Box office Blueprint

The Hindi film industry is derisking its business model by spreading out across the value chain.

Bollywood's storyline is changing. Earlier, filmmakers, distributors and exhibitors (the theatre owners) operated in glorious isolation, each considering their contribution the clincher in a film's success (and absolving themselves equally quickly of any blame if it flopped).

But that formula didn't always work, which is why the Hindi film industry is now looking for a twist in the tale "" it is reaching out across the value chain to bring all three functions under one roof.

The Delhi-based PVR started out as an exhibitor, moved on to distribution and, last year, turned producer with Taare Zameen Par. India's biggest multiplex operator, Adlabs, ventured into distribution in 2006, has co-produced 25 films and is now looking to produce four films a year.

Production and distribution house UTV not only has a full-fledged syndication desk, it has also launched DVD and music labels for its latest production, Jodhaa Akbar. Traditional houses, too, are cashing in on new platforms: at $10 each, Rajshri Media's Vivah has been downloaded 6,500 times.

There is sense in the strategy, assert film companies. "The biggest advantage of doing everything from production to syndication is that we have complete control over both, the creative and commercial aspects of the business," points out Siddharth Roy Kapur, executive vice-president, UTV Motion Picture, adding that acquiring pictures for distribution has now become the exception rather than the rule for UTV.

Others agree. Adlabs Films CFO Venkat Devarajan believes an integrated strategy helps keep a check on costs. "The risks are higher if you are only financing or distributing films because it makes you more dependent on other producers," he adds.

But how, and why, does the studio system work?

The portfolio approach
Perhaps the most significant reason for the change in approach is the ready availability of funds, thanks to the corporatisation of the Rs 8,000-crore Indian film industry. A decade ago, an independent producer struggled to make even one film a year.

Now, even fledgling production house PVR Pictures "" which is hoping to raise Rs 200 crore from private equity firms "" has four films lined up, each with a budget of Rs 12-14 crore. Others are equally comfortably off. Last year, The India Film Company (TIFC) raised £55 million from the overseas market; it now has three films on the floor. UTV, too, raised $80 million last year.

Not that the new strategy is a simple, have-money-will-spend tactic. A large part of the attraction of the portfolio approach is how it helps reduce risk: even if a couple of films come a cropper, one big hit at the box-office can save the day.

Consider Yashraj Films. Three of its 2007 productions sank at the box office: Jhoom Barabar Jhoom and Laaga Chunari Mein Daag reportedly brought in just Rs 25 crore and Rs 13 crore, respectively, while Aaja Nachle's earnings were apparently even lower. But Chak De India is said to have brought in Rs 36 core from theatre sales alone, making up for the other three disasters.

Of course, film-making isn't a zero-sum game, so most companies lean towards smaller budget films. "It is relatively easy to recover money from films that cost Rs 5-6 crore and I would think about 90 per cent of such films should make it," points out Devarajan, adding that Adlabs pencils in an operating margin of about 15 per cent from film production.

UTV's Kapur offers a simple formula for deciding scale of production: of 10 films, two should be big-budget, four in the middle segment and the rest small. "That would be a safe way to go about it," he muses. UTV's home productions will average Rs 10 crore, which is the mid-budget range.

The distribution game
The risks in production explain why distribution seems an attractive option. Margins are lucrative "" as high as 50 per cent, says Sandeep Bhargava, CEO, TIFC, which has acquired and distributed films such as Welcome.

Then, producers also want greater control over the "overflow", the surplus after distributors have recovered their costs and commission.

Typically, this is split between the producer and distributor, but underreporting is all too common. "Normally, we will not sub-licence the distribution unless we feel that the trade is giving us a better offer than we can recover," agrees UTV's Kapur.

PVR Pictures offers another reason for expanding into the distribution business. "We started out distributing films to feed our own theatres during the lean seasons but now we distribute both our own and others films," explains Ashish Saksena, CEO, cinema cell, PVR. Since most of the company's theatres and multiplexes are in the north, PVR acquires distribution rights mainly for those territories.

Another exhibitor that ventured into distribution with Krrish in 2006 was Adlabs, which has distributed about 40 films so far "" both Indian and foreign "" and by March it will have 10 offices across the country.

The company is picky about the target audience of the films it distributes, playing it safe by catering to the largest segment of the movie-going population. "We keep in mind the age group of 15-35 years, which we believe is a core segment and look at films like Spiderman III and Bheja Fry," says Sunir Kheterpal, COO, Adlabs Distribution.

Adlabs' business model is determined more by price than by territory or scale. The company is open to picking even single territories for a film "" "We quote a price and see what is available at that point in time," explains Kheterpal. For instance, Adlabs distributed Jab We Met only in Bengal but Black Friday across the country.

The emphasis on prices makes sense "" distribution is an expensive and risky business. The acquisition cost apart, distributors have to pay for marketing the film, which can range anywhere between 15-20 per cent of costs for a big film and 100 per cent for a small budget film like Khosla Ka Ghosla.

Moreover, at Rs 50,000 a print, the tab for 200 prints, which is the minimum needed to achieve scale, can add to up a lot. While bigger films do launch with more prints, Devarajan says there isn't always a science to it. Khosla Ka Ghosla had 200 prints, Taare Zameen Par was released with about 350 prints, while Cheeni Kum, which had an offbeat subject and a lower budget but was believed to have a wider appeal because it featured box office darling Amitabh Bachchan, was released with 400 prints.

Even a big hit like Welcome, which was the industry's second biggest grosser last year after Om Shanti Om, raking in a reported Rs 60 crore from the home market, didn't fetch TIFC too much money because it retained rights for just Mumbai and Delhi city territories, selling the rest of the territories for a minimum guarantee. Bhargava defends the decision saying, "We were trying to de-risk ourselves. What if the film hadn't done well?"

To hedge themselves, distributors are increasingly buying rights for overseas markets. With two overseas offices in the US and the UK and another planned in the Asia-Pacific region, Adlabs is looking to cash in on the growing international market for Hindi films.

According to a report by Ernst & Young, the overseas market now brings in roughly a fifth of the revenues for any major release. The value of Indian content sold overseas, the report says, is currently $200 million, growing at an estimated 20 per cent.

Not that it's a cinch. Marketing a film overseas means significant extra expenditure: for Rang De Basanti, which grossed $2.2 million in the US, UTV had to rope in international experts to ensure that the promotions were appropriate. Besides, there is a growing threat from the home DVD market, especially since films are now released on disc relatively soon after theatre release.

Explains Bhargava, "It's not always easy to draw crowds because weekend ticket prices at about $50 or more for a family are not low whereas legal DVDs cost $10-12."

The small screen is big
Which is why companies are derisking the business further by acquiring not just theatrical rights but rights for satellite, home video and music too, avenues that can account for up to 20 per cent of a film's revenues. "If the picture doesn't do well in the theatres, I can cut my losses by selling other rights. I will have a much longer time frame within which to recover the money," reasons Bhargava.

But syndicators today face the dilemma of whether to sell television rights before or after a film's theatre release. UTV's Kapur sums up the problem. "You can choose to sell TV rights before the release and reduce the risk but then you also run the risk of selling yourself short."

TIFC found a way out: it sold the television rights for Jab We Met within three months of its theatre release, perhaps the shortest gap ever between a theatre release and a television airing. More interestingly, in a first for the industry, the film has been sold to four television broadcasters for a single airing each; the order is pre-determined through negotiations.

Seeking stars
Does that mean the box office is irrelevant? Not at all. The biggest chunk of revenues is still earned from the theatre, although at 50-60 per cent, its share is down from the 70-odd per cent of a decade earlier.

But not every film makes money; of the 100-odd Hindi films produced every year, about 70 per cent are flops and financiers just about recover their investments, say industry sources.

One reason, points out PVR's Saksena, is the shortage of not only saleable stars but also directors. Which is why production houses are getting into multiple-movie contracts with directors and actors "" witness PVR's two-film deal with Aamir Khan, Adlabs' signing on of Hrithik Roshan and UTV's with a couple of directors. A good star cast and a reputed director more often than not spells success.

The flip side, says Chirag Negandhi, who tracks the entertainment space at Enam Securities, is that films will become more expensive. And there's no guarantee the money will be recovered.

"Producers will need to be prudent about how much they pay actors and technicians," he observes. The solution? Make many more small-budget films, where it is easier to recover investments. That's one way of ensuring Bollywood's story has a happy ending.