In-focus: Film Exhibition Segment

An E&Y look at the trends, challenges and way forward for film exhibition, from the September edition of The Newsreel

From single screens, to multiplexes and to the recent emerging trend of megaplexes, the Indian film exhibition segment, which forms the largest  component of the country’s filmed entertainment  industry in India, has undergone a sea change. In 2010, domestic theatrical film exhibition revenues were estimated to be INR75 billion, contributing 74 per cent of the total revenues of the Indian filmed entertainment industry.

In 2015, it is estimated that theatrical revenues in India will increase to INR101 billion, driven by the growth of multiplexes across the country and the implementation of digital technology in cinemas, which is expected to facilitate wider release of films and reduce piracy.The following are some of the recent trends in India’s film exhibition industry:

Key trends

•Rise in number of multiplexes and megaplexes:

Over the last few years, the number of multiplexes in India has grown exponentially and become the preferred choice for movie goers, despite ticket prices being higher than those charged by single screens. Multiplexes provide better service and an enhanced viewing experience as compared to singlescreen movie halls in terms of their sound systems, seats, ambience, and food and beverages offered by them. Their growth is driven by rising disposable incomes, the increase in the number of films targeted at niche audiences and entertainment tax benefits granted by various states. In 2010, there were 1,075 multiplex screens in the country. These comprised around 8 per cent of the total screens in the country, but accounted for 40 per cent of total ticket collections. All major players have been launching an increasing number of multiplexes every year — Cinemax plans to add 45 screens every year as a part of its expansion plan. By 2015, the number of multiplex screens is estimated to rise to 1,925, growing at a CAGR of 12 per cent between 2010 and 2015. The increase in the number of malls, which are the common choice of location for multiplexes, is a key enabler of the rapid roll out of multiplex screens.

The concept of megaplexes is also emerging in India. Megaplexes have 14–15 screens and more capacity, as compared to 4–6 screens in multiplexes. A megaplex offers a wider choice to consumers, with several movies, ranging from Hindi, regional and English films, and even special interest films, being screened at the same time. It can also be used to screen events including cricket matches and soccer games as well as movies.

It also offers value-added services such as a gaming zone for children and food courts. Mexico-based player Cinepolis is planning to open a 15-screen megaplex in Pune and a 14-screen megaplex in Thane in 2011.

• Increasing adoption of digital technology:

The digitisation of the Indian M&E industry’s distribution channels is a key growth driver, helping to increase industry revenues, curb piracy and reduce costs. Indian cinema houses are also increasingly adopting digital technology. As of March 2010, it is estimated that there were 2,000 digital screens in India, a figure that is projected to rise to 2,500–3,000 over the next three to four years. Major cinema chains are launching digital screens, e.g., Cinemax has implemented a phased program to digitise 30 screens in the all-digital mode. PVR Cinemas has entered an agreement with Imax Corporation, a global premium entertainment brand, to install digital Imax theatre systems in four locations across India, to meet the demand for premium entertainment.

Digital prints cost 80 per cent less than conventional film prints, and enable producers to reach five times the number of screens at the same cost. This has significantly improved realisations, since 60 per cent of box-office collections are now earned within the first week of a movie’s release. Digital cinema allows companies to exactly control at which locations and how many times movies will be shown. It also expands the reach of releases, from large cities to remote towns and villages across India.

• Globalisation in Indian film exhibition:

International players are entering the film exhibition business in India, backed by supportive government policies, which allow 100 per cent FDI for all film-related activities including exhibition. Mexican movie chain Cinepolis has opened multiplexes in Indian cities including Amritsar and Patna and has plans to open another 50 screens in 2011. Major Cineplex Group Plc. of Thailand has acquired a 10 per cent stake in PVR. Indian players are also going global by opening theaters in other countries. Big Cinemas operates screens in Malaysia and the US markets; Mumbai-based cinema exhibition company Inspire Multiplex has plans of launching multiplexes in Bulgaria and Romania and PVR Cinemas is exploring options to expand its operations overseas by operating theaters on management contracts.

• 3D films gaining prominence:

3D films are becoming popular in India. In 2010, there were around 18 Hollywood movies released in 3D and most of these did well. Avatar grossed INR1.1 billion, of which 45 per cent was contributed by its 3D version. Many Indian producers are planning 3D films, encouraged by the very positive response to these movies. Haunted, released in 2011, was India’s first stereoscopic 3D film—there are a few more in the pipeline, including Dangerous Ishq and Raaz 3. The aspirations of these producers are well supported by technology providers who are in the process of implementing 3D-compliant projection systems in theaters. 3D films contribute around 10 per cent to total multiplex earnings and tickets are priced at a 10 per cent–25 per cent premium. Satellite-based digital cinema network UFO

Moviez India plans to invest close to INR2.5 billion to convert 1,000 screens in the country to 3D over the next two years. 3D technology has helped theaters generate increased returns by allowing them to charge a premium to audience, maintaining the exclusivity of technology-enabled theaters and reducing piracy.

• Expansion into lifestyle entertainment:

Multiplex owners are diversifying into lifestyle entertainment, leisure and casual dining to house several entertainment formats under a single roof to increase their revenues. Cinemax has launched Versus, its gaming business in its Delhi multiplex. Versus has a bowling alley and offers third person shooting games, pool tables, air hockey, education-centered programs, and a special area for birthday celebrations and corporate parties. PVR has announced its launch of an entertainment city comprising a 15-screen multiplex theater, a bowling alley, a skating rink and food plazas in a shopping center in Noida. It also plans to expand its Blue-O gaming center business, which it currently operates in Gurgaon.

• Shift of focus of multiplexes from metros to smaller cities:

Multiplexes are gaining prominence in tier-II and tier-III cities across India. Companies are making investments to accelerate multiplex penetration in small towns, driven by rising disposable incomes in these locations.

Cinepolis will open a 14-screen resource multiplex in Thane and Mukta Cinemas, which has recently ventured into the exhibition business, has launched its first multiplex in Vododhara. In addition, Cinemax plans to invest around INR900 million on opening 160 screens in several small cities in the next 14 months; PVR has announced its intention of adding close to 60 screens, with an investment of INR 1–1.5 billion by the end of 2011—70 per cent of the screens will be added in tier-II and tier-III cities. South Indian cities offer an attractive opportunity for such expansion, since there is a significant demand for regional films in them.

Key challenges

• Emergence of other platforms:

In the last few years, the window available for monetising a film’s revenues in theaters has come down sharply. The growing number of outlets for monetising rights, e.g., cable and satellite (C&S), home video, direct-to-home (DTH), digital, wireless and internet downloads, have significantly increased the revenue-earning potential of producers and distributors, but at the same time, they are making inroads into the revenues of exhibitors. Revenues from ancillary streams and C&S rights are projected to grow at a CAGR of 17 per cent from 2010 to 2015. Furthermore, pre-sale of satellite and home video rights gained momentum in 2010, even for movies due for release in 2012. Studios are also making films available on pay-per-view, with DTH and digital cable, and IPTV distributors are offering movies at prices as low as INR25 per screening, supported by advertisements.

• Piracy in the film industry:

Piracy continues to be a major problem in the Indian filmed entertainment industry. It is estimated that 15 per cent–20 per cent of annual revenues of the film industry are lost to piracy. Film exhibitors also have to bear losses due to piracy, which adversely affects the revenues of the film industry in various ways such as illegal broadcast of films on local cable channels, unauthorised video rental stores selling pirated movies and illegal circulation of optical discs including DVDs and VCDs. Although the industry has begun to adopt cost-effective technologies such as encryption to curb piracy in recent years, effective enforcement of the Copyright Act through strong anti-piracy measures is the need of the hour. Adoption of digital and 3D formats is also expected to help in curbing piracy.

• Differential entertainment tax rates:Entertainment tax on cinema theaters is a state subject and entertainment tax varies by state — from 2 per cent to 100 per cent of the ticket price. The tax rate in Haryana and Chandigarh is 50 per cent, in Madhya Pradesh it is 20 per cent, whereas Punjab does not levy any tax. In some states, the tax rate varies according to the population of a town or the language of the film being screened. There are also various local taxes levied by the local municipal corporations on the operations of cinema theaters in towns and cities. These taxes are a disincentive for theaters. In addition, they adversely affect the growth of multiplexes and single-screen theaters in regions where higher taxes are levied. Therefore, a uniform and rational tax structure is required for the growth of the film industry to avoid market fragmentation and distortion.

• Increased share of producers in box office revenues:

Producers and distributors of Hindi films reached an agreement with multiplexes in 2009, whereby the former are likely to get a larger share of net box office revenues, the proportion of which can vary depending on the performance of a film at the box office. Also part of the settlement was that the distribution strategy of films would be left  to producers and distributors, and in the first week, when a film generates maximum revenues at theaters, the exhibitors would have to give a larger share to the distributors. This decreases the profits of exhibitors. In addition, there was a dispute between Hollywood production houses and Indian multiplexes in 2009, with the former asking for a higher share of box office revenues. They want a 55 per cent share of box office revenues in the first week of screening and multiplexes oppose this, since revenues earned from the Hollywood movie are lower than that earned from Bollywood films.

The way forward

• Increasing the number of screens:

There is significant potential for growth in the number of screens because of low screen penetration in India. In spite of a huge domestic demand, the country ranks among the lowest in the world in its number of movie screens. In 2010, the average number of screens per million was 12, as compared to 131 in the US, 81 in Europe and 31 in China. This indicates that there is considerable room for a substantial growth in the number of screens in the country.According to a UNESCO study on cinema in India, there is a demand for at least 20,000 screens as compared to 13,000 screens at present. The country’s largest theater chain has less than 200 screens, whereas the world’s largest movie exhibitor has more than 6,600 screens. Industry players have also realized this and have been workingon their expansion plans in various Indian cities. Moreover, the projected increase in the number of multiplexes is expected to result in better realizations through increased ticket prices. This is expected to be one of the key drivers spurring the growth of the industry.

• Increased investment in technology:

Investment in digital and 3D technology in theaters is expected to drive their growth. Currently, the number of such screens is low, but all the major multiplex players have been working on expansion plans involving investment in technological infrastructure such as 3D and digitisation of screens. The Indian film exhibition industry is small in terms of size, as compared to those of other countries around the world, despite having the largest number of theatrical admissions. This is mainly due to low ticket prices and occupancy levels at theatres. Investment on upgrading infrastructure (mentioned above) is expected to provide an enhanced experience to consumers, increase occupancy, reduce piracy and enable exhibitors to charge higher ticket prices. Help to foster innovation in content.(

Rakesh Jariwala is a Partner with the Tax & Regulatory practice of Ernst & Young in Mumbai and is specifically focused on the M&E industry.

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