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Tuesday, March 6, 2012

Film makers, distributors find a win-win formula

This analytical feature first appeared in DNA Money edition on Monday, March 5, 2012.

What decides a Bollywood film’s fate? Is it the lost-and-found formula, a hallowed star or a sizzling item number?

While these no doubt play an important role, certain rules set by distributor associations, too, can temper the boom of a blockbuster on the box-office or be a deciding factor as to whether a film will at least recover the investment.

The film fraternity—producers and distributors - claim that rules of distributors’ associations that decide the number of theatres in which a Hindi film would be screened and when the satellite versions will be out have led to losses running into crores for several decades.

However, all that is set to change.

A recent order passed by the Competition Commission of India (CCI) that curbs the power of regional theatre associations has come as a major breather to Bollywood film producers, distributors and exhibitors, who can now wring the last penny as far as the new film releases are concerned.

The film industry feels the order gives them a level-playing field.
It all started in 2010 when Anil Ambani group-promoted Reliance Entertainment decided to take the Karnataka Film Chamber of Commerce (KFCC) head on.

As per the KFCC rules, a non-Kannada movie could only be released in 21 theatres in the state. Reliance Entertainment, the distributor, however, released the film, Kites, in 46 theatres, which prompted the KFCC to ban the movie and stopped the release across the state.

Reliance Entertainment says it suffered losses of around Rs2.5 crore in Karnataka alone as it was not allowed to release Kites across the 200-odd screens in the state. Experts said theatres and multiplex chains, too, collectively lost an equivalent sum if not more because of the KFCC rules.

To avoid a similar situation for its next release, Raavan, Reliance approached the CCI, which gave an interim order before the release and the distributor was allowed to screen the film in as many theatres it wanted.

Sanjeev Lamba, chief executive officer, Reliance Entertainment, said, “We incurred huge financial losses but held our ground; and after two years, this historic order will change the business dynamics of the industry.”

Six months down the line, other producers like UTV Software Communications and Eros International joined in as some of their releases were also facing restrictions by distributor associations.

The film fraternity in the last two years has been resorting to seeking interim orders from courts every time a new film release came up. Experts say the film makers have spent a significant amount of money (believed to be in crores) towards legal expenses for this.

“While large corporate entities could possibly spend on legal costs, it is the small producer, distributor and exhibitor who continued to book revenue losses owing to the restrictions. However, the trade partners can now heave a sigh of relief,” said a top official from a large production house.

Kamal Jain, group chief financial officer, Eros International, feels the ruling will play a crucial role in curbing the non-compete environment. “The compulsion of taking membership of a regional association every time a producer is releasing a new movie meant working in a closed environment. A producer / distributor can now freely release his film without having to worry about the archaic rules and guidelines prescribed by the regional associations. It is going to be a fair play market for everyone and no association can put any restrictions on distribution and exhibition of movies anywhere in the country,” Jain said.

But how does the film market work?

The Indian film distribution market is divided into 14 circuits with each of them having a distributors’ and or exhibitors’ association. Producers and distributors are required to become a member of these associations every time they want to release a film and follow the prescribed set of rules and regulations laid down by these associations.

However, film makers claim utilisation of the cinema screen inventory in a particular region was not optimum because of these rules.

Besides restricting the number of screenings, the association also insisted the producer / distributor to follow a holdback period with respect to monetisation of content across other mediums (television, satellite, compact disc / DVD, etc), which led to under-selling of distribution or telecast rights.

Post the CCI order, Jain said the holdback terms and conditions will now be decided by business partners like IPR owners (UTV, Eros, Reliance, etc) or television channels (Zee, Sony Star, etc).
“I can certainly say that the order will significantly enhance business prospects in terms of monetising the new film content across platforms,” said Jain.

For the exhibitor fraternity, the CCI order means no restrictions on the number of shows and simultaneous release as per the film’s national release date — new Hindi films were allowed a release in Karnataka only after two weeks of its first release.

However, the CCI order does not apply on restrictions put in place by the various states for screening Hindi films. The state restrictions are not severely negative, hence not a big concern for exhibitors, experts said.

While industry players did not exactly quantify the kind of losses or the incremental revenue the fraternity could have booked, they feel it could be in the region of 5% per film.

“Taking a thumb rule average—the incremental revenue for smaller films will be less and vice-versa—the delta could be in the range of 1%-2% for the entire industry. The total film industry is in the region of Rs12,000 crore and the theatrical component roughly is 60% of the overall industry size, that is, Rs7,200 crore. Taking delta of 1-2% figure into consideration, the incremental revenue for the various stakeholders is in the range of Rs72-144 crore,” said the industry expert.

While the figure may appear small given the size of the industry, with the restrictions gone, producers / distributors / exhibitors can put together a better business plan that would enhance revenues.
“Today, India has more than 12,000 screens, but even the big blockbuster movies are released in only 3,000-odd screens. So the whole release plan can be taken to a different level now and the incremental business can be much larger than the 1- 2% being arrived at earlier,” the expert said.

Also, in a few territories, the associations would restrict the membership to only non-corporate entities and a private / public limited company could never become a member of the association.

“One had to be either a partnership or a sole proprietorship to become a member of the association. So partnering with the local guy was the only option for organised players to distribute their films in such territories before, which is not the case anymore,” said a top industry official.

While everything certainly appears hunky-dory for the film fraternity, some analysts feel that the CCI decision may not work for film exhibitors (theatres and multiplex chains).

“They will no longer be in a position to negotiate higher revenue share with film producers / distribution going forward,” said an analyst with a local brokerage.

Kamal Gianchandani, president, PVR Pictures, said, “There is a mutual agreement in place already between distributors / producers and exhibitors to share revenues in a certain manner.

All of that has already been put on paper and agreed up on. So irrespective of the CCI order, there are no concerns for a film exhibitor as far as revenue share is concerned.”

However, the CCI order certainly is a negative for a section of exhibitors who make advance payments to distributors for booking a particular film in their respective theatres. There is an industry practice wherein an exhibitor makes advance payments to the distributor for booking a picture. The advance payment is made to the distributor against the share the exhibitor will generate after the film releases.

For instance, if the exhibitor pays, say, Rs1 lakh as advance to the distributor, but his share is only Rs50,000. The exhibitor will have to recover Rs50,000 (excess advance) being paid to the distributor. If the distributor does not return the money on time, the exhibitor could then take the distributor to the association, which puts pressure on the distributor to clear the amount at the earliest.

“Now this dispute resolution mechanism will go out of the window because of the CCI order. This is because the distributor no longer has to register with the association which was the case earlier. Since the association has no jurisdiction on such disputes, the exhibitor will have no option but to go to the court to recover the money from the distributor,” said Gianchandani.

The general perception in the industry is that going to the court is a very time-consuming process and expensive proposition for such small sums. In fact, one may even end up spending more time, effort and money for it, which doesn’t make business sense.
“This certainly is a problem that will crop up in coming years which is a bit of a negative, particularly for smaller exhibitors. Though it is not something multiplex chains need to worry about,” said Gianchandani.

Similarly, any dispute between a distributor and a producer (with respect to advance payments) would earlier get resolved by these associations as the producer will not be allowed to register the new release unless he has cleared the backlog (if any). Now that the producer is not required to register, the distributor will have no option but to go to the court.

This could also mean that the commercial arrangement between producers, distributors and exhibitors is bound to change as distributors and exhibitors will have to be extremely judicious about producers and the amount of money they pay them in advance. There is no association protection now and the matter will have to be resolved in the court.

The distributor associations are planning to move the Supreme Court against the CCI order as the purpose of their existence is nullified. The procedure, however, prescribes that the associations will have to first file an appeal with the CCI and later move the apex court.

While the distributor associations and film makers battle it out in the court, new Hindi films would continue to be screened in more theatres.

The Complainant

The film fraternity comprising (Reliance Entertainment, UTV Software Communications, Eros International and FICCI Multiplex Association of India) had filed a case against distributor associations like KFCC (Karnataka Film Chamber of Commerce) for putting a restriction on the number of cinemas to release a non-Kannada film and BJMPA (Bihar and Jharkhand Motion Pictures Association) for demanding unreasonable holdbacks for registering its films.

The issue, according to the film fraternity, was that these associations barred studios from exploiting satellite and home video rights in the respective regions. This apart, studios were compelled to register films with the trade body and bend to their archaic rules. As a result, this constrained the market access of the studio for unfettered distribution of its films on non theatrical platforms.

The CCI Order

The CCI ruled that the anti-competitive behaviour of any entity needed to be condemned heavily for effective function of the market. It said that the associations were taking decisions and engaging in practices that were anti-competitive. Consequently, in February 2012, the CCI also imposed a hefty penalty on these distributor associations.

According to the CCI order, the associations will have to stop:

(a) Compelling producers / distributors / exhibitors to become their members as a pre-condition for exhibition in their territories.

(b) Discrimination between regional and non-regional films and imposing discriminatory conditions against non-regional films.

(c) Screen restrictions based on language or manner of exhibition of a film to be done away with.

(d) Holdbacks on satellite and home video, with studios are free to decide such holdbacks.

(e) Compulsory registration of films as pre-condition to release to be done away with.

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