Financing 24 frames a second

Mumbai?s cinematic dream factory is older than Hollywood, but has long been dwarfed by it. Although India?s film industry recently crossed $1 billion in revenues, this is just about 1% of the global movie business. Many of the 800-plus Indian films shot annually are low budget and of indifferent quality. Deals are done informally, there are many individual entrepreneurs, and little transparency in the business. Most strikingly, Mumbai?s underworld is heavily involved in financing Hindi films. Suketu Mehta, in Maximum City, his down-and-dirty tale of Mumbai?s underworld and dreamworld (with bar girls thrown in for extra titillation), even says, ?without underworld financing, the Hindi film industry would collapse overnight.? Not, perhaps, the most likely candidate for an economic growth story.

Still, this is the industry that has fans across the world, from Egyptian taxi drivers in New York, to Chinese soldiers in Tibet (whose love for Raj Kapoor got Vikram Seth a free pass into that region, and his first book success). Hindi films are India?s major cultural export, and its diaspora?s most common link with its roots. The film business is also part of a burgeoning entertainment and media industry that exceeds $1 trillion worldwide. Finally, the digital revolution is reshaping the industry in ways that will allow new players to take off. What are the opportunities and challenges?

Digitisation represents a major opportunity for India, by reducing costs of production and distribution. Digital effects often are, and more so as innovation proceeds, much less costly than real sets and props, giving a developing country?s industry a boost relative to established competition. Digital theatrical distribution, once the initial set-up and switching costs are borne, will make rapid, large-scale, global distribution easier, cutting down on piracy.

India?s film in-dustry also has the opportunity to ex-pand its DVD market, with special features, subtitles, and ?bonus material? that Hollywood has used to extend its revenue st-reams. Video game spin-offs, product tie-ins and made-for-TV movies also remain largely un-tapped opportunities. India?s gr- owing middle class is a new market for these multiple, related revenue streams. Every major Hollywood studio is a vertically and horizontally integrated entertainment conglomerate. Disney?s recent acquisition of the Hungama children?s TV channel points to where India can profitably go.

Developing new revenue streams tied in to Bollywood films will provide some relief from the huge uncertainty and risk film industries face everywhere. This uncertainty is one reason why gangsters are important film financiers in India: they have cash to be laundered, they are good at risk bearing, and they can enforce contracts without collateral. (Suketu Mehta also suggests they have the right tastes: extravagant, violent and passionate!) Unsurprisingly, even four years after India?s banks were allowed to invest in its film industry (removing a point-less, paternalistic prohibition), such bank financing re-mains minimal: the risk profile is not a good match.

Banks are not configured for high -risk, entrepreneu-rial investing. But other kinds of fin-ancial institutions may increase legitimate financing: Ho-llywood gets inves- tments from hedge funds, which fin-ance packages of films to pool risks. However, as Arthur De Vany, Professor Emeritus at the University of California, Irvine, and author of Hollywood Economics, points out, risk pooling alone may not help when individual projects have returns with infinite variance?a consequence of the high chances of big hits and total flops. De Vany suggests new kinds of contingent contracts, based on extreme outcomes. These, too, are used in Hollywood to share risk more effectively without stifling creative risk-taking.

As Hollywood illustrates, multiple revenue streams do not remove the large underlying uncertainties, so India?s film and financial industries should jointly develop new, best-practice financing modes and contracts. This will help Bollywood be globally competitive, and leverage its enormous talent. For this to work, the industry will have to be far more corporatised and professionalised. It will also mean greater transparency of process and contracting. There will still be scope for financial shenanigans, especially at the expense of star struck individual investors (as still happens in Hollywood), but some degree of corporate professionalism will allow the industry to tap new financing sources. India?s IT and ITeS firms have demonstrated the value of corporate professionalism.

Are any policy nudges needed? India?s financial sector is on the policy radar for achieving global excellence. The film industry is a natural customer for innovative financing. Surprisingly, Indian films are often shot abroad, not just for exotic locales, but also for greater ease of doing business. So there is scope for state governments, and even the Centre, to make film production in India more attractive. The more important technical aspects could be areas for expanded ?vocational? education. New know-how for stunts and make-up, as well as for digital wizardry won?t hurt. The latter, of course, is already developing as an offshoot of IT. Thus, removing obstacles to doing business, and to organisational innovation is what policymakers can do. Perhaps India?s actor-politicians can contribute to achieving this end.

?The writer is professor at the University of California, Santa Cruz