Multiplexes becoming the most important link in film distribution chain

Multiplexes becoming the most important link in film distribution chain

The rise in the number of multiplexes has revolutionalised the film-viewing experience in large cities. Multiplexes account for only ~5 per cent of total screens, but, on an average, they command 35-40 per cent share of the total box-office collections. Due to their ability to showcase movies of different genres, targeted at a diverse audience at a single location, multiplexes have changed the type of films being made.

Multiplexes are beneficial to every stakeholder across the value chain:

·         Consumers - In a multiplex, the movie-watching experience is much better than in single-screen cinemas and consumers also get more options to choose from.

·         Exhibitors - Average occupancy and realisations in multiplexes are higher than in single-screen cinemas. Multiplex theatre owners also enjoy the flexibility to exploit the commercial value of a movie in a better manner.

·         Distributors - In a multiplex, all sales are reported as ticketing systems are computerised. Thus, there is very little scope for any revenue leakage due to under-reporting of actual revenues. Distributors stand to gain as their returns would increase when higher collections are reported.

·         Producers - Higher revenue collections would translate into better returns for the producer as well.

Table 1: Comparison of multiplexes and single/double screens

	Multiplex	Single/double screens
Number of screens	1-2	1-2
Total number of screens	~700 (as of Sep'08 )	~12,500 (as of Sep'08)
Seats per screen	150-500	750-1500
Daily shows per screen	1-2	3-4
Ticket prices in Rs (range)	Rs 50 to Rs 250	Rs 10 to Rs 100
Average occupancy	35 - 35%	15- 35%
Share of ticket sales in total revenues	70 - 80%	85 - 95%
Ownership	Mostly corporates	Mostly individual entrepreneurs
Tax benefits	Entertainment tax benefit in	No benefits on account of
	several states	taxation
Major advantages	- Better viewing experience	-Location advantage
	- Better occupancy	-Lower ticket prices
	- Greater realisations
	- Sharing of fixed costs
	- Better exploitation of movies
	- Diversified revenue stream
Source: CRISIL Research

Digitisation of prints enabling wider release and reducing piracy

The digitisation of prints has had a big impact on the Indian film industry. Prior to the onset of digital prints, film distributors would release only a limited number of physical prints (based on feasibility) due to the high cost of producing prints and the low average ticket price. The distributors can now look for a much wider release and make the most of the weekend phenomenon. The distributor can flood the market with a very large number of prints at the time of release, thereby enhancing the revenue-generating ability of the distributors and exhibitors.

For example, earlier, a big budget Hindi film used to release with 400-500 prints. Now, with the use of digital prints, we are witnessing films being released with as much as 1000-1500 prints. Golmaal returns (2008) released with 450 digital prints out of total 850 prints in the domestic market. Krrish (2006) had released with 125 digital prints out of its 925 prints in the domestic circuit. As of June 2008, it is estimated that there were around 1,600 digital screens in India.

Players such as UFO Moviez and Real Image are active in this space. UFO Moviez, for instance, does not ask theatre owners to make any upfront investments for equipment, except for a refundable deposit of Rs 2,00,000 and a non-refundable deposit of Rs 25,000.  Instead, they charge a content delivery charge to the distributor and the exhibitor per show of the movie, and also earn revenues from advertisements played during the course of the movie.

Table 2: Advantages of digital cinema

Benefit	Impact on players in the value chain
	Producer	Distributor	Exhibitor	Audience
Wider release	Early release of the film	Release of the film at more	Timely release of film enables	Audiences in smaller
of film and	throughout the country	centres without making	exhibitors in smaller centres	centres get to view new
reduction in time	restricts losses due to	investments in prints	to attract more audiences	releases on the day of
to market	piracy and adverse reviews		and charge higher prices	the release
Savings in cost	Has to make one-time	Distributor need not make	Does not have to make any	Not applicable
of prints	investment of around	extra investment in digital	additional investment
	Rs 90,000 in digital prints	prints
Durability of film	Traditional 35 mm/70 mm	Does not have to spend on	Does not have to grapple	Good quality images will
prints	optical prints deteriorate in	reprints in case a film does	with issues such as bad	enhance the viewing
	quality over time; digital prints	well, and reduction in losses	quality and delivery of	experience
	retain their quality and the	if a film fares badly	prints
	pictures never get distorted
Curb on piracy	High definition content	Potential of increased	Improved theatrical potential	Not applicable
	protection software restricts	revenues due to reduction in	resulting in higher revenues
	piracy and adverse reviews	piracy
Improved	Wider release of film aids	Quicker recovery of	Savings in running costs such
profitability	in early recovery of money	investments made in	as electricity, employee, and
		print and publicity	maintenance of equipment
			helps in improving profitability
Conversion of	Old films already released	Generates a new revenue	Provides access to a wider	More choice available to
old films possible	can also be converted into	stream	range of films	the audience
	digital format
Source: UFO Moviez and CRISIL Research

Cost of production has escalated

Between 2005 and 2008, easy availability of finance from public markets and ambitious expansion plans of corporates increased the competition to acquire talent, resulting in a 60-100 per cent hike in the production cost. The level of competition is reflected in the fact that film production/distribution houses, which used to fund two to three movies a year, announced plans to make 5-10 projects in a year. As a result, the talent cost zoomed to about 40-50 per cent of a film's budget. The corresponding figure in Hollywood is about 15-20 per cent.

Table :3 Substantial funds raised from various sources

Name of company	Source	Rs million
Eros	(AIM) London	3,315
UMP plc	(AIM) London	3,150
Indian Film company	(AIM) London	3,959
SACVL	IPO & FCCB	1946
PVR Pictures	Venture Capitalists	1,200
Note:SACVL - Shree Ashtavinayak Cine Vision ltd
Source: CRISIL Research

Going forward, we expect the production budgets to come down as market conditions and the failure of several films at the box office in 2008 begin to impact the film industry.

Distribution prices have shot up

Higher production budgets, increased revenue-earning potential and growing competition amongst the distributors have escalated the cost of acquiring distribution rights. Big budget films with the top stars of the industry are being acquired for huge amounts. For example, Rang de Basanti (2006) was acquired for Rs 40 million in the Mumbai territory whereas Ghajini (2008) has been acquired for Rs 100 million in the same territory. Due to the spurt in costs, sub-distributors in many territories are now going out of business.

Not all bets have paid off for the distributors. In the case of films like Drona (2008), Karzzz (2008) and Love story 2050 (2008), the distributors and sub-distributors incurred huge losses due to the poor performance of the film at the box office as well as the high cost of acquiring the distribution rights. With financial sources drying up and several big budget films not doing well, we are now witnessing a correction in the cost of acquiring distribution rights.

Purchase of all-inclusive distribution rights becoming a trend

Film distributors are increasingly bidding for universal rights (domestic theatre exhibition, overseas, music, home videos, digital, cable and satellite rights) and that too, for a longer period of 7-10 years as opposed to the usual practice of 3-5 years, especially for big-budget Hindi films with good face value. The risk these distributors take is such that they would be able to recover their cost of acquisition by showcasing the content on the various platforms. An offshoot of this trend is that producers can theoretically eliminate their risks and make profits by selling universal rights before a film is released, if there is demand for the same amongst distributors.

For example, Om Shanti Om (2007) was reportedly acquired for Rs 730 million by Eros International. The deal included all the rights of the film except for the music, cable and satellite (C&S) rights.

Distribution rights being traded

The distributors sometimes resell the distribution rights of a film after acquiring it. For example, the global distribution rights of Welcome (2008) were reportedly acquired by Studio 18 for Rs 450 million and sold to UTV for Rs 500 million and later sold back to Studio18 for Rs 550 million. UTV made a flat profit of Rs 50 million through the deal.

Entry of international studios

International studios are also attempting to gain a foothold in the growing Indian film industry. Walt Disney produced Roadside Romeo in collaboration with Yash Raj Films. Saawariya was produced by Columbia Tristar- Sony whereas Warner Bros has produced and distributed Chandni Chowk to China along with Ramesh Sippy Entertainment and People Tree Films. It has subsequently entered into another 3-film deal with People Tree Films.