
At stake was UAP, a humble acronym that belies its immense significance to the Government and New Zealand. UAP, or "Unnamed Amazon Production", is an abbreviation for television series produced by the TV arm of Amazon.
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The TV series, already being filmed in New Zealand and billed as one of the largest ever made, was based on LOTR, another acronym, this time one more familiar to New Zealanders: Lord of the Rings .
Like all screen productions based in New Zealand, UAP qualified for a 20 per cent rebate on nearly every dollar spent here. But economically significant productions are invited to apply for a 5 per cent uplift, taking the subsidy to a full 25 per cent.
The Auckland meetings were about negotiating what New Zealand would get for that 5 per cent.
For a TV series looking at filming for a decade, that 5 per cent equates to tens of millions of dollars. But getting the money isn't easy. The Government requires each production to sign a Memorandum of Understanding to make sure that the country gets the "significant economic benefits" the productions promise.
Stuff can piece together the years spent negotiating the deal thanks to a long-running Official Information Act request.
A small number of films have qualified for the 5 per cent uplift, but proving significant economic benefit are often confined to things like tourism or reinvestment in the film industry. With Amazon, officials wanted something different. They wanted a foot in the door with not just Amazon Studios, the TV and film arm, but other Amazon companies, particularly in the tech side of things.
A long-expected journey
Three senior Amazon staff came to New Zealand to kick off negotiations: Tom Florino, senior manager, economic development; Lloyd Chee, senior corporate counsel; and Sara Karublan, corporate council.
By all accounts it went well. On March 5, Catherine Bates, who manages the film grant programme for the Film Commission, emailed attendees wishing them well.
"Sara and Lloyd – travel safely home tonight
"Tom, enjoy the next few days in NZ," she wrote.
Amazon first met with the Ministry of Business, Innovation and Enterprise (MBIE) and the NZ Film Commission in September 2018, but it wasn't until a year later the group applied for the 5 per cent uplift.
Florino shared – using an Amazon platform of course – preliminary documents with Bates.
Bates and other senior public servants looked at the proposal. They also got ready to meet Amazon Studios executives in Los Angeles, where the Film Commission was sending representatives for November’s American Film Market trade show.
By November 2019, executives were talking about how the agreement would be structured. There would effectively be two deals: one for the series as a whole, and one for each season that was produced in New Zealand.
A decision paper – with tracked changes – from November 19, shows officials were worried about losing New Zealand's "exclusivity". If other countries were used as locations for the series, could New Zealand lose its claim to be the real world Middle-Earth?
The paper was used by the SEB Panel (Significant Economic Benefits), a group of officials from Tourism, MBIE, and the Film Commission, who debate the productions' benefits to New Zealand. The SEB team needed to be convinced that the project met the economic criteria for the 5 per cent uplift before final negotiations for the Memorandum of Understanding could proceed.
Treasury, the government department notoriously sceptical of film subsidies, was not involved.
Waikato, Queenstown, and West Auckland were considered for locations, the paper said. About 51,000 hotels or apartments would be used during the production, 76,000 cars would be hired and about 90 per cent of the crew would come from New Zealand, and 20 per cent of the lead and supporting cast.
This was important. Films qualifying for the uplift need to meet a points test showing they employ a minimum amount of local staff, and promise to invest a substantial amount of money in New Zealand.
While Tourism and Film Commission officials were keen on the deal, MBIE cautioned against providing unconditional approval of Amazon's application saying "some aspects of the application are inconsistent with the NZSPG [NZ Screen Production Grant] Criteria". For example, Amazon wanted some money to automatically qualify for the grant, significantly increasing the cost.
What MBIE really wanted was something else: a relationship with Amazon itself, not just Amazon Studios.
MBIE's notes say they wanted Amazon to demonstrate four things in their final proposal.
First, "opportunities to showcase New Zealand in a serious and meaningful way to senior Amazon business leaders, through targeted visits to New Zealand".
Second, "ways to engage Amazon as a partner in fostering innovation in New Zealand, such as providing support for scholarships, student exchanges, prizes for innovation challenges or science/digital awards" – even internships.
The third suggestion was, "a willingness to explore innovative opportunities which can support inclusive economic development across different parts of New Zealand".
And finally, MBIE wanted Amazon to show opportunities for New Zealand to showcase its innovative capabilities offshore, such as the New Zealand Investor Showcases, with Amazon participation. "Amazon's participation at events could range from providing speakers to a joint hosting role."
Promises to build infrastructure – with taxpayers picking up the tab.
MBIE had other concerns too.
They warned that one part of Amazon's proposal, the establishment of a post-production studio in New Zealand, could undermine other parts of the proposal. In particular the establishment of a Partnership Innovation Fund, which would foster innovation between NZ and Amazon.
Essentially, there were concerns that Amazon would establish an innovation fund that it would use to fund its own projects – potentially using film subsidy cash – rather than looking for opportunities in New Zealand.
"It is noted that some activities proposed under the Partnership Innovation Fund, such as the establishment of a post-production studio, could fully consume the Fund.
"Therefore it will be important during the MOU negotiations to ensure other commitments are not made conditional on the availability of financing through this fund."
Concerns were raised that some parts of the proposal were not detailed enough, in particular the infrastructure investment Amazon promised.
"The proposal does not provide enough detail on the infrastructure project, however the NZFC [NZ Film Commission] and MBIE will continue to work with the applicant over the course of the production.
Despite the hiccup, New Zealand was excited. The Film Commission assessed the proposal as strong, noting "with the production spanning five seasons, across an estimated eight to ten years, UAP provides New Zealand with an unprecedented opportunity to stimulate growth and market the New Zealand screen sector".
The SEB team was also given a Deloitte report on the production's planned benefits to New Zealand: it would be part of the screen sector lifting the economy by $500m between 2020 and 2024 – a 0.1 per cent increase. It would create 600 full-time equivalent jobs, representing 4 per cent of current screen sector employment.
Tax revenue was a slightly different story. Film production companies notoriously pay very little tax. The revenue raised from the production was therefore limited mainly to taxes paid by workers, $43m from 2020 to 2024, or 0.04 per cent of all personal tax. That’s very little when each season of the show will likely receive a taxpayer subsidy in the hundreds of millions of dollars.
Tourism officials worried
A briefing from Tourism NZ warned that losing the production could lead to another 'Home of Middle-earth', were a country like the United Kingdon to wrest the production off New Zealand.
"Should another destination 'closer to home' (for example the UK) deliver the same value proposition, then NZ should expect [the Lord of the Rings ] legacy to quickly taper off – particularly in the current climate of slowing global travel and economic uncertainty".
Tourism NZ also raised concerns about Amazon looking to film in multiple locations. Series like Game of Thrones used locations across Europe , spreading tourism benefits to places like Northern Ireland and Croatia. If Amazon tried this with Lord of the Rings, it could erode New Zealand's exclusive association with the series, officials warned.
Significant Economic Benefits
The SEB Panel met on December 11, 2019. The proposal was approved, with Florino getting the good news on December 19.
Bates attached a letter to her email, outlining the conditions on proceeding to the next stage of negotiations: outlining a Memorandum of Understanding with Amazon.
Bates said the "UAP presents an opportunity for New Zealand local partners, including Auckland, to work with Amazon to facilitate the development of long-term business and creative clusters, building off the existing production nativity".
"The aim is to build clusters of business and entrepreneurship that can retain the economic development benefits from UAP and develop industry capability through film creation and co-working across a broad range of screen and digital production activities,"
The next step was to negotiate the detailed Memorandum of Understanding. In March, executives travelled to New Zealand to kick off three days of intense negotiations.
Pandemic slows negotiations
Returning home from New Zealand in March, the Amazon executives were faced with one of the earliest clusters of Covid-19 in the US, in Amazon's home base of Seattle.
Florino returned by March 13, when Bates told the New Zealand side that "all Amazon staff are now working from home" – updates would from then on be virtual.
Fortunately, Amazon has an app for that: Amazon Chime, which the company used to conduct negotiations virtually during the pandemic.
The pandemic slowed negotiations, which only kicked off again in August, when officials looked at Amazon's proposed changes to the draft Memorandum of Understanding.
What followed is local officials and Amazon execs passing notes to each other on what should and shouldn't be included in the memorandum.
Officials were not pleased with what Amazon was proposing, saying that "a number of Amazon's proposed amendments are contrary to the fundamental basis of the NZPSG [the screen grant]".
Concerns were raised over the proposed amendments getting Amazon off the hook from providing "deliverables that are unconditional and certain".
Officials were even worried that Amazon would not deal exclusively with New Zealand, allowing it to use another country for part of the filming. Worse still, officials were worried about some of the series "deliverables" actually costing taxpayers more than it was already pumping into the production.
There were also concerns over companies like Air New Zealand not being able to use images from the series in their marketing. This was also resolved, with Amazon saying the confusion was just a misunderstanding. However, there are lingering concerns about how long New Zealand can continue to connect itself with the series if Amazon decides to take future series offshore.
Amazon didn't move on this: "Amazon can only grant exclusivity regarding location-based rights to New Zealand for so long as New Zealand remains the production location for UAP".
So if New Zealand can't compete with other locations for the series in the future, tourism companies lose the ability to exclusively associate with it.
Amazon was keen to be able to take the production offshore if it wanted to. Its negotiators said those "creative" choices might require non-NZ locations to be used. This outraged officials who said it could justify filming anything in an overseas location should Amazon wish. In the end, those clauses were tightened.
Amazon even wanted the innovation fund to qualify for the subsidy, meaning 25 per cent of all payouts from the fund would actually be paid for by the New Zealand Government.
Amazon also wanted to ensure any disputes over the agreement went to arbitration in London, "rejecting the exclusive jurisdiction of the courts of New Zealand".
This did not impress New Zealand officials, who wrote "this is unacceptable" to Amazon.
But overall, officials were keen. They wanted a relationship with Amazon
"In the view of New Zealand agencies the development of broader relationships with the Amazon group represents a genuine and readily achievable opportunity for Amazon to deliver specific and measurable goals to New Zealand "
Concerns about how seriously Amazon would take that relationship, particularly its willingness to truly partner with New Zealand businesses.
Officials believed that edits made by Amazon to the MoU raised concerns "as to Amazon's commitment to a genuine partnership agreement".
"There may be instances where a New Zealand agency identifies an opportunity that it wishes Amazon to consider. In a partnership arrangement, the minimum expectation would be that Amazon would consider the request in good faith."
Despite the criticism. Officials were hopeful that an announcement of some kind could be made soon, noting that "22 September 2020 which is 'World Hobbit Day' (commemorating BIlbo's and Frodo's birthday)" was just around the corner.
Talks continued. New Zealand officials continued to worry about Amazon taking part of the film elsewhere, allowing another country to run campaigns based on a location in the series.
Tourism in the age of Covid-19, there's an app for that.
The election came and went. Stuart Nash became economic development minister in a post-election reshuffle. In November, he was briefed on the state of the negotiations.
Tourism officials were still optimistic about visitor numbers, mainly because they hoped borders would have begun to open by the time the series was released. They thought the tourism benefits would be worth $178m out to 2025, down from the $225m forecast before the pandemic.
Amazon actually had an idea for this. MBIE officials said they were looking for a briefing on the potential of Amazon Explore to help tourists enjoy New Zealand without actually arriving here.
Amazon Explore is a virtual experience app in which people pay a small sum of money to have a streamed tourism experience, such as a streamed tour of "Melbourne’s slums and sinful past," for $10. An ad for the experience says visitors will have the "opportunity to shop for unique, Australian books at a local independent bookstore," – although that opportunity will be streamed on a slightly bigger bookstore, Amazon.com.
It's clear from the briefing that tourism officials were worried about losing The Lord of the Rings. Officials said getting the series was a "defensive play" to ensure another country did not usurp our long legacy with the Lord of the Rings and the Hobbit .
"Interest in New Zealand's association with these trilogies has stimulated travel here over many years,"
MBIE even come up with a snazzy marketing slogan, saying officials were "seeking the right to promote New Zealand as the home of [next Tolkien world]".
But the real benefit of the agreement was the partnership offering "an opportunity to build a wider relationship between New Zealand and the Amazon Group, and leverage New Zealand's relationship with the Group".
"A long-term partnership with Amazon around LOTR is also of interest to New Zealand as a vehicle to develop a weir relationship with other business units within the Amazon Group."
But there were concerns. Originally, officials had hoped that executives from the US might be able to fly to New Zealand annually, but this was no longer possible.
"Prior to Covid-19 we proposed that this potential be advanced by including a commitment from Amazon to send annual delegations of executive-level representatives from other business unit[s] to see first-hand what different New Zealand businesses can offer.
"With closed borders, and little likelihood that senior Amazon executives would want to undergo 14 days managed isolation in NZ we are seeking other ideas on how NZ can access the wider Amazon Group and be in a position to showcase NZ capabilities in science and innovation".
The visit will now be held virtually.
Going to MARS
The MOU was finally approved by all parties at the end of 2020.
MBIE and other officials got what they wanted, an agreement by Amazon to deepen the company's relationship with New Zealand and a commitment to sign a new memorandum for each season filmed here.
Amazon got what they wanted too. An agreement likely to be worth hundreds of millions of dollars over the years the series is filmed here.
Usually, productions only get the 5 per cent uplift on spending they incur after the first $100 million spent in New Zealand. Amazon’s deal means this only applies at the level of the series as a whole. Subsequent seasons will be able to claim the 25 per cent from the first dollar, provided they meet the MOU conditions.
The company will fly execs over here (eventually), look to partner with firms for research and development here – it's even going to host a creative writing masterclass in Auckland.
The Government even negotiated for a member of the NZ Film Commission to be "escorted down the red carpet" at the series premiere, to be given the "opportunity to speak with interested members of the press".
But beyond the exec visits, scholarships, internships and masterclasses, it will be difficult to immediately ascertain the success of the deal: how much will Amazon invest here? Will they open an office researching virtual and augmented reality, as was discussed during the negotiations? Just what does a deeper relationship with Amazon mean?
One thing it will mean is that the finance minister will now have to find as much as $200 million a year to keep the film subsidy scheme afloat. According to written Parliamentary questions from ACT MP Brooke van Velden, the scheme was slated to cost $1 billion over the next five years.
Amazon is committed to looking at a different innovation "theme" for each season of the show filmed in New Zealand.
"Themes should align Amazon’s and New Zealand's goals," the MoU reads.
These themes will focus on MARS: Machine learning, home Automation, Robotics, Space.
It's a fairly vague commitment – the stuff you need a dictionary to understand. Fortunately, there's a website for that.
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