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State Of Art

An E&Y overview of the filmed entertainment sector in India from Ernst & Young’s newsletter-Newsreel

 

The Indian film industry celebrated the centennial of Indian cinema in 2012 reaching approximately Rs 108 billion. The segment has been growing at an estimated 13 per cent per annum and is expected to grow at 16 per cent to reach Rs 170 billion by 2015. Last year was significant for the industry, with the number of films released grossing collections of more than Rs 1 billion at the box office increasing to nine from a meager two in 2010. The year also saw a diverse range of movies, in terms of their budgets and subjects, which achieved success at the box office. Furthermore, the industry is seeing increased penetration across languages with the production of several multi-lingual movies such as Vishwaroopam, while there are several others being re-made in different languages.

 

Indian film industry – Revenue Source (as of 2012)

Source: “India Media and Entertainment – The Dark Horse Rising,” Anand Rathi Research, 6 August 2012, via Thomson One.

This spurt in revenues is the result of the increased focus of filmmakers on marketing, distribution and pre-production. Furthermore, there is an increase in the quantum of money being spent on movies, and producers have significantly increased their production and marketing budgets as well. All this has resulted in a decline in the number of movies being produced, but has significantly increased their success ratio. Increasing production budgets have also led to production houses entering co-production agreements to diversify their risk. For example, Eros International has recently signed two separate co-production deals with MSM and Endemol, and Yash Raj Films has tied up with Dibakar Banerjee on co-production.

The Indian film industry is one of the fastest growing in the world, next only to the Chinese film industry. It is poised to become a US $ 5 billion industry by FY14. In the recent past, several Indian-themed movies such as Slumdog Millionaire and Life Of Pihave also performed significantly well across the world. Several Hollywood studios are entering collaborations with or buying stakes in Indian companies such as Disney, Fox, Sony etc. There has also been a surge in the number of Hollywood films released in India given India’s large English speaking base and success of dubbed content. Furthermore, Hollywood studios have been releasing their films in India simultaneously with their North American release.

Earlier, Hollywood films were almost entirely restricted to India’s urban, English-speaking population, and consequently, only accounted for around 4 to 5 per cent of the country’s annual box office collections. However, over the last few years, the market share of such films has increased slowly and reached around 11 per cent of annual box office collections. During 2012, several movies such as The Avengers, Skyfall, The Amazing Spiderman and Ice Age 4: Continental Drift grossed significantly high revenues from India.

Over the last few years, Hollywood studios have been aggressively marketing their films in India and are looking at new ways of promoting their movies in the country. Last year, Marvel Studio’s The Avengers released an original Hindi soundtrack, composed by Mumbai-based rock band Agnee, to promote the movie. Hollywood studios have also begun dubbing their films in other regional Indian languages apart from Hindi. In addition, they are subtitling their English versions in Hindi, making variations in American English and accents easier for an Indian audience to understand. Furthermore, they are forging alliances with local studios to gain a strong foothold in the Indian market. For example, since completing its acquisition of UTV Software Communications, Disney has merged its India operations with those of UTV and releases all of its films through the new entity Disney UTV. Similarly, Paramount’s films are now handled by Viacom 18, the 50:50 JV between Paramount’s parent Viacom and Network 18.

 

The popularity of Hollywood films in India is facilitated by increasing knowledge of English among the country’s young population. The growing prominence of English TV channels, particularly among the young audience, highlights the fact that Hollywood films are set to gain a significant market share in India and may overtake local films — as they had done earlier in Western Europe and other countries across the world.

 

Multiplexes contributing to the growth story of the Indian film industry

The growth in box office collections has been accelerated by the increasing number of multiplexes in the country. In the past few years, the number of multiplex chains has grown significantly with an exponential rise witnessed in the number of shopping malls. On the other hand, single-screen theaters are finding it difficult to survive, especially in metros and tier I cities. Multiplex chain operators, including PVR, Inox Leisure and Cinepolis, are also expanding their operations aggressively. PVR is planning to open around 75 new screens over the next one year, while Mexico-based multiplex chain Cinepolis, which has 49 screens in India, is set to add 100 screens in the next six months.

Multiplex operators have also raised their ticket prices by 15 per cent to 20 per cent over the past couple of years, seeking to leverage the trend. The average ticket price at multiplexes is now Rs 145, as compared to Rs 60 at single screens. However, the average ticket price in India is still low, as compared to that in other countries. Ticket prices have reached a ceiling in the country, particularly in metros and tier I cities, and multiplexes are looking to find alternative avenues to grow their revenues. Multiplex chains are also implementing different initiatives to maximise their revenues, e.g., by having differential pricing during the weekends and for movies with big star casts. They are also developing and providing other value-added benefits and promoting multiplexes as entertainment destinations. However, they also need to look at cost efficiencies, since it is difficult for them to increase their ticket prices further.

 

Larger releases

The number of screens used to release a film is also rising, aided by the increased use of digital prints. More than 75 per cent of the screens in India use digital prints, up from 50 per cent in 2010. Due to this, the number of screens for small-budget films doubled to 600 from around 300 in 2010 and for medium-budget films, it rose from 600 in 2010 to around 1,100 in 2012. Today, big-budget movies are released in as many as 3,300 screens now as compared to 1,500 in 2010.

 

Filmmakers adopting aggressive marketing tactics

Filmmakers are aggressively marketing and promoting their movies across multiple platforms such as TV, print, OOH and social media. For instance, Eros International spent Rs 70 million on marketing its release Vicky Donor, which had a production budget of Rs 50 million. Filmmakers are also focusing on promotional videos to attract viewers during the initial days of films being released. In addition, they are aggressively marketing their movies across various TV shows. Furthermore, there is a significant increase in TV promotions, with movie stars appearing in reality and fiction shows and producers marketing their movies though social channels, particularly in the case of small-budget movies.

 

Indian films lagging behind in overseas revenues

On an average, Hollywood garners more than 50 per cent of its collections from overseas markets. It has a strong market in Western Europe, Brazil, Russia and Japan. Of late, China has also emerged as a significant market for big-budget Hollywood films. Several movies such as Avatar, Titanic 3D and Mission Impossible: Ghost Protocol has generated more than US $ 100 million in revenues from China. In fact, Life Of Pi garnered US $ 84.3 million in the country — more than what it earned (US $ 69.3 million) in North America. However, in the case of the Indian film industry, overseas revenues have reached a maximum of 20 per cent of total box-office collections, since mainstream Indian films are targeted toward the local market and lack global appeal, and the bulk of overseas revenues are garnered from Indian expatriates living in different parts of the world. The industry needs to open up and produce movies that are of universal appeal and can cater to global audiences. Of late, movies such as My Name Is Khanand English Vinglish have done well across the world, but there is a need for more such movies.

 

Opening up of non-box office monetising avenues

Indian movies are also slowly increasing their revenues from sources other than box office collections. There is a significant increase in revenues from satellite rights, e.g., the Salman Khan starrer Ek Tha Tiger’s satellite rights were sold for Rs 750 million. The actor has also signed up for an Rs 5 billion deal with the Star TV network for the satellite rights of his upcoming movies. Furthermore, producers and distributors are venturing into multi-platform branding and are tying up with brands for in-film product placements and merchandising. Indian producers have finally realised the potential of branding as a revenue-generating option, and brands are leveraging the power and reach of films to push their products. There is also a significant growth in digital distribution channels such as Ditto, BIGflix and Hungama, with several producers signing deals with these channels to generate additional revenue.

 

Growth of film tourism

Hollywood movies have significantly contributed to the growth of film tourism in India in the recent past. Several award-winning movies have been shot in Indian locations, e.g., Slumdog Millionaire in Dharavi and Best Exotic Marigold Hotel in Mumbai and Udaipur. Life Of Pi was partly shot in Puducherry and Kerala, while Zero Dark Thirty was filmed in Manimajara market in Chandigarh. These movies have put their locations on world tourist maps. Bollywood movies have also significantly increased tourism across India and several other parts of the world. Among recent releases, Barfi!, which was extensively shot in Darjeeling, has gone a long way in reviving the popularity of the location as a tourist destination. This has all resulted in increased tie-ups of film production companies and foreign governments on co-production deals and incentives. For example, Indian film producers have recently signed a co-production agreement with Spain. The Indian Government is also keen to ramp up the country’s film tourism market. It is providing incentives and streamlining the approval process to promote film-shooting in India.

The Indian film industry has grown significantly and gained a strong foothold in the global film industry, but still has a long way to go to compete with Hollywood. Its earnings are still based on domestic sale of tickets, whereas this is not the case in Hollywood. There is therefore a need for them to develop alternative revenue models such as franchising and co-branding. Most importantly, the Indian film industry needs to be wary of the fact that Hollywood is fast catching up in the domestic market and is poised to gain a strong market share in the country.

 

(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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