Supply chain of movies: How does it work ?

A supply chain is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer.”

The above is a definition of a ‘Supply Chain’ taken verbatim from Wikipedia. Now whenever words like Supply Chain Management, Operations Management, Logistics, Production Control, Distribution and Delivery are thrown around, most people tend to associate them with sophisticated manufacturing processes in some gigantic factory producing high technology complex goods. That is the general perception and it hard to blame them, for these words actually originated from such production processes a few decades ago. However what most people don’t realize (or it skips their mind inadvertently) is that the above explanation of supply chain is pretty generic and is perfectly applicable to a variety of industries and processes, and the principles remain more or less similar in these industries that may be termed unconventional in terms of their usage to operations management (or to put it in a more ‘efficient’ manner- Operations Management can be termed as unconventional in terms of its usage in these industries). The purpose of this series article is to introduce the Supply Chain and its Management for the much loved Movie Industry in India.

The scope of the article is limited to what happens after the finished product has been readied i.e. once the actual production is over. This is because the activities involved in actual production are rather nebulously defined and concern creativity and art- and this article being meant for students pursuing business administration has its focus clearly defined on business and profit generation. The final product in this industry is of course the movie itself- produced and readied after the hard work of hundreds of technicians and creative people and with the support of a thousand others (who most of the times go un-credited). Once the shooting is over, and the post production work including-but not limited to-dubbing editing and profiling is finished- what results is a production of a ‘print’. Now I am sure that many might have come across this term while their daily reading of the Delhi Times (or Mumbai Times or whatever)

“Mr. ABC plans to release his movie XYZ on a record number of prints.”

“The exhibitors encountered some problems due to delayed delivery of prints.”

It is these prints that finally reach us, the customers, the movie-goers- while are sitting back and relaxing on our comfy seats in the auditorium, complete with popcorn and coke, and completely in anticipation of getting entertained in the next two or so hours. Before going on any further, let’s look at the principal entities of the Supply Chain that is pretty simple in essence and quite linear in structure. They are- 

The forces of demand and supply exist pretty much in this industry too, and they are as powerful if not more in determining the prices that are paid by the distributors to the producers in acquiring the rights to distribute the ‘prints’ in their respective territories. India has been divided into a number of distribution territories geographically- Mumbai territory is formed by Mumbai City and Suburbs, Gujarat, parts of Maharashtra, parts of Karnataka and Goa; Delhi/UP territory is formed by Delhi City and the states of Uttar Pradesh and Uttaranchal Pradesh; East Punjab territory is formed by the states of Punjab, Haryana, Himachal Pradesh and Kashmir; West Bengal territory is formed by the state of West Bengal including Kolkata City; Bihar territory is formed by the states of Bihar and Jharkhand and parts of Chhattisgarh; CP Berar territory is formed by parts of Maharashtra, parts of  Madhya Pradesh and parts of Chhattisgarh; CI Territory is formed by parts of Madhya Pradesh; Rajasthan territory is formed by the state of Rajasthan; Nizam/Andhra territory is formed by Hyderabad and Andhra Pradesh and parts of Maharashtra; Mysore territory is formed by parts of Karnataka including Bangalore; Assam territory is formed by the state Assam and surrounding states; Orissa territory is formed by the state of Orissa; Tamil Nadu territory is formed by the state of Tamil Nadu; Kerala territory is formed by the state of Kerala.

Each geographic territory has its own sets of distributors who try to acquire the rights for distributing the prints to the exhibitors (read cinema hall owners/managers) of the region. These days, a few corporate houses that have ventured into this field buy the complete domestic rights across all territories. For understanding how this acquisition of rights is negotiated and how the supply and demand forces work, let’s look at some simple economics of the domain that would be helpful in understanding the pricing game in the industry. For the same purpose I am taking a hypothetical example:

Suppose Mr. ABC produces a movie XYZ at a total cost of Rs. 30 Cr. Now the movie stars a popular actor and carries a tremendous hype in the general public. The distributors are excited about the movie and are willing to pay a high price for it. A corporate honcho who is a film aficionado comes in and buys the complete domestic rights for a sum of Rs. 45 Cr (The producers make an on table profit of Rs 15 Cr). Now the movie releases and collects Rs. 50 Cr. Gross in week one. At this juncture it is necessary to differentiate between Net and Gross figures. The amount collected at the ticket window is taxed in India. This tax is called entertainment tax. These taxes vary from state to state. Net gross figures are always after this tax has been deducted while gross figures are before this tax has been deducted. The gross collection of a film at the present time (2011) can be anywhere from 30-35% higher than the Net collections today depending on where the collections are coming from.

Now the concept that is the most crucial in determining the commercial success of a movie (or in other words the bottom-line), called the ‘distributors share’ comes into the picture. The distributor shares are Net gross minus theatre rentals. The theatre rentals vary from state to state. Multiplexes give 50% in week one, 42.5% in week two, 37.5% in week three and 30% thereafter to the distributor. If a film collects 17.50 Cr Net from the six major chains then the first week and second week share is 52.5% and 45% respectively. Single screens are mainly on rental for big films so if a film generates big collections then 80% or even 90% of that can be the distributor share.

Coming back to the example taken, if the movie generates a Net Collection of Rs. 35 Cr in week one, the distributors will recover approximately 50%, i.e. 17.5 Cr (This percentage depends upon the release strategy in single screens and multiplexes as single screens give higher share). The life time collection that the movie generates comes out to be Rs. 80 Cr Gross (Rs 56 Cr Net- Distributor share of Rs. 30 Cr-the price he paid was Rs. 45 Cr- A loss of Rs. 15 Cr.) So while the producers make a healthy profit, the distributor makes an unhealthy loss. For the movie to be a commercial success it has to generate profits for all parties involved.  

In the recent times, a subsidiary entity has been added to the supply chain explained above. And that is a sort of virtual entity in the sense that it is just another method of delivering the product to the customers. Instead of physical prints, the industry is now moving towards ‘digital’ prints. The benefits of the same are manifold. While the difficulties involved in the physical delivery of prints are completely done away with, the reach becomes even wider with digital prints infiltrating theatres in the remotest corners of the country. The cost of distribution reduces making the distributors happy and the box office collections get a boost- making everyone happy. Another structural change in the industry is being caused by the high prices of satellite rights and music rights that producers are getting for the big-ticket films. In such an event, there are hardly any movies that prove to be a loss making propositions to the producer. But as a distributor, you are not only buying the prints, you are also buying the risk. All in all, it is a great time to become a film producer. Happy making movies!!