India: India Inc May Finance More Hollywood Dreams

Last Updated: 19 July 2011
Article by Desh Gaurav Sekhri

Originally published in the Financial Express, July 17th 2009.

The $825 million deal announced on Thursday between Reliance Big Entertainment and Dreamworks was the culmination of a long courtship between the two entities, and an unprecedented announcement of corporate India's crossover intent. By collaborating with one of the most respected players in Hollywood, and instantly becoming a part of industry folklore, Reliance Big has managed to stage a coup and avail of numerous synergies, not least of which could be a full-scale foray by Hollywood into an Indian film industry that is simply teeming with potential. The reasons behind this particular transaction aside, this is an area that is more than likely to see an explosion of activity by Indian corporate houses, for reasons that for the most part are simple to fathom.

It is a poorly kept secret that a number of studios in the US are cash-strapped to the core in an industry that is very capital-intensive. Simple economics and logistical simplicity entail a natural trend towards Indian investment into the US film industry. Unlike most industries, the entertainment industry is portable, and the synergies with India are clearly apparent. With a massive increase in Indian multiplexes featuring English films, and an ever-expanding middle class with growing interest in Hollywood, the Reliance Big-Dreamworks tie-up is a symbol of a soon to be recurring trend.

In many ways, Bollywood remains a somewhat unorganised sector with limited mainstream financing, as well as a dearth of any major global players with a presence in the industry, at least at present. All that is likely to change with the evolution of the film industry, a far more focused push towards intellectual property rights and the associated collateral benefits that accrue, clearly defined and sophisticated licensing and marketing arrangements, but above all, systematic project financing arrangements by the organised sector that will truly establish Bollywood as one of the film industries to be reckoned with.

In many ways, it is somewhat intuitive that Indian businesses are getting involved with Hollywood since there is a direct positive pecuniary externality that results from Hollywood studios lending their name, expertise, and eventually tapping what could in future be the world's largest entertainment sector. Along with an improvement in quality, it will result in a streamlining of the revenue sources, and eventually what that will mean is blockbuster Indian and foreign collaborative productions, as well as the mainstream entry points for Indian films and actors/actresses, in what could eventually become a seamless integration of the world's most popular film industries. This will eventually filter down to music and design, bringing them up to speed with the sophistication apparent in the US and Europe.

The intellectual property rights and their stricter enforcement will help increase revenues by reducing piracy as well, and the actors/personnel will be able to avail of royalty arrangements that will be far more conducive to enhanced performance bonuses, and will reward innovation and creativity, while reducing the upfront guaranteed salaries that inflate film budgets in India. At present, many of the superstars in Bollywood have sophisticated arrangements, but eventually this will be spread out to second and third tier affiliations as well.

Simply put, the reason why it makes sense for Indian corporations to partner with global production houses is because most Indian entities are far more liquid, and have not seen nearly the kind of pull-back and drying up of funds and profitability that North American and European firms have. Indian firms provide strong collateral assets and business processes that will help them raise debt ($500 million in case of Reliance Big), they are able to provide large sums of equity and, above all, the synergies that they can avail via domestic marketing and distribution rights as well as the crossover benefits vis- a -vis an exponentially growing market, and huge scope for improvement in production and marketing capabilities. From the perspective of the global production houses who are mostly cash-strapped, this is a golden opportunity to kill many birds with the colloquial boulder, as the benefits not only outweigh the drawbacks, but also ensure that Indian corporates now have a vested interest, and a stake in any developments that enable long term profitability and facilitate Western penetration of the Bollywood industry.

India has come a long way from when Steven Spielberg mocked its culture in the retaliatory Indiana Jones and the Temple of Doom. Beyond the hype, glamour, and feel-good factor, there is a very sound business model behind why Hollywood is likely to have numerous Indian stakeholders in the coming years. This is just another manifestation of the Indian corporate mindset reversing the Acquisition and Investment trend of the early 2000s and looking for suitable business ventures in atypical industries. Reel to real, in dramatic fashion.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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