In and professionalized industry with multiple players

In 2013, the Indianfilm industry celebrated golden Jubilee of film production and exhibition as anindustry. From way back in 1900s era of black-and-white and silent movies,where a small group managed the entire process of film making, acting andexhibiting, the industry has come a long way. Today, it is a highly evolved andprofessionalized industry with multiple players offering specialized servicesin different areas of film making – from script writing, casting, recruitingtechnicians, sourcing technology and equipment to editing and post-productionactivities, marketing, distributing films and exhibiting on theatres,multiplexes and internet.

As expected in 100 years, Indian cinema-makers haveundergone a steady learning curve to arrive at the present status of anindustry that is recognized world-wide. Today, it is well known that the Indianfilm industry is the largest in the world in terms of number of films producedand released in a year, with 1,255 films produced and released in 2011.  Films produced in India has number of Source:Central Board of Film Certification, India; Imacs(image management andcommunication) analysis in the early years, the industry was dominated byproducers and studios of Bombay and Chennai. Since the 1950s, it has spreadacross several regions of the country; with movies being produced in Hindi,Tamil, Telugu, Bengali, Assamese, Kannada, Oriya, Punjabi, Marathi, Malayalamand several other regional languages. Although Hindi films dominate mainstreamcinema in India, popularity of films in regional languages has also beengrowing both within and outside the country. In fact, the south-Indian filmindustry, which comprises Tamil, Telugu, Kannada and Malayalam; accounts foraround 47 per cent of the total number of films released inIndia.Corporatisation of Indian Film Industry.

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Language-wise distribution offilms released in India Source: Central Board of Film Certification, India,2011 In terms of revenue, the industry has grown at a rate of 2.6 per cent perannum from US$ 1.7 billion in 2006 to US$ 1.9 billion in 2011.

After theslowdown post-2008, the industry’s revenue growth has picked up since 2010. Totalrevenue growth was 9 per cent in 2011 over 2010.  Total revenues of Indian film industry (US$billion) Source: India Entertainment and Media Outlook, PwC; IMacs analysis Boxoffice collections from the domestic market have the highest contribution tothe total revenue.

Apart from traditional box office collections, the othercontributors to revenue growth today are domestic and Hindi 16% Telugu 15%Tamil 14% Kannada 11% Bengali 10% Marathi 8% Malayalam 7% Others 19% .Corporatizationof Indian Film Industry 5 overseas home video, as well as ancillary sourcesincluding cable and satellite broadcast and digital media. Contribution ofancillary revenue has almost doubled over the past five years. Revenuecontribution Source: India Entertainment and Media Outlook, PwC; IMacs analysisThe industry is expected to grow at a rate of 9.1 per cent per annum from US$1.9 billion in 2011 to about US$ 3 billion in 2016. The increase in the numberof multiplexes and average ticket prices will be the key growth drivers forrevenue from the domestic market.

However, the growth will also depend on thequality of content and the acceptance of viewers. Revenues from overseasmarkets are expected to grow further with the increasing demand of Indian filmsin other countries by the Indian diaspora, I e, nonresidential Indians (NRIs)and persons of Indian origin (PIO). Ancillary revenues are also expected toincrease.2. PROGRESSION OFINDIAN FILM INDUSTRY Beginning with the 1900s, the industry has moved throughseveral stages of evolution in each decade thereafter.

Moving pictures wereintroduced by the French in the late 1800s, when some documentaries wereproduced in India. The first full-length films were produced in the early 1900sup to the 1920s. These were mostly family managed and driven films – right fromthe cast to the production to the theatrical releases. This was the era ofsilent movies, 35 mm films, commercialization with affordable ticketing and theprominence of Madras as the hub of movie-making. There were no sound-proofstudios in those days. Post 1920s and up to the 1940s, talkies and studiosflourished after the release of the first movies with sound in the 1930s.Regional studios and films flourished; advanced sound technologies wereintroduced; multi-talented casts with the ability to act, sing, compose andproduce were in vogue; and play-back singing was introduced.

Importantdevelopments in Indian film industry Source: News reports; IMacs Research duringthe 1950s and 1960s, there was a proliferation of film makers. The south-Indianfilm industry had a major share of the overall market. New cinematographictechniques were introduced to display visual effects never seen before.Institutions were created such as the Film & Television Institute of India(FTII) for developing technical skills, the Film Finance Corporation forfinancing films and the Films Division. During this period, parallel cinemaalso found a space in the midst of mainstream movies. Film stars startedgaining commercial importance over studios by the end of this period. The 1970sand 1980s marked a period when big budget and multi-starrer movies dominated.’Art films’ or parallel cinema did find some audiences too.

This period wasalso significant because of the advent of women producers and directors in theindustry. The National Film Development Corporation was formed in 1975. It wasin the 1990s that technology up-gradation really started in the industry.Digital sound was introduced. Special effects were being perfected – 3D effectsand electronic media were on the rise.

The industry also started catching theattention of international audiences in the form of the Indian diaspora. Thisfurther led to an increased interest from the corporate sector in the industry.•Silent movies •Affordable tickets •Imported equipment1890s-1920s •Talkies •Studios •Regional movies •1 set internationalfestival screening 1930s-40s •Golden age •FTII established •Improvedcinematography CorporatizationofIndian Film Industry  Studio systemversus star system Studio system Film producers have adopted a factory-orientedapproach for making a film because of the costs and complexities involved.Hollywood had adopted this approach in 1910s and the firms with productionfacilities were known as “studios”.

The Indian film industry, influenced byHollywood since inception, also adopted the ‘studio system’ of film productionin the 1900s. One of the first studios formed in India was Kohinoor FilmCompany, which was founded in 1918. In a few years, many studios were formedand the number of studios had increased to over 20 by the year 1921.

Studioscomprised entire teams covering all aspects of filmmaking; including acting,technical expertise for post-production, marketing and distribution. Thisapproach helped studios standardize their film making style, achieve costefficiencies from economies of scale and develop their own brands in the filmindustry thorough consistent production. Under this system, all artists andtechnicians were employees of studios, who were either paid a salary or werecontracted for the long-term. Producers would get finances from filmdistributors with a guarantee of screening the film in cinemas for a certainperiod. Loans would be repaid in terms of box-office collections with nofurther liability of the film producer. Distributors would keep the profitsearned from the film with no share for the film producer.

Star system with thegrowing popularity of Indian films, the importance of films to viewerstransformed into a “hero cult” phenomenon, which made film stars the objects ofadmiration and imitation. Gradually, fan clubs for film stars emerged and theiridolization reached incredible heights. Although the star system existed evenduring the silent film era, it gradually grew stronger than the studio systemand eventually replaced it in 1960s.

Unlike the norm in the studio system, filmactors did not have long term contractual obligations towards film studios inthe star system. They operated as freelancers and were commanding professionalfees based on the box office performance of each film. Successful actors gotpaid higher remunerations as compared to monthly salaries in the studio system.

However, this increase in professional fees led to higher costs of filmproduction. Emergence of the star system increased the cost of production andchanged the financing pattern of film production. Film distributors only paid50 per cent of the total film cost, which forced film producers to look forother sources of finances. Promissory note system became the most prevalentsource of financing. Producers would write an unconditional order to financersto pay the payee. Other financiers came into prominence, including conventionalmoney lenders who usually charged interest rates of up to 40 per cent perannum. The high cost of film production and these financing structures madefilm production a risky profession until the advent of corporate players in theindustry.

Post-2000, the corporate sector has changed the way films are made,marketed and distributed globally. Professional service providers have replacedimprovisers and developed offerings in areas such as editing, digitization,archiving, animation and film making. Many production houses are listed onstock exchanges, thereby bringing in corporate governance into the industry.CORPORATISATIONOF INDIAN FILM INDUSTRY In 2001, the Government of India granted “Industry”status to the Indian film industry.

The government had established NationalFilm Development Corporation Limited (NFDC) in 1975 to produce and coproducefilms. However, institutional funding for the films increased after the grantof “industry” status in 2001, when the Reserve Bank of India (RBI) formulatedguidelines for the banks for funding the film industry. This facilitated themuch needed institutional financing, which was earlier unavailable. Under the’star system’, production of films was unorganized, which usually led toproduction delays and further increased the total cost of production. Securingfinances to complete the film was tough, because film producers would usuallyget finance in parts. Disbursement of the next instalment of money wasdependent on salability of the film to financers. The time taken to secure moneyfor completing the next part of the film usually led to delays in producingfilms.

To avoid such concerns, film producers started looking for institutionalfunding, which was cheaper and more reliable as compared to other means offinances. In order to get the funding, the industry had to adapt to newcorporate governance requirements such as adherence to standard accountingpractices, business plans, targets and time schedules and insurance as mandatedby banks and financial institutions. Profitability and commercial successbecame essential, which required professionalism, efficiency in film making andadoption of market driven practices. It resulted in the entry of corporateentities in all sections of the film industry. Deregulation of film screensalso helped in the corporatization of the Indian film industry. Earlier,setting up a new screen required many permits and most of the states hadstringent procedures to follow. There was also price control on theatreticketing.

After deregulation, the number of film screens increasedexponentially and ticket prices started being driven by market economics.Deregulation of import control increased the industry’s access to latesttechnologies from across the world and promoted digitalization of film content.Digital films had wider reach as compared to the old analogue system.

This ledto higher revenue and profitability for films, which encouraged moreparticipation from corporates in the film industry. With better corporategovernance practices, many international studios such as Walt Disney, WarnerBros. and Sony entered into collaborations with local production houses toproduce and distribute movies.

These collaborations have proved to be win-winsituations for the collaborators, because international studios have gaineddistribution reach and domestic companies have utilized the latter’s experiencein project management. Also, Indian films can now be released globally, whichhas increased revenues for the Indian film industry. Before corporatization,there was a monopoly of big producers and stars in the industry. Withinstitutional funding available at relatively lower interest rates, new andtalented filmmakers can easily produce their films. Corporatization of the filmindustry has also encouraged film producers to float new companies on stockmarkets. Corporatization of Indian Film Industry 9 Corporatization alsointroduced several new measures to reduce uncertainty in revenues earned by afilm. Corporates pre-license cable and satellite rights and distribution rightsacross geographies; which helps them to recover about 40-80 per cent of filmproduction costs even before the film is released. Further, producers havedeveloped new sources of revenue; including the sale of merchandise andpartnering with companies to advertise their products in the film.

Cost of filmproduction has also been reduced by adopting measures such as revenue sharingwith leading film actors. Marketing of films has also transformed with corporatization.While only 3-5 per cent of the total film budget was used for marketing a filmin the earlier days, it is now as high as 40 per cent. The focus of marketing afilm is to maximize the revenue earned by a film in the first week.

Increasinguse of technology has also helped and corporates have adapted to the latestchannels of marketing available, including social media. Corporate participationin the Indian film industry has increased in production, distribution andownership of film screens. Revenues of corporates (whose financial numbers areavailable) involved in film production have increased at a rate of about 16 percent per annum from US$ 679 million in 2008 to US$ 1.05 billion in 2011. Netrevenues of corporates involved in distribution (whose financial numbers areavailable) have also increased at a rate of about 19 per cent per annum fromUS$ 3.

35 billion in 2008 to US$ 5.58 billion in 2011. Table 2 Total netrevenues of listed companies (US$ billion) 2008 2009 2010 2011 2012 Filmproduction No of companies* 85 73 78 82 57 Net revenue 0.68 0.69 0.90 1.05 0.

90Film distribution No of companies* 66 72 72 69 45 Net revenue 3.31 3.99 4.

605.57 4.44 Source: IMacs Resources *Number of companies for which financialresults are available 4.

TECHNOLOGY DEVELOPMENTS AND INDUSTRY TRENDS Corporatizationof the film industry and adoption of technologically advanced equipment andscreening have gone hand in hand. In recent years, the Indian film industry hasadopted latest technologies to improve visual and cinematic effects, which haveresulted in a better viewing experience for consumers. Increasing use oftechnologies including digitalization of film content and 3D films has alsohelped the industry to increase revenues and reduce cost of distribution.

Increasing numbers of 3D films and theatres: Although the first 3D film wasreleased in India in 1984, the number of 3D films in India has increasedsignificantly after the success of the Hollywood movie “Avatar”. Since then,the industry is looking proactively to enhance the viewing experience ofconsumers by using 3D technology and hence increase the viewership. Multiplexesare also willing to invest large amounts for 3D screens to meet the increasingdemand for 3D films. Corporatization of Indian Film Industry 10 US$ 20,000 isrequired to convert a 2D screen into a 3D screen. Average ticket prices for 3Dfilms are higher as compared to 2D films; hence generating more revenues,despite lesser number of tickets being sold. 3D films usually generate abouttwo-three times the revenue as compared to 2D films, which makes the investmentwell worth it. Digital screens: With the increasing numbers of 3D films, thenumber of digital screens has increased, since it is easier to convert adigital screen to a 3D screen.

A majority of new multiplexes have digitalscreens with 3D capabilities. According to estimates, India has over 5,000digital screens as on date. Digitization of Indian films will also increase theconsumption of movie content by enhancing the viewing experience. Also, userscannot rent or share digital content, thereby curbing the menace of moviepiracy. Digitization has reduced the cost of operations, because content iseasier to store and deliver to screens. Digital content can easily bedistributed to the screens via satellites. The Indian film industry haswitnessed rapid digitization of cinema screens over the past few years.

Thishas lowered the acquisition costs for the print of a film to US$ 360 from US$1,200 under the old analogue system. Small budget films, which were unable tohave a wider release because of high print costs, can now release in largenumbers through the digital format; potentially earning higher revenuecollections. This has also enabled companies to simultaneously release theirmovies at the global level. According to industry estimates, around 70 per centof the screens in India are already digitized. With film producers increasinglymaking and selling movies in the digital format, there will be no option leftwith theatre owners but to go digital in the future. Digitization will alsohelp increase the revenues from cinema advertising, because of the low costsinvolved in distributing advertisements. Advent of multiplexes: The advent ofmultiplexes in India has significantly contributed to the growth of the Indianfilm industry and helped in its corporatization.

The culture of multiplexes hasimproved the overall movie-going experience of audiences. Big budget movies,which had to be content with about 500 prints earlier, can now release with1,500 prints. This has helped them reach a wider audience as well as collectmore than 50 per cent of the total revenues in the first week itself. There arejust 10 screens per million in India as against the global average of 54 and120 in the US. This highlights tremendous opportunity for the Indian filmindustry, which multiplex owners are gearing up to seize. According to the MultiplexAssociation of India, Indian had around 1,000 screens in 2012. The number isexpected to increase to 1,400 by the end of 2013.

New players such as Cinepolishave entered the market and have lined up huge investments for futureexpansion. Availability of food and beverages has helped multiplexes tomaintain double digit growth for the past 2-3 years. Growth of multiplexes inthe coming years will also be significantly driven by growth in the number ofmalls. Multiplexes are an integral part of malls today and both share asymbiotic relationship with each other. With the retail industry reviving afterthe slowdown, growth in the number of malls, and thus, multiplexes, isinevitable.

This is ideal for both industries as malls get higher footfallsbecause of multiplexes and multiplexes get the benefit of initial costreduction because of a revenue sharing mechanism with malls. Growth ofsmall-budget films: Small-budget films are beginning to create a place forthemselves in the Indian film industry. These films are mainly content andperformance driven rather than led by ‘star’ actors who drive big-budget films.Corporatization of Indian Film Industry 11 mouth publicity for their success.Some films have recovered their production costs from the sale of TV rights.This has helped good scripts to generate sufficient funding for their futureprojects. The advent of multiplexes has further helped their cause, as nicheviewers are always interested in such films.

The pay-per-view market: Thepay-per-view (PPV) market is an emerging source of revenue for the Indian filmindustry. Growth in PPV market in India has a high correlation with growth inthe direct-to home (DTH) segment. DTH service providers have reduced prices ofPPV films and brought them in the price range of US$ 0.5-1.0. With all fourmetros and many others cities moving towards digitization, the demand for PPVfilms is expected to increase. This will lead to increased competition foracquiring movie rights and a new revenue stream for film producers. Resurgenceof regional cinema: While Hindi films continue to dominate the Indian filmindustry, there has been a resurgence of regional movies over the past fiveyears.

This area is mainly dominated by south-Indian films, with films inMarathi, Punjabi, Bhojpuri and Bengali languages also playing their part.Regional films cater to the tastes of local audiences and penetrate deeper intorural areas. Leading production houses in India have realized the potential ofregional films and are increasing their presence in important regional markets.Large players like UTV, Reliance Media Works, Eros, etc.

, have entered thesouth Indian film market to tap the tremendous potential of these markets.Studios are also releasing popular films dubbed in different regional languagesto reach a wider audience and generate higher revenues. Their strategy has beenvalidated by the tremendous successes of some of the regional movies in thelast three years.

The box office collections of these movies have alsoovertaken some popular Hindi films. Emergence of regional cinema has helpedproduction houses restructure their portfolios, moving away from a dominantlyBollywood-dependent model to a more balanced one. Increasing market forHollywood films: Viewership of Hollywood movies is on the rise in India.Hollywood production houses have increased their focus on the Indian marketbecause of growing revenues from their releases in India. With greatercollaborations and digitization of cinema, foreign production houses have alsobeen able to release movies globally at same time. Hollywood studios are alsomaking an effort to release movies in different regional languages in India totap the huge market available. Growth of visual effects (VFX) industry: Thevisual effects (VFX) industry is a rapidly growing segment in India.

With theincrease in domestic demand from high-budget movies and outsourcing of work toIndia from international clients on the rise, the future of the industry looksvery promising. Industry players have been gradually trying to shift fromlow-end work towards higher-end assignments through collaboration with film andentertainment companies. Domestic players are increasingly setting up officesabroad for better service to the clients. India currently accounts for around10 per cent of the total animation and VFX outsourcing market. By focusing onkey areas such as improving the skill sets of artists and increasing salariesto attract better talent, there is enough room for significant growth in future