High cost of funding mars film industry growth, says Crisil

MUMBAI: Crisil risk evaluation for the Indian entertainment industry, a pioneering initiative undertaken by CII (Confederation of Indian Industry) would play a catalytic role in channelising institutional funding to the entertainment industry. Crisil evolved a framework for analysing film and television software producers.

The Crisil report says that the Indian film industry, which continues to dominate the Indian entertainment industry, is one of the most vibrant film industries in the world. However, the main disadvantages of the current funding mechanism is the high cost of funding. Private financiers charge exorbitant interest rates, which range even up to 40-50 per cent per annum.

Introduction to the Indian entertainment industry:

The Indian entertainment industry has been growing over the years and has attained prominence with the emergence of new technologies and delivery channels.

It came into being when the first feature film, Raja Harishchandra, was screened in 1913. The movie industry gradually evolved and the first talkie, Alam Ara, was released in 1931. Since then and until the advent of satellite television in the early 1990s, films have dominated the Indian entertainment industry.

Television made an entry into the country in 1959 but the state-owned terrestrial television channel, Doordarshan (DD), only commenced a one-hour daily service in 1965 and initially, this was only available to television households in Delhi. Mumbai became the first city outside Delhi to receive television broadcasting in 1972 and over a period of time, the network was extended to other parts of the country.

Commercials, now an important component of television broadcasting, made an entry through DD in 1976 and with the onset of color transmission in 1982, commercials received a further boost.

Until the arrival of cable and satellite (C&S) channels in 1992, DD was the only source of entertainment on television. The first two India-centric C&S channels, Zee TV and Star TV, were launched in 1992.

Over the last 10 years, a number of C&S channels have come up and currently, here are about 100 C&S channels, including regional language channels, offering various genres of entertainment to television households.

In the mid-1990s, the concept of live entertainment too attained prominence and avenues such as amusement parks added variety to the concept of entertainment.

The Indian film industry is one of the largest in the world in terms of the annual output of films. It is estimated that about 850 films are produced every year, of which Hindi films account for 20 per cent, Tamil films, 25 per cent, and Telugu films, 20 per cent. There are about 13,000 theatres or screens across the country.

Value chain

The value chain in the industry, which requires a high degree of project management skills. 

Cost of production

Production costs depend on the director's aspirations and the producer's financing ability. On an average, a Hindi film is estimated to cost Rs 40-50 million while a regional film is estimated to cost around Rs 20-30 million. Yet, budgets often overshoot these median figures.

For instance, Devdas, the first Indian commercial film to be shown at the Cannes International Film Festival, 2002, is the costliest film to have been made in India at Rs 500 million.

The typical components of the cost of production include: star cast (25 per cent), cost of sets, shooting the film and technicians (35 per cent), interest on borrowings from private financiers (15 per cent) and film processing, music recording, distribution and marketing (25 per cent).

The payment schedule by producers varies from film to film and from region to region. Generally, it is a combination of daily (dance troupes and the like), monthly (technicians, cameramen, playwrights) and staggered (star cast, musicians) payments. The production cycle is about four to six months for a low-budget film and about 15-18 months for high-budget films. Sometimes, it even takes two years to complete a film.

Value chain

The broad proportion of funding from various sources is as follows: own funds of producer (20 per cent), private financiers (40 per cent), distributors (25 per cent), music companies (10 per cent) and processing laboratory (5 per cent).

Revenue model

For domestic Hindi film distribution, the country has been divided into six territories and a producer sells the rights to screen the film in a particular territory. The pricing of the rights takes into account the theatres in a territory, the number of screenings per day, mean ticket price, average capacity utilisation at these theatres and the like.

The pricing for the Mumbai territory is decided first and pricing for the other territories is linked to Mumbai's base price. 

Overseas distribution rights are typically sold one or two weeks prior to the domestic release on an outright basis. The main international markets include USA, UK, Middle East, Singapore and Malaysia.

The payment mechanism for theatrical distribution could be a combination of several components such as flat pricing, minimum guarantee (MG) or minimum guarantee plus sharing of surplus generated. The payment mechanism for music distribution is typically on MG basis.

As regards C&S telecasts, the producer could sell the rights to the channel on an outright basis for a fixed sum. The channel would then have the right to telecast the film for a limited period or for a certain number of screenings. On the other hand, the producer could pay the telecast fee and buy free commercial time (FCT) from the channel. Subsequently, the producer could sell the FCT to various sponsors to generate revenues.

Current funding mechanism

Who avails of funding? Typically, producers, be they film producers or television software producers, need and avail of funding. Producers need funding to convert an idea into a film or a serial.

Current sources of funding: Producers depend on a range of sources to fund their projects. Of the various sources, private financiers provide a major portion of the funding requirement. The National Film Development Corporation (NFDC), which was incorporated in 1980, finances small-budget movies of reputed and promising filmmakers.

NFDC typically finances up to Rs 2.5 million per movie and that too, for feature films. Commercial filmmakers with big budgets depend on informal funding sources.

Tripartite agreement: Over the years, private financiers have emerged as the most important providers of funding. The tripartite agreement between the financier, producer and the laboratory is a vital component of this funding mechanism.

The tripartite agreement works as follows:

* Producer infuses his contribution and approaches the financier

* Financier agrees to provide funding. The laboratory (lab) also agrees to provide credit and undertakes to process the negative film into prints.

* At this point, the three enter into a tripartite agreement.

* As per this agreement, the lab would release the prints and negatives only after the producer pays off all the dues to the lab and the financier.

* The producer normally pays off the lab and the financier from the final instalments received from distributors and music companies.

* If the producer is not able to repay the dues to the lab and the financier, the lab will not release the prints for distribution.

* The tripartite mechanism ensures that the producer cannot release the film for distribution unless the financier's dues are cleared.

Yet, in spite of the existence of the tripartite agreement, a financier is exposed to the following risks:

* Ability of the producer to complete the film (completion risk)

* Ability to obtain the Central Board of Film Certification's (CBFC) approval for screening (regulatory risk)

* Ability of the producer to sell the rights (marketing risk)

* Ability of the producer to collect the money from distributors (counter-party risk)

Drawbacks of the current funding mechanism: One of the main disadvantages of the current funding mechanism is the high cost of funding. Private financiers charge exorbitant interest rates, which range even up to 40-50 per cent per annum.

Professionals and other senior members in the industry have been working towards extricating themselves from the clutches of private financiers with a view to not only reducing their funding costs but also to enhance the industry's credibility.

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