In and professionalized industry with multiple players

In 2013, the Indian
film industry celebrated golden Jubilee of film production and exhibition as an
industry. 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 and
exhibiting, the industry has come a long way. Today, it is a highly evolved and
professionalized industry with multiple players offering specialized services
in different areas of film making – from script writing, casting, recruiting
technicians, sourcing technology and equipment to editing and post-production
activities, marketing, distributing films and exhibiting on theatres,
multiplexes and internet. As expected in 100 years, Indian cinema-makers have
undergone a steady learning curve to arrive at the present status of an
industry that is recognized world-wide. Today, it is well known that the Indian
film industry is the largest in the world in terms of number of films produced
and 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 and
communication) analysis in the early years, the industry was dominated by
producers and studios of Bombay and Chennai. Since the 1950s, it has spread
across several regions of the country; with movies being produced in Hindi,
Tamil, Telugu, Bengali, Assamese, Kannada, Oriya, Punjabi, Marathi, Malayalam
and several other regional languages. Although Hindi films dominate mainstream
cinema in India, popularity of films in regional languages has also been
growing both within and outside the country. In fact, the south-Indian film
industry, which comprises Tamil, Telugu, Kannada and Malayalam; accounts for
around 47 per cent of the total number of films released in
India.Corporatisation of Indian Film Industry. Language-wise distribution of
films 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 per
annum from US$ 1.7 billion in 2006 to US$ 1.9 billion in 2011. After the
slowdown post-2008, the industry’s revenue growth has picked up since 2010. Total
revenue 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 Box
office collections from the domestic market have the highest contribution to
the total revenue. Apart from traditional box office collections, the other
contributors to revenue growth today are domestic and Hindi 16% Telugu 15%
Tamil 14% Kannada 11% Bengali 10% Marathi 8% Malayalam 7% Others 19% .Corporatization
of Indian Film Industry 5 overseas home video, as well as ancillary sources
including cable and satellite broadcast and digital media. Contribution of
ancillary revenue has almost doubled over the past five years. Revenue
contribution Source: India Entertainment and Media Outlook, PwC; IMacs analysis
The 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 number
of multiplexes and average ticket prices will be the key growth drivers for
revenue from the domestic market. However, the growth will also depend on the
quality of content and the acceptance of viewers. Revenues from overseas
markets are expected to grow further with the increasing demand of Indian films
in other countries by the Indian diaspora, I e, nonresidential Indians (NRIs)
and persons of Indian origin (PIO). Ancillary revenues are also expected to
increase.

2. PROGRESSION OF
INDIAN FILM INDUSTRY Beginning with the 1900s, the industry has moved through
several stages of evolution in each decade thereafter. Moving pictures were
introduced by the French in the late 1800s, when some documentaries were
produced in India. The first full-length films were produced in the early 1900s
up to the 1920s. These were mostly family managed and driven films – right from
the cast to the production to the theatrical releases. This was the era of
silent movies, 35 mm films, commercialization with affordable ticketing and the
prominence of Madras as the hub of movie-making. There were no sound-proof
studios in those days. Post 1920s and up to the 1940s, talkies and studios
flourished after the release of the first movies with sound in the 1930s.
Regional studios and films flourished; advanced sound technologies were
introduced; multi-talented casts with the ability to act, sing, compose and
produce were in vogue; and play-back singing was introduced. Important
developments in Indian film industry Source: News reports; IMacs Research during
the 1950s and 1960s, there was a proliferation of film makers. The south-Indian
film industry had a major share of the overall market. New cinematographic
techniques 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 for
financing films and the Films Division. During this period, parallel cinema
also found a space in the midst of mainstream movies. Film stars started
gaining commercial importance over studios by the end of this period. The 1970s
and 1980s marked a period when big budget and multi-starrer movies dominated.
‘Art films’ or parallel cinema did find some audiences too. This period was
also significant because of the advent of women producers and directors in the
industry. The National Film Development Corporation was formed in 1975. It was
in the 1990s that technology up-gradation really started in the industry.
Digital sound was introduced. Special effects were being perfected – 3D effects
and electronic media were on the rise. The industry also started catching the
attention of international audiences in the form of the Indian diaspora. This
further led to an increased interest from the corporate sector in the industry.

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•Silent movies

•Affordable tickets

•Imported equipment
1890s-1920s

•Talkies

•Studios

•Regional movies

•1 set international
festival screening 1930s-40s

•Golden age

•FTII established

•Improved
cinematography

Corporatizationof
Indian Film Industry  Studio system
versus star system Studio system Film producers have adopted a factory-oriented
approach for making a film because of the costs and complexities involved.
Hollywood had adopted this approach in 1910s and the firms with production
facilities were known as “studios”. The Indian film industry, influenced by
Hollywood since inception, also adopted the ‘studio system’ of film production
in the 1900s. One of the first studios formed in India was Kohinoor Film
Company, which was founded in 1918. In a few years, many studios were formed
and the number of studios had increased to over 20 by the year 1921. Studios
comprised entire teams covering all aspects of filmmaking; including acting,
technical expertise for post-production, marketing and distribution. This
approach helped studios standardize their film making style, achieve cost
efficiencies from economies of scale and develop their own brands in the film
industry thorough consistent production. Under this system, all artists and
technicians were employees of studios, who were either paid a salary or were
contracted for the long-term. Producers would get finances from film
distributors with a guarantee of screening the film in cinemas for a certain
period. Loans would be repaid in terms of box-office collections with no
further liability of the film producer. Distributors would keep the profits
earned from the film with no share for the film producer. Star system with the
growing popularity of Indian films, the importance of films to viewers
transformed into a “hero cult” phenomenon, which made film stars the objects of
admiration and imitation. Gradually, fan clubs for film stars emerged and their
idolization reached incredible heights. Although the star system existed even
during the silent film era, it gradually grew stronger than the studio system
and eventually replaced it in 1960s. Unlike the norm in the studio system, film
actors did not have long term contractual obligations towards film studios in
the star system. They operated as freelancers and were commanding professional
fees based on the box office performance of each film. Successful actors got
paid higher remunerations as compared to monthly salaries in the studio system.
However, this increase in professional fees led to higher costs of film
production. Emergence of the star system increased the cost of production and
changed the financing pattern of film production. Film distributors only paid
50 per cent of the total film cost, which forced film producers to look for
other sources of finances. Promissory note system became the most prevalent
source of financing. Producers would write an unconditional order to financers
to pay the payee. Other financiers came into prominence, including conventional
money lenders who usually charged interest rates of up to 40 per cent per
annum. The high cost of film production and these financing structures made
film production a risky profession until the advent of corporate players in the
industry. Post-2000, the corporate sector has changed the way films are made,
marketed and distributed globally. Professional service providers have replaced
improvisers and developed offerings in areas such as editing, digitization,
archiving, animation and film making. Many production houses are listed on
stock exchanges, thereby bringing in corporate governance into the industry.CORPORATISATION
OF INDIAN FILM INDUSTRY In 2001, the Government of India granted “Industry”
status to the Indian film industry. The government had established National
Film Development Corporation Limited (NFDC) in 1975 to produce and coproduce
films. However, institutional funding for the films increased after the grant
of “industry” status in 2001, when the Reserve Bank of India (RBI) formulated
guidelines for the banks for funding the film industry. This facilitated the
much needed institutional financing, which was earlier unavailable. Under the
‘star system’, production of films was unorganized, which usually led to
production delays and further increased the total cost of production. Securing
finances to complete the film was tough, because film producers would usually
get finance in parts. Disbursement of the next instalment of money was
dependent on salability of the film to financers. The time taken to secure money
for completing the next part of the film usually led to delays in producing
films. To avoid such concerns, film producers started looking for institutional
funding, which was cheaper and more reliable as compared to other means of
finances. In order to get the funding, the industry had to adapt to new
corporate governance requirements such as adherence to standard accounting
practices, business plans, targets and time schedules and insurance as mandated
by banks and financial institutions. Profitability and commercial success
became essential, which required professionalism, efficiency in film making and
adoption of market driven practices. It resulted in the entry of corporate
entities in all sections of the film industry. Deregulation of film screens
also helped in the corporatization of the Indian film industry. Earlier,
setting up a new screen required many permits and most of the states had
stringent procedures to follow. There was also price control on theatre
ticketing. After deregulation, the number of film screens increased
exponentially and ticket prices started being driven by market economics.
Deregulation of import control increased the industry’s access to latest
technologies from across the world and promoted digitalization of film content.
Digital films had wider reach as compared to the old analogue system. This led
to higher revenue and profitability for films, which encouraged more
participation from corporates in the film industry. With better corporate
governance practices, many international studios such as Walt Disney, Warner
Bros. and Sony entered into collaborations with local production houses to
produce and distribute movies. These collaborations have proved to be win-win
situations for the collaborators, because international studios have gained
distribution reach and domestic companies have utilized the latter’s experience
in project management. Also, Indian films can now be released globally, which
has increased revenues for the Indian film industry. Before corporatization,
there was a monopoly of big producers and stars in the industry. With
institutional funding available at relatively lower interest rates, new and
talented filmmakers can easily produce their films. Corporatization of the film
industry has also encouraged film producers to float new companies on stock
markets. Corporatization of Indian Film Industry 9 Corporatization also
introduced several new measures to reduce uncertainty in revenues earned by a
film. Corporates pre-license cable and satellite rights and distribution rights
across geographies; which helps them to recover about 40-80 per cent of film
production costs even before the film is released. Further, producers have
developed new sources of revenue; including the sale of merchandise and
partnering with companies to advertise their products in the film. Cost of film
production has also been reduced by adopting measures such as revenue sharing
with 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 film
in the earlier days, it is now as high as 40 per cent. The focus of marketing a
film is to maximize the revenue earned by a film in the first week. Increasing
use of technology has also helped and corporates have adapted to the latest
channels of marketing available, including social media. Corporate participation
in the Indian film industry has increased in production, distribution and
ownership of film screens. Revenues of corporates (whose financial numbers are
available) involved in film production have increased at a rate of about 16 per
cent per annum from US$ 679 million in 2008 to US$ 1.05 billion in 2011. Net
revenues of corporates involved in distribution (whose financial numbers are
available) have also increased at a rate of about 19 per cent per annum from
US$ 3.35 billion in 2008 to US$ 5.58 billion in 2011. Table 2 Total net
revenues of listed companies (US$ billion) 2008 2009 2010 2011 2012 Film
production No of companies* 85 73 78 82 57 Net revenue 0.68 0.69 0.90 1.05 0.90
Film distribution No of companies* 66 72 72 69 45 Net revenue 3.31 3.99 4.60
5.57 4.44 Source: IMacs Resources *Number of companies for which financial
results are available 4. TECHNOLOGY DEVELOPMENTS AND INDUSTRY TRENDS Corporatization
of the film industry and adoption of technologically advanced equipment and
screening have gone hand in hand. In recent years, the Indian film industry has
adopted latest technologies to improve visual and cinematic effects, which have
resulted in a better viewing experience for consumers. Increasing use of
technologies including digitalization of film content and 3D films has also
helped the industry to increase revenues and reduce cost of distribution.
Increasing numbers of 3D films and theatres: Although the first 3D film was
released in India in 1984, the number of 3D films in India has increased
significantly after the success of the Hollywood movie “Avatar”. Since then,
the industry is looking proactively to enhance the viewing experience of
consumers by using 3D technology and hence increase the viewership. Multiplexes
are also willing to invest large amounts for 3D screens to meet the increasing
demand for 3D films. Corporatization of Indian Film Industry 10 US$ 20,000 is
required to convert a 2D screen into a 3D screen. Average ticket prices for 3D
films are higher as compared to 2D films; hence generating more revenues,
despite lesser number of tickets being sold. 3D films usually generate about
two-three times the revenue as compared to 2D films, which makes the investment
well worth it. Digital screens: With the increasing numbers of 3D films, the
number of digital screens has increased, since it is easier to convert a
digital screen to a 3D screen. A majority of new multiplexes have digital
screens with 3D capabilities. According to estimates, India has over 5,000
digital screens as on date. Digitization of Indian films will also increase the
consumption of movie content by enhancing the viewing experience. Also, users
cannot rent or share digital content, thereby curbing the menace of movie
piracy. Digitization has reduced the cost of operations, because content is
easier to store and deliver to screens. Digital content can easily be
distributed to the screens via satellites. The Indian film industry has
witnessed rapid digitization of cinema screens over the past few years. This
has 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 to
have a wider release because of high print costs, can now release in large
numbers through the digital format; potentially earning higher revenue
collections. This has also enabled companies to simultaneously release their
movies at the global level. According to industry estimates, around 70 per cent
of the screens in India are already digitized. With film producers increasingly
making and selling movies in the digital format, there will be no option left
with theatre owners but to go digital in the future. Digitization will also
help increase the revenues from cinema advertising, because of the low costs
involved in distributing advertisements. Advent of multiplexes: The advent of
multiplexes in India has significantly contributed to the growth of the Indian
film industry and helped in its corporatization. The culture of multiplexes has
improved the overall movie-going experience of audiences. Big budget movies,
which had to be content with about 500 prints earlier, can now release with
1,500 prints. This has helped them reach a wider audience as well as collect
more than 50 per cent of the total revenues in the first week itself. There are
just 10 screens per million in India as against the global average of 54 and
120 in the US. This highlights tremendous opportunity for the Indian film
industry, which multiplex owners are gearing up to seize. According to the Multiplex
Association of India, Indian had around 1,000 screens in 2012. The number is
expected to increase to 1,400 by the end of 2013. New players such as Cinepolis
have entered the market and have lined up huge investments for future
expansion. Availability of food and beverages has helped multiplexes to
maintain double digit growth for the past 2-3 years. Growth of multiplexes in
the coming years will also be significantly driven by growth in the number of
malls. Multiplexes are an integral part of malls today and both share a
symbiotic relationship with each other. With the retail industry reviving after
the slowdown, growth in the number of malls, and thus, multiplexes, is
inevitable. This is ideal for both industries as malls get higher footfalls
because of multiplexes and multiplexes get the benefit of initial cost
reduction because of a revenue sharing mechanism with malls. Growth of
small-budget films: Small-budget films are beginning to create a place for
themselves in the Indian film industry. These films are mainly content and
performance 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 future
projects. The advent of multiplexes has further helped their cause, as niche
viewers are always interested in such films. The pay-per-view market: The
pay-per-view (PPV) market is an emerging source of revenue for the Indian film
industry. Growth in PPV market in India has a high correlation with growth in
the direct-to home (DTH) segment. DTH service providers have reduced prices of
PPV films and brought them in the price range of US$ 0.5-1.0. With all four
metros and many others cities moving towards digitization, the demand for PPV
films is expected to increase. This will lead to increased competition for
acquiring movie rights and a new revenue stream for film producers. Resurgence
of regional cinema: While Hindi films continue to dominate the Indian film
industry, there has been a resurgence of regional movies over the past five
years. This area is mainly dominated by south-Indian films, with films in
Marathi, Punjabi, Bhojpuri and Bengali languages also playing their part.
Regional films cater to the tastes of local audiences and penetrate deeper into
rural areas. Leading production houses in India have realized the potential of
regional films and are increasing their presence in important regional markets.
Large players like UTV, Reliance Media Works, Eros, etc., have entered the
south Indian film market to tap the tremendous potential of these markets.
Studios are also releasing popular films dubbed in different regional languages
to reach a wider audience and generate higher revenues. Their strategy has been
validated by the tremendous successes of some of the regional movies in the
last three years. The box office collections of these movies have also
overtaken some popular Hindi films. Emergence of regional cinema has helped
production houses restructure their portfolios, moving away from a dominantly
Bollywood-dependent model to a more balanced one. Increasing market for
Hollywood films: Viewership of Hollywood movies is on the rise in India.
Hollywood production houses have increased their focus on the Indian market
because of growing revenues from their releases in India. With greater
collaborations and digitization of cinema, foreign production houses have also
been able to release movies globally at same time. Hollywood studios are also
making an effort to release movies in different regional languages in India to
tap the huge market available. Growth of visual effects (VFX) industry: The
visual effects (VFX) industry is a rapidly growing segment in India. With the
increase in domestic demand from high-budget movies and outsourcing of work to
India from international clients on the rise, the future of the industry looks
very promising. Industry players have been gradually trying to shift from
low-end work towards higher-end assignments through collaboration with film and
entertainment companies. Domestic players are increasingly setting up offices
abroad for better service to the clients. India currently accounts for around
10 per cent of the total animation and VFX outsourcing market. By focusing on
key areas such as improving the skill sets of artists and increasing salaries
to attract better talent, there is enough room for significant growth in future