CJ Research: Understanding India’s VPF Conundrum

By | May 19, 2019 8:39 pm PST

Cinema has transcended many a barrier, from the analogue era to the digital cinema evolution. India despite being one of the largest cinema markets has been a very complex one. This has been evident in the adoption of digital cinema technology and the subsequent transition to digital cinema. Today that complexity has resulted in the current stand-off between film producers and distributors on one hand and the cinema owners and operators on the other hand over this issue of the virtual print fee (VPF).

Overview of VPF, its history and implementation in India

The fundamental business problem in moving cinemas from film projection to digital cinema is that the costs of digital cinema equipment, both the initial capital costs and the operating costs, are significantly higher than that of film equipment.

While the immediate economic benefits of digital cinema adoption, in terms of lower release costs due to the elimination of expensive film prints, accrue only to the distributor/producer, the high costs of the change to digital cinema and the continuing higher operating costs need to be borne by the exhibitor. The digital cinema revolution would have therefore been greatly delayed by this business problem.

The solution, initially proposed by Access Integrated Technologies and Christie through their joint venture Christie/AIX, was for them, as an independent intermediary, to fund the cost of the digital cinema equipment and recover this cost by levying a ‘Virtual Print Fee’ (VPF) every time a movie released on the digital equipment funded by them. The solution agreed to by the major Hollywood Studios was for the VPF to be nearly equal to the film print cost and to continue to be charged to all parties using the digital equipment, until the equipment along with maintenance costs and a reasonable return on investment were achieved.

On this ‘recoupment’ basis, VPF contracts were drawn up between the major studios and several integrators such as Christie/AIX (subsequently renamed Cinedigm) and Digital Cinema Implementation Partners (DCIP), a joint-venture setup by AMC, Regal and Cinemark, the three largest exhibitors in the US.

The Cinedigm and DCIP VPF contracts finally achieved full recoupment only around nine to ten years after the digital cinema equipment was deployed. While the Cinedigm VPF is believed to have been about USD $1,100, the DCIP VPF was USD $850. It’s important to keep in mind these figures and the period before recoupment was finally achieved in the US where equipment has no import duties.

Scrabbel Digital

In India, Scrabble Entertainment set up by Ranjit Thakur and Dr. Sunil Patil and funded partly by Manmohan Shetty, formerly of Adlabs, attempted to negotiate VPF contracts with the major Studios in 2008. The company agreed to a fixed VPF term of 5 years after installation at each site and a limited VPF level of USD $500 – then INR 20,000 (USD $288). The rate has remained at INR 20,000 since 2008!

Scrabble rolled out DCI-compliant digital cinema equipment to various multiplexes in India. For the Studios, this was an excellent deal as the period of VPF was fixed, there was no requirement for recoupment to be achieved and the VPF levels were much lower than those in the US or other developed markets.

Given the higher costs of digital cinema equipment in India due to the over 30% in import duties at that time and the far lower VPFs, recoupment would clearly take much more than the nine to ten years that it took in developed countries. In addition to the import duties there were local taxes in each states which added on to the cost of every installation. So the equipment and installation is approximately 30% more than in the rest of world due to import duties and local taxes. This had a major impact on the payback period.

But in fact, the VPF in India was limited not just because of what the Hollywood Studios were willing to pay, but also by what Indian distributors could afford and justify for their digital releases. Since the lower-grade E-cinema VPF was at an even lower level, Indian distributors could not easily justify a much higher VPF for DCI systems. If the VPF were set any higher, distributors would have simply released on E-cinema alone and not bothered to release on DCI systems. That was not a desirable outcome as India needed to move forward and embrace the global standard with its better quality and increased security as well as universal compatibility.

Hollywood studios paid VPF for about five years per site but they had a hard stop date for each contract, after which they wouldn’t pay VPF at all. They also paid for a certain percentage of new installations.

While DCI VPF has rates per show, per week/site and flat/site, E-cinema is now charged mostly on a per-show basis, capped at a certain maximum per site.

The other factor which influenced VPF in India was there were hardly a handful of Indian Studios that released multiple movies year-after-year. Most movies were still produced by individual production houses that made an occasional movie. Thus, there weren’t many companies with whom one could sign long-term VPF contracts. Movie contracts were thus signed on an ad-hoc movie-by-movie basis.

UFO Moviez and Qube Cinema are the two largest digital cinema integrators in India. There are also a number of smaller digital cinema integrators offering either DCI systems, E-cinema systems or both. PXD from the Prasad Group, KSS, TSR ProVA, One Source Media, Aerox and K Cinemas are some of the other digital cinema integrators currently operating in India.However, only Scrabble Entertainment and Qube Cinema signed VPF contracts with the Hollywood Studios.

Virtually all screens in India continue to be under VPF. It must however be noted that the VPF levels in India are significantly lower than elsewhere in the world at a peak level of approximately USD $300 today [USD $1= INR 70] but with various options for weekly and per-show payments that bring the effective VPF cost per theatre down to a much lower level. Based on the actual VPF payments for movies, both large and small, the average VPF paid per location is INR 10,000 to INR 12,000 or USD $140 to $175.

Indian regional films - still paying VPFs. (photo: Patrick von Sychowski / Celluloid Junkie)

Indian regional films – still paying VPFs. (photo: Patrick von Sychowski / Celluloid Junkie)

Protests against VPF by Hindi Producers

Ronnie Screwvala, a well-known media and entertainment entrepreneur and founder of UTV Motion Pictures who later sold his company to Disney, approached the Competition Commission of India (CCI) — India’s highly effective anti-trust regulator — against the four largest multiplex chains – PVR, Inox, Cinepolis and Carnival Cinemas- for alleged collusion and for charging Indian movie makers discriminatory VPF. Screwvala has proposed to be the principal witness in the investigation.

Ronnie’s Mumbai-based movie production company RSVP, a part of Unilazer Ventures, has also included the Multiplex Association of India (MAI) as one of the respondents in its complaint.

Ronnie ‘s last film “Uri : The Surgical Strike” was a blockbuster and had box-office collections of close to USD $35 million. He is active in the movie production business and movie production is a passion for him. And he is willing to battle it out with the multiplex chains to settle the VPF dispute.

Ronnie has also found support from the Producers Guild of India & Indian Motion Pictures Producers Association. Some of the producers and distributors have openly supported him in this VPF battle. Ronnie has been getting support from some leading names in the Hindi Film Industry which include names like Hansal Mehta, , Ramesh Taurani, Anand Pandit.

It was also reported that Disney/Fox Star, Viacom 18, Jio Studios, T-Series, Zee Studios and , distributor Anil Thadani, producer Siddharth Roy Kapur (President of the Producers Guild Of India) and producer Mukesh Bhatt were looking at ways of joining Ronnie’s existing complaint with CCI. Apparently some of them wanted to be appended as a party to the complaint.

While Inox and PVR have not commented on this issue, PVR has approached the market regulator Securities and Exchange Board of India (SEBI), saying the statements made by Ronnie Screwvala about VPF were false and misleading and amounted to stock price manipulation. They pointed out that Ronnie had released his CCI complaint to the press even before the CCI had sent them this information officially and they had in fact become aware of the complaint only from press reports!

UFO Moviez Qube logos

Earlier Protests Against VPF by the South Indian Film Industry

Last year the South Indian Film Industry had gone on a major strike in protest against the VPF charges. Subsequently Qube Cinema, along with other digital cinema integrators, agreed to a reduction in the DCI and E-cinema VPF rates in response to the request of the South Indian Film Industry.

This reduction effectively gave distributors between 18%-23% savings on their VPF charges for a movie with the variability being due to the exact release pattern adopted for a movie. However, the producers association in Tamil Nadu stated that this reduction was insufficient and decided to go on an indefinite strike, stopping the release of all Tamil movies and even trying hard to prevent the release of Telugu and Hindi movies in the state.

As their strike dragged on, some exhibitors filed a complaint against the striking producers with the Competition Commission of India. After a preliminary examination, the CCI decided that the complaint indeed had merits and called for a full examination of the matter. This is an ongoing matter.

Subsequently the Government of Tamil Nadu managed to bring an end to the strike by requesting the digital cinema integrators to agree to a temporary reduction of their E-cinema VPF to 50% for a period of up to six months. This VPF level was found to be unviable by Qube and at the end of the 6 month period; the VPF was reset to the level agreed with the associations of the other South Indian states, i.e. the 18%-23% reduction.

One key aspect the producers and distributors in the Southern states seem to overlook is that the VPF in these states includes the cost of mastering, including last minute jobs, the cost of delivery and the cost of key management. All of these are separately charged for everywhere else in the world and the international cost per location for these services alone would well cover the VPF rates in the Southern states!

Hollywood vs. Hindi VPFs in India

While Hollywood studio movies do not pay the multiplex chains any VPF, the locally produced movies of the same studios do continue to pay VPF. What needs to be examined is whether there are commercial differences in the distributor/exhibitor sharing for Hollywood studio movies and locally produced movies. If such a difference exists in the sharing ratios, then this would be purely a commercial matter.

In any case, the CCI will examine the matter and decide whether to take up the case and that will be the first test of the validity of this claim. There’s no implication for the Hollywood Studios in this issue unless the Competition Commission of India (CCI) decides to look into their VPF practices in India as a result of the submissions by various parties in response to the RSVP complaint.

But given the huge commercial implications for the multiplex chains and the profile of Ronnie Screwvala and RSVP, it is certain that whatever the outcome of the CCI filing, this will be appealed by the losing party all the way to the Supreme Court. And the matter would get dragged on for years before a final outcome is achieved.

While there have been discussions with the South Indian film industry and the digital cinema integrators on a timeline for the end of VPF and separate discussions between the major chains, PVR, Inox and Cinepolis with some of the key Indian studios, no agreement was reached. A common industry-wide discussion with sensible timelines would need to be discussed and agreed to by all the stakeholders.

PVR box office India

PVR Infinity box office Mumbai. (photo: Patrick von Sychowski / Celluloid Junkie)

The road ahead

The technology change from film to digital cinema has brought about a significant saving in print costs apart from the security, quality, speed and accountability benefits. The cost savings and many of the other benefits accrue mainly to the distributors while exhibitors are saddled with much higher capital and operating costs. This imbalance is what VPF seeks to remedy.

In practice, a distributor pays only an average of INR 12,000 (USD $173) per location. This is in comparison to a film print that used to cost INR 60,000-75,000 (USD $864-$1,080). At a minimum, the savings to the distributor are in the order of 80%. The peak VPF rates have remained constant over the last 10+ years but many additional flexibilities have been added such as per-show and per-week billing options.

Clearly the business model adopted by the digital cinema integrators in India is thus not a recoupment-based model as adopted in developed markets but rather a service model (digital cinema as a service) where there was never any commitment made by any party to end the fee being charged nor a discussion between all the industry stakeholders on transitioning smoothly to a different operating model.

Finally, if VPF were to be eliminated in India, the multiplex chains may suffer significant financial losses. The bigger impact will be on the large number of independent screens and smaller chains in the country. They would simply not be able to continue in business without the help of VPF to partly subsidise their digital cinema costs. That would effectively mean that more than half of India’s screens will not be able to continue in business and would likely be forced to shut down or sell their properties to larger chains. And this does not augur well for the movie business in India.

Manoj K

Manoj.K is a professional with an extensive experience of over two decades in the cinema exhibition and entertainment business in India.

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