By Tanisha Kamat | Edited by Khushi Shah
India’s box office is no stranger to the limelight, with a staggering $1.4 billion valuation in 2019 (pre-pandemic) and an impressive 11.5% year-over-year increase since the 2000s. At the heart of this success is Bollywood, the hub of Indian cinema, covering a sprawling 30-square-mile area that wields significant influence over Indian culture and its global perception. But it’s not just entertainment, it is an essential contributor to the Indian economy. If you’ve ever sat through a movie’s credits, it’s easy to see why the film and television industries employ nearly 2.5 million people. To put this in perspective, that’s greater than the number of people employed as miners. Therefore, the 1.4 billion dollars generated by the box office in India has a much larger impact on the economy through the multiplier effect, making the film industry an important contributor to economic growth and development.
Part of the reason why the film industry is so big is that they have big budgets. Budgets that are often amounting to hundreds of millions of dollars. how do movies get funded? Movies are companies, just like Apple, Google, and Amazon. Studios incorporate their films to raise capital. In this way, films are like pre-revenue startups: they don’t have a product yet, and they need funding. Just like in the startup world, there’s an investor ecosystem for the movie world. An investor ecosystem that looks for the same things that all investors look for: the opportunity to earn solid returns from a venture managed by an equally solid management team. This leads to the question of whether movies are indeed profitable. Despite economic downturns, people continue to flock to cinemas, making movies an affordable form of entertainment that generates a steady stream of revenue. As a result, movies are a dependable source of returns. But even with the financial backing of large institutions, studios rely on two other important funding sources: paid product placement and government subsidies. ‘Paid Product Placement’ is the reason why you see so many brand advertisements in movies, some of which are just laughably unbearable. For studios, paid product placement is a critical fundraising tool: one that allows them to retain a larger ownership stake in their movies. Without it, a studio would have no other choice but to raise more money from its investors which, in turn, dilutes the studio’s ownership.
So, how big of a deal is paid product placement?
Consider the ‘Krrish’ franchise. Rakesh Roshan’s Krrish prominently featured Sony, Bournvita, Tide, Hero Honda, Boro Plus, Lifebuoy, HP Power, and Lays chips. Krrish made 12 crores out of product placement which equates to about 30% of the movie’s entire budget. But perhaps the most interesting thing about paid product placement is that sometimes you don’t even know it’s there and that’s the point: it’s meant to be subliminal, you’re not supposed to notice it. The reason films don’t disclose their brand placements is simple: they don’t have to. It’s not legally required. The movie industry argues that making disclosures mid-movie would be disruptive. The real ethical issue here that is, arguably, criminally overlooked is paid product placement targeting children. Children are easily manipulated and don’t have any concept whatsoever of the dynamic between brands and their non-transparent advertising. Case in point: Lays Chips sponsoring Krrish.
We saw how the film industry, in general, is a major contributor to the global economy, but it requires substantial initial investments due to its high fixed costs. In addition, the industry benefits from external economies of scale, which means that the overall industry’s size and production capacity influence the costs of individual firms. This is particularly important in the film industry, where larger productions can benefit from lower costs per unit. To increase revenues and offset production costs, the film industry relies heavily on international sales and distribution. The industry, producers, and distributors use price discrimination to maximize profits by charging different prices for films in different markets, platforms, or formats. This allows producers and distributors to sell films in multiple markets without incurring additional production costs. For example, they may charge higher prices for films in theaters or on premium streaming services, while offering lower prices for DVDs or on-demand streaming. By doing so, they can capture different segments of the market with different willingness-to-pay levels, increasing their overall revenue. However, the film industry is characterized by market power, which gives producers and distributors the ability to influence the pricing and availability of films. This can result in certain films being priced higher or only released in specific markets or platforms. As a result, the film industry is a highly competitive and dynamic market that requires significant investment and strategic decision-making to remain profitable. Therefore, balancing price discrimination with consumer welfare is an important consideration for the film industry to remain competitive and profitable.
Bollywood movies have not only gained immense popularity in India but have also become highly successful exports, particularly to other parts of Asia and the Middle East. Keep in mind that although Bollywood is a kind of dominant cluster within India, there are plenty of Indian movies not made in Hindi, for instance, in Bengali or Tamil. One striking feature of cinema is that it shows a lot of geographic clustering. So why is it that India, and Mumbai in particular, have become centers for making and distributing movies? One key reason is simply that India has a large home market for cinematic viewing. There are large numbers of Indians, and for many, many years now, India has been the biggest film cluster as measured by the number of films made each year. It puts out many more films than, say, Hollywood does. The theory of international trade suggests that countries with sizable domestic markets are more likely to succeed in exporting, as a large home market supports a robust domestic industry capable of producing a diverse range of films and experimenting with various styles. Furthermore, the high number of domestic customers in a large home market results in lower per-customer costs when making movies.
Overall, the film industry operates in a competitive and monopolistic environment, with imperfect substitutes and strong market power influencing the pricing and availability of films, as well as the distribution of profits. In summary, the film industry is a complex and challenging environment, with high fixed costs and external economies of scale influencing production, and market power affecting pricing, availability, and profit distribution. Understanding these complex and interrelated factors is critical for stakeholders looking to thrive in the film industry. With the industry continuing to evolve and change, it is essential to develop strategies to navigate these challenges and take advantage of new opportunities that emerge. Only by doing so can filmmakers and producers continue to create movies that captivate and entertain audiences around the world.
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