Kollywood - Economics

Economics

Average annual film output in Tamil film industry peaked in 1985. The Tamil film market accounts for approximately 0.1% of the gross domestic product (GDP) of the state of Tamil Nadu. For the purpose of entertainment taxes, returns have to be filed by the exhibitors weekly (usually each Tuesday). Costs of production have grown exponentially from just under 40 lakhs in 1980 to over 11 crores by 2005 for a typical star-studded big-budget film. Similarly, costs of processing per print have risen from just under 2,500 in 1980 to nearly 70,000 by 2005.

The Government of Tamil Nadu made provisions for an entertainment tax exemption for Tamil films having titles in words from the Tamil language only. This is in accordance with Government Order 72 passed on July 22, 2006. The first film to be released after the new Order was Unakkum Enakkum. The original title had been Something Something Unakkum Ennakkum, a half-English and a half-Tamil title. In July 2011, strict norms on entertainment tax were passed which stated that films which were given a 'U' certificate by the Central Board of Film Certification alone were eligible for tax exemption and those with an 'A' certificate could not fit into this category.

There are 3 major roles in the Tamil film value chain viz producer, distributor and exhibitor. The distributor purchases theatrical distribution rights from the producer for exhibiting the film in a defined territory. The distributor performs enhanced functions such as:

1. part-financing of film (in case of minimum guarantee / advance based purchase of film rights)
2. localised marketing of film
3. selection of exhibition halls
4. managing the logistics of physical print distribution

There are three popular approaches to transfer of distribution rights via distribution contracts:

1. Minimum Guarantee + Royalty – Here, the producer sells the distribution rights for a defined territory for a minimum lump sum irrespective of the box office performance of the film. Any surplus is shared between the producer and distributor, in a pre-set ratio (typically 1:2) after deducting entertainment tax, show rentals, commission, print costs and publicity costs. Effectively, the distributor becomes a "financier" in the eyes of the market. This is the most common channel available to high budget producers.
2. Commission – Here, the distributor pays the producer the entire box office collection after deducting commission. So, the entire risk of box office performance of the film remains with the producer. This is the most common channel available to low budget producers.
3. Outright Sale – Here, the producer sells all distribution and theatrical rights for a defined territory exclusively to a distributor. Effectively, the distributor becomes a "producer" in the eyes of the market. So, the entire risk of box office performance of the film remains with the distributor.

There are four popular approaches to transfer of exhibition rights via exhibition contracts:

1. Theatre Hire – Here, the exhibitor pays the distributor the entire box office collection after deducting entertainment tax and show rentals. So, the entire risk of box office performance of the film remains with the distributor. This is the most common channel for low-budget films, casting rank newcomers, with unproven track record.
2. Fixed Hire – Here, the exhibitor pays the distributor a maximum lump sum irrespective of the box office performance of the film. Rental is not chargeable per show. Any surplus after deducting entertainment tax is retained by the exhibitor. Effectively, the exhibitor becomes a "producer" in the eyes of the market. So, the entire risk of box office performance of the film remains with the exhibitor. This is the most common channel for high budget films, casting established front-runners, with proven track record.
3. Minimum Guarantee + Royalty – Here, the exhibitor pays the distributor a minimum lump sum irrespective of the box office performance of the film. Any surplus after deducting entertainment tax and show rental is shared in a pre-set ratio (typically 2:1) between the exhibitor and distributor. But risk of deficit remains with the exhibitor. This is the most common channel preferred by single screens.
4. Revenue Share – Here, the exhibitor shares with the distributor, in a pre-set ratio (typically 1:2), the entire box office collection of the film after deducting entertainment tax. Rental is not chargeable per show. So, the entire risk of box office performance of the film is shared between the exhibitor and distributor. This is the most common channel preferred by multiplex screens.