The evolving business of Bollywood

The story goes that while making his most renowned film Pather Paanchali, auteurSatyajit Ray had to pawn his wife’s jewellery. Fast forward to 2011 and the latest Ajay Devgan starrer Singham has racked up collections in the region of Rs 25 Cr in just over three weeks. The transformation that Bollywood has seen ever since Dadasaheb Phalke made the iconic ‘Raja Harishchandra’ has been nothing short of spectacular.

The early days
The pre-Golden age had film-makers taking the entire financial burden of film-making on their own shoulders. They themselves would reach out to people, entice them and get them ready to sell property, jewellery, and invest in this magical medium. Financial returns were secondary to the attainment of one’s artistic ideals.
The Golden Age of Hindi cinema, which lasted from the 1940s to the 1960s, saw filmmakers like Guru Dutt (Guru Dutt Pvt. Ltd.) and Raj Kapoor (R.K. Studios) organise the cinema sector. They bought land, created the studio system, formed teams on monthly salaries, grouped regular technicians and thereby tried to introduce some semblance of organization into the Hindi film fraternity.
The dark period
Slowly, through the 70’s, commercial interests began to undermine creativity and aesthetics as tradesmen from Punjab and Sind began to pump their money into the film-making business. All through the 70s, 80s and 90s, the film-making business was considered a vice by the government and taxed egregiously at rates ranging from 25 to 75 percent in contrast to the US where tax benefits were provided. With a hit to flop ratio of 1:4, the film financing business was like playing the jackpot. So it wasn’t surprising that the bulk of film-financing came from the unorganized sector. Nearly 25 percent of the films were financed by conventional money lenders who charged exorbitant rates of interest ranging from 36 to 40 percent. The informal nature of the system also made it a convenient haven for ‘black money’ –- cash investments by gangsters, who needed to hide their earnings from tax collectors.
Meanwhile, rampant piracy and poor screening infrastructure had the film industry on its knees. Well-off middle class families tended to stay away from cinema halls as the sound systems, seating and air-conditioning facilities were abysmal. It was only when banners like Rajshri Productions and Yash Raj Films, backed by their seminal hits Hum Aapke Hain Kaun and Dilwale Dulhania Le Jayenge, threatened to stop screenings at poorly equipped theatres that there was some improvement.
Era of the Multiplex
 In the early 90s, in Delhi, India’s first multiplex came up and completely redefined the film-watching experience. In starting the country’s first multiplex, PVR showed a lot of vision and foresight and an impeccable understanding of the changing urban Indian consumer who was ready to embrace the best the world had to offer and was willing to pay for it. A consumer, who up until now was paying 25 rupees for a ticket, was now willing to pay 100 bucks. This one development catalyzed the transformation of film-making in India as films were now looking at substantial theatrical revenues.
The next epochal moment came with the granting of industry status to Bollywood by the government of India in 2001. This opened the door to institutional financing, something that the industry had been waiting for a long time.
Post-2001 stage
With Bollywood being granted an industry status, the whole business of film-making underwent a paradigm shift. The sourcing for film-financing has now assumed a new avatar with more and more films being financed through organized sources (comprising APO funds, institutional / bank loans, private equity / venture capital from institutions etc). This increase in film financing from organized sources has been led by Media & Entertainment (M&E) companies that have raised funds through IPOs over the last few years and new entrants comprising of high net worth individuals (HNI) & companies, who were traditionally not engaged in the M&E business. This has resulted in the players reducing their funding from traditional unorganized sector debt financiers by a subsequent amount. The major players in the M&E space include Adlabs Films, PVR, Mukta Arts, UTV, Pritish Nandy Communications and YRF. With organized financing came a certain level of professionalism which has ensured that even films with an experimental story and cast get to see the light of the day.  The general film-viewing experience has gone up substantially and consumers (in this case the audience) have more good quality options to choose from.
A major source of revenue in this stage has been the growing foreign market for Hindi films. In many cases, the cost of making the film can be recouped from overseas distribution rights alone. To capitalize on this segment, Bollywood has tried a number of marketing strategies. From holding annual film awards in foreign countries (case in point being the IIFA awards) to increasing the amount of dialogues in English, a number of initiatives are being undertaken to boost overseas returns.
Challenges ahead
Not everything is rosy though. Bollywood has a long way to go if it harbours hopes of catching up with Hollywood. As of 2002, Bollywood sold 3.6 billion tickets to Hollywood’s 2.6 billion and yet was able to generate revenues of only $1.3 billion as compared to Hollywood’s $51 billion. This disparity has been driven by a vast gap in the average number of prints and the price charged per ticket.
Until the film industry is able to give better structure and organization to the production, distribution and exhibition segments, it will be unrealistic to expect Bollywood to compete with Hollywood. Also, banks are still circumspect about financing films in India as the risks are too high. As observed by the head of the Reserve Bank of India, the film industry must recognize that it is, after all, a business, and the most difficult task for bankers is “to create an environment where the dreamers understand the numbers, and the accountants understand the dreams.”

Google’s strategy for Android

The mobile industry has grown exponentially since the 1990’s to have about 5 billion connections worldwide and a penetration of more than 100% in several parts of the world. This evaluates to there being more than three times the number of mobile users than PC users with about 500 million connections added every year.
Along with mobile phones, smartphones have captured majority of the cellphone market. High end smartphones have become affordable because of availability of cheaper hardware and technology and fast, affordable internet. The smartphone business has shifted from being device based to being operating system based with Android being the fastest growing operating system. Android has captured nearly 50% of the world market share in 2011 as compared to less than 4% in 2007. But how does Google benefit from all of this? How does it source its revenues from Android?
Google’s derives more than 95% of its revenues from advertising using web based services like Google search, Google mail etc. Google perceives the rising consumer base of smartphone consumers both as an opportunity and as a threat. The high penetration and the huge consumer base across all demographics is a lucrative advertising opportunity for the company. However, the dependence on mobile phones for internet access can lead to less dependence on PCs for consumers where Google is the dominant web based service provider for search. But in smartphones, it is the manufacturer and the operating system that determine the default services. So, Google can end up losing its overall market dominance if the smartphone manufacturers decide to move to different default services.
Google provides Android with zero licensing cost along with an entire plethora of services like Google maps with street view and mail customized for Android running mobile phones. This has ensured presence of a complete and standardized platform across a range of manufacturers. Android gives them the flexibility to develop their own UI and enhance user experience as per the manufacturer’s target segment. A tremendous surge in the smartphone market hence ensued because of lowered barriers to entry and has created a tsunami like impact on Nokia, which is now unable to make use of its scale. Google also provides cloud computing services which links all its mobile services to its online services. This gives it an edge over most of its competitors like RIM and Apple. Android gaining dominance is significant because technology markets tend to get standardized around one dominant platform. The standardization of Android and availability of many substitutes for hardware will lead to reduction in profits from manufacturing. This pushes the business in the mobile industry towards providing mobile based software services i.e. application development.
Apple with an App Store of over 350,000 applications leads in the applications race, followed by Android’s Google Marketplace with over 275,000 applications. However, devices based on other operating systems have barely over 50,000 applications. The business model for both these application markets is different. For Apple, the application store acts as a major source of revenues through paid applications and hence paid applications consist of about 65% of the total number of applications. Google on the other hand encourages free applications over paid ones for the Android platform and has about 60% free applications. Google’s policy is skewed towards free applications for two strategic reasons. The first one being that providing good quality free business and multimedia applications would help in increasing the consumer base and also affect consumer disposition to switch from paid applications, that Apple has created, to free applications. Another reason is that if application developers cannot derive revenues from the sale of applications then the only other way of deriving revenues is through advertisement. And Google owns AdMob – one of the largest mobile advertising companies in the world.
Apple depends on sales of applications in its App Store for its revenues. It mainly targets the segment of people who would otherwise not buy a smartphone and brings them into the world of smartphones.  These are potential consumers for Android who can switch for better services and specialized business applications (which Apple cannot move into without alienating its current consumer base) at a much lower price. Google, hence, perceives a low threat from Apple. Another area where this duopoly is heading into is the tablet PC market. This is another fast growing consumer electronic which Apple was successful in commercializing and popularizing. Now, Android based tablet PCs are entering with a similar strategy as that in the smartphones. Thus Google is trying to make Android a standardized platform for mobile phones as well as tablet PCs by creating a vibrant ecosystem of manufacturers, software providers, carriers, developers and advertisers for the consumers so as to supplement its advertising revenue and secure its dominant position in the market.