Bollywood dreams of Hollywood

In late 2008, two major players of the Indian and the US film industries, Steven Spielberg and Anil Ambani, agreed to a partnership. Anant Thaokar and Gollapalli Syam Prasad (IBS Research Center) present the background of the companies involved and the motives behind the deal

DreamWorks and Reliance Anil Dhirubhai Ambani Group (R-ADAG) joined hands in 2008, initiating a $1.2 billion 50:50 partnership to set up a new film studio in Los Angeles with an annual production goal of six films. The deal provided financing for DreamWorks - it was agreed that Reliance would invest $500 million and provide another $700 million in debt through JPMorgan Chase & Co. In return, Reliance got a gateway to Hollywood and distribution rights in India for all the films made by the studio. Anant Thaokar and Gollapalli Prasad present the history of the two groups and the rationale behind their partnership.

DreamWorks
It was in 1994 that Stevens Spielberg, Jeffrey Katzenberg and David Geffen established DreamWorks studio, with each of them investing $33 million and Paul Allen $500 million into the company. One year later they moved into computer and video game development with the launch of DreamWorks Interactive. Their first movie was released in1997 – “The Peacemaker”. It was quickly followed by their first great animation success, "Antz" which made $171 million worldwide. In the next years, the live-action movies "American Beauty" (1999) and "Gladiator" (2000) won Oscars.

On the game side, DreamWorks Interactive achieved tremendous success with‘Medal of Honour’. But realizing that this industry thrives on size, DreamWorks sold the game business to Electronic Arts in 2001. Focused on films, DreamWorks next success was "Shrek 2" which became the most profitable computer animated film in 2004, collecting a total of $920 million worldwide. However, just a year later DreamWorks faced potential bankruptcy due to overestimation of DVD demand for "Shrek 2" and the disastrous failure of "Sinbad: The Legend of Seven Seas."

That led to a period of turmoil. Paul Allen, DreamWorks biggest stake holder, sold his share to Viacom’s Paramount Pictures, with Viacom purchasing DreamWorks in 2005 for $1.6 billion. Paramount got the distribution rights for DreamWorks movies domestically and internationally- which gave Paramount instant power in the money-spinning computer animation business. Paramount then turned around and sold DreamWorks’ live-action library to a group led by George Soros for $900 million.

Adlabs- a foundation for R-ADAG
A key moment in the constitution of Ambani’s entertainment group was the 2005 takeover of the Indian player, Adlabs Films Limited (AFL). Established in 1978, Adlabs started its life as a film-processing company. It then moved into film production a decade later, in1989. By 1999 it was prospering on the processing and production fronts with several award-winning movies and a state-of-the-art processing facility in Filmcity (Goregaon, Mumbai).

Sixty per cent of Bollywood’s movies were being processed by Adlabs when it decided to go public in 2000. Revenues at that time were approximately $8 million (36.8 crore) and the profit margin stood at 14%. In 2001, Adlabs moved into the theater business with the lauch of a multiplex in Mumbai in technical collaboration with IMAX Corporation, Canada.

In 2005, R-ADAG purchased its 51% stake in Adlabs for approximately $80 million (360 crore). Therafter Adlabs pursued its expansion strategy. It moved into television content by acquiring a 51 per cent stake in Synergy Communications, a television content provider that produced shows like Kaun banega Crorepati.

Even more significantly, in 2008 it made its move into the American market. First it created a 250-screen chain of movie theatres in 28 North American cities under the brand BIG Cinema. Then it moved toward the production side, by providing development funds to the production houses of Hollywood stars like Brad Pitt, Nicolas Cage, Tom Hanks and George Clooney. And finally it signed its partnership with DreamWorks.

The DreamWorks – R-ADAG deal
As presented by Mssrs. Thaokar and Prasad, both parties had strong motives for the $ 12. billion deal. For Dreamworks, R-ADAG provided an attractive financing alternative as well as improved access to the Indian market, while for R-ADAG the alliance was way to play a larger role in the international entertainment market and move towards its goal of becoming a $10 billion digital media empire.

On the financing front, DreamWorks was faced with private equity investors and financial institutions whose funding approach was on a project basis while Spielberg was searching for financing of a whole slate of projects. Furthermore, American investors wanted to spread their risk over several directors rather than finance a series of films by one director, albeit Steven Spielberg. R-ADAG on the other hand, was willing to finance a plurality of films, all directed by Spielberg.

For its part, R-ADAG was buying into the brand equity of Spielberg, arguably the world’s most recognized filmmaker. Not only was it buying into Spielberg’s future theatrical successes but it was also gaining access to the more lucrative aftermarket of TV, DVD and Internet. The deal could also help with the distribution of Bollywood movies globally, using the DreamWorks platform.

The deal carries risks, especially for R-ADAG. DreamWorks was not reputed for its financial control over film production. And other Bollywood players were dreaming of Hollywood. UTV had produced movies like "Namesake" under various foreign collaborations; it had also signed deals worth $37 million with Overbrook Entertainment and Sony Pictures Entertainment. Yash Raj films and Walt Disney had made the computer-animated movie, "Roadside Romeo." Pritish Nandy Communication had signed a 5-movie contract, worth $25 million with Motion Pixel Corporation.

Many foreign players have been burned in Hollywood – this case serves as an introduction to the next few years which will tell whether Anil Ambani can succeed in creating Bhollywood.

Reference:
ECCH 309-225-1
“BIG Cinema Teams Up With DreamWorks: Hollywood Aspirations”
Anant Thaokar and Gollapali Syam Prasad
IBS Research Center

By Sunaina Anand

Published January 2010