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Business Model of Bollywood | How Film Industry Earns Money? | Dhruv Rathee - YouTube
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Hello, friends!
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About four years ago,
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the film Race 3 was released with Bollywood actor Salman Khan in it.
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This film received terrible reviews from the audicence and critics alike.
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It is considered a huge flop.
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But do you know, despite this, this film was a financial hit?
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This film was made on a budget of ₹1.8 billion,
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and it earned more than ₹3 billion.
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On the other hand, there's a stark contrast
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the Bollywood film Mera Naam Joker, 1970.
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The director, producer, and actor of the film was Raj Kapoor,
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a huge celebrity of his time.
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This film is considered a cult classic nowadays.
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One of the best films of its time.
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Even so, this film lost so much money,
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that it put Raj Kapoor in a financial crisis.
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If anyone earned profits from this film
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it was a company based in the Soviet Union.
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This is the reason why some hit films turn out to flop for some people,
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and flops films become a financially hit film.
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Come, in this video, let us understand
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the Business Model of Bollywood Films.
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"How are films distributed?"
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"This secret is lost to us, Sir."
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"People aren't going to the theatres as much."
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"I think nobody on this planet can judge what people like."
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"I just spent a lot of money on marketing, and it's a whole business."
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"Right now, truly content is skin."
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"We'll be swimming in money!"
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"When you say a South Indian film is successful,
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I think it's an Indian film which is succeeding."
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Friends, the Indian film industry is the world's largest film producer.
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The number of films made in India,
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is unmatched by any other place in the world.
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Every year, about 1,500 to 2,000 films are made in India
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in 20 different languages.
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The Hindi film industry that's known as Bollywood,
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had been the most popular film industry in India for a long time.
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Even though, only about 16% of the Indian films are made in Bollywood.
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Out of the total films being made in India.
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But the market share of Bollywood in terms of revenue,
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was the highest.
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About 45% of the collections from the films,
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were by the Bollywood films.
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I am using past tense because this was the scenario before the pandemic.
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Today, the number 1 film industry in India is the
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Telegu film industry.
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Their share in the domestic box office this year is at 28%.
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And Bollywood's share has fallen to 27%.
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Overall, the South Indian language film industries,
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have increased their market share from 36% in 2019,
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to 59% by 2020-21.
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Bollywood is slowly losing its dominance,
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but the business model on which all these films work,
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is the same for all of them.
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To understand how a film earns money,
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first, we need to understand
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how a film is made.
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The process of making a film
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can be divided into four stages.
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In the stage of Development,
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the story of the film is developed.
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The script and dialogues of the film are prepared.
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Then in the Pre-Production stage,
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the main cast and the supporting cast as selected.
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The actors who will work in the film.
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During this stage, a crew is hired as well.
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The shooting equipment is arranged,
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whether it'll be rented from somewhere.
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The shooting locations are selected.
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And the travel and accommodations are arranged.
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And if the film needs any permission for filming,
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the permits and insurance are secured at this stage.
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And then comes the third stage, Production.
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The film is actually shot at this stage.
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Once the shooting of the film is over,
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it goes into editing.
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This editing is known as the Post-Production stage,
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wherein the film is finally compiled.
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In each of the stages of this entire process,
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a lot of money has to be spent.
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Apart from the salaries of the actors,
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the writers need to be paid,
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at least in some films,
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the crew needs to be paid,
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the expenses of renting or buying the filming equipment,
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the expense of getting the requisite permits.
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Overall, there's a huge expenditure.
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It is very rare that a single individual has this kind of money.
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The budget of an average mainstream Bollywood film
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is around ₹500 million.
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The upcoming film Brahmastra,
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has an estimated budget of more than ₹3 billion.
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Even the most successful Bollywood actors
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like Ranbir Kapoor or Akshay Kumar
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wouldn't have the money to spend on one film.
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That's why the task of managing expenditures is undertaken by huge corporations,
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known as Production Companies.
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Brahmastra is among the most expensive Bollywood films.
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That's why it's not produced by only 1 production house,
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multiple production companies are spending money to make this film.
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Dharma Productions, Prime Focus, and Star Studios.
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The individuals who pay their own money to pay the expenses of the film,
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are known as the Producers.
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If you remember the brilliant comedy film released in 2007, Bheja Fry,
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was actually one of the lowest-budget Bollywood films of all time.
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The total cost of making this film is estimated to be around ₹7 million.
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₹7 million can easily be paid by a rich person.
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That's why there was only one individual producer for this film.
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Sunil Doshi.
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The only producer of Bheja Fry.
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Friends, the film producers are like entrepreneurs,
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their task is very risky.
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They invest their money to bear the expenses of making a film.
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If the film turns out to be a hit,
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they will earn a good return on the money they spend.
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But if the film turns out to be a flop,
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they lose their money.
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And as you know,
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most of the films are flops.
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It is very rare that a film is a hit.
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The producers basically invest their money to make a film.
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The money they invest in a film,
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is known as the budget.
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And they hope that the film is a hit so that they can make a profit.
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The actual task of making the film is of the Director.
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Shooting, editing, post-production,
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to maintain an overview of all the various activities and to actually make the film.
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In most cases, the directors are like the actors.
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They are employed on salary.
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They are paid a salary per film.
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Especially in films with a small budget.
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For the big-shot directors,
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such as Steven Spielberg,
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they often work on the basis of profit-sharing.
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But in our business model, the directors and actors play almost no role.
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Once the film is made,
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it is loaded onto a small hard disk,
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and the producers take this film
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to the Distributors.
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The distributors has to ensure that the films reach cinema halls,
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as well as the OTT platforms.
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Often, the distributors are responsible for marketing the films as well.
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So they spend their money on the promotion and advertisement of the film.
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The distributors make money by selling the satellite rights to the film,
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and the digital streaming rights.
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The TV channel on which the film is telecasted for the first time,
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has to pay the distributor to buy this right.
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So that the film is telecast on TV for the first time only on that TV Channel.
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When this is done,
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it is known as the World Television Premiere.
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You might have noticed this.
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The distributors sell the film to the OTT platforms as well.
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And the OTT platforms pay the distributor for this.
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You can take the example of the latest film Bhool Bhulaiya 2.
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It was produced by T Series,
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and distributed by the company AA Films.
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Often, before the film is released,
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the distribution companies enter into deals with the OTT platforms.
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They sell the film at a mutually determined amount,
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and set a date after which they can release the film on their OTT platform.
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In the case of this specific film,
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this film was a Super Hit.
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Even after 2-3 weeks,
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this film continued to be in the cinema halls.
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But since the deal was already struck between the distributor and Netflix,
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and the distributor has sold the film to Netflix for ₹300 million,
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and they had agreed on the date after which the film could be released in Netflix,
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regardless of the fact that the film was still in theatres,
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Netflix released the film on their platform,
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because Netflix was protecting its revenue.
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They would get the benefits when
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they release the films on their platform as soon as possible.
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The collections of the film from the cinema halls,
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are negatively impacted by this.
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But this is a risk borne by the distributor.
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The film could have been a flop.
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In that circumstance, a quicker release in OTT platforms would have been a wiser decision.
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Friends, often for major films,
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the production company and the distribution company of the film
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are the same.
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The large production houses
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such as Yash Raj Films, Dharma Film Productions,
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UTV Motion Pictures,
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Fox Star Studios, Reliance Entertainment,
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they are distribution companies as well.
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If the producer and distributor of the film are the same,
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the production company maintains separate budgets for production
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and for marketing and distribution.
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Next, when the films are shown in the cinemas,
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you need to purchase tickets to watch it.
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The ticket counter from where you get the tickets,
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is known as the Box Office.
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And the revenue of a film by selling the tickets,
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is known as its Box Office Collection.
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This amount is collected by the theatre owners.
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The owners of the cinema halls.
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On this revenue, the theatres have to pay GST to the government.
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GST at the rate of 18% if the price of the ticket is more than ₹100,
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or at 12% if it is less than ₹100.
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After paying GST the remaining amount
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is known as the Net Collection of the film.
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If the Net Collection of a film is more than its Budget,
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the film can be considered profitable.
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Before GST was introduced, the State Governments charged an Entertainment Tax.
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It used to vary from State to State.
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When a film was declared Tax Free in a state,
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it meant that the Entertainment Tax on that film had been waived off.
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It reduced the cost of the tickets.
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As I said, now the GST is levied at either 12% or 18%.
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The GST is then shared by the Central and State governments.
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So now when a state declares a film tax free,
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only the SGST component of GST is waived off.
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You still need to pay the CGST.
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So now the exemption can either be 6% or 9%.
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Depending on the price of the ticket.
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Basically, this is the involvement of the government
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in the business model of films.
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You can say that it is the government's way of regulating the film industry.
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But since the introduction of OTT platforms such as Netflix,
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they are providing free entertainment online.
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So the government is unable to charge tax on it.
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This aspect is quite similar to crypto.
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when crypto was newly introduced
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it was outside the purview of the government's regulation.
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Although now the government has introduced Crypto Tax as well.
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To ensure that there are no avenues on which they aren't levying taxes.
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Friends, this reminds me,
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did you know that the PNP coin claims to be the world's first regulated cryptocurrency?
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A cryptocurrency which follows all government regulations.
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It was launched in May 2021,
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by the Helios Wealth Management.
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A Hong Kong-based company.
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To purchase this, you would need to submit your KYC first.
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Only after that, a wallet address is issued to you.
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This makes illegal transactions quite difficult.
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They claim to be the first cryptocurrency
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to offer a physical card and physical coins to its users.
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Within 2 months of becoming eligible.
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They are for those customers who purchase at least 1,000 tokens.
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Today, the cost of 1 PNP is at
7 Hong Kong Dollars.
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Around ₹70.
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They have grown exponentially.
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At the time of the launch, 1 PNP coin was valued at 1 HKD.
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Another interesting fact about this crypto is that
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there is a maximum limit to the investment made by an individual.
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No one can invest more than ₹300,000.
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Their target for the next year is to,
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reach 1% of the growth of Bitcoin,
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and to focus on community growth.
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They have launched their regulated exchange as well.
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Helios DAX.
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If you're interested, you can go check them out.
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The link is in the description below.
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Here, I'd like to thank them for sponsoring this video.
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Now let's get back to the topic.
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Friends, it is interesting to see
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the deal between the producer and distributor
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when they aren't the same entity.
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There can be 3 basic ways of profit-sharing between them.
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First: Minimum Guarantee Royalty.
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The distributor pays a minimum guaranteed amount to the producer,
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it is a fixed amount to be paid
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irrespective of whether the film is a hit or a flop.
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If the film is a hit,
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a certain percentage of the profits is to be paid to the producer as well.
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As Royalty payments.
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In this case, the risk is shared between the producer and the distributor.
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The second way is when the producer completely sells off the film to the distributor.
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And then it is up to the distributor to decide what they want to do with the film.
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If the film rakes in a profit, the distributor will earn more,
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and if the film turns out to be a loss, it will be borne by the distributor.
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In this case, the producer is safe.
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There is no risk taken by the producer.
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The producer walks away with their fixed amount of profit,
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by selling the film to the distributor.
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The rest is up to the distributor.
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This is what happened in the case of the film Mera Naam Joker.
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Raj Kapoor's one of the best films,
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In India, this film was produced and distributed by RK Films.
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Raj Kapoor's production house.
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Raj Kapoor invested all his money in making this film.
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He mortgaged his house as well.
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But despite working so hard on it,
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this film turned out to be a big flop.
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The budget for this film was ₹10 million at the time.
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But its Net Collections was only ₹8 million.
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What can be done to cover the losses?
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Raj Kapoor decided that the distribution rights of the film outside India,
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in Russia, which was then the Soviet Union,
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should be sold off completely to a distribution company based there.
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No need for complicated deals,
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he sold off the rights for ₹1.5 million.
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Because from Raj Kapoor's perspective, he had already taken a huge risk,
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and now he wanted a sure-shot amount.
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When the film was released in the Soviet Union in 1972,
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it became a Blockbuster there.
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In 1972, the total collections of this film in the Soviet Union alone,
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was ₹168.1 million.
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If you adjust this amount for inflation,
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this amount would stand at ₹1.007 billion now.
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The distributor in the Soviet Union raked in a lot of profit.
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But because of the way the deal was structured,
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by shifting the risk to the distributor,
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Raj Kapoor did not get any part of the profit.
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He had to incur losses because of this film.
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Isn't this business model surprising?
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The third way is the most common.
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the producers give the films to the distributors
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and then work on commission.
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Such that the distributors would be given a commission from the overall profits.
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Here, the risk is borne by the producer alone.
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And the distributor doesn't have to bear much risk.
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It means that in this case, the money spent on marketing and distribution
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is spent by the producer.
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Once you've understood this, we can move on to the next step of the process.
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The distributors approach the sub-distributors in the various regions of the country.
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The country has been divided into multiple areas,
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known as the Distribution Circuits.
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For Hindi films, there are 11 such Circuits.
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The sub-distributors then enter into arrangements,
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to show the films in cinema halls,
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and for screening.
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It is the sub-distributors who actually deal with the Exhibitors.
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Who are the Exhibitors?
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They are the cinema halls or the companies that own the cinema halls.
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The sub-distributor and the cinema halls strike a deal
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on the revenue sharing.
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The deal basically depends on the number of screens given to the film.
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There are mainly 2 types of cinema halls in the country,
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Single Screen Theatre,
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here the deal between the two is usually in the ratio of 25% to 75%.
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Of the profits from the sale of the tickets,
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25% of it would be given to the exhibitors,
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and 75% to the sub-distributors.
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And a significant portion of the sub-distributor's revenue
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is then paid to the distributors and the producers.
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In some cases, this ratio can be 30:70 or 20:80 as well.
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The second type of cinema hall in the country is the one found in malls.
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known as the Multiplexes.
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For these, the ratio of profit sharing between the exhibitors and sub-distributor is different.
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It keeps on changing each week.
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In the first week, it is usually in the ratio of 50:50.
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And with the passing of each week,
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the share of the distributor keeps decreasing.
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60:40 in the second week,
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70:30 in the third.
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But this isn't worrisome for the producers and distributors,
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because most of the films
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earn the majority of its profits in the first week.
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Especially the flop films.
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To cite an example,
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Akshay Kumar's recent release Samarat Prithviraj.
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It was a high-budget film.
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Its estimated budget was around ₹3 billion.
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The producer and distributor of the film was YRF.
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In the first week, this film earned ₹550 million.
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But the total collection of this film is around ₹860 million.
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Most of the earning potential of the film
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was reached in the first week.
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From the second week onwards, the earnings keep decreasing.
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It is the same for most films.
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A majorly flop film with the loss of more than ₹2 billion.
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And as you know,
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this loss will have to be borne by Yash Raj Films.
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In big films with top-level actors,
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whether the film would be a hit or a flop,
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often depends on the image of the actor.
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So there are times were the actors
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enter into profit-sharing deals with the producers and the distributors.
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A way in which the actors become one of the producers as well.
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So that the risk of investing in the film
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doesn't have to be borne by the producers alone,
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the actor shares the risk too.
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It's said that Aamir Khan, works on a zero salary.
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He doesn't charge a salary,
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He enters into a profit-sharing agreement,
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where if the film is a hit,
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he gets 50% to 80% of the profit.
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But if the film is a flop,
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he wouldn't get any money
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and will have to incur losses.
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Many actors work on the model on part salary and part profits.
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Such as Salman Khan, one of the highest-paid actors.
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It's said that he charges ₹700 million per movie as a salary.
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But for his film Sultan,
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he had entered a profit-sharing deal for that film.
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The gross collection of the film Sultan was ₹5 billion.
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Of which ₹1.06 billion was the Entertainment Tax.
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The Net Collection was ₹3.94 billion.
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This film was produced and distributed by YRF.
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10%-20% of the Net Collection went to YRF,
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if we assume 20%,
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20% of ₹3.94 billion = ₹790 million.
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Of this, YRF had spent approximately ₹200 million on marketing the film.
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Deducting that, we're left with ₹590 million.
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This ₹590 million was earned as profit by YRF,
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as the distributor of the film.
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The profit they earned as the producer of the film is separately calculated.
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₹3.94 billion less ₹790 million
= ₹3.15 billion.
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Of which, it is estimated that ₹1.57 billion was the exhibitors' share.
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₹3.15 billion less ₹1.57 billion,
= ₹1.58 billion.
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The production cost of YRF was ₹700 million.
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So the net profit remaining with them was ₹880 million.
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Form the deals of selling other rights to the film,
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they had earned an additional ₹200 million,
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so their total earnings stood at ₹1.08 billion.
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They had earned ₹590 million from distribution as well.
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So the total earnings of YRF from this film was
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₹1.67 billion.
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As suggested by reports,
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the profit-sharing deal struck between Salman Khan and YRF,
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was of 50% profit sharing.
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So 50% of the profits earned by YRF would go to Salman Khan.
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In this case, ₹835 million.
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It can be estimated that Salman Khan
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earned this amount from this specific film.
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because he had entered into a profit-sharing deal.
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It turned out to be more than his normal salary,
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because this film was a super hit.
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Friends, this is the workings of the Business Model of Films.
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I hope you've clearly understood everything.
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If you want to understand other Business Models in detail,
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such as the IPL or the T20 World Cup,
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or of Amazon or Tesla,
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I've explained all these Business Models in multiple videos,
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You can watch the series of all these videos by clicking on the playlist here.
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Let's meet in the next video.
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Thank you very much!
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