MANAGERIAL ECONOMICS:LIVE

EXPERIENTIAL CASE

IPR IN FILMMAKING
& PRODUCTION HOUSE
By
Arun Majhi [1511083]
Ashish Kumar [1511084]
Ayush Kumar [1511086]
Biswajit Marndi [1511088]
Faizan Ahmed Hashmi [1511094]
Monalisa Sethi [1511104]
Vaibhav Gupta [1511139]

Contents
Acknowledgement ................................................................................................................................. 3
Executive Summary ................................................................................................................................ 4
Industrial Overview ................................................................................................................................ 5
Benefits of IP rights in Investment plan and cost benefit analysis....................................................... 7
Protection of creative, intangible assets with Intellectual Property.................................................. 10
Role of IP in Business Plan for leveraging funds from Equity Markets / Debt Markets & Profits
Realisation ............................................................................................................................................ 12
Use of IP in Marketing .......................................................................................................................... 13
Using IP for Risk Management ............................................................................................................. 14
Strategic management of intellectual property rights for competitive advantage ........................... 16
References: ........................................................................................................................................... 19
Appendix............................................................................................................................................... 20

Acknowledgement
We would like to thank Professor A. Damodaran for giving us this opportunity to undertake this
project on the role of intellectual property rights on film making.
Working on this project has helped us maximize our learning of various micro economic concepts by
analysing the role of intellectual property rights in the business of film making. It has helped us in
incorporating these concepts in our report leading to practical applications of microeconomic theories
We are grateful to Professor A. Damodaran for his continuous support and guidance throughout the
course of the project.

Executive Summary
Intellectual property rights play a very vital role in protecting the rights of industry that thrives on
creativity just like film making. The Bollywood industry is growing at a very high rate with its viewership
scaling across various platforms such as multiplexes, television and through online streaming and
downloading.
IP can also help in leveraging the distribution of content thus attracting more investors for fund
generation through private equity, hedge funds and venture capitalism. IPR also helps in maximizing
the commercial return in each phase of the value chain of movie distribution across various media. IP
can be valued through various methods like income method, cost method and transaction method. If
the risk in movie in higher then discount rate will be higher.
Patents, trademarks and copyrights can be used to create competitive advantage and also at times
entry barriers in the market. To ensure that we are able to utilize the full potential of our IP we need
to first register, patent, trademark and copyright it.
However changes in digital media and advancement in broadband internet services has posed some
serious threats to film makers in recent times. Video piracy has led to the cannibalization of up to 90%
of the market share. Problem of illegal downloading through internet via peer to peer network services
have increased the sunk cost of legitimate distributors who are struggling to make their share of the
profits. Copyright laws enable these distributors to take legal action against the illegal distribution of
films through cable piracy, DVD and CD piracy. DVD piracy of Indian films happens in international
markets as well, typically in Middle East countries and Pakistan. Therefore copyright protection laws
can help in preventing revenue loss in international markets. IP laws are a bit weak and government
must improve these laws to boost up local production and to also encourage investments from outside
India. The distributors therefore need to acquire their rights as fast as possible so as to cover the
maximum extent of their risks.

Industrial Overview
The film and media industry in India is very vibrant and is growing at a high rate. India has around 600
television channels, more than 100 million television households and more than 1000 films which are
produced annually. Government has set up liberal economic policies because of such a high level of
consumption and a high growth rate combined with fast growing middle class, a large amount of
investments has taken place in this sector, basically film production house are meant for two types of
movies, real motion pictures and digital films. For the scope of this project we are assuming that we
are starting a production house of real motion pictures for Bollywood. Despite of such extraordinary
growth numbers, there are a few issues faced by this industry which are like piracy concerns, lack of
quality, challenges from Hollywood movies etc.

5
4.5

Revenue (Billion Dollar)

4
3.5
3
2.5
2
1.5
1
0.5
0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

Year
Figure: Growth of Bollywood Industry

Current Trends

Sources of Revenue - A major part of revenue aggregating to roughly 60% still comes from
theatres but now new phenomena are starting to settle in. Home video rights which is still in
early phases in India is allowing producers to make money even after the movie has been
taken off from theatre. Other sources like online viewing on internet (Youtube) and viewing
on mobiles (Hotstar) are also gauging peoples attention.

Portfolio Approach - The production costs of movies are on a rise currently, which is making it
difficult to get funding which in turn is leading to cut down of number of movies getting
produced each year. To overcome this, more of the production houses are shifting towards a
portfolio approach which identifies movies as Small budget, Medium budget and large budget
movies.

Niche Movies The main feature of niche movies is that they can be prepared with a low
budget and not much money is required for their marketing as they generally tap the market
through word-of-mouth marketing.

Income rise & Multiplexes growth - Indias per capita income has increased by around 123%
in the last decade. The middle class of India is expected to grow at a rate of 5% annually. One
interesting fact to note here is that with the growth in income of middle class, an average
Indian household has increased its expenditure on movies in the last decade from 1% to 4%
of the disposable income.

Intellectual Property Rights (I.P.R) rights and regulations - Bollywood produces more than
1000 movies in a year compared to Hollywood which just produces 500, but the surprising
thing is Bollywoods annual revenue is only $4.5 bn as compared to Hollywood with $51 bn
annual revenue. India is facing many issues in IP rights and in controlling piracy. IP laws are a
bit weak and government must improve these laws to boost up local production and to also
encourage investments from outside India.

Competitors - India has currently around 30 film production houses with a heavy competition
among them. Few of them have been well established and have been running for more than
50 years also many of them have attained economies of scale, there is a network effect
existing also and few firms have captured a major share of market.

Benefits of IP rights in Investment plan and cost benefit analysis

IP rights are the most valuable source of fund generation which can help a film maker in getting the
finances for his film project. They enable above the line talents such as actors, producer, director,
screenplay writers and below the line crew to earn their living. IP Rights contents of the film help to
attract investors, giving them right to produce the film in multiple languages. As a result of which it
becomes easier to get the funding from private equity, venture capitalists and hedge funds. IP helps
to leverage the distribution of the contents of the film. If IP rights have not been acquired then it
becomes difficult to attract investors as the strategic value of the film decreases.

Costs Involved In Film making

The funds generated by the production house will be invested in various aspects of film making. The
table below gives a cost breakup of the investment:
Production Heads

Cost (%)

Type of cost

Artists and Technicians

36.36

Fixed cost

Interest, insurance and financing costs

4.55

Fixed cost

Shooting and production expenses

45.55

Variable cost

Print costs

4.55

Sunk cost

Publicity and marketing cost

9.09

Sunk cost

Cost Break Up %
Publicity and
marketing cost
9%
Print cost
5%

Artists and
Technicians
36%

Shooting and
Productionn exxpense
45%

Interest, insurance
and financing cost
5%

The fees charged by the artists and technicians and the cost incurred in shooting and production
consume major chunk of the investment. Filming involves the technology used for using specialized
camera, cost of shooting in foreign destinations, cost incurred in building movie sets, transportation
cost etc. Post production cost involves the amount that has to be invested for generating special
effects and cinematography. Promotion and marketing the movies also add to the expense of the
producers.

Value Chain and Revenue Breakup % of Film Making

A thorough understanding of the intellectual property rights help the producers to get a sense of
how different IP rights interact with each other to allow profit maximization at each stage of the
value chain. The value chain is the order in which a film can be exploited in different platform of film
distribution. A typical value chain in Indian film industry comprises of the following sequences and
timelines.

Forms of exploitation

Timeline

Theatrical release

2-3 months

DVD/VCD

6 - 24 months after theatrical release

Paid Television

12-36 months after theatrical release

Free Television

12-46 months after theatrical release

Value Chain of Film Business

2-3 months

6-24 months

DVD/VCD

Theatrical Release

12-36 months

12-46 months

Free Television

Paid Television

Revenue Breakup % from different sources

Revenue % from various sources

100
90
80
70
60
50
Revenue %

40
30
20

48.14
33.34

10

14.82
3.70

0
Box office collection

Satellite Rights
Revenue

Music and Home

video Revenue

Overseas Revenue

Revenue Breakup % from IPR

Revenue % Break Up
Collection through
IPR
37%
Collection through
box office
63%

The whole idea behind having a value chain in this manner is to exploit the commercial benefits that
one film can bring in its respective value chain. Copyright protection laws prevent each segment
from eating into the profits of other by strictly adhering to these timelines.

Protection of creative, intangible assets with Intellectual Property

An intangible asset is an identifiable non-monetary asset, without physical substance, held for use in
the production or supply of goods or services, for rental to others, or for administrative purposes.
Film making requires audio and video recording equipment, camera, microphones, props, land,
building, film reels, and hard drives housing content. These can be categorised as tangible assets as
we can see, touch and feel them. But the most important aspects of a film are the story, ideas of the
scriptwriters, directors, songs, visuals, performances. These are the valuable intangible assets of a
film. These type assets cant be defined precisely many times and usually protected by IP. Sometimes,
they are very ambiguous, for example, know-how and goodwill.
The following are a few assets which are defined as intangible:

Trademarks/ Name: brands, logo, band name, franchise name

Copyrights: literary, artistic, dramatic, musical and graphic content and compositions

Patent: camera, film, music and television equipment/technology innovations, innovations

in merchandising

Trade secrets: format and show title of proposed show

Publicity rights: right to exploit name, likeness or biography of artist in association with
project

Contractual Rights: binding contracts with vendors/artists/athletes/advertisers/agents

The brand name is usually protected by registering with a government body for a trademark. It is an
identifiable legal right which can be further sold. The trademarks create an opportunity window for
revenue generation through merchandizing. Mickey Mouse, Star Wars, Harry Potter, Krishh are a few
to name under this category.
For the movie to be filmed in a particular jurisdiction, the company obtains an exclusive license under
a franchise agreement.
The digital audio-visual materials like film and audio recordings are licensed to the customers in return
for payments. In this case, the value of the physical devices where the materials are stored is ignored
if it doesnt matter significantly.
In a case where the movie is adapted from an existing script, book, play, article or short story, the
producer signs an option agreement with the original owner of the work. In case of an original script
the legal status of the writers contract will differ according to the existing legislation. The producer
goes into a rights purchase agreement so as to obtain rights to screenplay, TV, home video and new
media channels.
The director of the movie is either the joint owner of the film or a salaried employee or both. Such an
agreement is known as the Directors agreement which the producer signs with the director.
The rights granted to the actors of the movie vary from country to country. In many places the actors
are hired as paid employees to work on set on contract basis. All these rights are laid down in the
actors right.
Innovation is the hallmark of the movie industry. A large amount of equipment is used to make a
movie. Camera in itself is useful for lighting, editing, sound and special effects. These technologies of
3D, animations are patented to provide protection to the innovations.

Role of IP in Business Plan for leveraging funds from Equity Markets /

Debt Markets & Profits Realisation
Following methods are explored
1. Market Approach
2. Income Method
3. Cost Method

Market Approach:

Here we can find how a similar, related films IP have traded in market, i.e. what price they have
fetched in market under similar circumstances.
For example the movies satellite rights, license for songs and viewership will be sold to a third
party owners. A baseline price will be fixed for an exclusive license for the films IP with no upfront
fee but a certain percentage of royalty in net sales.
These rates will vary depending on geographies. For example in India the satellites rights can be
sold at a royalty of 20% while this rate can be lower like 15% for foreign locations.
Length of the licensing period will be kept short for Bollywood like a year or so to earn a higher
royalty and can be a bit longer for Hollywood like for 3 years.

Income Method:

Here we try to find the ability of our film to generate future cash flows and discount it by the
expected economic life of the films IP to get a present value. Discount rate will be smaller for the
film if a similar film already has a proven success.
We try to estimate what will be the future revenues generated by the movie during its useful
economic life. A conservative estimate for the revenue generated by the film could be 80 Cr over
a year. So the expected cash flow can be discounted over 1 year with a discount rate of 40%. The
details of the valuation are mentioned in the Appendix.

Figure: Revenue-Time Series

Cost Method:

Using cost method or replacement cost method we try to find what will be the cost to develop a
similar movie. It starts with the cost of developing a script, a story line for the movie. Other costs
include cost of screening casts for selecting them. Human resource costs like skills of director,
casts and other support staffs need to be accounted. Time taken to develop the movie also has to
be valued. Sum total of all these costs will be the total value of all the IPs of the film.
And hence an investor will value the IP at a cost not more than the cost of getting similar benefits
from other assets. Estimating such a value for film will come to around 40-50 Cr.

Use of IP in Marketing
In filmmaking we cannot ignore the importance of copyright and trademarks in this current evolving
nature of film industry with respect to ancillary revenue opportunities.

Trademarks and Merchandising

Trademarks have to be registered at the necessary Patent/Trademark offices. The registered

trademarks can come into play across more than one class of goods/services and so is more
favourable towards long-term, film-related objectives. Unlike direct-to-home movies if we expect
to exploit the brand of the movie in a long-run through a sequel or merchandising opportunities,
trademark can endow us with long lasting revenue. Registered trademark protection can also be

obtained by attaching the

TM

symbol to all depictions of the movie name, logo, title etc. which

indicates unregistered trademark rights.

Copyrights

On the other hand copyright arises upon the creation of a relevant work like script, sound
recording, film etc. But these copyrights cannot be such that they violate or disturb someone elses
copyright present.
In the first context if we take the originality of a movie, the makers of movie Knock Out were
fined for copyright infringement of the movie Phone Booth. Again pertaining to recording and
sharing of music, the music director has rights over the music of the song. The lyricist has rights
over the lyrics and the singer over the song as in singing vice. But the music producer has rights
over the whole recording of the song. So song downloads and sharing needs permission for that.
Remaking a movie in the future or adapting a movie from a novel to churn out more from an
existing brand, copyright issues should be dealt by issuing license fee or royalty to the author and
the producer in case of a sequel being decided upon.

Distribution Deal

Producers deal with an integrated company that releases the film in local cinemas, in VCD or DVD
formats, or license it to local TV stations and satellite rights or sell it to foreigner buyers at film
festivals. Different distributors may be dealing with operating in different market segments, e.g.
cinema and video, and have to licensed rights separately.

Using IP for Risk Management

There are various risks involved in a film making industry primarily because it is a long drawn process,
sometimes spreading over a few years. Intellectual property rights play a major role in protecting the
creative ideas of filmmakers. But even after filing for IP rights, there are high risks of IP theft.
Some of the countries where pirated DVD and VCD form over 90% of the market include India, Egypt,
Nigeria and Kenya. The main problem with piracy is that it takes away the artists fair compensation
for his creative work and impairs his incentives for subsequent production.
Some of the key ways to discourage piracy are:

Public awareness campaign

This is the simplest way to deal with piracy at the grass-root level. A well-known example of this is
the short commercials that appear at the beginning of DVDs showing people that piracy is
equivalent to shoplifting. There are organisations as well as appeals from respected, popular actors
informing people about the evils of piracy.

Technology

As in every other field, technology is playing a key role in reforming the media industry as well. To
prevent unauthorised copying of music and video content from DVDs, companies put anti-copying
software on DVDs. Some software ask for authorisation codes that are provided with legal copies.
Others restrict the number of devices on which a DVD can be used, thereby preventing unauthorised
use of same DVD on multiples devices.

Filing litigations

This is usually an effective but difficult to implement method of stopping piracy due to the
enormous cost, time and effort involved, not to mention the stigma that comes with filing of
lawsuits against common public. A recent example of this was the social attack on the Recording
Industry Association of America in 2000 for suing people who had wrongfully downloaded
copyrighted content through Napster. Moreover, since piracy laws vary from country to country, its
effectiveness also varies accordingly.
One of the key regulations related to IP right protection is Trade-Related Intellectual Property Rights
(TRIPS). It is a set of internationally agreed trade rules that protect WTO member countries from
encroachment of their IP assets. Some of the key features of this agreement are:

Standard It details the minimum standard of protection to be offered by each member.

Specifically it covers details about content to be protected, duration of protection, associated
rights to be given and exceptions to those rights in different areas.

Enforcement It also covers the procedures and remedies related to the enforcement of IPR.
It covers provisional measures on civil and administrative procedures, broader measures and
criminal measures to protect the rights of the creator.

Settlement of disputes It also sets out the acceptable procedure for resolving disputes
between WTO members related to IPR enforcement.

Strategic management of intellectual property rights for competitive

advantage
Bollywood produces 1000 films annually on an average, with a viewership of 3.6 billion. Half of
the movies produced are never released; amongst others which are released only 5% make it to the
hit list. This tough competitive environment creates a strong need for continuous creation of creative
work and protecting it from being used by others without permission. A strong IPR portfolio or chain
of title document provides a strong solution for the same along with different other advantages over
competitors.

Creating competitive advantage using IPR

The long list of credits at the end of any Bollywood movie clearly states the effort put in by writers,
cinematographers, musicians, singers etc. All these connected to copyrights, patents and
trademarks etc. have to be licensed to the production house or the producer. Collating all the
aspects properly may give rise to a very strong IP rights portfolio, which not only prevents
competitors from using the different stated works without permission, but also creates a space
for creative contributors to the Bollywood film industry.

Horizontal differentiation by IPR

In film making a lot of technical equipment are used, which provides a big space for technological
innovation in the industry. Creating any such new advancement used in the film will outperform
the other competitors. In 2007 Prima Focus created thatched village huts in India in golden
compass which were the rural replicas of office cubicles. This technological innovation, by Prima
Focus completely outweighed its competitors. The patented innovations have proved to be
differentiating factors in blockbuster movies like Endhiran (Robot) and Ra.One and has been
able to revolutionise technical innovation in India.

Creating barriers to entry

IP rights has a very strong potential to create market barriers. In Bollywood film industry mainly
copyrights by script writers, cinematographic technical innovation patents and at times
trademarked brand names also act as a barrier to entry and turn market into monopolistic
situations.

1. Copyrights laws have been designed to promote competition and innovation. But at times
copyright litigations by authors and script writers act as a barrier to market entry. For
example consider the case of 3 Idiots, in which Chetan bhagat, a famous author filed
litigation against producers about the storyline being copied from his book.

2. Patents in cinematographic technical innovations have been used as a tool to defeat the
strong competition as well as temporarily create entry barriers.

3. Recently, RK studios filed an IPR to protect brand name of Raj Kapoor, restricting others
to seek legal permission before using the name. In DMEntertainment vs. Jhaveri case,
Daler Mehndi brought an action against the registrants of dalermehndi.net. The Delhi
High court recognized the fact that the singers name may have trademarks significance.
Thus at times trademarked brand names do create entry barriers.

Game Theory
In Bollywood film production market is closest to Oligopoly. So, techniques of game theory can be
applied for cutting down costs and thereby increasing profits. But to achieve this, the production
houses must play a cooperative game. Lets take an example, suppose there are 2 production
houses A & B, which wish to take an actor P in their upcoming movie. It is assumed that after
signing actor P the revenue of the production house will increase. Now, suppose the actor can
only work with a single production house at a time. Actor initially demands an amount of INR 1Cr
but if the production houses have colluded and fixed the fees of actor as INR 80lakhs then on
average there will be cost cutting and saving of INR 20lakhs. But even if a single firm goes against
this collusion and to take an actor for their movie for a higher price this disturbs the equilibrium
earlier and at the new equilibrium the fees for the actor will rise which is not the desirable
situation for any of the firms in long run.

Yellow cell in the following figures represent Nash equilibrium, suppose if A or B cheats then the
new Nash equilibrium shifts to 1 Cr which means that now each form has to pay INR1core to get
actor now.

Payoff Matrix when both A & B collude

Actor fees

Firm B

Firm B

Firm A

INR 1 Cr , INR 1 Cr

INR 1 Cr , INR 80 lakhs

Firm A

INR 80 lakhs , INR 1 Cr

INR 80 lakhs , INR 80

lakhs

New Payoff Matrix when either A or B cheats

Actor fees

Firm B

Firm B

Firm A

INR 1 Cr , INR 1 Cr

INR 1 Cr , INR 80 lakhs

Firm A

INR 80 lakhs , INR 1 Cr

INR 80 lakhs , INR 80

lakhs

References:
[1]. Accounting Standards AS (26) Intangible Assets. Web.
[2]. Transfer Pricing of Intangibles: Media and entertainment. Web.
[3]. IFRS Foundation: Module 18- Intangible Assets. Web.
[4]. From Script to Screen: What Role for Intellectual Property? Web.
[5]. BSBIPR405A- Protect and use intangible assets in small business. Web.
[6]. Distribution of Bollywood Movies. Web.
[7]. Technology and Innovation. Motion Picture Association of America. Web.
[8]. Raj Kapoors brand value protected using IPR. Web.
[9]. Sardana, M.M.K. BOLLYWOOD ON THE WINGS OF TECHNOLOGY AND ITS CONTRIBUTION TO
ECONOMY Hundredth Year of Indian Cinema. Web.
[10]. Reidenberg, Joel R. An Analysis Of The Economic/Legal Literature On The Effects Of IP Rights As
A Barrier To Entry. 1st ed. 2011. Web.
[11]. Reitzig, Markus. Strategic Management of Intellectual Property. MIT Sloan Management Review
Magazine: Spring 2004. Web.
[12]. Jewell, Cathy. From Script to Screen: What Role for Intellectual Property? Wipo.int. Web.
[13]. How Indian Celebrities Are Protected By IP Laws? 2012. Web.
[14] Optimal-Copyright-Protection-In-Bollywood-And-Media-Industry. 1st ed. 2015. Print.
[15] Findlaw, 'The Film Industry: What You Need To Know About Trademarks'. Web.
[16] Film industry in India: New horizons. Web 2015
[17] Web.
[18] India's per capita income to rise by 10% to Rs 7,378 a month. Web 2015
[19] Geetika. Managerial Economics. India. 2008
[20] The Importance of IP in India as Bollywood Doubles Hollywoods Movie Production Meridian
Blog. Web. 2014
[21] Wto.org,. World trade Organization Home Page. Web.
[22] Prabhakar, Binoy. Business of 100-Cr Films: Who Gets What and Why? timesofindia-

Appendix
Week

Revenue
film

for Additional revenue

due to IP

Cost of IP

Free Cash
Flow

Present
value

0
1
2
3
4
5
6
7
8
9

3600,00,000
1800,00,000
450,00,000
56,25,000
3,51,563
10,986
172
1
340,84,357

68,16,871

10,00,000
-

(10,00,000)
68,16,871

(10,00,000)
64,31,225

10
11
12
13
14
15
16
17
18
19
20

340,84,357
340,84,357
340,84,357
340,84,357
340,84,357
340,84,357
340,84,357
340,84,357
340,84,357
340,84,357
340,84,357

68,16,871
68,16,871
68,16,871
68,16,871
68,16,871
68,16,871
68,16,871
68,16,871
68,16,871
68,16,871
68,16,871

68,16,871
68,16,871
68,16,871
68,16,871
68,16,871
68,16,871
68,16,871
68,16,871
68,16,871
68,16,871
68,16,871

63,89,745
63,48,533
63,07,587
62,66,905
62,26,485
61,86,326
61,46,426
61,06,783
60,67,396
60,28,263
59,89,382

IP valuation
734,95,054

This is valuation of a Bollywood movie with Rs100 Cr collections. We have assumed that 60% of total
collections are coming from Box office where as 40% of the amount is coming from satellite rights and
Music & Home videos. Out of INR 60 Cr the first 60% of the amount that is Rs36 Cr is coming in the
first week whereas remaining amount of INR 24 Cr comes in the subsequent weeks. After 8 weeks the
box office collection saturates and now the company earns revenue because of 20% royalty through
sales to Satellite media, internet and music & home videos. So the revenue curve vs. time initially
comes down then after movie is out of box office then the revenue curve again rises up before
saturating.