Film industry battles high costs and low revenues

Production houses as well as studios are devising innovative ways to control talent and marketing costs

Restrict marketing spends, avoid outdoor media, pare down the full-page ads and TV promos and cut pre-release publicity from six weeks to four or five. Those were some of the ideas thrown up at a meeting of senior managers of ten big Indian studios at the offices of Karan Johar's Dharma Productions in Mumbai last month. They met in a desperate attempt to figure a way out as costs rise, revenues stagnate and margins are squeezed for the Rs 12,640-crore Indian film industry.

Since it started corporatising 14 years ago, this is the fourth time that the world's most prolific film industry has faced a bad year. But its reaction this time is more measured. Till two years ago it was impossible to think that studios and production houses, which are constantly fighting a bitter war for plum film projects, would even sit together. It is a sign that this bad year could end up creating a stronger, more profitable industry.

Going by FICCI-KPMG numbers, the industry remained stagnant in 2014 over 2013. Some of the biggest films of 2014 - Jai Ho and PK - went abegging for television buyers, say reports. Of the top 20 films released in 2014, only four turned up a profit, according to one analysis. "It has not been a good year for the industry," says Amrita Pandey, vice-president and head, marketing and distribution (studios), Disney India.

After rising sharply for two years, the price broadcasters paid for airing films fell by half or more. "Rights worth Rs 20 crore went to Rs 50 and Rs 60 crore, now they have come back to Rs 25 crore," says Jayantilal Gada, chairman, Pen, the agency that buys films on behalf of Zee. "For a Rs 60-crore movie, 20-25 per cent, or Rs 12-15 crore, came from TV rights; if cost goes to Rs 100 crore, we can't expect TV to proportionately fill the gap," says Jyoti Deshpande, managing director and CEO, Eros International.

For example, the TV rights for Eros' Om Shanti Om sold for Rs 17 crore in 2007 and RA One for Rs 35 crore in 2011. But last year's big film, Happy New Year, went for the same Rs 35 crore. The reasons are several. Star India, one of the biggest bidders for film rights, is now more focused on sports and entertainment. Then there is a decline in the time spent watching films from 20 to 18 per cent. The 12-minute cap on advertisements makes monetisation tougher. Many broadcasters settle for cheaper dubbed regional films.

To this, add the stagnation in the box-office. This is a function of India's abysmal 10 screens per million people screen density (the US is at 125). All it takes is a look at China to understand how critical screen infrastructure is for growth in ticket sales and prices. Five years back, China was at roughly the same number of screens as India. It has worked furiously to push the number to 24 screens per million. This has taken it to $4.8 billion in total box office revenues, compared to India's $1.7 billion, making it the second largest film market in the world after the US - this in spite of not having a robust local film industry like India.

"This growth would not have been possible without the Chinese government's investment in theatres, support to co-productions and help in attracting world-class cinema technology," points out Mike Ellis, president and managing director (Asia-Pacific region), Motion Picture Association. What India needs is some hard policy decisions: treating the building of screens as infrastructure and subsuming the crazy variations in entertainment tax in the upcoming goods and service tax.

Funding issues
Of the cost side triggers, the biggest is talent that can go up to 40 per cent of the budget of a film. "Nowhere else in the world do talent costs rise beyond 15-20 per cent," says Pandey. Marketing costs have risen to 30-50 per cent of a film's budget depending on how big or small it is, from 15-25 per cent five years ago.

All of this needs money. But "funding is a huge issue. Studios are the only source of funding. Film funds have failed miserably in India," says Rakesh Jariwala, partner (media and entertainment), EY. When they were setting shop in India between 2006 and 2008 most of the studios - Disney, Fox, Eros - bid competitively and took prices up. It is therefore right that they have got together to correct it.

There are three things that are being worked on. One is controlling marketing costs. "Even if we save Rs 1.5 crore on a film, that is Rs 9 crore on six films a year," reckons Aashish Singh, vice-president (production), Yashraj Films.

Two, talent costs are coming under control as younger stars, that studios increasingly use, accept a share in profits instead of taking a fee upfront, like Shahid Kapoor did for Haider (2014). Or studios sign on younger talent for bulk deals. Talent costs at Yashraj Films are 25 per cent lower than the industry average because it signs "new actors with three-film deals," says Singh. This model seems ideal - it does not co-produce or look for outside financing and has a tight control over every possible revenue stream. On an average, Yashraj Films gets 15 per cent more revenues than any other production house because of this control, say insiders.

"Hollywood style deals with a percentage of box-office gross are not possible in India because there is no neutral agency (to collate this data)," says Rajkumar Akella, managing director, Rentrak India, the global audience measurement firm that tracks 110,000 screens in 40 countries.

That brings us to the third thing: data, transparency and more screens are critical if costs have to go down and, "admissions (ticket sales) and average ticket prices have to continue to increase," says Pandey.

"The tide will change only when digital takes off (with 4G) and starts paying higher prices for films. Then broadcasters will start negotiating for all rights," says Jariwala. Deshpande predicts, "large-scale consolidation in which TV firms will become film companies and vice versa." Note that some of the biggest studios in the world are owned by firms that have a strong television business as well: 21st Century Fox, Disney, Viacom, Time-Warner et al.

The wait for truly global size Indian studios begins now.