ent case

W16187

UFO MOVIEZ: FLYING IN THE DIGITAL CINEMASPACE IN INDIA

Subhadip Roy and Varsha Jain wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality.

This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com.

Copyright © 2016, Richard Ivey School of Business Foundation Version: 2016-04-04

In October 2012, a meeting was held at the headquarters of UFO Moviez India Limited (UFO) in Mumbai. Founded by the Valuable Group in 2005 and headed by Sanjay Gaikwad, UFO was the largest satellite- based digital cinema distribution company in the world by late 2012. The company operated successfully in a country where Internet and digital technology penetration rates were much lower than those in other developing nations.

In attendance at the meeting were Rajesh Mishra and Priyanka Gala. Mishra was the CEO while Gala was a public relations executive in the company. Mishra was explaining how UFO started with a small idea and went on to become a major influence behind the revolution in the way movie screening was conducted in India.

Within a few years of its inception, UFO had established a differentiated platform-based business model. With more than 3,000 theatres connected to it, the company was the first and largest of its kind. According to the company, the digital infrastructure highway was a means to distribute movies to exhibitors using technology, delivering the movies online and faster than with traditional means.1 For the film industry, this offered benefits to the entire ecosystem consisting of distributors, exhibitors, advertisers, and audiences. Most importantly, UFO had enabled a widespread “first day, first show” standard across geographies, irrespective of physical or technical drawbacks, and reducing film piracy in the process. However, the company still had to address some looming challenges that could hamper its growth.

The company had spread rapidly to movie theatres across India, but was about to face saturation if the growth of new movie theatres was not faster than the company’s own growth. Thus, UFO had two choices to increase revenue: 1) It could maintain its current strategy and expect the macro environment to foster the growth of cinemas across the country; or 2) It could explore alternative revenue sources using the same business model.

In the first case, there was potential for cinema screens in rural India because alternative entertainment avenues were few. However, there was a requirement for support from the government since investors were wary of the intricate rules and regulations and the hassles they had to endure to set up a cinema. Mishra

1 According to the company, the “digital infrastructure highway” was a means to distribute movies to exhibitors through the use of online technology that was faster than through more traditional means of distribution.

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noted, “To establish a cinema required around 90 permissions. This scares away the investors. People do not want to be in [the] cinema business as they perceive that their investment would be stuck.” Thus, the growth of the cinema-viewing infrastructure was important for the growth of UFO.

In the second case, UFO would have to focus on alternative revenue sources, such as advertising in theatres, which offered much less than the revenues from movie distribution. To acquire more revenues from advertising in movie theatres, UFO would need to market to consumer brands with a different approach than that used for movies.

Irrespective of the choice UFO made, there was a possible threat of a low-cost competitor. UFO innovated a new model of movie distribution; thus, it had to incur all the typical expenditures that came with being a technology pioneer. There was always a possibility that a new company could use reverse engineering and come up with the same model at a lower cost. Thus, UFO needed to devise a strategy to counter competition, while also implementing option one (maintain its current strategy) or two (increase advertising revenue).

The company was considering the next steps that UFO should take. Mishra chose this time to reflect on the way film distribution used to work in India, and how UFO brought a significant change to the industry.

THE INDIAN FILM INDUSTRY: A CULTURAL AND SOCIAL EVOLUTION

The Indian film industry started its journey soon after Auguste and Louis Lumière exhibited the “Cinématographe” in Paris. French cinematographer Marius Sestier was sent by the Lumière brothers to show their short films to affluent British audiences in Mumbai (then Bombay) in 1896.2 The first Indian feature film was released in 1913, and the first “talkie” (movie with sound) was released in Hindi and Urdu languages in 1931. In the 1930s and 1940s, movies focused on social issues in India. By the end of the 1940s, Tamil films came into the limelight, and by the early 1950s, Kolkata (then Calcutta) became the vanguard of art cinema. The momentum in the industry in the late 1950s was strong, led by directors such as Satyajit Ray. The Film and Television Institute was founded in Pune in 1959 to develop the technical skills of candidates interested in a career in film and equip them for the demands of the industry.3

Subsequently, several cultural organizations came together to promote acting and cinema, forming associations such as the All India Progressive Writers Association and Indian People’s Theatre Association. During the 1960s, the film industry shifted its focus from social issues to more romantic themes and showcased many stars who gained national fame. In parallel, this era emphasized Indian nationalism and witnessed patriotic movies. The 1970s marked a turning point in Indian cinema, as industrialization and urbanization became the focal themes for films. Simultaneously, throughout the 1970s and 1980s, art cinema became a more popular alternative to commercial films. With the advent of satellite television in the 1990s and the arrival of multiplex theatres in India, the concept of movie viewing underwent a significant change. One downside to this change was that inefficient film distribution channels, piracy, and a lack of viewers forced many single-screen theatres to close due to losses.

2 Pamela Hutchinson, “The Birth of India's Film Industry: How the Movies Came to Mumbai,” The Guardian, July 25, 2013, accessed July 15, 2015, www.theguardian.com/film/2013/jul/25/birth-indias-film-industry-movies-mumbai. 3 Noel De Souza, “A Brief History of Indian Cinema,” HFPA, January 2, 2014, accessed July 15, 2015, www.goldenglobes.com/global/brief-history-indian-cinema-5625.

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Page 3 9B16M051 FILM DISTRIBUTION IN INDIA PRE-DIGITIZATION

In the early days of cinema (before the 1970s), there was no television in India. Thus, the only way to watch a movie was in a movie theatre. However, with the advent of the national broadcasting network Doordarshan and the debut of television sets in the Indian market in the 1970s, movies began to be aired on television — though they aired infrequently and were never recent movies. In 1975, Video Home System (VHS) tapes came onto the market and movie piracy started in India. In the 1990s, compact discs (CDs) flooded the market, which further added to piracy. Since then, the advent of the Internet only exacerbated the problem.4

According to Mishra, in the early 2000s, the main problem for the film industry was that of managing costs. At the time, analogue prints cost around INR₹50,000;5 these prints were in photographic reels and would typically weigh around 40 kilograms. The cost was apportioned to the materials (e.g., polyester) and printing. Out of the total cost, 80 per cent was the reel itself and 20 per cent was the laboratory cost for printing. This was a one-time sunk cost, and reprinting a second reel replicated the entire cost again. Mishra explained with an example:

Let’s say a producer has made a ₹500 million film with [an all-star] cast and would like to spend a significant amount on prints. If the producer wanted to release 600 prints in 2004, it would have been considered a phenomenal release at that point in time. Thus, if the producer wanted to create a unique print for each cinema, the total cost would be 600 times ₹50,000 to give ₹30 million. Now ₹30 million is not a big fraction of ₹500 million. However, the same cost applies for a low-budget film of, say, ₹50 million, if the producer wants to release it in an equal number of cinemas (600). In that case, the printing costs would rise up to more than half of the total budget. Thus, for a low- budget movie (which [represents] around 60 per cent of the total films made), the producer typically decides upon 60 prints. In that case, the print costs would be ₹3 million and the ratio of print costs to total costs would have remained the same as that of a big-budget [film].

For big-budget movies, not every movie theatre had the same potential, and there was a timeline release date by which the movie was shown until there was no further earning potential. Therefore, if the film was released at 600 large theatres in the first week and it was a hit, it continued at 300 theatres while the remaining 300 prints were shipped to second-tier theatres either in the same city or outside. In the third week, more prints were shipped from first-tier theatres to second-tier theatres, and some from second-tier theatres were shipped to third-tier. During this process, almost half of the prints typically became surplus and there was a loss. In addition, the print quality deteriorated due to wear and tear in use, transit, and storage, and other reasons.

Alternatively, if the movie flopped in the first week, the outcome would be worse. In that case, the producer would have released 600 prints, but after a week, there was a cumulative demand for only 150 prints — and so the losses kept on increasing. Given that the ratio of hits to flops was 10:90 at the time, this posed a huge risk to producers. For big-budget producers, it was not possible to reduce the number of prints because each movie’s budget was too large to do so. For small-budget movies, producers had no choice but to release somewhere between 20 and 30 prints. In this way, the high cost of prints was the root cause of the stunted growth of India’s film industry.

4 Ontrack Systems Limited, “The Film Industry in India: An IndiaOneStop Synopsis,” IndiaOneStop.com, accessed July 16, 2015, www.indiaonestop.com/film. 5 ₹ = INR = Indian rupee; all figures are in INR unless otherwise specified; ₹1 = US$0.02 as of October 22, 2013.

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The second major problem was a lack of transparency. It simply was not possible for producers in a major city like Mumbai to confirm whether their films were being played in other parts of the state or country. Producers had to depend on the distributors and exhibitors to judge the success rate of a movie. The distributors made use of this situation by manipulating the number of shows or theatres where the movie was being played in order to make money. This was known as internal piracy or leakage.

The third problem was that of piracy, which was heightened because simultaneous release was not possible at all levels of theatres in Tier 2 and Tier 3 cities. Moreover, it was very difficult to control piracy because any individual with a computer, some software packages, and the Internet could easily circulate pirated films (see Exhibit 1). Therefore, piracy was a two-pronged dilemma for the producer: the producer had to reach as many audiences as possible within the first week of the release itself, but at the same time keep the costs down.

ENTER UFO

UFO Moviez India Ltd was founded after in-depth research and market study. With an initial investment of ₹1 billion and a unique business model, UFO was confident of its long-term success. Mishra explained:

This is how digital cinema works. We take a film, scan it, and create computer files . . . instead of analogue prints. The computer file is then put through a digital cinema conversion process. Traditionally, one second of footage in a movie would equal 24 frames. Each frame is one file of four megabytes, so a two-and-a-half-hour movie would equal three to four terabytes of data. However, such a huge file could neither be transferred online nor played. Moreover, it would require a huge amount of storage space. Thus, the file size of an entire movie needs to be brought down to around eight gigabytes [GB] . . . [but] the downside of such a compression could be the possible decrease of the picture and sound quality.

This is where UFO came up with an innovative solution: technology that enabled compression of the movie file without compromising picture or sound quality. While the traditional encoding standard in the early 2000s was MPEG-2,6 UFO went one generation further with the MPEG-4 format for movie files. The company designed a unique frame prediction algorithm that enabled removal of unnecessary data from the file (see Exhibit 2). Thus, a three-terabyte movie file could be compressed to 10 to 12 GBs without loss of quality. This allowed satellite-based transmission and easy storage.

The next part of service delivery was equally important. The film needed to be encoded, encrypted, and then packaged into smaller packets for online transmission. Next, the entire package had to be put up for satellite download. The transmission method allowed cinemas to receive the packets one by one until they had received a pre-specified number. In the event the cinema did not receive a set of packets, the system was enabled to deliver only those packets they had purchased rather than the entire stock of copies.

The model was designed to save on cost and time, and to reduce piracy (see Exhibit 3). UFO also introduced the novel concept of visible and invisible watermarking. Visible insertions were integrated in the digital prints of films to identify the exact date, time, and location co-ordinates of a film screening. Similarly, the company inserted invisible watermarks to deter piracy.

6 Motion Picture Experts Group (MPEG) was an association that developed industry standards for digital film. “MPEG: The Moving Picture Experts Group,” accessed March 7, 2016, http://mpeg.chiariglione.org.

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Other issues that UFO needed to address were the problems of electricity failure, cinema owners starting their servers late, and so on. Obviously, the most important immediate task was to convince the distributors to adopt this new technology.

INITIAL HURDLES

UFO faced numerous challenges in its initial years. According to Mishra:

In 2005, when we first entered the market, the first roadblock we faced was resistance from our target audiences. Why should they experiment with a new technology and not a 100-year-old time- tested technology that was working fine? Theatre owners wondered how we would deliver films to them since we were primarily a technology company and not producers or distributors. Producers were wary about handing over content because we had limited network strength . . . and there were concerns of piracy. The main issue was the inertia to change.

The next issue after the technological hurdle was that of the business model. Exhibitors wanted to know the equipment cost. The initial equipment cost for the theatres was around ₹500,000 to ₹1 million. This was a bulk cost for exhibitors, which they were skeptical of. They were also unsure of content delivery after investments in equipment, and there were issues regarding ownership of the equipment required for the switchover. Mishra continued:

We anticipated this in advance and devised a novel rental model. We decided to completely fund the investment required . . . in digital cinema equipment in theatres, and then make it available to theatres on a rental basis. Initially, this rental was also on a “pay-per-show” basis. This basically meant that if the theatre was running a show using UFO’s digital cinema system, [the theatre] was paying a small rental charge of ₹200 to ₹250 per show.

This pay-per-use rental model provided an opportunity for theatres to adopt digital cinema without risking any of their own funds. The model helped UFO to quickly expand its network across the country. Once network theatre numbers were sufficient, UFO approached producers for content. This step was not without its own set of challenges, as explained by Mishra:

We told producers that we would not charge anything and that initially, it would be free of cost, including encoding, digitization, and distribution. We asked the exhibitors to pay us only around 20 to 30 per cent of the cost of the equipment. Subsequently, we charged a paltry ₹175 per show from the exhibitors.

For distributors, UFO started charging only for the actual use of its platform — that is, when the film was actually screened in a theatre, UFO would charge a small service fee. In this way, the distributors’ earlier sunk cost of prints was converted into a direct cost. UFO’s overall service fee was just a small portion of the total print cost. After UFO entered the market, the average cost of releasing a film in a theatre ranged from ₹8,000 to ₹12,000 — less than 20 per cent of the former print and logistics cost.

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Initially, UFO got only “C” and “D”7 grade films because the movie budgets were low and, thus, carried a lower risk of loss. Slowly but surely, the film industry began to acknowledge the positive changes UFO’s presence had made in the business environment. UFO accorded savings in print and handling costs, and provided screening flexibility for distributors. Most importantly, the company was enabling faster, widespread film releases across geographies, making it possible to completely do away with the need for staggered releases. All industry parties were able to increase funds for the promotion and publicity of the films.

UFO FLIES AHEAD

By 2008, UFO had about 1,000 theatres under its umbrella, and instead of marketing themselves to exhibitors, exhibitors were approaching UFO. Therefore, the company decided to shift to a different pricing model instead of the pay-per-show. Mishra elaborated:

We were still behind break-even . . . [and] recovering our costs. We told the exhibitors that we would switch to a rental model instead of [a] pay-per-show model. By this time, exhibitors were sure of a steady flow of films. In a conservative estimate, if an exhibitor ran four shows a day for a movie, it was running 120 shows per month, [so it] was paying UFO 120 times ₹175 to equal ₹21,000. We told [exhibitors to pay us just] ₹12,500 as fixed rental. In 2008, prints still existed and there were leakage problems of around 25 per cent. Our objective was to move toward 100 per cent digital cinema so that this leakage could be plugged. For exhibitors, there was no limit for shows in the rental model and it was an incentive for them to shift toward the digital model.

Movie distributors were approached with a different pricing strategy, as Mishra outlined: “We did not tell the distributors, ‘Instead of ₹50,000, which you used to spend earlier, pay me ₹20,000, save ₹30,000 and we will release the film.’”

For the distributor, even ₹20,000 would have sounded risky because there was always the possibility of a movie not doing as well as anticipated. Instead, initially, the distributor was initially asked to pay only ₹250 per show. Most distributors had at least seven shows for the release. Effectively, distributors could get a movie released for only ₹250 × 7 = ₹1,750, as compared to ₹50,000, which they paid before. When distributors realized that they could release a movie at such a low cost, they started increasing their release orders.

MORE INNOVATIONS AND THE INCLUSION OF ADVERTISING

In 2010, UFO introduced another concept that was possible because of its digital model. The Indian Premier League (IPL), a cricket tournament along the lines of the English Premier League, started in India in 2008, and during its one-month season, the tournament was drawing viewers away from the cinemas. Many people preferred to watch IPL rather than to go to a movie theatre. Therefore, in 2010, UFO screened IPL matches live in cinemas across the country. The semi-finals and the final match were screened in three- dimensional film (3D). Unfortunately, this initiative was not lucrative and was discontinued afterwards. Mishra explained:

7 Indian movies were categorized into AA, A, B, C, and D categories based primarily on their budget and content. While AA and A movies had popular actors and were produced with big budgets, C and D movies were made with lower budgets, poorer production quality, and relatively unknown actors. The C and D movies mainly consisted of those with sexual or violent themes. Chandrima S. Bhattacharya, “ABC of Film Finance,” The Telegraph, March 30, 2005, accessed March 3, 2015, www.telegraphindia.com/1050330/asp/nation/story_4551478.asp.

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The way these leagues are structured is that they have a good element of regionalism. If Mumbai and Hyderabad are playing against each other then only people of these cities will be interested. . . . Audiences [will not] flock to a theatre if the local team is not playing.

However, at the same time, UFO recognized the potential for 3D movies in India and, after the success of Avatar in 2009,8 envisioned a rapidly expanding market for 3D films. The company developed a cost- effective technology to convert existing two-dimensional screens into 3D-capable ones. Any theatre undergoing conversion required a dual projection setup for 3D projection along with a playback server, 3D format converter, polarized filters, silver screen, and 3D glasses. Soon, UFO had successfully converted more than 100 cinemas into 3D projection systems.

The company also wanted to explore new avenues beyond distributors and exhibitors for revenue generation, such as in-cinema advertising. In 2005, in-cinema advertising constituted 1.5 per cent of the total advertising market in India, which, at the time, was valued at ₹1.5 billion. At that time, advertising was primarily in the form of slides or short clips, and 80 per cent of the revenue went to the multiplex chains. However, multiplex chains constituted only 10 per cent of the cinema business; the rest was fragmented. Accordingly, most of the advertisements were of a local nature. Mishra noted:

Rough estimates put the number of cinemas in India . . . in the range of 8,000 to 12,000. Assuming there are 9,000 cinemas in India, this translates to roughly 8,500 owners across 300 cities and towns. Now, if a consumer product/brand wants to advertise in 9,000 theatres, it has to approach 8,500 owners individually and negotiate with them. [After] negotiations, ad material needs to be provided and [playback] ensured. It is a very complex activity, and that’s why major national brands kept out of it.

UFO approached exhibitors with a novel proposition: in exchange for advertising rights in the theatres, the company offered exhibitors 25 per cent of the ad revenues generated. In the past, exhibitors’ revenue from the advertisements had been zero, so the offer was well received. UFO waited until its network strength was sufficient before approaching advertisers. The management at UFO was optimistic about this third source of revenue, as Mishra described:

In-cinema advertising has its inherent advantages. It offers a captive environment sans remote control to advertisers and language-specific solutions for targeted communication. It is clutter free and has high recall. You are in a dark movie theatre with a large screen. You are seated and not talking. You also know that the advertising is not interruptive because it is only there for five to seven minutes, and then the film starts and continues without interruptions. So cinema advertising is well received and is not seen as an obtrusive irritant.

In-cinema advertising increased with the advent of UFO. Advertisers released campaigns on UFO screens with specifications for screening, such as the number of theatres and shows. Once the release order was given, UFO delivered the advertisements to the cinemas in the same way that it delivered movies. A playlist was required to play the ad, instead of the licence required for a movie. The playlist defined where the advertisements would be shown. Scheduling was done by UFO through interaction with the client agencies. Thus, the theatre operator only had to screen the movie. The playlist automatically identified the advertisements and trailers to be played with the film and played them at the right time. Since it was controlled by UFO, the cinema operator did not have any power to exclude the advertisements. Advertisers were provided with logs of screenings, allowing for transparency and accountability.

8 According to Box Office Mojo, Avatar was the highest grossing movie to date; IMDb.com, “All Time Box Office,” Box Office Mojo, accessed September 20, 2015, www.boxofficemojo.com/alltime/world.

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BENEFITTING ALL STAKEHOLDERS

After 2010, UFO changed its focus to recovering costs and breaking even. As Mishra pointed out:

From ₹250 per show, we increased the distributor fees to ₹395 because their collections were also increasing. We convinced the industry that even ₹395 was a subsidized cost, and we wanted to take it up to ₹450 per show. We could not have started from ₹450; we had to grow the entire eco-system. Whenever we raise the prices, it is frowned upon by some clients, but the overall response is positive.

By mid-2012, many movie producers in India were releasing their movies through UFO. The company had around 22 film releases a week in 33 different languages across a network of approximately 4,400 theatres and held over 15.1 million screenings by the middle of 2012. UFO had 19 offices and a fleet of 600 field engineers across India, with each engineer in charge of about 10 theatres.

The business model developed by UFO was benefitted every stakeholder because the model was created with a holistic view. Producers were benefitted from lower release costs and less piracy. Exhibitors were benefittedfrom lower playing costs, and many theatres that were shut down had reopened. Consumers benefitted from better viewing quality and an improved experience; further, neither suburban nor rural consumers had to wait for films to be released in larger cities before coming to their local theatres. Even the government and society benefitted from the digital cinema model. The government benefitted through better tax collection because of the digital tracking of movie screenings. Society as a whole benefitted from the advantages of using digital film, which was better for the environment than the vinyl tapes that were previously used for film reels.

THE WAY FORWARD

By mid-2012, UFO’s greatest challenge was not competition but the need for a conducive environment. The company’s financial revenue was good (see Exhibit 4), but its business model was based on full utilization of capacity. Therefore, UFO reaped benefits only when there was a large number of cinemas. Mishra observed:

A huge potential for new movie theatres lies in rural India today. We have received a lot of enquiries . . . to set up a cinema in an area that has local activity. In many cases, the villagers have to travel 15 to 20 kilometres to get to the nearest cinema. We are working with some stakeholders in such cases to develop solutions. However, the fact remains that India is an “under-screened” country when compared to the United States or China. There is significant scope for increasing the screen density in India.

An alternative strategy would be to grow revenue sources other than movie distribution. Herein lay the importance of advertising revenues; if UFO could get more national and international brands to advertise in movie theatres through UFO, it would generate a steady revenue stream. This would continue even when the company had saturated options for collaborating with movie theatres for distribution. Even though UFO had made some headway, growth of advertising revenues required more of a non-technical approach.

From its initial struggle to overcome the resistance to change, UFO had come a long way. Not only had it grown, but it had helped the ecosystem grow as well (see Exhibit 5). Innovation was at the core of the company’s business philosophy, and the environment that UFO operated in demanded technical agility and flexibility to quickly respond to ever-changing market requirements. Thus, UFO’s technical research and development team was constantly innovating to provide maximum benefits to its partners and the ecosystem

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at large. However, Mishra was aware of the risks of being a technology pioneer: “There are many instances where some company reverse engineered the technology of a pioneer company and then re-created and sold the same at a lower price.” However, Mishra felt that threat was minimal and easily overcome if it arose.

The meeting ended. Gala thanked Mishra and returned to her office, pondering the next phase of growth for UFO and the film industry that it had become such an inherent part of. The first hurdle that UFO had to address was increasing the share of revenue from advertisers. The company also had to assess its role in changing the movie infrastructure in India and decide whether it could be a part of any change. Lastly, UFO had to pre-empt competition from a competitor with a similar offering at a lesser price. Gala needed to develop a plan of strategy.

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Source: Company materials.

EXHIBIT 1: MOVIE DISTRIBUTION BEFORE 2005

Exorbitant cost of prints Limited number of prints Release of new film first in metro cities Delayed exhibition of new movies in other centres Loss of commercial value of the movie due to delay Quality of film (print) deteriorated with passage of time Delay allowed pirated versions of the film to eat into legitimate market share Combined effect: Low overall theatrical collection Multiplier effect: Majority of films in India incurring losses or barely recovering costs

EXHIBIT 2: THE UFO FILE COMPRESSION SYSTEM

UFO created a unique algorithm to reduce the size of movie files without compromising quality: a concept called “IMPACT 4.”* The system was intelligent. It made one pass of the film before encoding to check for duplicated and waste data present in the movie files. In that pass, the system determined the moving and static parts of the movie frames. The algorithm divided the frame into units and captured the units containing movement. The system captured the units that contained movement once. Capturing the same thing again and again did not make sense, so the system checked for movement within a certain number of frames (e.g., frame numbers 1 to 60,000). If the system stored the same movement 60,000 times, unnecessary space would be used only to show the same thing repeatedly. Thus, instead of storing 60,000 frames, the algorithm allowed storage of only a part of it. The file size decreased as a result.

Note: * While IMPACT is a ticketing platform — the Integrated Media Pact — that mediates the transactions between exhibitors and distributors, IMPACT 4 is a compression algorithm developed by UFO. Source: Company materials.

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The Key Processes

EXHIBIT 3: THE UFO MODEL OF DIGITAL CINEMA

1. Conversion Process (Capture Centre Process): In this process, the celluloid film content or the digital film content was converted into an encrypted digital version using MPEG-4 standard. As the end result of this process, a full-length feature film was converted into an encrypted, small-size (8 to 10 GB) computer file, which could only be read and played using UFO technology playout servers at the theatre.

2. Transmission Process: At this stage, the encrypted film content (MPEG-4 file) was transmitted to all exhibitor franchisees (i.e., theatres) over the satellite network. The transmitted files were stored in UFO’s playout servers, installed at each theatre. Using DLP projectors, theatres could show the films as and when required, according to the terms of the license.

3. Licensing Process: In this process, the distributor/promoter provided an approval (licence) to UFO allowing a specific exhibitor (i.e., theatre) to show the film a certain number of times in a pre-defined period of time. UFO delivered this licence to the smart card installed on the playout server. After the predefined number of shows played, the licence expired, and the playout server would not allow any further screenings of the stored movie unless the licence was renewed.

4. Digital Playout Process: The digitally encrypted content of the film resided on the UFO-provided digital server at the theatre. Upon receipt of the licence for playout of the encrypted content, the theatre manager could schedule the shows for the next two weeks using the scheduling master of the UFO server. Once scheduled, the film was played out at the scheduled time just by clicking a button on the digital server. The encrypted content was decoded and, using the high-end digital projector, was displayed on the screen at the theatre. Every screening created a technical log of the playout, which was then retrieved by UFO’s central billing server for billing purposes.

Source: Company materials.

EXHIBIT 4: UFO MOVIEZ’S AUDITED REVENUE FIGURES (₹ MILLIONS)

Revenues	FY 2011/12	FY 2010/11	FY 2009/10	FY 2008/09
Distributor Revenue Exhibitor Revenue Ad Revenue	513 586 369	378 417 324	278 387 97	337 230 152
Total Revenue	1,468	1,119	762	719

Source: Company materials.

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Page 12 9B16M051 EXHIBIT 5: ADVANTAGES OF UFO’S DIGITAL CINEMA SERVICE FOR STAKEHOLDERS

Stake- holder	Advantage	Details
Distributor	Savings on print costs	High cost of film prints (₹50,000–60,000 per print for a conventional release) was avoided. Such high print costs could be around 25% of a film's production budget. The reduction of cost made a much wider release possible.
	Savings in handling costs	A normal print weighed around 40 kilograms and could cost about ₹10,000 per print in transportation/handling to the theatres and back after the screening. Because of digital distribution, handling costs were avoided.
	No last-minute print orders	Response to demand could be more flexible and efficient. Producers and distributors did not have to guess a film’s fate and then forecast the number of prints. A low-budget movie could be released in a small number of theatres, and if it became popular, the number of theatres in which it was screened could be increased without delay.
	Faster and wider spread of movie release	With film print cost being virtually negligible in the digital format, distributors were able to release movies in more theatres in a single instance instead of waiting to allot used prints to B and C centres (see Note). This ensured faster recovery of investments by producers and distributors.
	Longer print life	The film's quality did not deteriorate with age, unlike celluloid, which became scratched, especially with the older projectors used in India. Every show of a movie provided the same quality as the premiere show.
	Curb on piracy	The playout system allowed accurate and secure reporting of screening details to ensure that no unauthorized screenings were shown. The threat of piracy was further reduced because the media was encrypted and provided with a unique watermarking system unrecognizable to the viewers.
	Bigger promotional budgets	Because of cost savings in production and distribution, movie producers could channel the savings into bigger promotional methods.
	Lower breakeven point	With reduction in investments, distributors were able to recover their investments faster and, thus, were able to push the growth of the industry as a whole.
Exhibitors	First day, first show	With no investment in print cost, a distributor was able to release the films at many theatres simultaneously. Thus, with digital cinema, even B and C class cinemas could get access to fresh releases in the same week as A class.
	Increased box office collections and profitability	Fresh releases prevented piracy, generated more revenues, and raised box office collections at theatres. Coupled with savings attributable to lower power consumption, the theatre owner’s profit increased.
	Scheduling flexibility	Digital cinema servers had the capacity to store 8–10 films. Once a film was stored on the server, exhibitors had the flexibility to schedule shows to meet their requirements and audience attendance patterns.
	Savings in running costs	The manpower and electricity required to run a digital projection system was about 25% of a traditional system. Also, consumables such as arc lamps used for the traditional projectors were no longer needed.
Consumers	Simultaneous release	With digital cinema bringing fresh releases to B and C class centres, viewers there did not have to wait for weeks to see their favourite films.
	Good video quality	Digital cinema provided consistently high-quality images. Earlier, B and C centres were getting film prints in the fifth or sixth week of release, by which time the prints had deteriorated in quality. With UFO’s model, all theatres had access to high-quality digital images and sound.
Government	Increased tax collections	Increased box office collections directly translated into increased revenue for the state as taxes such as entertainment tax, surcharge, service tax, etc. In addition, digital cinema curbed piracy, capturing money that normally would have escaped the exchequer.
	Savings in power	The power consumption of a digital projection system was more economical than that of an optical projection system. For a standard cinema, the annual cost savings could be up to ₹300,000.
	Increased employment	The advent of digital cinema resulted in new and compact cinema houses in small towns and cities. Theatres that were on the verge of shutting down were revived. These opportunities were prompting many entrepreneurs to start cinemas/multiplexes, which improved employment potential as a whole.
Society	Energy savings	The technology used by UFO equipment used less electricity and thereby contributed to energy conservation.
	Environmentally friendly solution	The polyester films used as movie reels were imported and posed a significant environmental hazard after the film’s cinematic shelf life. Such physical prints were dumped and, in most cases, burnt, causing heavy air pollution with the emission of dangerous gases. The UFO model eliminated physical copies of prints altogether, creating an environmentally friendly solution.

Note: The Indian film industry classified exhibition centres (cities) based on market size and population. B and C centres were typically the semi-urban and rural centres with lesser populations and purchasing power. Source: Company materials.

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