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The baron of the box-office

Eros India’s vertically integrated business model is proving to be a success

Sunil Lulla is trying hard to stop smiling and eventually just gives up. His glee is understandable: two of the biggest Bollywood grossers of the year had his company’s involvement. Even by the most conservative estimate, Lulla’s investments in Yeh Jawaani Hai Deewani and Raanjhanaa have more than doubled, though the executive vice-chairman and MD of Eros International Media does not readily share numbers. Where Eros made $11 million (over ₹60 crore) on the overseas distribution of the Ranbir Kapoor film, Raanjhanaa was a surprise hit, earning its producer ₹65 crore in domestic box-office collection and another ₹15 crore from overseas ticket sales.

For a business that’s really less than a decade old, Eros has done pretty well for itself. It has a library of over 1,200 titles in Hindi, Tamil, Punjabi and Marathi and has interests spanning end-to-end distribution, co-production and acquisition. In FY13, the company released 77 films and an equal number in the preceding year. Over the past six years starting with FY08, Eros’ total income on a consolidated basis moved up from ₹490 crore to ₹1,074 crore, while net profit increased from ₹42.73 crore to ₹154.54 crore, making it one of the fastest growing companies in India. And Lulla and his team think this kind of growth can be sustained for a while to come. Here’s how.

Advantage overseas

Eros was started in 1977 by Lulla’s father, Arjan Lulla, as a partnership firm. The family, most of whose members were in London, would acquire overseas rights of films from Indian producers and distribute them in markets outside India. Eros was incorporated in 1994 as Rishima International, which bought out the partnership firm a few years later. The Indian foray started only in 2005 when Eros co-produced Waqt with Vipul Shah. Since then, the company steadily moved from mere film distribution to becoming a content aggregator through a mix of acquisitions, co-productions and productions. This content is then distributed across various media and different geographies.

None of which is really complicated or really unique, so what’s the secret sauce that is helping Eros succeed in such a highly unpredictable market? The short answer: family ties. Eros has a cast-iron agreement with its parent, Eros International Plc, through which the British firm acquires the international film rights for every film co-produced, acquired or distributed by Eros International Media. According to group CFO Kamal Jain, this covers 30% of the cost of the film with a 30% mark-up. “In all, this works out 39% of the cost recovered. There is no doubt this is a cushion for us,” he admits. 

It’s also a guaranteed source of about 25% of Eros’ annual income. Where other producers and distributors may struggle to find an overseas market for their films, either because of small budgets or inadequate network, Eros has the reassurance that any film it invests in — whether it is a hit or flop, and no matter the budget — will also find a market overseas because the British parent will buy it regardless. According to Rakesh Madhotra, CEO, Nadiadwala Grandson Entertainment, his banner has always serious challenges when it comes to distributing films overseas, given a lack of expertise and connections. In the past few years, Nadiadwala Grandson has co-produced three hit film with Eros — Kambakkht Ishq, Housefull and Housefull 2.

With Eros taking care of distribution, marketing and execution, “our focus was restricted to being creative and we managed to minimise risks substantially. More importantly, they took care of opening up new markets for us,” says Madhotra, adding that the company was “pleasantly surprised” by the movies’ showing in overseas markets.

Well-known producer Boney Kapoor concedes that a good network is critical for earning from overseas markets. “For most producers, India is still the largest market because it is difficult to sell your film outside if you can’t catch the attention of the right people, or you don’t have a substantial budget.” On the other hand, with the backing of a strong parent, even small films can make it big overseas. Vijay Singh, CEO, Fox Star Studios, points out that his film My Name is Khan brought in $24 million from the overseas market. And it’s not just big-budget films. “Even a film like Jolly LLB [produced and distributed by Fox Star] this year was released in 18 markets, which is unheard of for a small budget film without a top billing star. It did a business of ₹3.3 crore outside India,” he says. In all, the film brought in ₹31 crore on a budget of ₹13.5 crore.

For Eros, the guaranteed overseas rights sale is critical not just as an income stream but also as part of its derisking strategy. In a year, the company has about 75 film releases and in all, it sells the music and satellite rights two to three weeks before release — by doing this, even a film that proves a lemon at ticket sales could still be profitable for the company. Between overseas distribution, satellite and music rights, Eros usually manages to recover as much as 60-80% of the cost even before the film makes it to the theatre. 

“I bet you thought we lost money on Ra.One,” Lulla smiles mischievously. The SRK-starrer, in which Eros invested ₹100 crore as co-producer, proved a damp squib on its Diwali 2011 release. Still, Eros wasn’t in the red over the film — apart from ₹65 crore from the box office, it earned ₹35 crore from satellite rights, ₹12 crore from music sales and at least ₹25 crore from overseas theatrical rights. And it owns the film’s rights forever, so it can keep making money on future television rights, any sequels or spinoffs and online versions. As it happens, Eros’ derisking obsession isn’t limited to distribution — and it spills over to sourcing content as well.

Go green

Eros’ approach to sourcing content — building up the library, acquiring film rights and striking production and co-production deals — can be considered one of abundant caution. It’s also been institutionalised within the company. A “greenlight” board comprising executives in India and overseas review each new project based on two criteria: creative and financial. Creative takes into consideration the track record of the producer and director, the script and star cast, whether the genre will click with the audience and the tentative release date. The financial analysis looks at the track record of the lead stars, their returns from earlier films, the possible return on investment and budget. CFO Jain says that after considering all this, the cost of the project, including promotion and advertising, should yield a return of at least 25%. Usually, we don’t touch anything less than that,” he adds. 

Typically, in new acquisition projects, the company takes over distribution, satellite and all other global rights, while it rarely settles for less than 50% of all intellectual property rights in co-productions. Still, every film is considered on its own merits. “It’s like a complete buffet. We pick and choose what we want and only in rare cases will we eat everything,” Jain says. “This makes our model unique and devoid of irrational risks.” 

About 70% of Eros’ movies are acquisitions, where the company buys out the rights to films for 15-20 years. Co-production deals account for about 20%, while the least preferred model, which accounts for the rest, is one where Eros is the producer. That’s also the model where it has seen the most failures. Recent examples include Desi Boyz and Aa Dekhen Zara, both of which failed to strike it rich at the box-office. “This is a tough model to scale up and that is why we have a limited number of films here,” says Jain.

The stringent selection process means only about one film in five that come to the table is shown the green light. While that does help separate the wheat from the chaff, sometimes blockbusters are given the go-by. Industry sources point out that Eros passed up films such as 3 Idiots based on its greenlight process. By and large, though, Eros has had a good track record. “Over the last four years, we have had at least three films in the top 10 Bollywood grossers every year,” says Lulla. In FY13, the winners were Housefull 2, Son of Sardaar and Khiladi 786; the previous year, it was Ready, Zindagi Na Milegi Dobara and Ra.One. “Our USP is that we know how to monetise across platforms, be it television, DTH, iPTV or any form of new media. Our co-production model means we get a chance to work with every star,” he adds. Going forward, though, it’s looking beyond obvious routes to success. 

Beyond the obvious

On April 1, 2012, the brass at Eros held a strategic meeting at the  company headquarters in Mumbai. “It was just to understand and get ideas from everyone on how to take the brand to the next level,” recalls Jain. A long meeting and much brainstorming later, two key decisions were taken. The first was to look beyond Hindi. “It was important to reduce our dependence on one market and we needed to step up as far as Tamil was concerned,” he says. Eros already had a headstart in the Tamil film business, thanks to a 51:49 joint venture with Ayngaran, a company that distributed Tamil films in overseas markets; the 2007 deal also gave Eros access to Ayngaran’s library of over 600 films. During Diwali 2012, two films where Eros acquired the distribution rights, Thuppaki and Maatraan, set the cash registers ringing and went on to be among the top three Tamil grossers of the year, convincing the company even more that investing in Tamil films was money well spent. 

Since the dynamics of the Tamil film industry are completely different, Eros had to tweak its approach here. Jain points out Tamil films depend heavily on theatrical revenue, with limited contribution from other avenues such as music and satellite rights, all of which are critical to Eros’ Bollywood model. A Tamil film’s cast also plays a huge role in deciding its fate, and so Eros is entering into co-production agreements only for movies with big names such as Rajinikanth, Vijay and Surya. Later this year, Eros will co-produce and release the Rajinikanth-starrer, Kochadaiyaan, to be followed by Rana. “It’s slightly hard to go wrong with Rajinikanth,” Lulla says with a laugh. That’s perhaps the biggest change from Eros’ Bollywood model since big names also mean big budgets. 

In fact, the second decision taken at the April 2012 meeting was completely contrary to this since it encouraged taking up non-star cast films and marketing them like big productions. “There is a huge upside and a low downside. You could make as much as ₹200 crore and the downside could be a much smaller ₹20 crore,” Jain explains. The rationale: In a non-star cast film, you lose very little if the film flops. For instance, if films like Vicky Donor and Ferrari ki Sawaari — which Eros co-produced and released in May 2012 — had bombed on their budgets of ₹9 crore and ₹10 crore (which included ₹4-5 crore for advertising), respectively, the pain would have been far less compared with, say, what UTV underwent with Himmatwala (budget: ₹72 crore). But if the films turned out to be hits — and both these films did make returns of three to seven times on budget — there is a huge windfall. 

The big winner with this strategy was English Vinglish. Made on a total budget of ₹27 crore, the movie made ₹40 crore at the domestic box office and another ₹24 crore outside India. And that’s not even counting the ₹15 crore made from the sale of home video, music and satellite rights. “On an average, a film makes 20-25% of its collection from overseas markets. In the case of English Vinglish, it was 40%,” says Lulla. That’s because in addition to Hindi versions of the film, Eros also released versions dubbed in Japanese and German. 

Neither of these strategies — focusing on regional cinema and low-budget films — is rocket science, so why aren’t other film companies adopting similar methods to grow? Industry players point out that most producers and distributors are limited by their competencies — they may have access to overseas markets (which would give a boost to small-budget movies), or pockets deep enough to sign on big stars, or the network to negotiate the best pre-release deals for satellite and music rights, but it’s unusual to find all these under one roof. “Our model is not easy to replicate since most of the others are either just producers with a small overseas presence or people with a small library or people who just do a bit of everything,” agrees Jain.

Even big corporate players such as Fox Star, UTV and Reliance Entertainment lose out to Eros when it comes to library size — UTV, for instance, has just 120 films compared with 1,200 for Eros. Incidentally, that’s another asset Eros plans on utilising to the hilt going forward.

A new script

The Lullas took their first step towards television in the late 1990s, when Eros Plc launched a Bollywood channel, b4u, beamed from London. While the channel has survived all these years, late last year, Eros deepened its TV connection by adding a new partner — it inked a deal with HBO Asia to launch HBO Defined and HBO Hits. The two bilingual ad-free movie channels were launched in February at a price tag of ₹100 per month. While HBO owner Time Warner, will bring in the English films that will make up 70% of the content, Eros will supply Hindi films (which make up the remaining 30%) from its own library, adding 10 new titles every year. “This is an opportunity born out of digitisation. In the time to come, we will need to look at new ideas where our content can be offered on 4G and other broadband platforms,” says Lulla. 

Already, the company is considering new media as an important avenue of content distribution. Last March, Lulla launched Eros Now, an on-demand entertainment portal online that has 50,000 paying subscribers, while the Eros Now channel on YouTube is among the most-watched Indian channel on the website, with over 1 million subscribers. And in July 2012, Eros also signed a ₹95-crore deal with general entertainment channel Colors for nine of its coming films to be shown on the channel over the next few years. There’s a good reason for this off-screen activity. As Lulla points out, “A film getting into the second week is a rarity these days. It’s not an easy business to be in.”