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How Bollywood makes money
Surajeet Das Gupta | May 27, 2006
As Fanaa's will-it-won't-it release sends jitters through the film frat, producer Yash Raj Chopra is presumably less worried than he might have been had this been the Big Bad World of Cinema Before It Was Corporatised.
Today, Yash Raj Films can afford to detach itself from the fortunes of its film because chances are, whatever the controversy, it'll end up making money anyway.
And that's because somewhere, sometime circa 2006, the film industry grew up, the corporate world looked around and spotted an opportunity, and the rules of the game changed irreversibly. Stars began to report on locations in time not because some Bhai was arm-twisting them, but because it was written into their contracts.
Films went on to the floor and proceeded to wrap up schedules on time because the contracts had completion bonds written into them, and because such things as bound scripts had become mandatory to the process.
And the phrase "bombed at the BO" (referring to the box office and not, as is widely understood, body odour) became redundant because, whether they ran or not, chances are that everything from 36 China Town to the ill-fated Tom, Dick and Harry made at least enough money to tide them over.
In a matter of only a few years, filmmaking in India has changed rapidly, crossing over (a favourite Bollywood phrase) to the Hollywood mould.
It's the reason Sandeep Bhargava, CEO of Sahara One Motion Pictures, no longer gets the blues on a Friday morning even when the company's blockbusters are slated to hit the screens. And all because - as he says cockily - "the success of my movie is no longer dependent only on box-office collections".
It's the reason managing director Bobby Bedi of Kaleidoscope Entertainment, who pulled in Rs 33 crore (Rs 330 million) from Mangal Pandey, a film everyone's crowing is a dud, can afford to smile. And all because Bedi saw his movie as a business venture and looked around for appropriate financing in the one place film producers have never turned to - banks.
When Bedi walked into Exim Bank's office in Mumbai to convince officials that the movie had export potential, even he hadn't reckoned with success.
The bank offered him Rs 8 crore (Rs 80 million) as loan at an amazingly low annual interest rate of 5 per cent (much less than what you get for a home loan). That's not all, for he also roped in high net worth NRIs - as equity partners on the project.
"The combination of debt and equity helped us in reducing the cost of money to finance a film dramatically. It changed the whole economics of film making," he says, days before leaving for Cannes to network with buyers and sellers on an international platform.
Remember, some years back, it wasn't like this. Films were (mostly) financed by the underworld or diamond merchants charging exorbitant rates of interest - 30 per cent and more. The dons dictated the stars, interfered with the storyline, and sometime asked "special friends" to be cast alongside the hero, virtually guaranteeing that the film would bomb.
Today, it isn't just the financing that has changed. Recoveries from the box office constitute no more than 35-40 per cent of a film's revenue (compared to 80 per cent just two year ago).
Producers are now milking other avenues for whatever it's worth, selling an array of emerging rights - satellite (which is in the same league as the box office), home video, music, wireless song downloads, the Internet, DTH and, now international rights too.
Bhargava, for instance, sold the satellite rights of animation film Hanuman for a staggering Rs 2.5 crore (Rs 25 million) before the movie released, no one was ready to offer even Rs 25 lakh (Rs 2.5 million)}, and that too for only two telecast rights. No wonder he's confident that his dependence on the box office will lower further to no more than 20 per cent in the next six months.
Welcome to the new world of movie business where institutional funding is the norm, IPOs are possible and the advent of large corporate houses like the Aditya Birla group or Anil Ambani in the movie fray are making filmmaking more affordable than before.
Pritish Nandy doesn't mince his words. "That production is a risky business is all bullshit," he says. "Over the next five years, 50 per cent of film revenues will come from the 'new media', from the Internet, DTH, mobile phones and pay-per-view."
There are others who agree with the chairman of Pritish Nandy Communications, such as Anshuman Swami, CEO of the Aditya Birla-promoted Applause Entertainment that produced Black: "Today there is more funding available than there are good films in the market. And with the cost of money becoming cheaper, and with new innovations like joint marketing and revenue share deals, the risk factor in making movies is coming down."
The changing paradigm is reflected in numbers too. According to a Yes Bank report, over 38 per cent Hindi films in 2004 were financed through non-traditional sources (debt, IPO, private and individual equity, companies, TV broadcasters) compared to only 10 per cent two years before that. As much as Rs 256 crore (Rs 2.56 billion) was disbursed through these sources to the film industry in that year.
From the Industrial Development Bank of India and Exim Bank to Yes Bank, they're all queueing up to lend money to the entertainment sector.
Says Sanjay Bhandari, a chartered accountant who has structured various cheap money deals for producers: "The rate offered by banks is anywhere from a third to a sixth of what traditional financiers used to charge. That changes the whole economics of filmmaking."
Exim Bank, for instance, offers loans at 8-10 per cent interest provided the film has export potential. IDBI's credit line for films is available for 10-15 per cent, to be paid before the film is released.
Yes Bank has just sanctioned a Rs 5 crore (Rs 50 million) loan to Pritish Nandy Communications on the strength of its balance sheet, at 12.5 per cent. By comparison, traditional financiers charged a staggering 30-50 per cent by way of annual interest.
But the banks are still cautious about disbursing loans to producers, banking on the bettable. Exim Bank may have sanctioned loans worth Rs 100 crore (Rs 1 billion) over the last 18 months, but Mathew John, general manager, says: "We have chosen only top producers with a good track record." Among the beneficiaries are Yash Raj Films, Farhan Akthar, Bobby Bedi and Sunil Manchanda, "who is producing a film starring Amitabh Bachchan".
But the bank is now poised to take bigger risks in funding distribution. Exim Bank has sanctioned a credit line of Rs 20 crore (Rs 200 million) to Yash Raj Films, which has moved into movie distribution in a big way. John says the interest rate is slightly higher as the risk factor too is greater, since distributors have to take a call on expected box-office earnings.
Others have used the buoyant IPO route to fund films - PNC, for instance, raised Rs 38 crore (Rs 380 million) from its IPO of which Rs 23 crore (Rs 230 million) was used to finance films. The company is now raising $12 million through convertible debenture, and the cash will be used to de-risk its movie-making portfolio.
Says Pritish Nandy, "The money will help us increase the number of films we make each year from three to at least eight. Also, we will make bigger films and reduce the number of small films to reduce the risks."
Also showing their money are corporate houses jumping into the entertainment fray. Aditya Birla's Applause Entertainment is able to borrow money from group companies at rates lower than even banks. Big boy Sony Pictures is debuting with director Sanjay Leela Bhansali's lavish offering Eklavya, slated to cost Rs 35 crore (Rs 350 million).
Adlabs (in which Reliance has bought a majority equity stake) has earmarked a revolving fund of Rs 60 crore (Rs 600 million) to finance films. The company is tying up directors in long-term contracts to make films for the company - it has signed on director Vipul Shah to make 10 films in two years.
Points out Manmohan Shetty, chairman of Adlabs, "We can rotate these funds to finance films and double our output of 5-6 films a year." And in keeping with Hollywood studios, it's clear that "you need to have your own distribution too".
If the movie business suddenly looks attractive, industry experts say it's because the banks haven't lost money on any projects yet. In fact, they get their money back even before a film is released because distributors pay upfront, pick big banners to minimise risk, and have a stable collateral in the negatives. Producers say the upside is mind-boggling.
Points out Bedi: "Failure no longer means huge losses as you recover part of the money while pre selling territories to distributors. And if a film is a hit, you get 4-5 times the money you put in."
What has made financing easier is innovative instruments to mitigate risk. US-based Film Finance Inc which has set shop in India is offering "completion bonds" to producers and has eight films in the post-production stage that have signed these bonds.
Says Pooja Bedi, who heads the company in India, "What we take care of is mitigation of two key risks - completion of the movie, and cost overruns. We underwrite these risks so financiers have no fear they will not get their money back."
Producers have to pay a steep fee of 3-5 per cent of the cost of the film by way of guarantee and they have to face strict scrutiny on their budgets, daily schedules and even control on production budgets, but the regimentation is worth it.
Bedi is taking completion bonds to the next logical step - for distributors who pay a minimum guarantee to book a territory from a producer but have no risk mitigation opportunity if the film gets delayed or faces cost overruns. Pooja Bedi says they are already talking to both sides for creating a completion bond to underwrite the distributor's risk.
Production companies too are devising strategies to hedge their risks. Applause shaved off 5-10 per cent from the cost of the film when it tied up with Star TV for promotion space in return for an exclusive Making of Black on the channel.
It also worked out a deal with in-house cement company Ultratech and used its hoardings to promote the film. Says Anshuman Swami, CEO of Applause, "You have to spend around 10 per cent as promotion on a film, so by saving this money we were able to reduce the overall budget risk."
Adlabs has formulated a de-risking strategy by pre-selling distribution to just one company for a series of film projects. It has sold all rights for three films - Bluff Master, Rooh and Taxi 9211 - to UTV (except DVD and satellite). Says Shetty, "By pre-selling, we not only recouped our costs but even made money upfront."
But changing financial models does not mean everything is hunky-dory. UTV's Ronnie Screwvala says while completion bonds are good, the problem is they preclude the need for discipline in production houses. Bhandari says the completion bonds are too expensive and large production houses don't require them anyway since investors are not asking for such security.
Besides, smaller producers can't afford them to begin with. Warns veteran producer and director Subhash Ghai: "There is too much easy money, whether from banks or from IPOs and investors, floating around but the creative talent base is limited. There is a danger that this honeymoon might not last."
The N K Singh report on the role of venture capital funding in cinema had mooted a Rs 200 crore (Rs 2 billion) fund bankrolled by the government and managed by fund managers like ICICI Ventures. But the move has not taken off the ground and an ICICI Ventures executive says, "We have kept away from funding movies as the risks are still very high and you can never predict your earnings."
The good news is that new revenue channels for movies are opening up, which could reduce box office risks substantially. Home videos, an unknown segment a few years ago, already constitute over 10 per cent of a film's revenue. And industry pundits say movie downloads can fetch a producer as much as Rs 1 crore (Rs 10 million as revenue share from mobile operators.
And if you retain control over the intellectual property rights for your library, you could make good money - Yash Raj Films is believed to have earned Rs 60 crore (Rs 600 million) through selling the movie rights of films in its library to Sony for a limited period.
Bedi says satellite and overseas film rights could be as big as domestic film rights for most films. "Five years ago, the overseas market was limited to movies depicting Indian weddings and culture. But with the high economic interest in India, today every movie has an international audience. And ticket prices are much higher there."
He adds that the high demand for software on satellite channels has also driven up prices. One example: Theatre audiences for PNC's Jhankar Beats constituted only 8 per cent of its viewers; the rest came from TV.
Once, filmstars went to Dubai to hobnob with the underworld, and danced to the tunes of diamond traders. Today, moviemaking has overcome its attendant risks with a business model that banks and corporate houses understand. And if movies are getting made on time, it's because your friendly neighbourhood bank - and not Dawood Ibrahim - are turning the screws on the stars. Films really have gone the way of the masses.
How the industry rakes in moolah
Producer: Distributors give him a minimum guarantee fee before the movie in return for film rights in a territory within the country. Producers can recover up to 30 per cent of the cost of the film, pre-selling it to distributors. If the movie does well and the distributor recovers his money, any additional inflows get divided between the two.
Another 25 per cent of the revenue comes from overseas rights, 20 per cent from satellite rights, 10 per cent from the emerging home video market, 10 per cent from music (which includes wireless and Internet downloads). If the producer owns the intellectual property rights and has not sold it off in perpetuity (generally, rights are given for five years), he could make money selling his library to a TV channel in the long term.
And where does he get his money? From banks, like Yash Raj does. He can borrow on the strength of his balance sheet, as UTV does. He can fund his films from IPOs, like PNC. Or go to individual high net worth individuals or companies to put in money as equity. Or, of course raise money upfront from distributors, or through selling some of the rights early to finance the cost of the film.
Distributor: They offer an MG fee to the producer to book a territory. And spend on print and publicity on which they take a 20 per cent commission. Any overflow of revenue after recovery of the MG fee and commission is divided between them and the producer. In cases like Yash Raj Films, which distributes most of its films, while the risks are bigger, so are the gains.
Exhibitor: The old system in which distributors paid a rental to the theatre irrespective of whether the movie ran or not is rapidly becoming history. Under a new system revenue gets shared between theatre owners and distributors. Generally, in the first week of a release, the split is evenly 50:50, in the second week the producer gets 40 per cent and the exhibitors the rest, in the third week the producer makes 30 per cent and if the movie continues into the fourth week, he gets 25 per cent of the collections.
"We are planning to hit the IPO route and raise Rs 50-70 crore (Rs 500-700 million). We have an ambitious Rs 120 crore (Rs 1.2 billion) project to make the film Mahabharata, which we will finance through a combination of debt and equity. We are clear we won't put in more than 20 per cent of the money, so in case the project fails we can get up and continue to run"
"Film companies are getting structured, banks are realising we are a service industry and cannot give hard assets as collateral. I think very soon the system of minimum guarantee given by distributors to producers will get replaced by straight commission"
"We have preferred to remain a debt-free company. We do four films a year, and our plan is to scale up to six"
"There is nothing like a big or a small film. What you have is a good film or a bad film. We have created an overriding brand in PNC. We might get into distribution as an independent business and do promotions in movies. We want to be like DreamWorks"
"We went into a revenue share with Sanjay Leela Bhansali for Black. Otherwise, we'd have to pay him Rs 6-7 crore (Rs 60-70 million) and the movie's cost would have gone up"
"We don't have our own creative unit like Yash Raj Films, that is why we are tying up with directors to produce their films. We are into the multiplex business and are going for distribution so we will be in the entire chain"