The Competition Commission of India (CCI) has begun its probe
into the anti-competitive practices alleged by actor-producer Kamal Hassan against certain film distributors and exhibitors. The probe has been initiated in relation to the simultaneous direct-to-home (DTH) release of his latest blockbuster film, Vishwaroopam. It all began in December last year when the actor announced
his plans to release the film through pay-per-view (PPV) on DTH platforms, a day before it’s theatre release. This hits directly at the exclusive window of theatre owners for exhibiting films and this led the film distributors’ and exhibitors’ associations in Tamil Nadu to call for a state-wide boycott and even threatened to disrupt screening by facilitating piracy. Acceding to mounting pressure, the actor held back his DTH release plans and postponed the theatre release from 11th to 25th of January. In midst of this, the release landed in more trouble with some Muslim groups
objecting to certain portions of the film, which resulted in further delay by a week. In his complaint before the CCI, the actor has alleged an abuse of dominance and cartelization against the film distributors and exhibitors, resulting in the disruption of the DTH release. The final report of the Director General (DG) on the alleged anti-competitive practices is expected very soon.
This episode has served to highlight an unfortunate practice long followed in the Indian film industry. The conventional practice in the industry is to first release movies in theatres, followed by a brief gap before the release of the movie in other platforms such as satellite, home video, cable, video-on-demand (VOD), PPV, DTH and online streaming. This practice has long been unquestioned to a large extent. Supposedly, this initial exclusive window for theatre exhibition is perceived to exploit the initial consumer interest, a simple economic theory of demand and supply. The approach has mostly been to limit access for increasing consumer demand, and thereby increasing the per unit price. This post will explore the efficacy of such a simultaneous release strategy, from both the consumers’ and producers’ standpoints.
Untapped home entertainment market
India is the largest producer of movies in the world with over 1,300 films released each year. With respect to theatre density, however, India ranks poorly with 12 screens per million as opposed to 117 per million in the US. As a result of this huge infrastructural deficit, an industry survey estimates
a poor volume of 4 billion ticket sales each year across 12,000 odd
theatres. For a country with a population totalling 1.2 billion, the volume of ticket sales vis-à-vis movies produced is abysmal.
Fortunately, the duration of the exclusive window for theatre viewing has reduced considerably over the years, primarily owing to explosion of content distribution channels and piracy. In fact, a trend has emerged where film digital rights (such as satellite, home video, VOD, PPV, DTH and webcast) are being negotiated and sold much ahead of the theatre release. Some movies have even realized their investments before the release date! To get a better sense of the film market, the table below captures revenues generated by a few films released in 2011 and 2012:
There is no shortage of alternatives to theatres and from the above, it is evident that there is no dearth in consumption. With a rapidly growing market for home entertainment (largely due to the latest digital technologies), the rationale for an exclusive theatre release doesn’t hold much weight. Although Kamal Hassan’s plans failed to materialize to conclusively establish this, the simultaneous release strategy appears to be well founded. The following statistics explain the sound economics behind his strategy:
- A total of six DTH platforms (Airtel, Sun Direct, Videocon, Tata Sky, Dish TV and Big TV) share 50 million subscribers between them, which account for approximately 30% of the Indian audience.
- Much of this subscription base consists of semi-urban and middle-class consumers. Their numbers are estimated to be growing at 16% each year. Within this sizable subscription base, the current market for PPV is estimated at 5-10%. With the analog sunset of cable television, this figure will increase exponentially in the coming years.
- If news reports are anything to go by, Airtel has agreed to purchase PPV-DTH rights over Vishwaroopam for a whopping 40 crores. Another news report has estimated that the movie will gross 175 crores through the DTH stream. (Having said this, I am a little cautious in accepting these figures at face value, for the specifics of the revenue sharing arrangement are unknown.)
- Last but not the least, the comfort of a high quality viewing experience through DTH surpasses theatre viewing for many, especially so in semi-urban and rural areas.
Profitable simultaneous release strategy
In a similar vein, it is interesting to note the results of a study
conducted by American Marketing Association in 2007. It found that a simultaneous movie release in rental DVDs and VOD, followed by DVD retail after 3 months, could result in as much as a 16% increase in revenues. Simultaneous release undoubtedly has a positive impact on consumer access, as it controls prices by introducing competition between competing distribution channels (in this case, the theatre owners and DTH services).
The market for entertainment is more than what meets the eye. Several non-economic factors affect movie success, and losses claimed by producers cannot be attributed solely to bad release plans. Having said that, a question that must be asked is whether there is a compelling argument against increasing access through simultaneous releases? One might argue that simulations release could enable easy piracy, which would eat up revenues from legitimate streams. This view fails for the simple reason that consumers of ‘pirated’ (for lack of better word) goods do not appreciate pricing mechanism of the legitimate market. Between picking up a DVD at a street corner for a mere fifty rupees, and purchasing it from an authorized dealer (if there is one in their town) for five times that amount, how many consumers would bother purchasing an original disc? A study
conducted by Lawrence Liang and Ravin Sundaram as part of ‘Media Media Piracy in Emerging Economics’ argues that the problem of piracy stems from ‘a failure of affordable access to media in legal markets’. The report demonstrates the wide disparity in cost of pirated discs and legitimate copies.
Furthermore, the report, in great detail, elaborates on the success of Moser Baer in the home video market by emulating the pirate market; i.e., cheap, quick and wider access to movies. Moser Baer entered the market in 2006 by selling original DVDs at very affordable Rs. 34, a price comparable to pirated discs. Consequently, many other companies followed suit, which greatly reduced the price, while at the same time increasing revenues through higher sales. In a nutshell, the success of the simultaneous release strategy would seem to be heavily dependent on pricing.
Before the CCI: Creators before distributors
To conclude, the simultaneous release strategy is beneficial for producers, as it puts a check on the monopolistic behavior of film distributors and exhibitors. Instances of distributors and exhibitors arm-twisting producers and vice-versa are nothing new. In fact, the CCI
is examining a volley of complaints between them. Needless to say, the tussle is predominantly over distribution of revenues. In Hassan’s complaint however, the distributors and exhibitors were unwilling to let go their initial exclusive window. The distributors’ and exhibitors’ associations did eventually succeed in deferring the DTH release with their threats to boycott screening. This decision to boycott is likely to violate the following provisions of the Competition Act:
- Refusal to deal: The threat of the distributors has an effect of restricting the ‘classes of persons to whom goods are sold or from whom goods are brought’ which is prohibited under sub-clause (d) of Section 3(4).
- Denial of market access: Section 4(2)(c) prohibits dominant entities from indulging in ‘practices resulting in denial of market access in any manner’. It is likely that the DG might find a valid claim against the associations which control theatre distribution in Tamil Nadu for denying home-video market to the actor.
In the context of this controversy, the distributors have stated that Hassan has violated an informal understanding in the industry to release films exclusively on theatres. Even if this be the case, such understandings are anti-competitive, and can hardly muster against anti-competitive charges under Competition Act. In fact, Section 3(5) of the Competition Act excludes agreements made in furtherance of exploitation of an IP right. As long as the terms of license are ‘reasonable’, IP owners are free to impose any measure. In other words, an informal pact for exclusivity in distribution of films does not stand valid before a court of law. I would be surprised if the finding of the DG goes against the actor.