GIM 2007 -
POSTED ON: 01 Apr 2007
RESEARCHERS: Anand Babu, Beatriz Soto, Kelly Winters
Larger-than-life heroes and heroines. Bright costumes. Elaborate song-and-dance numbers.
Releasing over eight hundred movies annually, the Indian film industry (centered largely in Mumbai, or “Bollywood”), is as colorful and dynamic as the products it puts out, with its films popular in India and globally. But individual Bollywood producers and studios often fail to receive their fair shares of revenues from international distribution. This paper is a synopsis of research conducted as part of Kellogg’s Global Initiatives in Management program into the unfair distribution deals and the content-owners’ inability to overcome specific challenges related to international markets. Specifically, international distributors wield power over a fragmented producer base, limiting competition and lowering prices (e.g., Eros, the major exporter of Bollywood products, boasts profit margins well above those of U.S.-content distributors), and Bollywood players often lack insights into the distribution process, hampering their ability to negotiate better deals.
There are two main routes through which producers can enhance U.S.-based Bollywood revenues: (1) Improving profitability of distribution deals by asking for more than the 40 percent of potential international revenues typically agreed to by producers; better transparency in regard to international distribution and box office results will facilitate this. (2) Increasing revenue through enhanced marketing to core audiences, or selling more content to South Asian and non-resident Indian (NRI) populations. Both approaches are considered here in detail, along with their implications for producers and distributors.
From Bollywood to Hollywood
Among the many foreign films finding success in the United States, Bollywood movies may have the most growth potential for several reasons: the Indo-American population, at 3 million in 2005, has been growing at 10 percent annually; NRIs maintain strong ties to their home country and culture, including as related to movie-going; Bollywood films already have a strong foothold in the United States, generating $100 million here in 2005 and representing seven of the twelve highest-grossing foreign films in 2006.
But where do these films come from in the first place? Indian films are produced across multiple sites in the world’s second most populous country. These range from Chennai (“Tollywood”) in the south to Calcutta in the north, with Mumbai—the true “Bollywood”—the most dominant domestically and internationally, churning out Hindi features (about 25 percent of all Indian films) and new stars seemingly daily. India’s eight hundred annual films dwarf Hollywood’s typical output of two hundred.
The box office numbers tell a different story: in 2006 Indian films generated over $1.7 billion, whereas Hollywood rang in $40 billion. Yet Bollywood’s growth remains impressive, with analysts expecting that greater investment in film quality and the popularity of multiplex-style movie houses will propel revenues to approximately $3.5 billion by 2010.
Structurally, Bollywood comprises three major segments: producers, content owners, and distributors. But players are currently consolidating up and down the supply chain as well as horizontally. Major film exhibitors and rental chains are expanding market share, while StarTV and other satellite providers gain against fragmented cable operators—both trends imply that the distribution channel is gaining power, forcing consolidation among content-owners. Thus this analysis focuses on content-owners, who are enjoying Bollywood films’ popularity outside of India (e.g., major hits can earn about a third of total revenues outside the country, with a third of that from the United States) but seek to appropriate more value from global Indian markets.
Today, U.S. consumers of Bollywood films access these in four ways: (1) Theaters: Because of the fragmented nature of Indian film-viewers in the United States, only about eighty theaters feature first-run Indian movies regularly; this could change as digital cinema becomes more popular. (2) DVD rentals: Along with mom-and-pop operations (mostly Indian grocery stores) and bricks-and-mortar Blockbusters, online sites are popular destinations for Bollywood rentals, with Netflix alone carrying over nine hundred titles. (3) Online Direct: Streaming is an increasingly popular channel for movie-watchers. In mid-2006 Eros International announced a partnership with video-on-demand provider Movielink to offer downloadable Bollywood content. (4) Cable: Comcast, Time Warner, and lesser known players such as BOD-VOD also offer on-demand Indian films.
Who are the primary U.S. consumers of Bollywood fare? Three segments: Indian-born residents (NRIs), second-generation Indians, and Non-Indians. Preferences vary among these groups—for example, NRIs who arrived before 1990 tend to seek out older, more romantic Bollywood films. According to BOD-VOD, the non-Indian segment includes “several other ethnic groups such as Continental Africans, Middle Easterners, Russians,” and others, making the total U.S. market size for Bollywood films about 10-15 million people. The South Asian market is growing quickly, and the high percentage of educated professionals it includes gives it the highest median household income (over $70,000) among ethnic groups and a strong measure of tech savvy.
How to Increase Foreign Returns
To understand how Bollywood can improve monetization of its output, consider the economics of the film industry. Contrary to popular belief, box office returns for U.S. films contribute on average under 25 percent of a film’s total revenues, and less than 20 percent of total profits. In Bollywood, theater box office represents over 80 percent of total revenues. In the United States, a much more important revenue driver is home video sales (DVD purchases and rentals), which can constitute 50 percent of a film’s total take. Syndication to broadcast and cable TV is another major revenue driver, and a disproportionate one of profits, contributing 40 percent of net returns on average. Thus successfully monetizing a film in the United States requires a distributor to maximize profits at every stage of the release window, a complex task—one that is often outsourced to international distributors by Bollywood producers.
Distribution agreements have two main non-financial dimensions: content type (theatrical, DVD, syndication, etc.) and geography. Most of today’s distribution deals cover most or all content types, but focus on a particular geography. The agreements also comprise two financial elements: an upfront “minimum guarantee,” and a share of returns above that minimum. Established producers command attractive minimum guarantees, while smaller players struggle in this regard. Additionally, due to rampant piracy and the limited transparency of revenues in the “last mile” of distribution (from distributor to consumer), producers have no way of knowing the actual returns on their films once they are out of their hands, and rarely see much revenue above the minimum guarantee. And distributors don not make this part any easier. “The biggest rascals of them all,” one producer called Eros. As low-cost technologies proliferate (e.g., new cables related to new internet technologies), producers may be able to provide content directly through providers, ultimately cutting out distributors or at least pressuring them to provide better transparency.
Whatever the producer-distributor relationship, the question of how to derive greater international revenues for distributors—and thus profits for producers—remains. Answering this is crucial, as international consumers already contribute about a third of Bollywood producers’ net incomes. To approach an answer, a demographics- and survey-driven “bottoms up” market sizing exercise was used to arrive at an estimated $100 million U.S. market for Bollywood content; this baseline model and a set of key assumptions (e.g., theater and home video revenue potential) were then used to assess potential revenue opportunities for distributors if they could increase their “share of wallet” for South Asian consumers. The new calculations pointed to a $200 million potential revenue opportunity, or double the current market size; producers’ profits would also double, given the improved syndication opportunities projected.
How to Reach the South Asian Consumer
To provide specific recommendations for reaching more South Asian consumers—or gaining greater share of their wallets—Bollywood films that have been particularly successful in the United States (e.g., Kabhi Khushi Kabhi Gham) were examined, in conjunction with an online survey of approximately one hundred South Asians in the United States. A major takeaway was that successful Bollywood films in the United States have had several shared features: a superstar (e.g., Shah Rukh Khan); a non-Indian setting or a storyline that includes a culture clash; some form of pre-release promotion (e.g., the pre-release soundtrack for Veer-Zaara was a hit, driving strong ticket sales); a “wide” opening (i.e., over sixty screens); and special home video options (e.g., a two-disc collector’s edition DVD for Veer-Zaara).
The online survey, while not truly scientific, revealed several interesting patterns likely to characterize the general perceptions and preferences of South Asians in the United States. Over 95 percent of respondents had at least some interest in watching Bollywood films, with media-type preference for cable/satellite TV, movie theater, store rental, and video on demand, in that order. Cable/satellite TV seems to be a potential growth area in this domain; of the 81 percent of respondents who do not receive Indian channels and shows through this medium, 56 percent said they would be interested in it. Capturing this opportunity may require higher quality and variety of offerings, attractive pricing, and improved means of creating awareness. While respondents expressed interest in viewing Bollywood films in theaters, they averaged only 2.5 visits to theaters per year for such fare, compared to the general U.S. average of five theater visits. Relatively low publicity for Bollywood films in U.S. theaters and long travel times were viewed as factors in this trend. Relative to cable/satellite TV and theater, home movie rentals and purchases had high penetration and usage rates, with 82 percent of respondents stating that they watched Indian movies at home, and an overall average of 6.5 films viewed annually in this manner. Local Indian stores were the most popular source of rental films, followed by Internet rental sites (e.g., Netflix). Despite their popularity, Indian stores present coordination challenges for Bollywood distributors due to their fragmented nature and potential for contributing to distribution/copyright violations.
In the context of Bollywood’s popularity and momentum globally and especially in the United States, several key recommendations are made for the two main groups that stand to benefit: Bollywood producers and U.S. distributors. It is crucial that producers require distributors to provide clear and detailed metrics, to make sure the producers receive the returns to which they are entitled and that distributors are maximizing a given film’s potential. To seek higher revenues, producers can also consider alternative distributors including those based in Hollywood itself, and even explore the option of establishing their own distribution capabilities, as enabled increasingly by the consolidation and transparency of video on demand and syndication to broadcast and cable TV.
Distributors can improve monetization of the content they own by investing in direct/indirect marketing to primary audiences, bolster the home video channel using merchandising support for small retailers and attractive deals for national chains, and expand the syndication market by investing in free TV operators and signing additional cable/satellite operators. In anticipation of increasing transparency in the industry, distributors could also consider shifting the rights-bid structure from upfront payments to a hybrid of fixed and royalty payments, to share risk with producers and open the door to producer-funded marketing schemes, already quite successful in Hollywood, to expand the home video category.
Thus, while there is no question that Bollywood films will continue to entertain consumers far from India’s shores, exactly how the industry’s producers and distributors will capitalize on this trend remains to be seen.