Opinion
Movie makers: Brace for the gathering storm
Summary
- Content may be ‘king’ but its producers are being left at the raw end of a bargaining power shift
Security Analysis 101 rarely makes room for Michael Porter’s Five Forces model. As Porter is a business management guru, it is generally included in B-school strategy courses, which finance bros often sleep through. However, understanding an industry structure and likely changes therein is a critical building block for fundamental analysis. Any model has its shortcomings, but if one judges them by the yardstick of what is ‘simple yet comprehensive,’ Five Forces would be one of the best models around.
In a nutshell, Porter’s Five Forces model analyses the bargaining power of the buyers and suppliers of a company or an industry. It also assesses the threat of substitutes and new entrants, and finally, considers the extent of competitive intensity within the industry under consideration. The economic attractiveness of a company or an industry can be determined by the interplay of these forces, and significant money can be made or lost with their ebbs and flows.
In India, the content creation industry seems to be in the midst of dramatic changes. Till a few years ago, the business fell into two broad categories; content for the big screen, which meant movies, and content exclusively for small screens that included daily soap operas, reality shows, live sports, etc, that were televised. This industry had a limited number of content producers and there were no substitutes to these two forms of media consumption. Today, the industry faces an onslaught of substitutes, be it OTT platforms producing or commissioning their own content or individual micro content creators who create short-format content for social media.
While this change is well understood, another force affecting traditional content creators is turning into a headwind. A movie typically has three main revenue streams; theatrical collections, revenues from the sale of satellite rights to TV channels, and sale of digital rights to OTT platforms. Right now, we are seeing unprecedented consolidation among buyers of traditional media, and this is going to exponentially increase their bargaining power.
Take the case of theatrical revenues. After the merger of two largest multiplex chains PVR and Inox, the combined entity now accounts for a massive 43% of gross box office collections for Hindi movies. Pre-pandemic, PVR which ran the largest chain of halls, accounted for 24% of these collections, and Inox, which had not merged with PVR, had a 15% share. This means that the fight for getting prime slots for movie screenings is likely to get intense and multiplexes will flex their muscle to eventually pay film producers a lower amount or charge them higher for various ancillary services. Small and independent film producers are likely to bear the brunt of this.
For satellite revenues, the story is no different. At the time of writing, there are four large players in the fray; Zee Entertainment, Sony India, Viacom18 and Disney Star. While we may not know who is going to marry who, it seems fairly certain that there will be two weddings and four hitherto independent buyers of satellite rights will become two. Again, bargaining power will shift to buyers of satellite rights to the detriment of movie producers, especially the small and independent ones.
During the pandemic years, OTT platforms became an important source of monetization for movie producers. Covid lockdowns induced an explosion in viewership of online content, and these platforms spent lavishly on acquiring new content to satiate this demand. A few things have changed since. Post re-opening, viewership metrics for most platforms have suffered, and more importantly, interest rates globally have been substantially hiked. Money has a price again and a steep one at that. It is not surprising that Netflix Inc, which was part of the original ‘FANG’ quartet, has since lost its membership of this tech high-flyers club.
After growing a massive 52% in 2021, Netflix’s content acquisition spends declined by 11% in 2022 and Bernstein Research estimates that it will shrink by an equal amount in 2023. Content investment trends at Netflix are symbolic of what is happening in the OTT space at large, and what is happening at the head office generally gets replicated at regional outposts as well. This means that OTT platforms are likely to be tight-fisted while spending their content dollars and may focus on big banner and tent-pole shows to keep audiences engaged. Bernstein Research finds that 87% of the time spent on OTT platforms by subscribers is restricted to the ‘Top 10’ movies and shows. This again does not augur well for content producers in general, especially not for small and independent ones.
The changing dynamics of content creation in India will likely lead to a gradual exodus of independent content producers who aren’t affiliated with the small club of media buyers. The occasional sleeper hit is inevitable, but in general, given the monetization challenges, it will take a brave person to commit capital to independent films. One upshot of this shift could be a long overdue price deflation of the entire movie-making chain. From what actors are paid to publicity and advertising spends, distributor fees and what movie theatres charge their patrons for tickets and popcorn, all could get shaken up. What the new equilibrium will look like is hard to forecast, but Porter’s Five Forces model will remain as powerful an analytical tool as any to analyse such shifts.
These are the author’s personal views.
