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is Bollywood a good investment?



India boasts one of the largest media industries in the world. In addition to its 49,000 newspapers and magazines, over 200 television networks and 97 percent radio coverage, India is best known for producing over 1,000 major motion pictures per year. India creates more product annually than Hollywood and independent studios combined, and despite changing industry economics and audience tastes, the pace has not slowed. 

The Facts The average Bollywood film is budgeted at $1.3 million versus the $13.6 million it costs to produce a film in the U.S. India has a substantial domestic market for film given its population of 1.1 billion, which is more than 4 times the size of the U.S. In 2009, Indian films cost a total of $531.9 million to produce and generated $957.4 million in revenue for an aggregate return of 80%. Sounds good so far, right? 

It would seem that given the dynamics of lower production costs and a larger internal market, that Bollywood films would be exceptionally profitable relative to their U.S. counterparts. This is actually not the case as the overwhelming majority of Bollywood films lose money or breakeven and only a few provide returns to investors. Of the 130 Hindi films released in 2009, 98 actually lost money. The fact is that only the sophisticated investor that tracks Indian media can consistently profit against such difficult odds. It's critical to understand why.

Industry Size

By all measures, the volume output of Bollywood films is misleading. In India, a per capita income of $400 per year and an average ticket price of 20 cents means that the 3.6 billion tickets sold in 2009 translates into theatrical revenues of approximately $800 million annually. To put that in perspective, "Titanic" alone produced $600 million at the domestic box office in the U.S. and more recently "Spiderman" produced $400 million. The U.S. film industry benefits from an average ticket price of $4.70.

Indians only spend 2 percent of their disposable income on entertainment compared to 8 percent in Western markets such as the U.S. This can be explained in part by the Indian government's belief that entertainment is a luxury, justifying a entertainment tax of nearly 60 percent on all theatrical ticket sales. More importantly, it is the poor state of Indian exhibition that contributes to the minimal amount spent on movies. In the U.S., movie theaters surround us with 117 theaters per million people. In India, that number is 12.5 per million and of the only 13,000 theaters in the country, 3,600 are "temporary" screens. In India, only 30 percent of all films made get proper screen coverage.

Revenue Streams

Indian producers primarily recoup their production budgets from theatrical exhibition (80 percent) and overseas rights sales (12 percent). TV and video rights sales, which are often bundled, only account for 4.5 percent of a movie's aggregate revenues and despite the prolific nature of Bollywood music, music rights sales represent 3 percent of the take. Most of this money comes in the form of upfront direct rights sales to a territorial distributor in India (there are 9 separate domestic territories) or an overseas distributor such as Eros or Videosound. Productions that are successfully "packaged" with strong casts, a solid director and commercially successful playback artists such as "Devdas" can recoup up to 70 percent of their production budget before the film is even released! This however, is rare. 


The model is vastly different than the U.S. model. In the U.S., a film's theatrical release only represents 26 percent of pie with video rentals (29 percent), video sales (26 percent), DVD sales (14 percent) and broadcast and cable (5 percent) contributing significant dollars. In many instances, foreign box office, video and DVD sales are greater contributors than all domestic revenues combined. Going back to the example of "Titanic," of the $1.8 billion that it grossed, the foreign markets alone recouped the production investment 500 percent. 

Content

The consequence of Indian producers' dependence on domestic theatrical revenues is that, not surprisingly, they end up making movies exclusively for the Indian market. If 80 percent of revenues are going to come from a single source, in this case domestic theatrical exhibition, producers are often forced to stick to an accepted formula of star-driven, overly dramatic, musically oriented, 3-hour long potboilers. These movies are relevant only to India, and unless it is a certified hit at the Indian box office, investors will not see their money. Even critically acclaimed movies such as "Lagaan," which received an Oscar nomination in 2001 in the international category, only grossed $835,767 in the U.S. I would wager that a significant amount of that represented curious Indians and not your typical connoisseur of international film. To date, Bollywood movies have not traveled - and have not been designed to travel - and the consequence is an undue dependence on an Indian marketplace, which is ultimately small. 

Movies like "Memento," "Boys Don't Cry" and "Shrek," which saw significant revenue contribution from non-theatrical sources such as DVD sales, pay cable and merchandising, don't get made in India because these distribution channels are not developed. Furthermore, most Indian financiers are not going to fund a non-traditional, avante garde Hindi movie in the hopes that it will recoup money in, say, the U.S. arthouse market. There's little precedence for that result and the conservatism is paralyzing.

Recent Developments

So is Bollywood a bad idea for investors? Not necessarily. There are a number of positive developments which indicate that new models for production investment may be well-supported.

First, the government of India recognized the motion picture industry as a legitimate industry in 2001, allowing producers to obtain institutional financing from banks such as IDBI and allowing investment at the film level as well as the production company level. The result is that there has been significant investment in building media infrastructure in India with much money being invested in state-of-the art production facilities for live action and animation. 

For example, Ramoji Film City in Hyderabad is one of the world's largest and most comprehensively planned film production centers with over 40 indoor sets, 200 outdoor sets and a workforce of nearly 7,500 skilled in production.

Second, the international community is beginning to realize that production costs in India are a fraction of their domestic costs and there is little difference in production quality. Nowhere is this more pronounced than in the animation industry, where the combination of skilled engineering resources in India and low cost PC platforms allow a typical 22-minute episodic TV animation to be produced for $150,000 versus $350,000. Across a 26-episode season that amounts to over $5 million in savings. U.S. companies such as Wild Brain and French production houses such as a France Animation have keyed in on this cost differential and have outsourced a high volume of work to skilled Indian animation shops.

Third, India is rapidly developing a creative talent base that will soon be able to produce truly global media if given the opportunity. India has the growing presence of TV and the advertising demands of multinationals such as Coca Cola Co., Colgate-Palmolive Co. and Samsung Electronics Co. to thank. Writers and directors from the television commercial side are often held up to high global standards of creative and production quality and are now translating their skills behind the small screen into creating big screen product. 

Companies such as Percept IMC and United Television in India, which have both commercial and filmmaking capabilities in-house, are spearheading these efforts. Remember that satellite television has only been in India for 10 years, so the best is yet to come.

The Opportunity

There are a number of ways in which Foreign/NRIs can financially participate in Bollywood's growth. Financial value can be realized by effectively bridging the gap between Bollywood production teams and the U.S.

Co-Production

Indian producers need international production partners, with deep expertise in their own domestic markets and sophisticated marketing experience, to produce co-owned content with international distribution potential. Indian companies can contribute highly skilled, low cost production alongside their share of the production capital with international producers guiding the project's creative direction, negotiating international distribution, designing sophisticated marketing and promotions programs and providing financing. The partnership and results can be outstanding. 

United Television was recently awarded a co-production contract with Disney Asia for their "Legends of the Ring of Fire" project. Production Capital and Outsourcing

U.S. producers need strong financial incentives to outsource their productions to India and consider co-production agreements with Indian companies with which they may not have a working relationship. Foreign/NRI investors can provide the development and production capital for such programming and help U.S. producers and studios to find suitable production partners. Foreign/NRI investors can also help to make a clear case to U.S. producers that the opportunity for co-production and production outsourcing is real and comparable to the success that U.S. giants such as Microsoft Corp., American Express Co. and IBM have had in setting up shop in India. The result is unique, high-quality, low-cost programming in which an investor could have substantial ownership from the onset or generate fees and gain profit participation from setting up the deal.

Content Development

U.S. producers constantly scour the market for unique content and storylines that they can adapt and produce for a global audience. 

Despite the rich history of Indian mythology, literature, comic books, film and TV programs, India has been overlooked as a source of content. Foreign/NRI investors can acquire the rights to Indian properties and guide the development process acting as producers or sell those rights to an established international production house for exploitation.

Foreign/NRI investors are in a strong position to act as a financial and operating bridge between Indian production talent and the global media marketplace. There are several advantages to taking this route rather than a straight equity investment in an Indian Bollywood production. 

First, investors are assured that the product they create will have an addressable market beyond India and can thus tap into multiple revenue channels for recoupment. Second, investors can wield the deep marketing experience and broad distribution outlets found outside of India to make a global product. Third, investors can still utilize the low cost production of India to create a more competitively priced product. Fourth, investment alongside or through a U.S. entity affords Foreign/NRIs protection under U.S. laws. Fifth, investors can help to develop Indian production and acting talent by partnering them with U.S. producers. The result is that investors can place themselves in the enviable position of being able to easily identify the Indian production talent that will be able to make a project successful.