Bollywood Business Model: How the Bollywood Industry Makes Money

In 2018, a Bollywood actor Salman Khan’s film named ‘Race 3’ was released. The movie was met with negative reviews from both critics and audiences. The film, which failed everywhere, including IMDb (1.9/10) and Rotten Tomatoes (7% fresh), is considered by many to be one of the worst films of that year. But despite all these failures, Race 3 was a fairly successful project at the box office! This film, made on a budget of Rs 180 crore, earned more than Rs 300 crore at the box office.
This is just one side of the coin of an exceptional example. On the other side is Raj Kapoor’s dream project ‘Mera Naam Joker’ film, released in 1970. Actor Raj Kapoor ruled Bollywood from the 50s to the 70s. He gave many hit films! The actor, director, and producer of Mera Naam Joker were all Raj Kapoor himself. But the cult classic film failed at the box office, and Raj Kapoor faced a financial crisis. On the other hand, a production company of the then Soviet Union, which was running this movie theater, grew banana trees. Therefore, the profit and loss issues of Bollywood movies are a bit complicated. To understand it well, you need to have a clear idea about Bollywood’s business model.
Before discussing how a Bollywood film makes money, let’s take a look at the film production process.
The long process of film production can be divided into five stages.
Development: The development stage is the very first stage of film production. In this stage, a story is created for the film. Based on this story, a draft is made. The director, producer, screenwriter, script writing, the budget of the film, what kind of manpower is needed here, everything is developed in this stage. Then all that remains is to wait for the green signal.
Pre-Production: Once the green light is given, the pre-production stage begins. Pre-production includes finalizing the shooting script, finding and obtaining permission for the shooting location, and setting the production budget. The director begins auditioning actors and actresses for specific roles. The film crew members such as the director of photography, assistant director, unit production manager, and costume designer are selected at this stage.
Production: The shooting of the film begins at the production stage (principal of photography). The actors act according to the director’s instructions, and the screenwriter captures it on camera. The camera crew looks at the lighting, camera angles, and visual style.
Post-Production: After the principal shooting is complete, the audio and visual material is combined to make a film. An editor finishes the editing work by combining the shot-by-shot footage, adding music, sound, and visual effects.
Distribution: After all the editing work, when the film is ready for the audience to watch, it comes to the distribution stage. At this stage, the film is delivered to cinema halls or digital platforms.
A lot of money is spent at each stage. The money that is currently needed to make a good quality Bollywood film is almost impossible for an individual to bear. The average budget of a mainstream Bollywood film is currently around 50 crores. The work of spending money on the production of these films is done by big production companies. Again, many production companies invest money together for big budget films. For example, Dharma Productions, Prime Focus, and Star Studios were involved as the production companies of the film Brahmastra with a budget of Rs 300 crore. If only one person produces the film instead of a production company, the work becomes very risky. The producer invests his saved money behind the movie.
If the movie is a hit, the profit goes into the pocket, and if it flops, both the mango and the peel are gone. The chances of a film being a hit are also rare. Most movies flop. The director is responsible for handling the shooting, production, and post-production of the movie. He usually enters into a contract for a fixed fee for each movie. Once the film is fully made after all the editing, it becomes the property of the producer. Then the producer or production company takes it to the distributor.
The distributor’s job is to get the movie to theaters and OTT platforms. The distributor is also responsible for a part of the film’s advertising and promotion. Apart from theaters, the distributor earns money from the film by selling satellite rights and digital streaming rights. They also sell the movie to various TV channels, which then broadcast it on a grand scale with the tag ‘World TV Premier’. Also, in this era of technology, the distributor sells movies to OTT at record prices. For example, the movie ‘Bhool Bhulaiyaa 2’.
Its production company is ‘T-Series’ and the distribution company is ‘AA Films’. Before the release in the cinema, AA Films made a financial agreement with Netflix after selling it for Rs 30 crore. The main purpose of the agreement is to determine the exact date on which Netflix will be able to release the film on their platform. Usually, the distribution company/distributor determines the time for the OTT company to release the movie, when the movie is no longer likely to run in the cinema. Because, if the movie is released online in the beginning, people will no longer come to watch the movie in the cinema. But the movie Bhool Bhulaiyaa 2 did business at the box office for a long time. So, in addition to running in the cinema, the film was also released on Netflix on a specific date. Because, they had a release agreement in advance!
For big budget films, the same company often acts as the production company and the distribution company. Some of the big production companies in Bollywood are Yash Raj Films, Reliance Entertainment, Dharma Productions, Eros International, etc. The place where tickets are purchased to watch a movie is called the box office. The money that a movie earns from a cinema hall is the box office collection. This money is collected by the theater owners. For this, the theater owners have to pay GST (Goods and Services Tax) to the government. If the ticket price is more than Rs 100, the GST is 18%, and if it is less than Rs 100, the tax is 12%. After depositing this tax in the government treasury, what is left with the hall owners is the net collection.
If the net collection of a film is more than the budget of the film, then that film is considered profitable. Before GST, the state government had to pay entertainment tax. The amount of this tax varied from state to state. Declaring a film tax-free in a state means that there is no entertainment tax on it. This reduces the ticket price of the film. Both the central and state governments get their share of GST. Even if the state government makes the film tax-free, the central government still has to pay 6%-9% tax, depending on the budget of the film.
There are three types of profit sharing methods between producers and distributors.
1. Let’s start with the minimum guarantee royalty. In this method, the distributor pays a certain amount of money to the producer. If the film is a hit, some amount of money is given to the producer as royalty payment. Here, the risk of loss is shared between the two.
2. The producer sells the film completely to the distributor. Now, whether the distributor throws this film into the river or releases it in theaters is entirely the distributor’s choice. Even if the film earns a lot of money, it belongs to the distributor, and if it flops, the entire loss is the responsibility of the distributor. Here, the producer has no risk. This story happened in the film Mera Naam Joker. This film was produced and distributed in India by Raj Kapoor’s production company RK Films. Raj Kapoor invested all his money in making this film. Despite all this effort, the film did not see success.
This film, made on a budget of Rs 1 crore at the time, earned Rs 80 lakh. To save itself from bankruptcy, its overseas rights were sold to a company in the Soviet Union for Rs 15 lakh without any contract. The film was a blockbuster after its release in the Soviet Union in 1972. Although the Soviet Union’s distributors earned a lot of money, Raj Kapoor did not get a penny from it.
3. Here, the producer pays the distributor’s remuneration based on the dividend. This is the most common method. Here, all the risks are on the producer, the distributor’s risk is less. The producer/production company itself takes the responsibility of promotion and distribution.
Distributors maintain contact with sub-distributors in different parts of India. Sub-distributors are divided into different distributions, which are called distribution circuits. There are a total of 11 such circuits in India for Bollywood films. The job of sub-distributors is to reach the cinemas. They basically enter into agreements with exhibitors. Exhibitors refer to companies that own cinema halls or cinema halls. Agreements are made between sub-distributors and cinema halls, what percentage of revenue they will share. It depends on how many screens a film is given.
There are two types of theatres in India.
Single Screen Theatre: In this, the agreement is such that the sub-distributor will take 75 percent of the revenue generated by selling tickets and the exhibitor will get 25 percent. The sub-distributor’s revenue goes back to the distributor and producer.
Multiplex: In a multiplex, the share ratio of the sub-distributor and the exhibitor is usually 50%-50% in the first week. As the week progresses, the sub-distributor’s share starts to decrease. In the second week, it usually reaches 40%-60% and in the third week, it reaches 30%-70%. Most films make the most of the box office in the first week of their release. After that, the box office collection rate gradually starts to fade.
In the case of big budget films, the verdict of the film often depends on the popularity of the actor. Meanwhile, Salman Khan gets the benefit. Even many of his films with bad stories have escaped the box office disaster, only because of his immense stardom.
Sometimes actors are seen making profit sharing agreements with distributors. For example, Aamir Khan. He basically works on a profit sharing agreement with zero salary. In this case, if the film is successful, the actor will get 50%-80% of the profits. And if it is a flop, he will not get any remuneration, but on the contrary, he will have to pay a subsidy.
Many actors work on a half salary model-half profit sharing. For example, Salman Khan’s Sultan movie. Sultan’s total collection at the box office was around Rs 500 crore. Its entertainment tax was Rs 106 crore. Therefore, the net collection of the film is Rs 394 crore. Both the production company and the distribution company of Sultan were Yash Raj Films. Yash took a distributor share of Rs 79 crore. If you deduct marketing costs of Rs 20 crore from this, the distributor share is Rs 59 crore. This is the profit of Yash Raj Films as a distributor. Apart from this, the calculation of what Yash Raj Films earned as a production company is different. If you deduct the distributor share of Rs 79 crore from the net collection of Rs 394 crore, the remaining amount is Rs 315 crore. Out of this amount, Rs 157 crore went to the exhibitors. Then there is another Rs 158 crore left.
If the production cost is Rs 70 crore, the net profit is Rs 88 crore. The film earns another Rs 20 crore by selling digital and satellite rights. This means the production share of the film is Rs 108 crore. Adding Rs 59 crore for distribution, the total income stands at Rs 167 crore. According to reports, Salman Khan has a 50% profit sharing deal for this movie. This means that Yash Raj Films paid him Rs 83.5 crore as remuneration for this movie. Salman usually charges around Rs 70 crore for each of his films. But due to the profit sharing system, he has been able to earn an additional Rs 15 crore.