How well is the Indian film industry positioned to ride out the global economic crisis' Screen takes a look at the impact of the crunch on production and multiplex expansion as well as the country's high-profile international financing deals.
The Indian film industry may have made headlines last year with the DreamWorks-Reliance deal and other attention-grabbing tie-ups, but it did not escape the financial chills sweeping across the globe.
Box office appears to be relatively buoyant (see p21), with dips attributed to weak product rather than waning consumer confidence, but the credit crunch put the big-spending industry's finances into a spin. Last year, an avalanche of fresh finance poured in from a combination of stock markets, banks, US studios and local private equity backers - but the flood started to subside in the fourth quarter as corporations watched share values plummet and Indian banks that had been active in film financing, such as Idbi and Exim, began to retreat from the sector. A series of high-profile flops earlier in the year - such as star-laden action titles Drona and Tashan - also made investors jittery.
By the end of 2008, corporations were scrambling to slash marketing costs, shelve expensive productions and renegotiate pay packages for stars and other talent. However, Mumbai-based producers believe this is a good thing. 'With lots of money chasing limited talent, prices had become unrealistic,' says UTV Motion Pictures CEO Siddharth Roy Kapur. 'The costs had risen so high that even if a film was a success it had become difficult to recoup.'
Indeed, the word 'correction' has become the new mantra in the Mumbai industry where until recently leading stars were being paid upwards of $10m a film. 'Talent and key technical costs were accounting for 75% of the budget, compared to 30% historically, so people were not spending much on actually producing the films,' says Percept Picture Company CEO Navin Shah. 'If consumers have a good experience they will watch more content, but if they watch one bad film you will lose that customer for the next three months.'
According to Indian Film Company CEO Sandeep Bhargava, the industry is now going through a period of readjustment and assessing how to make projects for the right price. 'We haven't changed strategy but we're focusing on production costs,' says Bhargava. 'A lot of filmmakers wanted to sell projects to the studios, so they were putting attractive elements together, but they weren't focusing on the scripts. In 2008, films with good stories did well. You have to concentrate on making good content.'
However, analysts believe that even with a complete overhaul of production costs, the industry is likely to face difficulties in raising fresh capital for at least the next three quarters. This will also affect multiplex expansion, one of the chief drivers of box-office growth, as most multiplexes are housed in shopping malls and local property developers tend to be highly leveraged. In turn, this could affect the smaller-budget and more diverse range of films into which the multiplexes were breathing life. India's middle class may also become more cautious - multiplex tickets are not cheap at around $4 (rup200) - which could shift the emphasis back to mass-market product that can play on single screens.
There are also whispers the credit crunch has affected DreamWorks' refinancing deal - although the studio has raised $500m in equity from India's Reliance Big Entertainment (RBE), DreamWorks is struggling to raise the remaining $750m in bank finance, which could stall the deal. While he will not comment on DreamWorks, RBE president Rajesh Sawhney observes that, as far as its Indian plans are concerned, the company is working with its own money rather than stock-market funds.
'We've always been conservative film-makers, so the first quarter is on course as planned,' Sawhney says. 'We see opportunities in the correction, as the drying out of stupid money will help build a realistic and robust business model.' Sawhney adds the company aims to announce the first projects from its development deals with leading Hollywood players, including Brad Pitt and Tom Hanks, at this year's Cannes International Film Festival.
While the Mumbai studios expect box office to hold steady throughout the downturn, they are concerned about ancillary revenues. Although leading broadcasters such as Star, SET, Zee and Colours are expected to weather the storm, a drop in advertising revenues is expected to hit smaller broadcasters and result in a more cautious acquisitions policy across the board. This would not have been a problem three years ago when box office accounted for 85% of revenues, while TV, video and other platforms took a measly 15%. But now ancillaries can account for almost 50% of the pie.
'The challenge for 2009 is satellite pricing,' says Sawhney. 'In 2007, three or four new players entered the market and the competition resulted in driving up prices (for acquiring films). But now we're seeing a correction.'
Meanwhile, around seven direct-to-home (DTH) platforms, including Bharti Airtel TV, Dish TV and Tata Sky, have launched in India and are expected to become a new stream of revenue for filmmakers, but so far they are not spending heavily on content.
So while India can rely on the bedrock of its vast cinema-going population, albeit with a slowdown at the multiplexes, this is likely to be a transformative year for the Mumbai-based film industry. There is some strong product lined up for the first part of the year, but looking further ahead, producers will have to persuade talent to take pay cuts or wean themselves off expensive stars.
The industry is also bracing itself for the second outing of cricket's Indian Premier League (IPL) in April and May. This is not something to be sniffed at: cricket and religious festivals are usually the only two things that can keep audiences out of cinemas.