Hello, friends! About 5 years ago, the film Race 3 was released with Bollywood actor Salman Khan in it. This film obtained terrible reviews from the audience and critics. It is considered a huge flop. But do you know, despite this, this film was a financial hit. This film was made on a budget of ₹ 1.8 billion and it earned more than ₹ 3 billion.
On the other hand, there's a stark contrast to the Bollywood film Mera Naam Joker, 1970. The director, producer, and actor of the film were Raj Kapoor, a huge celebrity of his time. This film is considered a cult classic nowadays one of the best films of its time. Even so, this film lasted so much money, that it put Raj Kapoor in a financial crisis. If anyone earned profits from this film it was a company based in the Soviet Union.
This is the reason why some hit films turn out to flop for some people, and flop films become financially hit films.
Come, in this article, let us understand the Business Model of Bollywood Films.
Friends, the Indian film industry is the world's largest film producer. The number of films made in India is unmatched by any other place in the in India, is unmatched by any other place in world, Every, year, about 1,500 to 2,000 films are made in India in 20 different languages. The Hindi film industry that's known as Bollywood, had been the most popular in India for a long time. Though, only about 16% of Indian films are made in Bollywood.
Out of the total films being made in India. But the market share of Bollywood in terms of revenue was the highest. About 45% of the collections from the films, were by Bollywood films. I am using past tense because this was the scenario before the pandemic.
Today, the number 01 film industry in India is the Telegu film industry. Their share in the domestic box office this year is at 28%. And Bollywood's share has fallen to 27%. Overall, south Indian language film industries, have increased their market share from 36% in 2019.
Bollywood is slowly losing its dominance., but the business model on which all these film work, is the same for all of them.
To understand how a film earns money, first, we need to understand how a film is made.
The process of making a film can be divided into four stages.
- Development
- Pre-Production
- Production
- Post-Production
Development
In this stage of Development, the story of the film is developed. The script and dialogues of the film are prepared.
Pre-Production
In the pre-production stage, the main cast and the supporting cast as selected. The actors who will work in the film. During this stage, a crew is hired as well. The shooting equipment is arranged, whether it'll be rented from somewhere. The shooting locations are arranged. And if the film needs any permission for filming, the permits and insurance are secured at this stage.
Production
The film is short at this stage. Once the shooting of the film is over, it goes into editing. This editing is known as the post-production stage, where the film is finally compiled.
In each stage of this entire process, a lot of money has to be spent. Apart from the salaries of the actors, the writer needs to be paid, at least in some films, the crew needs to be paid, the expenses of renting or buying the filming equipment, and the expense of getting the requisite permits.
Overall, there's a huge expenditure. A single individual rarely has this kind of money. The budget of an average mainstream Bollywood film is around ₹500 million. The film Brahmastra has an estimated budget of more than ₹3 billion. Even the most successful Bollywood actors like Ranbir Kapoor or Akshay Kumar wouldn't have the money to spend on one film.
That's why the task of managing expenditures is undertaken by huge corporations, known as production Companies. Brahmastra is among the most expensive Bollywood films. That's why it's not produced by only 1 production house, multiple production companies are spending money to make this film.
Dharma Productions, Prime Focus, and Star Studios. The individuals who pay their own money to pay the expenses of the film are known as the producers.
If you remember the brilliant comedy film released in 2007, Bheja Fry, was one of the lowest-budget Bollywood films of all time. The total cost of making this film is estimated to be around ₹7 million can easily be paid for by a rich person. That's why there was only one individual producer for this film. Sunil Doshi. The only producer of Bheja Fry.
Friends and film producers are like entrepreneurs, their task is very risky. They invest their money to bear the expenses of making a film. If the film turns out to be a hit, they will earn a good return on the money they spend. But if the film turns out to be a flop, they lose their money. And as you know, most films are flops. A film is rarely a hit.
The producers invest their money to make a film. The money they invest in a film is known as the budget. And they hope that the film is a hit so that can make a profit.
The actual task of making the film is of the Director. Shooting, editing, and post-production maintaining an overview of all the various activities and making the film. In most cases, the directors are like the actors. They are employed on a salary. They are paid a salary per film. Especially in films with a small budget. The big-shot directors, such as Steven Spielberg, often work based on profit-sharing. but in our business model, the directors and actors play almost no role.
Once the film is made, it is loaded onto a small hard disk, and the producers take this film to the Distributors. The distributors have to ensure that the films reach cinema halls, as well as the OTT platforms. Often, the distributors are responsible for marketing the film as well.
So they spend their money on the promotion and advertisement of the film. The distributors make money by selling the satellite rights to the film, and the digital streaming rights.
The tv channel on which the film is telecasted for the first time has to pay the distributor to buy this right. So that the film is telecast on Tv for the first time only on that Tv channel. When this is done, it is known as the world Television Premiere. You might have noticed this.
You can take the example of Bhool Bhulaiya 2. It was produced by T-Series and distributed by the company AA FIlms. Often, before the film is released, the distribution companies enter into deals with the OTT platforms. They sell the film at a mutually determined amount and set a date after which they can release the film on their OTT platform. In the case of this specific film, this film was super-hit. Even after 2-3 weeks, this film continued to be in the cinema halls.
But since the deal was already struck between the distributor and Netflix, and the distributor has sold the film to Netflix for ₹300 million, and they had agreed on the date after which the film could be released on Netflix, even though the film was still in theatres, Netflix released the film on their platform, because Netflix was protecting its revenue. They would get the benefits when they release the films on their platforms as soon as possible. The collections of the film from the cinema halls are negatively impacted by this. But this is a risk borne by the distributor.
Friends, often for major films, the production company and the distribution company of the film are the same. Large production houses such as Yash Raj Films, Dharma Film Productions, UTV Motion Pictures, Fox Star Studios, Reliance Entertainment, etc. They are distribution companies as well.
If the producer and distributor of the film are the same, the production company maintains separate budgets for production and marketing, and distribution.
Next, when the films are shown in the cinemas, you need to purchase tickets to watch them. The ticket counter from where you get the tickets is known as the Box Office. And the revenue of a film by selling tickets is known as its Box Office Collection.
This amount is collected by the theatre owners. The owners of the cinema halls. On this revenue, the theatres have to pay GST to the government. GST at the rate of 18% if the price of the ticket is more than ₹ 100, or at 12% if it is less than ₹ 100. After paying Gst the remaining amount is known as the Net Collection of the film.
If the Net Collection of a film is more than its Budget, the film can be considered profitable.
Before GST was introduced, the State Governments charged an Entertainment Tax. It used to vary from State to State. When a film was declared Tax Free in a state, it meant that the Entertainment Tax on that film had been waived. It reduced the cost of the tickets. As I said, now the GST is levied at either 12% or 18%.
The GST is then shared by Central and State governments. so now when a state declares a film tax-free, only the SGST component of GST is waived off. YOu still need to pay the CGST. So now the exemption can either be 6% or 9%. Depending on the price of the ticket.
This is the involvement of the government in the business model of films. You can say that it is the government's way of regulating the film industry.
Friends, it is interesting to see the deal between the producer and distributor when they aren't the same entity.
There can be 3 basic ways of profit-sharing between them,
- Minimum Guarantee Royalty.
The distributor pays a minimum guaranteed amount to the producer, it is a fixed amount to be paid irrespective of whether the film is a hit or a flop. If the film is a hit, a certain percentage of the profits is to be paid to the producer as well.
As Royalty payments. In this case, the risk is shared between the producer and the distributor. - The second way is when the producer completely sells off the film to the distributor.
And then it is up to the distributor to decide what to do with the film. If the film rakes in a profit, the distributor will earn more, and if the film turns out to be a loss, it will be borne by the distributor.
In this case, the producer is safe. There is no risk taken by the producer. The producer walks away with their fixed amount of profit, by selling the film to the distributor. The rest is up to the distributor.
This is what happened in the case of the film Mera Naan Joker. Raj Kapoor's one of the best films, In India, this film was produced and distributed by RK Films. Raj Kapoor's production house. Raj Kapoor invested all his money in making this film. He mortgaged his house as well. But despite working so hard on it, this film turned out to be a big flop.
The budget for this film was ₹ 10 million at the time. But its Net Collection was only ₹ 8 million. What can be done to cover the losses? Raj Kapoor decided that the distribution rights of the film outside India, In Russia, which was then the Soviet Union, Should be sold off completely to a distribution company based there. No need for complicated deals, he sold off the rights for ₹ 1.5 million. Because from Raj Kapoor's perspective, he had already taken a huge risk, and now he wanted a sure-shot amount.
When the film was released in the Soviet Union in 1972, it became a Blockbuster there. In 1972, the total collection of films in the Soviet Union alone was ₹ 168.1 million. If you adjust this amount for inflation, this amount would stand at ₹ 1.007 billion now.
The distributor in the Soviet Union raked in a lot of profit. But because of the way the deal was structured, by shifting the risk to the distributor, Raj Kapoor did not get any part of the profit. He had to incur losses because of this film. Isn't this business model surprising - The third way is the most common. The producer gives the films to the distributors and then works on commission.
Such that the distributors would be given a commission from the overall profits. Here, the risk is borne by the producer alone. And the distributor doesn't have to bear much risk. It means that in this case, the money spent on marketing and distribution is spent by the producer.
Once you've understood this, we can move on to the next step of the process.
The distributors approach the sub-distributors in the various regions of the country. The country has been divided into multiple areas, known as Distribution circuits. For Hindi films, there are 11 such circuits. The sub-distributors then enter into arrangements, to show the films in cinema halls, and for screening. It is the sub-distributors who deal with the Exhibitors.
Who are the Exhibitors? They are the cinema halls or companies that own the cinema halls. The sub-distributor and the cinema halls. The sub-distributor and the cinema halls strike a deal on revenue sharing. The deal depends on the number of screens given to the film.
There are mainly 2 types of cinema halls in the country, Single Screen Theatre, here the deal between the two is usually in the ratio of 25% to 75%. of the profits from the sale of the tickets, 25% of it would be given to the exhibitors and 75% to the sub-distributors. And significant portion of the sub-distributors revenue is paid to the distributors and the producers.
In some cases, this ratio can be 30:70 or 20:80 as well.
The second type of cinema hall in the country is the one found in malls. Known as the Multiplexes. For these, the ratio of profit sharing between the exhibitors and sub-distributor is different.
It keeps on changing each week. In the first week, it is usually in the ratio of 50:50. And with the passing of each week, the share of the distributor keeps decreasing to 60:40 in the second week, and 70:30 in the third.
But this isn't worrisome for the producers and distributors, because most films earn the majority of their profits in the first week.
Especially the flop films. for example, Akshay Kumar's recent release Samarat Prithviraj. It was a high-budget film. Its estimated budget was around ₹ 3 billion. The producer and distributor of the film were YRF. In the first week, this earned ₹ 550 million. But the total collection of this film is around ₹ 860 million. Most of the earning potential of the film was reached in the first week. From the second week onwards, the earning keep decreasing.
It is the same for most films. A majority flop film with a loss of more than ₹ 2 billion. And as you know, this loss will have to be borne by Yash Raj Films.
In big films with top-level actors, whether the film would be a hit or a flop, often depends on the image of the actor. So there are times were the actors enter into profit-sharing deals with the producers and the distributors. Away in which the actors become one of the producers as well. so that risk of investing in the film doesn't have to be borne by the producers alone, the actor shares the risk too.
It's said that Aamir Khan, works on a Zero salary. He doesn't charge a salary, He enters into a profit-sharing agreement, where if the film is a hit, he gets 50% to 80% of the profit. But if the film is a flop, wouldn't get any money and will have to incur losses.
I hope you've clearly understood everything. Let's meet in the next blog. Thank you very much!