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BOX OFFICE UNCUT

by IBOS Team

Introduction

Many film industry enthusiasts have admitted to being puzzled by the box office reporting that they've seen in the business magazines and journals. A significant part of the confusion results from the fact that the box office enumeration in the trade is done from the distributor's, not the customer (audience's) perspective. Furthermore, many media outlets report success or failure arbitrarily without any associated explainations of how the Indian Film Industry Box Office system works. This article & the FAQ below will explain the internal workings of the industry, delineate the major criteria of enumeration using a customer-centric approach, and help do away some of the current confusion.

Background

The Hindi cinema Box Office is based on a territory based system. Films are sold to distributors on a cost-per-territory basis. And the entire market for Indian films is divided into 7 physical territories: six in India and one comprising the overseas market. But not all territories are the same. There are major territories and minor territories depending on the marketsize of the audience for hindi films there. For the purposes of enumeration, all territories are rated as a percentage of an arbitrary major territory. The breakdown is as follows:

Mumbai Territory is a major territory, ie. a 100% territory and consists of Mumbai city, Gujarat, Western Maharashtara and Northern Karnataka.

Delhi/UP is a 90% territory but can fetch 110% for certain films and it consists of Delhi city and Uttar Pardesh.

North India/East Punjab is a 40-45% territory and consists of Punjab, Haryana, Himachal Pardesh and Kashmir.

Central circuit is a 90% territory and consists of 3 sub territories.
1.CP Berar is a 40% sub territory and consists of Eastern Maharashtara,parts of Madhya Pardesh and parts of Chattisgarh.
2.CI is a 20% sub territory and consists of the other places in Madhya Pardesh which are not in CP Berar territory.
3.Rajasthan is a 30% sub territory and consists of all the Rajasthan state.

Eastern Circuit is 90-100% territory and consists of 4 sub territories.
1.West Bengal is a 25-30% sub territory and consists of Kolkatta and West Bengal
2.Bihar is a 40% sub territory and consists of Bihar, Jharkhand and parts of Chattisgarh and Nepal
3.Orissa is a 15% sub territory and consists of all of Orrisa state.
4.Assam is a 10-12% sub territory and consists of Assam and the other small Eastern states like Manipur and Mizoram.

South Circuit is a 45-50% territory and divided further into 4 sub territories
1.Nizam is a 25% sub territory and includes Hyderabad, parts of Andhra Pardesh and a small section of Maharashtara.
2.Andhra is a 7.5% sub territory which consists of all of Andhra Pardesh not in Nizam territory.
3.Mysore is a 12-15% sub territory which consists of Bangalore and all of Karnataka apart from the 4 or 5 places in Mumbai Circuit.
4.Tamil Nadu and Kerala is a 5% sub territory consisting of all of Tamil Nadu including Chennai and all of the Kerala state.

RECOVERYCLASSIFICATION
< 50% DISASTER
50%-74%FLOP
75%-99% BELOW AVERAGE
100%-124% AVERAGE (B)
125%-149%COMISSION EARNER/OVERFLOW (B1)
150%-199% SEMI-HIT (B11)
200%-249% HIT (A)
250%-299% SUPERHIT (A1)
300%-399% SUPERHIT (A11)
400%+ BLOCKBUSTER (A111)
Beyond these, there is an additional overseas territory which is inconsistent as a market but is worth noting nonetheless. The overseas territory comprises of the NRI audience primarily in US & the UK. Although the overseas collections are subject to international tarrifs and regulations and the physical size of the NRI audience number is much smaller in viewership, due the currency exchange factors, the overseas territory can be a lucrative territory depending on the genre of a film. the overseas territory is roughly equivalent to a major territory of India. However for certain genres (romance/family dramas) the NRI audience-currency exchange leads the territory to generate amounts equalling two major territories of India.

Although there are six territories in India, the total marketvalue for the country is rated as roughly FIVE times the value for a major territory. We multiply by 5 instead of six, because when we add up everything it all amounts to the same as a little less than 5 major territories. For example, when a producer says a given film is sold for 2 crore per major territory, the all India based distributors' cost (or producer's revenue from distribution cost) for that film would be Rs. 2 crore x 5 or roughly about Rs. 10 crore.

But is earning 10 crore from the box office then enough for that film to be considered a success. The answer is no. Because apart from the price Distributors pay the producers to distribute a given film, they also have an additional overhead cost which arises from the film promotions, publicity & print costs. This is usually an additional 25% to the distribution price of the film. So the net cost for the distributor of a film in a given territory is 125% the cost he/she paid to the producer initially and subsequently, the distributor only goes in the black once the film's theatrical collections cross the 125% of the net cost benchmark. Using our example from above, a 2 crore/territory film would have to fetch beyond 2 crore to around 2.5 crores/territory from box office collections to be considered having 100% recovery (ie. labeled AVERAGE) for the distributor. The all India base cost was 10 crores but the All India net cost/break even point would be closer to Rs. 12.5 crores.

To be declared a Trade Hit, a film must earn 200% of its distribution cost. The commercial labellings as per a film's distribution price are as per the table above.

Flaws in this approach

To understand the Box Office flow in the industry, one has to be cognizant of the three essential parties that are involved in the commercial screenings of a film in India. They are: the producer, the distributor, and the exhibitor.

1. The Producer - The producer is the individual or entity who finances and organizes the logistics of the entire film project. He is responsible for raising the funds and making the necessary investments into the cast, crew and equipment that are integral to the making of the film.

2. The Distributor - Once the film is complete, the producer sells the theater screening rights to his film to a distributor in one or more territories of the Indian market. A big chunk of the producer's revenue comes from the price he is able to sell his film at to the distributor.

3. The Exhibitor - Once a distributor has the rights to a film for a given territory, he needs to get the prints out to individual theater halls in that territory, so that the film can be screened to the audiences. This is where the exhibitor comes in. The exhibitor is the person who controls cinema hall(s) in a territory. The exhibitor buys the prints from the distributors, usually using a Minimum Guarantee (MG), meaning the exhibitor agrees to pay the distributor a certain GUARANTEEED amount regardless of how the film fares. Obviously the higher the minimum guarantee, the safer it is for the distributor and the riskier it is for the exhibitor, but usually the minimum guarantees are standard rates across the board.

There are other ancillary parties as well; such as audio, DVD, and Satellite companies who buy the music, dvd and satellite rights of a film from the producer for screening in their respective media. The revenue from each goes to the producer and helps cover against his production cost.

A commercially successful film should be one which earns in the black for ALL parties involved; ie. the producer, distributor, exhibitor AND the ancillary parties: the audio, dvd, and its satellite rights holders.

That is how it should be tabulated. But arcanely enough, the Indian Box Office rating scheme which was developed nearly half century ago and used by popular media today, goes by the *distributor's* earning ratios to rank a film's commercial success, and not it's net gross or turnover for the producers or the exhibitors.

To be termed a Hit, a film has to generate 200% its distribution cost in every territory, ie earn double the price the distributor paid for it in each territory. So a film sold at 3 crores per territory would need to gross 6 crores/territory to be termed a trade hit, but a film sold at 1 crore per territory would need to only gross 2 crores per territory to be classified a Grade A trade hit. Although the former film generated three times the gross, it is the latter which is considered the bigger trade hit.

Moreover, nowadays films don't tend to perform uniformly across all the territories. A film may be a hit in Bombay/Maharasthra & South but flop in Bihar and Vice Versa. These discrepancies muddle the classifications to an extent and therefore call for a newer system to rank & rate films based on net costs and net revenues.

Proposal for Standardized Formulas

Our objective is to come across a calculation approach that will most accurately reflect the economic impact and overall viewership of films across time and geography.

The current convention is of ranking films using primarily, though not invariably, the following equation:

Box Office Result = Distribution Revenue per Territory / Distribution Cost per Territory (Formula I)

This formula bases the success-failure index from the perspective of the distributor, leaving out the other parties involved. Many times, this leaves the BO index to hinge on the type of deal a distributor made with the producer and his exhibitors. Furthermore, as mentioned before, it presupposes that films perform uniformly across all territories whereas it is documented that over the last several years, that has not been the case. Films do not perform uniformly across all territories, some recent examples being Aankhen (2002) and Dil Chahta Hai which performed much better in Bombay & South India than in CPCI or East India.

We believe that a better approach of enumerating the commercial success of the production should entail the profit/loss breakdown for the film as a discrete economic entity and for all parties involved with that film's release not just the distributor. Our proposed formula for judging a production's overall success/failure is as follows

Film Venture Result = (Producer Revenue + Net Distributor Revenue + Exhibitor Revenue + Music Sales Revenue + DVD Sales Revenue + TV Ads Revenue + Webcasting & Other rights Revenue) - (Producer cost + Net Distributor cost + Exhibitor cost + Music Rights Fee + DVD Rights Fee + TV Rights Fee + Webcasting & Other rights Fee) (Formula II)

However for strictly tracking the Theatrical Box Office, we can do away with DVD, TV, Audio sales etc. and focus on Production cost and distribution and exhibition revenue. Furthermore, given that the Exhibitor and Distributor are simply parties in splitting up the net theatrical revenue, we can combine Distributor & Exhibitor revenue as Theatrical Collections and reduce the Box Office equation simply to (All figures in presented charts are for India):

Box Office Result = Net Theatrical Collections - Production Cost (Formula III)

So we find ourselves arriving at this simple and intuitively obvious formula centered around net profits. However this formula is not an accurate indicator of the economic impact across time since it doesn't take into account inflation. One way to get around that is by dividing by the production cost instead of subtracting it from the theatrical collections, giving us:

Box Office Result = Net Theatrical Collections / Production Cost (Formula IV)

So is this formula the most complete and accurate indicator of a film's success, economic impact and viewership? Alas no, one must note that this formula is not itself complete indicator of a film's net impact on the audience and the industry since it strictly measures box office revenues as a percent of cost. So it is inherently biased towards productions with lower production costs including lower star prices and set costs. The formula does not yield the films/productions that have resulted in the highest viewership and the largest amount of tickets sold and thus which impacted the economy at large the most.

So how do we determine that? Well the first approach is to do away with figuring production/distribution costs into our formula since they reflect the business acumen of the producer more than the film's theatrical performance; and concentrate only on grosses to determine the viewership.

Box Office Result = Net Theatrical Collections (Formula V)

This reduces ranking box office to simply raw collections and is often used in the media as well, but like formula I above, this formula also does not give the accurate picture of viewership and economic impact since it does not handle inflation of currency. So how do we take inflation into account? The approach that can consistently work is actually one that is commonly used by economists in various facets of economic analysis. We track everything by net grosses and appreciate or depreciate the value of the monetary gross in current terms using the national inflation index of India over the years, and and thus quantifying what the generated gross was worth to the economy at large. Since the inflation index is cumulative over all major consumer products, it is implied that the rise in ticket prices was proportional and consistent with the rise in inflation indexes. Thus we render

Box Office Result = Net Theatrical Collections * Current Inflation Index/Inflation Index during the theatrical Run (Formula VI)

The above formula ranks all films equally independent of production cost and adjusts the revenue generated across time to determine net viewership and performance against the national economy at large. That is how the IBOS charts are currently ranked on. They indicate the films with the highest number of tickets sold and the highest impact on the economy relative to the entire GNP during the time of their theatrical run.

Formula VI gives us a fairly accurate indicator of viewership and economic impact of a film, which is suitable for our original goal of looking at box office from an audience-centric approach. However an effective financial analysis will be incomplete without figuring in costs. To that extent, for the purposes of internal accounting, we propose that a combination of formula VI and formula II be used to account for the net profitibility of the venture at large, whereas formula VI be used as a standard across the industry to measure audience size, ticket sales and magnitude of the box office turnstiles for all films over the years.

Film Venture Result = ((Producer Revenue + Distributor Revenue + Exhibitor Revenue + Music Sales Revenue + DVD Sales Revenue + TV Ads Revenue + Webcasting & Other rights Revenue) - (Producer cost + Distributor cost + Exhibitor cost + Music Rights Fee + DVD Rights Fee + TV Rights Fee + Webcasting & Other rights Fee)) * Current Inflation Index/Inflation Index during the run (Formula VII)

Conclusion

The Indian box office reporting in media is lacking in clarity and disclosure. The current trade convention for indexing the industry uses a distributor based approach of dividing the Indian market into 6 physical territories. The current distributor based approach to determine success/failure for a film is not accurate since it penalizes films bought with a higher distribution price.

We've have put out seven criteria formulas that can be used to track a film's commercial success. For the purposes of theatrical box office, formula VI, which indexes films via net theatrical collections and inflation indexes is the most accurate in determining the overall viewership and representative economic impact across time. For the purpose of internal accounting within the industry, formula VII which takes into account inflation adjusted costs and revenues for ALL parties associated with a film release is the most efficacious.

 

FREQUENTLY ASKED QUESTIONS

Q: What is the biggest hit in cinema history in India?
A: The word hit is often colloquially used to denote a degree of success. But in numerical terms, determining the biggest 'hit' is a function of which criteria gets applied. The biggest current hit as per All India Theatrical Collections - Production cost is Hum Aapke Hai Kaun which has made 56 crores in profits in India. On the other hand, the biggest hit as per All India Theatrical Collections / Production cost is Jai Santoshi Maa (1975) which was made on a cost of 20 lakhs and went on to Gross Rs. 6.5 crores thus earning nearly 35 times its budget. The biggest grosser in terms of collections is Gadar at 65 crores. But the biggest earner after adjusting for inflation and thus the film with the highest viewership of all time is Sholay. The film grossed 15.5 crores in first run, when the average ticket price was around 3 Rupees, and over 30 crores total via reruns. It's adjusted India gross in 2002 terms was over Rs. 180 crores.

Q: Can a film be a hit without being a big grosser or viewership?
A: Yes in current trade parlance that is true. Example is Ek Choti Si Love Story (2002) which released on less than 100 prints and grossed less than 4 crores total; however since the entire cost was less than 2 crores, the film is considered a hit in the trade.

Q: How many physical territories are there in India?
A: Six. Earlier there were 8 but in recent years, they've been combined to comprise 6 territories in the Indian market. They are: Mumbai-Maharshtra, Delhi-UP, East India, CPCI, North India, and South India

Q: How many of those six are major and how many minor territories?
A: Four are major territories and two are minor. Mumbai-Maharashtra, Delhi-UP, East India and CPCI are major territories. North and South India are minor territories. Adding up the net weight of all the above, the entire Indian market adds up equal to roughly (ie 4.7) FIVE major territories.

Q: Where does the Overseas fit into the picture?
A: Due to the currency exchange rates in US and UK, the overseas territory on average is roughly equivalent to a major territory of India. However it is not a consistent market and the net viewership small compared to India. For certain genres (romance/family dramas) the NRI audience-currency exchange leads the territory to generate amounts equalling two major territories of India while for the rest, it may only be equivalent to a minor territory. The usable gross after the tarriffs and trade impositions is usually about 70% of the raw gross converted into Indian Rupees. This variance from film to film in this territory serves as another case for leaving the distributor profit per territory approach and applying Formula VI and VII as the primary standards for box office indexing.

Q: What are highest grosses for each decade?
A: In raw collections: Barsaat (1949), Mother India (1957), Aradhana (1969), Sholay (1975), Maine Pyar Kiya (1989), Hum Aapke Hai Kaun (1994).

Q: What are the inflation adjusted top grosses for each decade?
A: Kismet (1942), Mother India (1957), Mughal E Azam (1960), Sholay (1975), Coolie (1983), Hum Aapke Hai Kaun (1994)).

Q: Which film has had the highest All India opening week collections?
A: As of October, 2002 that record is held by Kabhi Khushi Kabhie Gham with a 13.5 crore opening week all over India

Q: Which are the major centers for box office in India?
A: Bombay, Delhi, Hyderabad, Calcutta, Ahmedabad, Pune and Bangalore are the the top centers collectionwise for hindi language films. Collectively they are known as the metros.