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Bollywood: The Case For Not Going Bust
Motion Picture Business is a long term business. Players who have been in the business for more than ten years create a strong foundation with their IP, leveraging which becomes their single most important valuation driver as well as growth driver
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It has been an eventful month for the Hindi Film Industry with reports of a subsidiary of a US Studio shutting down local language film production followed by self-addressed cautionary approach to newer Hindi Film Projects by a leading TV Content Production company. This has led to widespread prophecies pointing towards an obituary for the Motion Picture Business in India. Such doomsday prophecies have been made earlier in the US, in Europe, in Hong Kong and even in India. However, the 100+ year old Motion Picture Business has time and again withstood such closure calls globally, improvised inherent business models, witnessed advent of newer players and attracted newer capital from investors.
Let us digress quickly to look at examples from the US Motion Picture Industry before highlighting issues in the Hindi Film industry and what is probably in store for Bollywood over the coming 18 to 36 months.
In mid 1990s, release of Cutthroat Island closed Carolco Pictures, the company behind films like First Blood, Rambo II, Rambo III, Total Recall, Cliffhanger, Basic Instinct and so on. In 1980s, Heaven's Gate almost single-handedly led to shutdown of United Artists. Over the past five years, US Studios have continuously delivered flops of the likes of Ben-Hur (2016 Paramount), Ghostbusters (2016 Columbia Pictures), The Lone Ranger (2013 Walt Disney), John Carter (2012 Walt Disney), Mars Needs Moms (2011 Walt Disney), 47 Ronin (2013 Universal) and Green Lantern (2011 Warner Brothers). Failure of such prolific players like Carolco, United Artists and annual recurrence of Studio backed big budgeted flops invariably losing between USD 50-125 mn per film did not result in industry shutdown. Stakeholders remained resilient, learnt (or at least tried to), improvised and emerged stronger. And if a Film loses significant amount invested there are others which make up for it thus emphasizing the very nature of Motion Picture business.
Inferences about the Motion Picture Business
" Motion Picture Business is a risky business. A few Films work and a larger number do not. That is the reality of the business. Nobody knows Nothing as William Goldwyn said.
" Biggest fallacy for Independent Production Companies and Studios comes from the desire and / or greed to grow too fast, somewhere on the way, assuming greater than desirable risk.
" Motion Picture Business is a long term business. Players who have been in the business for more than ten years create a strong foundation with their IP, leveraging which becomes their single most important valuation driver as well as growth driver. Resilience follows.
" Partnerships - with other companies and / or above the line talent - are key. No one went out of business by sharing profits. No one went out of business by mitigating risks through partnerships. US Studios understand this better than anyone else. It takes time but the Above the Line Talent eventually gets cognizant of the same.
" Motion Picture Business is a difficult business owing to challenges required to package film projects. It is never easy. Just the degree of difficulty is different for different players.
Bollywood: The Past Decade
Let us look at what has transpired in the Hindi Film Industry over the past ten years.
Event I: Investors backed stakeholders with an objective to grow business and work towards an exit through a sale, merger and / or floatation. Raising capital comes with a challenge to deliver growth numbers. Developing Content is a painful, longer term but a definitive process for creating strong foundation than most of the investors fathom while acquiring films to grow is an easier, often the only way out to try and meet short term demands of investors from whom the capital has been raised.
Result: Acquisitions helped create competition amongst buyers and provided smarter independent producers to package films and sell at a neat margin to the Buyers. That is the reason why, over the last 10 years, select producers have created a lot more "Projects" and lesser number of "Films". The more genuine of the lot have continued to make "Films" and retained their strategy of making one film every 2-3 years. These producers have continued to prosper and shall continue to do so going forward as their strategy has not been dictated by short term opportunistic bets. It does not mean that one should not make more number of films just that organic growth in this business gives better results than inorganic growth.
Event II: Booming Consumer Market at Cinemas. The exhibition sector was growing. Average ticket prices were growing faster. Patrons had started visiting theatres more often than what they had ever done in their lives. More importantly, the new patrons who could spend more for a better viewing experience led to the growth in Gross Box Office and hence overall revenues from Films started growing.
Result: Growing revenues lead to higher remuneration for professionals across the Film Value Chain. Sharp escalation in remuneration, by its nature shows tremendous elasticity on an upswing but is excruciatingly inelastic in a downswing. And a higher demand from ever growing players seeking an entry into the industry does not help. Nor do low entry barriers into the Motion Picture Business especially when looked at from the perspective of acquisitions. What gets missed conveniently is that cinema attendance worldwide including India is falling. It is just the average ticket prices which are resulting in higher numbers. Very soon, a reality check will happen whereby this will start emerging as a key driver to lower than expected revenue growth. However, the lack of elasticity in remuneration during such a downswing shall continue to persist, which, in turn will put pressure on business economics of films.
Event III: Competition also facilitated boom / bust cycles amongst buyers of Satellite Pay TV rights and Music rights.
Result: Alternate bouts of aggressive buying and hibernation led to volatility in electronic distribution rights which constitute upto 50 per cent value of the Film.
Event IV: Producing and distributing films quickly became a very expensive business due to entry of newer aggressive players and fresh capital.
Result: Independent producers became less active while independent distributors went out of business (as buyers of territorial rights) as stakes became higher. This resulted in a simmering imbalance in the business dynamics across the Film Value Chain. Complement this with the volatile 50 per cent component comprising Satellite Pay TV and Music distribution and the industry got stuck with skewed risk-reward ratio waiting to fail.
Event V: Capital is available and the ubiquitous belief that the bigger players will win the game. Why not associate with producing, acting and directing talent in order to increase output?
Result: Diversification to become a Production House became the most revered activity. Actors, Directors, Distributors, Exhibitors, Music Distributors, TV Broadcasters, TV Content Producers and other Media Companies started becoming Producers and the objective shifted from creating content to creating "Projects" to enhance wealth for themselves suing capital which was freely available. Acting & directing talent prospered on the back of hefty fee, majority of Producers took a backseat, Distributors suffered, Risk Capital allocated by Investors got eroded even as Business Economics continued to erode irreparably.
Event VI: Due to imbalance created in demand and supply of films and pressures created upon larger players to have an on-going pipeline better than competitors, natural focus was to acquire rather than to develop and produce.
Result: Content Development, which should ideally be funded by larger players as they have larger amount of risk capital and resources, was completely ignored except by a handful of players. Everyone wanted to play for the short term discarding the importance of a strong foundation for longevity of the production house. However, producers who were willing to take the pain of development, which by its nature, is long term, emerged super successful and these are the players who have been least affected by on-going downturn.
So, What Do we do?
Business economics of Films in India has always been a question mark for stakeholders. After the acting and directing talent take out front-ended fee, there is very little left on the table for producers. For the industry to have longevity, it is important to work out win-win structures with the acting and directing talent. Given the turmoil witnessed in the electronics rights market over the past three years, all stakeholders understand the vagaries of the revenue pie. With the help of increased transparency, it is today possible to create multiple structures linked to overall profitability, India theatrical business, Satellite Pay TV revenues, etc; which can help nurture win-win structures.
While the above creates a strong foundation for the positive business economics, the next focus should be on the other major cost ie; marketing. The Tamil and Telugu film industry has shown a way to curtail marketing costs associated with a film's release for many years. They are able to do it because the producers are united. In Bollywood, that has not been successful because the producing community and Studios are not united. Rationalization in marketing costs can help save between 5 to 20 per cent of costs associated with a Film's release and that is bountiful.
Motion Picture Business is a long term business. Longer term than most other businesses. It is important to have a long term vision for this business. Over a long term, the Motion Picture Business has always paid off for its promoters and / or investors. The top 6 US Studios in 2016 are the same as they were in 2000 or 2005.
A new player will be very lucky to strike it big within the first five years and will be very unlucky not to make it big within say, ten years. The difference between the two time horizons is an ability to be patient and resilient, focus on IP development, diversify intelligently and not lose the passion for which one enters this business. All old school players who are successful in India have been in the business for more than ten years. The ones which have shut down or are facing problems are the ones which have entered with loads of capital in the last decade completely focussed on outgunning competitors with acquisition led strategies. A single picture is more of a catalyst than the cause of shut-down as the cause is deeply embedded in a series of decisions which would have been made in the past years. Sometimes, there will be a winner following the plain vanilla acquisition approach. However, that will more often be an exception rather than the norm. Same goes for bigger independent producers as well as the Studios in the US, Europe and Asia. While we look at West and Far East for comparisons on all aspects, it is important we learn from their experiences on how to create Motion Picture Business with longevity.
One needs to have the capital to continue making films over say, ten years (and that should be a part of the vision) and an introspective ability to continue evolving for the better. It is important to have an ability to sustain, be resilient, be patient and think long term while shying away from continuously taking short term aggressive calls while building a sustainable Motion Picture Business. Over the long term, some companies will shut down, some will bounce back, new ones will enter. That is true for almost every business and why should it be different for Motion Picture Business. Capital shall return in a newer form from a different source. Probably because the success stories in the motion picture business are as sensational as the failures.
Crystal Ball Gazing: 2017 and Beyond
" Independent producers shall flourish. Newer players will enter the business.
" Output from Studios will decline and they will have less "peer to peer" competition but more competition from independent players. Add patience and a desire not to chase turnover. Add content development to a Studio's organization structure and we would be looking at Studios which have got the basics right.
" Production companies who have an ability to create packages of stories with the acting & directing talent only to create off-balance sheet structures with a third party buyer were the buyer assumes all the risk and the production companies makes a (huge) table profit. Such companies will find it difficult to find third party financing without assuming at least a part of the risk. There will always be exceptions based on specific actors and directors to this. However, it will be more of an exception than the norm.
" Independent distributors who went out of India theatrical business will become more active, maybe more powerful even.
" For a country with a limited exhibition capacity not growing at a pace like that of China and in an environment where the smartphone and digital platforms take away a large chunk of leisure time of the audience at much lower cost, lower film output will help.
" Diversification into other forms of Content will probably crystallize by way of large format series made for Digital Platforms like Netflix, Amazon, Hotstar, Voot and Eros Now rather than through TV Content creation.
" Proactive partnerships with the acting and directing talent will make the eco-system stronger.
" Writers will be in huge demand and their remuneration shall become commensurate with the value they bring to the Film Value Chain.
" Bollywood will probably create lesser number of Films every year. There will be lower number of "High Concept" Films as several of these will take the Digital route. However, there will be a gradual but definitive shift to create "Spectacular" Films. A few at the beginning and once a few of them succeed, Capital will follow irrespective of Stars. That is exactly how Hollywood re-invested itself post 2000 - that is what Chinese Film Production Houses are doing in 2016 - there is no reason why it would not happen in India. Come to think of it. Dharma Productions did that when it put $10 mn behind Student of the Year and created three new stars and it will reap longer term benefits of the risk it took. Yash Raj did the same with Band Baaja Baaraat. Baahubali did that "spectacularly" and everyone knows how that film travelled and how eagerly Baahubali 2 is being awaited. Once there is initial success, others will follow till we create another bubble. Who knows, as and when the industry improvises to stand back on its feet with strength, there might be ten or more years of supernormal profits before there is another correction.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.