Since its start in 1896, when Lumiere brothers came to India to unveil six short films in Bombay, Indian Cinema has made a long journey from simple silent movies to technically advanced movies of the present day which have everything from sound to color to all the razzmatazz. India's first feature film King Harishchandra (a silent movie) was released in 1913 while the first Indian 'talkie' was Alam Ara in 1931. Today, India is the largest producer of films in the world, when it comes to the number of films produced (Austrade, 2008), and its viewer base is also one of the largest with 3 billion admissions in 2006 (IBEF, 2008). According to a PricewaterhouseCoopers report (2009), The Indian film industry has grown by 15.6% in the period 2004-2008. In 2008, the Indian film industry registered a growth of 11.5% over the previous year. On an overall basis, the Indian film industry stood at Rs. 107 billion in 2008, up from Rs. 96 billion in 2007.
Until the 1960s, film industry was dominated by many film-producing companies, many of whom owned studios(such as the now defunct Bombay Talkies, New Theatres and Prabhat Studios). At that time, these companies either employed artistes and technicians or contracted them on long-term basis. However, since the 1960s, freelance route was adopted by most performers resulting in emergence of the star system which led to a huge escalation in movie production costs. Financing deals in the industry also became much secretive since then as black money and underworld started getting involved into financing of movies.
Conventional routes of financing in Indian film industry
Until the 1960s, film producers used to get loans from film distributors against a minimum guarantee: this meant that all the distributors had to ensure was that the film was screened in cinemas for a fixed minimum period. If this minimum guarantee were fulfilled, the producers had no further liability. Profit or loss would be the destiny of the distributors.
The financing pattern, centred on distributors, is believed to have changed since the 1960s when the studio system collapsed and 'freelance' performer system emerged. In this 'star' system, actors and actresses started commanding fees proportionate to the box office performance of their recent films. This increased the costs of film production phenomenally since the more successful actors and actresses started capturing the major proportions of the producers' budget. In this new system, distributors rather than financing the whole film production cost would pay only 50 per cent of the total cost - an implication of which being that the producer had to get the rest of financing from other sources.
The 'other' sources were:
Conventional moneylenders (these would lend at an interest rate of 36-40 per cent annually);
Non-conventional but corporate resources,
Promissory note system (traditionally known as 'hundi' system)
Underworld money: even today about 5 per cent of the movies are believed to be financed by underworld sources.
Also, India has a Government funded, National Film Development Corporation (NFDC) which finances film makers who would otherwise find it hard to obtain finance from the regular sources. However, NFDC is hardly central to working of Indian film industry as it finances too few films which, too, are not of the type that has made the Indian film industry so enterprising and successful.
Impact of changes in economic and regulatory landscape
Even though Indian film industry produces one of the largest number of films in the world, its revenues share in the global market by value is only 2 percent. Until the late 1990s, the film industry was not even recognized as an 'industry' by Indian Government. In the year 2000, 'Industry' status was granted to filmed entertainment business due to which banks and other financial institutions can now finance the production of movies. However, mostly these institutions continue to avoid the industry due to the enormous risks involved in the business.
With the fast paced growth of Indian Economy coupled with widely distributed Indian diaspora, the demand for Indian filmed entertainment has grown. Even established entertainment companies from Western markets have started entering the Indian filmed entertainment business to tap this opportunity. Several film production, distribution and exhibition companies have been listed on stock markets and they have issued shares to public. Many theatres across the country have been turned into multiplexes and initiatives to set up more digital cinema halls are already underway. This is expected to not only improve the quality of prints and thereby make viewing a more pleasurable experience but also reduce the piracy of prints.
Table 1: Growth of Indian Filmed Entertainment Industry: 2004-08
As Lord Meghnad Desai put it, "That one gesture(of giving 'industry' status to Indian film industry) has transformed Bollywood. It no longer needs to rely on criminals or black money or usurious money lenders to survive. It can draw on the vibrant financial market, which has emerged in India thanks to liberalisation.
Now new cinemas can be built, especially multiplexes which make niche films viable. Film producers are into serious corporate structures and Indian and foreign business is pouring money into cinema. Already on the AIM facility of the London Stock Exchange Indian film companies - Eros, Adlabs, India Film Company, UTV - have raised hundreds of millions of pounds from hungry institutional investors. Western film companies are taking a significant
equity share in these companies. Indian business such as Reliance is not far behind. A wall of money is descending on Bollywood and there is a huge bubble building up."
Value Chain of the Film Industry
In recent years a number of analysts and academic writers have studied the relevance of the value chain concept for analysing the motion picture industry, including Zerdick et al. (2000); Eliashberg et al. (2006); Lampel et al. (2006); Aris and Bughin (2006); Vogel (2007); Vickery and Hawkins (2008); and Küng (2008). Primarily, value chain of film industry can be described into three core functional parts: Production, Distribution and Exhibition (Eliashberg et al. , 2006). These three parts of value chain can then be analyzed based on categorization of the movies into Studio films or Independent films.
Value chain model proposed by Lucy Küng (2008, pgs 70-73) breaks down development and production further (see the illustration below) and maintains a distinction between licensing (sales) and actual distribution, a feature important to independent films model
Figure 1: Value Chain - The Film Industry: Küng et al. 2008, pg 143; and Küng 2008, pg 71. [Independent films model]
Vickery and Hawkins (2008) value chain model shows market research taking place at the development and finance stage, and shows prints and advertising spend being incurred at the same time as production. This is more applicable to studios (with in-house marketing departments and subsidiary distribution companies) than independent film model.
Figure 2: Value Chain of film industry - Vicker and Hawkins(2008) [Studio films model]
Distributor-Exhibitor Business Model in India
Similar to the Producer-Distributor business relationship, there are various business models that exist in the Distributor-Exhibitor relationship involving different levels of risk-sharing between the two parties: Outright Model, Minimum Guarantee Model, Collections Model and Rental Model. The selection of business model for a film is governed by the business model between the Distributor and Producer, the Distributor's and Exhibitor's confidence level with respect to performance of the film, the financial position of the two parties and their relative negotiating powers, as well as the demand-supply position of the film's prints in that particular location. While Rental and Collection are the most commonly used models, the Minimum Guarantee model is used for a big banner film which is expected to become a blockbuster. In the Rental model, the rental for a screen varies from film to film, and depends on the potential of the film and its catchment area as well as the number of seats for the screen. In the Collections model, the net ticket revenues are shared between the Distributor and Exhibitor, with the percentage share of the Distributor being 50% in the first week, 42.5% in the second week and 37.5% in the third week, and 30% from next week onwards. There is also a provision for a 2.5% swing either way in the event the films make above Rs17.5 crore or less than Rs10 crore. In case of the latter, the films are released with at least 500 prints.
Figure 3: Exhibitor's vs Distributor's risk model in India
Figure 4: Share of theatrical revenues in India at each point in film value chain
Definition of metrics: How to define the success of a film in terms of Hit-Flops etc.
Komal Nahta is my external guide for this thesis. He is a a qualified chartered accountant and the editor of India's highest circulated trade magazine, Film Information, and has recently launched another magazine titled 'The Film Street Journal'. He has written an article regarding definition of success of a film in terms of hit/flop etc. on naachgana which is a film review website:
"Circuit: The area for which a distributor buys the distribution rights for a film for a period of (generally) 5 or 7 or 10 years.
Ratio: The price for which a film is sold for Bombay circuit. Prices for all other circuits are determined as a fixed percentage of the ratio. For example, Delhi-U.P. is usually 80 to 85% of the ratio. But in the case of action films, which have a bigger market in North India, Delhi-U.P. may be sold for 100% of the ratio.
Flop: If a film can't even cover its investment by the distributor, it is termed a flop.
Average: If a film manages to simply recover its cost, it is an average fare.
Commission Earner: When a film recovers the investment and, over and above that, gets in revenues of 25% more, it is termed a commission earner. Thus, if the distributor's total investment in a film is Rs. 2 crore, and it does a business of Rs. 2.50 crore, it is termed a commission earner. 25% of Rs. 2 crore is Rs. 50 lakh which is the amount of commission which belongs to the distributor to cover his expenses of releasing the film.
Overflow: When a film crosses the commission mark, the revenues thereafter are to be shared between the producer and distributor. The producer gets a share in the 'overflow' business, generally fifty-fifty. Such sharing makes the film an overflow film. Overflow films can be further categorised as under, depending on the quantum of overflow.
Semi-Hit: A film which does a business that is double the distributor's investment in it, is termed a semi-hit. In such a case, the producer gets handsome overflow from the distributor.
Hit: If a film more than doubles its investment in the distributor's hands, it is deemed to be a hit.
Super-Hit: If the returns on a film are much more than double the investment, it is termed a super-hit.
Blockbuster: Returns are almost triple the investment."
Table 1 A timeline of events in the history of Indian cinema
1896 First film screening at the Watson's Hotel, Bombay on July 7 by the Lumiere brothers.
1898 First gramophone record is released by Gramophone & Typewriter Company, Belgatchia.
1898 Hiralal Sen begins making films in Calcutta.
1898 The Warwick Trading Co commissions Panorama of Calcutta newsreel, other films made include Poona Races and Train Arriving at Churchgate Station (by Andersonscopograph).
1911 The Durbar of George V in Delhi is the first film extensively filmed in India.
1912 Pundalik, directed by Tipnis - probably India's first feature film.
1914 R. Venkaiah and R. S. Prakash build Madras' first permanent cinema, the Gaiety.
1916 Universal Pictures sets up Hollywood's first Indian agency.
1918 Indian Cinematograph Act comes into force.
1924 First radio programme broadcasted privately with a 40w transmitter by the Madras Presidency Radio Club Radio.
1925 Light of Asia by Himansu Rai is the first film co-produced with a German company.
1933 Sairandhri (Prabhat Studios, Pune) is arguably India's first colour film (processed and printed in Germany).
1935 First all India Motion Picture Convention.
1940 Film Advisory Board is set up by the Government of India.
1952 First International Film Festival of India held in Bombay.
1952 The Indian Cinematograph Act of 1952 replaces the Cinematograph Act of 1918.
1956 Experimental Television Broadcasts begin in Delhi.
1958 The Indian Copyright Act comes into force.
1958 The festival of documentary films begins in Bombay.
1959 Kagaz ke Phool, the first Indian cinemascope film, is made by Guru Dutt and shot by V. K. Murthy.
1960 The Film Institute of India is founded in Pune.
1960 K. Asif's Mughal-e-Azam, the most expensive feature film in Indian film history.
1967 The first 70mm wide screen film is shown in India.
1971 India becomes the largest producer of films in the world with 433 films.
1974 The International Film Festival of India becomes an annual event.
1974 The Film Institute of India becomes the Film and Television Institute of India.
1982 Doordarshan begins colour broadcast with Satyajit Ray's Sadgati and Shatranj ke Khiladi.
1985 Doordarshan becomes a fully commercial network, broadcast of the first major tv series Humlog.
1991 Cable and satellite television comes to India following the Gulf War.
1992 The government greatly liberalized the requirements resulting in a significant increase of foreign films released in India.
1995 vsnl introduced Internet services in India.
Literature Review
Eliashberg et al.(2006) have categorized existing literature on motion pictures into two research traditions: the 'psychological approach' and the 'economic approach'. The 'psychological approach' focuses on individual decisions to first watch movies from among the pool of consumable entertainment options available and second, to choose which particular movie to watch (e.g. Litman & Ahn, 1998). In this approach, generally data is collected by surveying individual consumers, with an attempt made to correlate variables such as opinions, needs, values, attitudes and personality traits of individuals to consumers' decision-making processes. Examples are Becker et al (1985), Austin (1986; 1989), Cuadrado and Frasquet (1999), Moller and Karppinen (1983), Palmgreen et al (1988), Palmgreen and Lawrence (1991), D'Astous and Touil (1999), and De Silva (1998).
The 'economic approach' seeks to explore the variables that influence the financial performance of films and explore factors that influence collective movie attendance decisions, based on the aggregate data on movie-going behavior reported by industry trade sources. Examples of such research include Smith and Smith (1986), Litman and Kohl (1989), Litman (1983), Litman and Ahn (1998), De Vany & Walls (2000), Dodds and Holbrook (1988), Eliashberg and Shugan (1997), Elberse & Eliashberg (2003), Walsh and Wruck (2001), Prag and Casavant (1994), Jedidi, Krider and Weinberg (1998), Moul (2004), Ravid (1999), Sochay (1994), Wallace et al (1993), Zufryden (1996; 2000), and Simonoff and Sparrow (2000).
A Motion Picture as an experience good
From an economic point of view, a motion picture can be considered as an experiential good (Chang and Ki, 2005) since individuals do not know what the value of the movie will be to them until they experience it (Shapiro & Varian, 1999). When the audience watches a movie, they enter into a purchase agreement with little knowledge of the particular movie; the form may be familiar, but the content is not (Reddy et al., 1998). Also, Individuals choose and use movies solely for the experience and enjoyment (Hirschman & Holbrook, 1982; Holbrook & Hirschman, 1982). That is, in the case of movies, consumption experience is an end itself (Reddy et al., 1998).
Motion Picture Microeconomics: Demand and Uncertainty
De Vany and Eckert(1991) analyzed the motion picture industry from economic theory point of view, and came up with four unique characteristics of the industry's product:
Each motion picture is unique and cannot be duplicated
Demand is unpredictable
A motion picture needs time on the screen to build an audience
Most of the costs of production and distribution occur before a film can be shown and are sunk.
Jordi McKenzie(2009) in his literature survey on economics of movies, found that most research done till date on the determinants of demand for a movie and consequently box office revenues has considered factors such as budget, screen counts, advertising, awards, quality (critical reviews), star, sequel, award, genre, and rating, etc. as covariates; but most of these research findings have resulted in heavy-tailed revenue distributions and hence should be read with special attention considering potentially endogenous right hand side variables.
Review of existing box office predictor models
Among past research done on box office revenue prediction models, Prag and Casavant (1994) found positive effects of budget, quality, star, sequel and award, but found only quality remaining significant factor when advertising was included. Sawhney and Eliashberg(1996) developed a BOXMOD model for predicting box office revenues by decomposing the consumer's movie selection in two steps: (1) the consumer makes the decision to see a movie and (2) the consumer acts on this decision. By modeling the time to decide and the time to act as exponential decays, they studied the impact of factors that drive movie sales (e.g., MPAA rating and movie genre). They also studied the phenomena of blockbusters and sleepers on the basis of the diffusion pattern of box-office collections. [Blockbuster-type movies have an exponential-decaying sales pattern, with the opening week grossing the largest sales. Sleeper-type movies build sales gradually and generally peak 3 to 6 weeks after launch. In the illustration below, Vivah was a sleeper as its weekly revenues diffusion pattern varies considerably from Om Shanti Om, which was a blockbuster. Despite having a slow start and low 1st week collections, Vivah earned Rs. 24 crores over a period of 35 weeks compared to Om Shanti Om, which earned Rs. 34 crores over a period of 8 weeks]
Figure 5: "Blockbuster vs Sleeper" in Indian context
Ainslie, Dreze and Zufryden(2005) built on the BOXMOD model and incorporated the element of competition by considering a moviegoer's choice to see a movie among all the movies present at the box office at any point in time. Elberse and Eliashberg (2003), in their research, found screen counts as being the main determinant of box office revenues, and concluded that while advertising may be the main predictor of opening week screens and revenues, word-of-mouth is the important factor in subsequent weeks. On the contrary, De Vany and Walls(1999) found it impossible to attribute the success of a movie to individual causal factors upon finding audience reception as the most important contributing factor, and consequently, rejected all forecasting models of box office revenue. Moul (2007) specifically investigated the effects of word-of-mouth on demand and found a 10% of variation in consumer expectations with associated word-of-mouth. He also concluded that movies with low expectations find it harder to capitalise on word-of-mouth than movies with high expectations.
McKenzie (2009) investigated the number of weeks in which a film plays in the weekly Australian box office charts by considering a number of film specific covariates relating to the production characteristics of the film (budget, star power, re-release, sequel,
genre, and rating), consumer signals (U.S. revenue and critical reviews), and strategic
distribution variables (previewing, advertising, opening week screens, and release gap
with the U.S. market). The results stated that box office life-length responds to previewing, advertising, critical reviews, and U.S. box office - but not to production budget, star power, or opening week screens.
Narmada Deb(2008) did a research on performance of motion pictures in Indian context by building on a model suggested by Chang and Ki(2005) wherein they categorized the independent variables into four mutually exclusive groups:
Brand-related variables(factors related to audience)
Objective features(factors related to movie itself)
Information sources(factors related to third person evaluation)
Distribution-related factors(factors related to marketing power and release strategies)
Narmada Deb(2008) considered verdict of the movie(Hit, flop, average, etc.) as the dependent variable in her research and found diurnal temperature, critical acclaim, audience rating, director's rating, genre and star vs multi starer as significant predictors of success of a movie in Indian context. However, she did not study the impact of independent variables on box office revenues or financial performance, which is something critical to a producer while deciding on making a film. Hence, even though her research might suggest that multi starrer films work better than single starrer films, it doesn't give an indication on whether a "Shahrukh khan+Kajol" combination would work better than a "Sharman Joshi+Nandita Das" combination, or how much should the producer pay each of the stars. Also, she did not take into account the number of prints, which has been found as a major contributing factor to box office in most of the research done in western markets.
Need Gap
Inspite of being the largest producer of movies in the world, Indian film industry suffers from low success rate. Approximately only 10% of the films out of more than 1000 produced each year are successful at the box office, remaining 90% of the films fall under flop category annually, i.e. their investors suffer from losses.
This current study aims to determine the key factors impacting success of a Hindi motion picture and build a framework using which the potential box office revenues for the movie can be predicted.
Approach/Conceptual framework
This study builds on the research done by Chang and Ki(2005), Narmada Deb(2008) and McKenzie(2009). The conceptual framework suggested by Chang and Ki(2005) has been modified slightly for Indian context, as a much lesser amount of data is available in public domain in India. Hence, few independent variables have been replaced along with newer categorizations invented for brand related variables such as star cast.
Source: Adapted from Chang and Ki(2005)
Dependent variables
The dependent variables for this study include
Total box office (BOXT)
The overall gross revenues for the film over its complete length of run. Cursory examination of this variable shows that it is long right-tailed, so the logarithm of total box office gross will be used.
First-week box office(BOXFW)
The gross revenues for the film's first weekend of general release. Cursory examination of this variable shows that it is also long right-tailed, so the logarithm of first weekend gross will be used.
Length of run in weeks) (LRUN)
The number of weeks for which a movie ran in theatres. Cursory examination of this variable shows that it is also long right-tailed, so the logarithm of length of run will be used.
Independent variables
Genre (G)
A carefully balanced portfolio of movie types - for example in terms of genre, can help a studio to manage its risk (Ding and Eliashberg, 2002) - protecting it against the changing audience tastes(De Vany and Walls 2002). For purpose of this research, the genre of the film is taken as a categorical variable classifying the film as Action, Children's, Comedy, Documentary, Drama, Horror, Science Fiction, or Thriller - variables broadly classifying a film's storyline element. Genres were obtained from the Bollywoodhungama published by Taran Adarsh, a Bollywood trade analyst.
Starcast remuneration(RA)
Starcast past box office performance(RPERF)
Research done on the role of stars driving box office performance is mixed even though star power has been considered as one of the covariates in a regression model in most economic research studies done in this area with box office performance as the dependent variable (e.g. Litman 1983; Litman & Kohl 1989; Sochay 1994; Litman & Ahn 1998; Wallace et al 1993). Albert (1998) found that stars act as the most consistent 'markers' for successful films which is the reason for their power in Hollywood. However, De Vany & Walls (1999) and Ravid (1999) found no correlation between star participation and movie revenues or profitability, supporting the view that stars capture their 'economic rent'.
Number of Prints (P)
Ideally, prints indicate the number of screens for the film's first weekend of general release. Cursory examination of this variable shows that it is long right-tailed, so the logarithm of prints will be used.
Director(RD)
The rating of the director (from zero to ten stars, with roundoff done) given by users on the website www.imdbPro.com which is one of the most popular websites on the internet when it comes to user generated movies related reviews, ratings and content.
Music(RM)
Censor board rating(RCENS)
It was found by Leenders and Eliashberg (2004) that ratings for parental guidance of a particular movie often significantly differ across countries. They also found that the relationship between movies' censor ratings and corresponding box office success differs across countries. In case of India, the central censor board authority decides the rating to be given to the film. Hence, a movie targeting the family audiences would obviously miss its target audience if it contains too much violence or brutality or depiction of sexuality - which might result in the film getting an 'A' certificate.
Critics rating(RCRIT)
The rating of the movie (from zero to five stars) given by Taran Adarsh, the well known
film critic from the Bollywood Hungama and famous anchor on a television show based around movies, assuming Taran Adarsh reviewed the movie.
Audience rating(RAUD)
The rating of the movie (from zero to ten stars, with roundoff done) given by users on the website www.imdb.com which is one of the most popular websites on the internet when it comes to user generated movie review and audience ratings.
Release Month/Season of year(S)
Release dates are one of the important factors in determining the success of a movie. Three indicator variables are coded in this research identifying whether or not the movie was released during the Dussehra-Diwali season, post-summer exams season, and/or during the Christmas-New Year season.
It is unlikely to find two blockbuster movies going head-to-head on a single release date as there are a limited number of screens and weekends. Hence, film distributors decide on the release dates months in advance and leak the information to trade so as to scare off the competition.
Research Problem
To determine the key drivers affecting box office performance of a Hindi Commercial Motion Picture
To establish a framework for calculating potential box office revenues of Hindi Commercial Motion Picture based on above key drivers
Research Questions
Does there exist a significant relationship between supply side economic factors and total box office returns?
Does there exist a significant relationship between supply side economic factors and first week box office returns?
Does there exist a significant relationship between supply side economic factors and length of run of movie?
To what extent, do these supply side economic factors have an impact on the ultimate box office performance of the movie?
Rationale of research
During 2008, India's first film fund was created in India by Vistaar Religare Film Fund
and Manmohan Shetty's Walkwater Media. These financial investors obviously demand a risk assessment framework for investing in films. An absence of a credible revenue predictor models leads to difficulties in financing opportunities for film makers, which hinders the scale of growth of Indian cinema industry. Also, an inappropriate understanding of key drivers which impact performance of a motion picture can lead to focus on wrong attributes. A working model would help all the stakeholders and the growth of the industry.
Figure 6: Revenue breakup for major Hollywood studios in US markets
Figure 7: Composition of Film revenues in India
Compared to the Hollywood, where theatrical revenues account for only 11% of the overall revenues earned from a movie, domestic theatrical revenues still account for 73% of the total revenues earned from a movie in case of an Indian film. Hence, it is very important for the Filmed Entertainment business investors in India to understand the success factors in case of theatrical exhibition business.
Research Methodology
A basic primary research would be done by conducting in-depth interviews with few industry and trade professionals involved with Indian film industry, so as to arrive at the final list of dependent and Independent variables. This is necessary because most of the research on this subject has been done in Western markets, and primary research done with Indian film industry professionals might throw up some factors which might be missed by research done in Western markets, or suggest some cultural nuances specific to India such as presence of a song-and-dance number almost being a mandatory feature of any Indian film, and in absence of such a proposition, how does a movie fare on domestic box office.
The data for secondary research would be tested by Strucutual Equation Modeling and Multiple Regression Analysis. Thus, each of the independent variables would be run against the dependent variables so as to determine the key drivers as well as arrive at the best-fit model for box office revenue collections.
Sample
For the purpose of this study, a total of 160 movies released in duration of September 2006 to August 2008 have been considered for the study. Since the Indian Commercial Cinema industry is still plagued with data discrepancy and reporting problems, the sample would consist of movies for which box office collections data is in public domain. Few movies which were released during the aforementioned duration and have been excluded from the study are either due to incomplete data on them, or their revenue collections being too small(less than 40 lakhs) for them to have a considerable commercial importance to the industry. However, for statistical significance and data validation purposes, few movies having revenue collections less than Rs. 40 lakhs have also been considered in case they belong to genres new to Indian Cinema such as Animation etc.
Data Sources and Collection
Most of the research related to topic is secondary data based. For this purposes, following data sources have been used:
Trade magazines e.g.Trade guide, The Film street journal, etc.
Movie review websites e.g. imdb
Film trade websites and journals e.g. Bollywood Hungama, Indiafm
Movie information databases e.g. imdbPro, boxofficemojo
