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How producers, distributors & multiplexes are going to survive COVID19?

It’s showtime. Behind the glitz, glamor, and razzmatazz that seems to be associated with the movies, hard-nosed finance propels the business end of the drama!

But during these unprecedented times, the movie distributors and exhibitors have imbibed the spirit of Rakhee from Karan Arjun, as she asserts with absolute, unshakeable blind faith to everyone in sight,

“Mere Karan Arjun aayenge.”

Similarly, the distributors and exhibitors assert in the time of COVID-19 lockdowns,

“Box office business waapas aayega.”

It’s a tough time for everyone. But it’s tougher still for those depending on the theatrical releases for earning money, as the movie producers are rushing towards the OTT platforms, bypassing the theatres completely to release their movies. Disney + Hotstar has spent over a whopping INR 400 crores in order to acquire seven Bollywood titles starring the likes of Sushant Singh Rajput, Akshay Kumar, Ajay Devgn, Alia Bhatt and Abhishek Bachchan.

It is a massive acquisition, and it is hitting where it hurts the most as theatre owners have publicly expressed that this would justify digital as the main medium of consumption, making multiplexes and theatres irrelevant. Netflix and Amazon Prime are also nipping at their toes

So in this context, it would be insightful to understand how the movie business works in India. Please note that we would be only considering the business generated by selling the theatrical rights. A movie producer has a lot of avenues to earn money apart from the theatrical releases like selling of satellite rights, music rights and overseas subsidies.

So let’s dive in.

Before going down to the numbers, let’s understand the cast of this dramatic potboiler: ‘Movie Producer’ is the one who fronts the cost of the production of film – renumeration of the actors to the costumes and the set, travels expenditure – everything. Once the movie is made, he also bears the cost of marketing/promoting the movie.

Next is the 'Distributor'. As in any industry - the distributor forms a vital link between the producers and the theatres. The producers sell the theatrical rights of the movie to the distributors, or they work with a third party who would deal with the distributors. In case of the third party, the movie producer recovers the money even before the movie is released from the third party.

Please bear this info in mind, we would come to this later. Indian film rights are mainly distributed in 14 circuits in the country through various distributors: Delhi/UP, Mumbai, Central India, East Punjab, CP Berar (Central Provinces), West Bengal, Bihar, Rajasthan, Mysore, Nizam, Tamil Nadu, Kerala, Orissa, and Assam.

And third is the movie 'exhibitor'. Exhibitors are theatre owners: single screen and multiplex. They have different kinds of agreement with the distributors on the margins depending on the “number of screens” and the “monetary returns” that are paid back to distributors. It is on this end where the numbers are crunched. Of course, one must deduct 30% from the collection, as the Government of India earns the lion’s share of the margins in the form of entertainment tax.

Let us understand the break-up of the margin arrangement between the distributor and the exhibitor.

Distributors receive the money from the theatre owners on a weekly basis and the arrangement is straightforward. If the movie is released in the multiplex, in the first week of the release of the movie – the distributor commands 50% of the collection after the tax has been deducted, in the second week – it is 42%, in the third week, it is 37% and from the fourth week onwards – it is flat 30%. While if it is a single screen, the distributor commands 70-90% of the collection after-tax, right from the first week till the time the movie is exhibited in the theatre.

This is one of the very few businesses where distributors command such high margins! But while it may seem that the margin collection from the single screen owner is too steep, one must consider the price of the ticket as well.

Say that a multiplex charges Rs 300/ticket while the single screen charges around Rs. 100/ticket. In the first week of the release of the movie, suppose it is screened over 100 times. Suppose 100 people visit each show. This is how the calculations would work out:

Hence, a distributor is earning much more from a multiplex than a single screen despite commanding a higher share of margins from the single screen owners. While multiplexes are where the distributors earn money, they cannot discount single screen – they give consistent revenue to the distributors and if you want the movie to break big records, you need sizable business in the single screen.

One more aspect that I wish to discuss before wrapping up the financials is the profit-sharing deals of the male superstars of the Bollywood. The megastars are fin-savvy. Gone are the days, when they would ask for a hefty flat fee upfront. They want more than the chunk of change in profits. Remember, the producers sell the theatrical rights of the movie to the distributors or the third party and they sometimes earn their return even before the film is released. They have already made their profits, after deducting for the production and the marketing costs.

Superstars like Shah Rukh Khan, Salman Khan, Akshay Kumar or Aamir Khan ask for anything between 50-80% of the producers’ profit besides a flat upfront fee. Aamir Khan is the only A-list actor who is paid entirely in profits!

This isn’t a new practice. Back in the 80s, Amitabh Bachchan had commanded few territories of the country as his remuneration. Back then, there were 11 distribution territories, so he would command the profit of any of those distribution centers as his fees which would have otherwise gone to the producers!

The biggest advantage of these kinds of deals is that this doesn’t front-load the cost of the movies. An upfront fee to a megastar would mean anywhere between 40-50% of the entire production cost! A profit-sharing deal would mean that while the actor earns much more in the process if the film were a blockbuster hit, in case if it is a flop – the producer doesn’t have to incur heavy loss. And this way, the actor is also more invested in ensuring the success of the movie – so he would put all his energy into promoting it.

On the other hand, female actors receive short shrift of a deal. They are paid a flat upfront fee because if a producer were to go for a profit-sharing arrangement with everyone, he wouldn’t earn any money. Of course, we must consider the star power of the male actors as people go to watch movies on their brand power.

As mentioned, in many cases the actors and producers earn money even before the film is released if they go for the deal with third parties, who would then do business with the distributors. The OTT platforms are counting on this behavior, as they try to shut out the exhibitors and distributors from the equation.

Disney + Hotstar paid an unprecedented Rs. 150 crores to the producers of ‘Laxmmi Bomb’.

Of course, the producers would have earned slightly more if there was a theatrical release in pre-COVID times were they to deal with the distributors directly.

Yet, considering everything – the movie stars and the producers are not impacted much. It is the other end of the movie-making spectrum, which is getting a raw deal.

There is an adage, ‘Magic happens on the big screen’.

So while OTT platforms are a hit in the metros, would they be able to command the same presence in the other cities, villages,? and districts? Or will the movie theatres go the same way as the erstwhile pager went after the advent of mobile phones.

Only time will tell.

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