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There is no business like show business

There is no business like show business
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First Published: Thu, Feb 26 2009. 09 31 PM IST

Updated: Thu, Feb 26 2009. 09 31 PM IST
In keeping with the spirit of the Oscars, we discuss the business models of two of the largest film industries globally.
In times of economic stress, people stop eating out, cut back on apparel purchases, but one thing they tend not to cut back on is going to the movies. Movies being an affordable, inexpensive indulgence have ensured strong growth for box office receipts in past recessionary periods. For instance in 2001 and 2002, years marred by the tech bubble fallout, rising unemployment and terrorist attacks— hardly heralding economic cheer—box office collections grew at a healthy 9% and 14%, respectively, in the US. This should make the industry more recession-proof than toothpaste! At the same time, unusual times such as these aside, the obvious glamour has meant that if financiers aren’t buying personal jets, they are bankrolling film productions!
In the US, the big film studios—there were and are just a handful—were vertically integrated to the extent that they created the films and controlled distribution as well as exhibition through directly or indirectly owned cinemas. In addition to controlling stars, writers and theatres, the studios controlled third-party exhibitors through a practice called block booking, where they sold large blocks of the much-sought-after title in combination with lesser known B grade titles. This derisked a lesser known cast or a lower grade movie substantially for the studios, but as was to be expected, the practice was thrown out in an antitrust ruling. Following the ruling, the major studios finally separated their production and distribution business from the exhibition business. Since then, studios have changed hands multiple times. To date most of the studios still remain a part of conglomerates.
The past decade or so has seen an influx of private equity and to a lesser extent hedge fund participation in production financing. The overriding objective of these new investors was to distribute movies which are profitable; art, therefore, was purely incidental.
Over the years, the revenue model has shifted away from box office collections to increased participation of ancillary revenue. While box office collections still remain roughly 30% of revenue, DVDs (digital video discs), VOD (video on demand) and other channels have contributed to increasing profits.
Visual indulgence: PVR Plaza in New Delhi. In times of economic stress, people stop eating out, cut back on apparel purchases, but one thing they tend not to cut back on is going to the movies—an affordable, inexpensive indulgence that has ensured strong growth for box office receipts. Harikrishna Katragadda / Mint
The cost of production continues to climb, with production and marketing reaching an average of $106 million (Rs534.24 crore) a movie last year. In lock-step with a new financer base also came increasing accountability and an inclination to keep sign-on costs low. Rumour has it that Meryl Streep’s compensation in the partly hedge fund financed movie The Devil Wears Prada was tied to the performance of the movie at the box office. This is a material difference from India where stars are now having to be coerced to being paid for performance and the recognition that variable pay can also mean upside hasn’t sunk in as yet.
The road to Hollywood
There’s no question that Bollywood’s mantra for “corporitazation” is emulating Hollywood. Of course, the scale is totally different—India produces at least 1,000 movies a year, compared with Hollywood’s 600 odd. Box office collections, on the other hand, are about $1billion and $27 billion, respectively. Bollywood, which is the primary area of interest for the organized players, produces far fewer movies than the south Indian film industry, so the market of interest at best isn’t larger than $600-700 million. Fighting in the market you have a myriad of family-run old timers as well as at least a dozen well organized entities. Clearly too many competitors are fighting for an expanding, but as yet tiny pie. Like their US counterparts, the Indians have a fierce urge to control both production and distribution. Adlabs is trying to go a step further and capture the extra exhibition “dollars” as well, emulating the pre-antitrust days of the US studios. Locking creative talent into contracts is also a trick Indians have learnt from Hollywood. Unlike the West, non-box office revenue sources make up just about one-third of overall revenues for the film business. A lack of structured channels such as networks, on-demand services and of course, piracy, have as yet reined any efforts to lend structure to this industry.
Where scale is in doubt because of the sheer fragmentation of the industry, profitability should not be. The preselling of rights to the peripheral revenue sources can cover production costs to a large extent, as production costs, even for blockbusters, are still low compared to the global standard. This leaves the remaining revenue, for the most part, to fall to the bottom line. Of course, industry participants love to tout this model quoting instances of triple digit returns on capital in certain projects. Truth is, best of breed UTV’s movie margin was under 20% last year—certainly respectable but not outlandish. Fact is, though cost overruns are better managed now, professionalism is still in its infacy in Indian movies.
What the industry direly needs is the exit of weaker/older players so that the market is less fragmented. That can assure a better, contemporary product for the audiences as well as a meaningful industry that investors can then take seriously.
Rajeshree Varangaonkar and Bharat Indurkar have day jobs with US-based hedge funds. They write every other Thursday. Send your comments to globalbeat@livemint.com
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First Published: Thu, Feb 26 2009. 09 31 PM IST