The Reliance-Spielberg Blockbuster?

A different sort of number is being discussed in the corner office of Reliance Entertainment– the entertainment and media arm of the Anil Dhirubhai Ambani Group (ADAG) – though Anil Ambani and his lieutenants must be hoping it proves equally lucky. That is the $500 million the group is proposing to invest in a joint venture with Steven Spielberg, the man who made Jaws and Jurassic Park. The money will enable Spielberg to exit his current contract with Viacom’s Paramount Pictures. The new Dreamworks studio will invest $1.5 billion in film production and is expected to roll out 30 movies over four years.

Steven Spielberg is the best — and most expensive — brand in Hollywood.

Movie industry experts view the Spielberg-Reliance deal as compelling math on many fronts. Spielberg would have found few other investors with a penchant for the movie business willing to invest such a large amount, and Reliance offers a gateway to Indian audiences, they say. For Reliance, Spielberg represents the lowest-risk opportunity to secure its lofty $10 billion revenue target while tapping markets globally.

In the U.S., Spielberg is not commenting on the deal and in India, Reliance Entertainment is being equally circumspect.

“Steven Spielberg is regarded as the world’s greatest storyteller and a brand in [himself],” says Nelson Gayton, executive director of the Entertainment Media Management Institute at the UCLA Anderson School of Management. Adds Jehoshua (Josh) Eliashberg, professor of marketing at University of Pennsylvania’s Wharton Business School, “There are very few names in the movie business on which it seems worthwhile to take risks. Spielberg is one of them.” Spielberg delivers effectively in two key areas of the movie business, he notes: “selecting the right stories and telling them in a very appealing manner.”

Gayton says the deal makes eminent business sense for Spielberg and Reliance. “We are not talking about dumb money coming into the industry. Reliance has had a long history in the movie business, and they want to turn this into a $10 billion entertainment company. When you are trying to achieve that much growth, you have to think of how you are going to get there from a content perspective and what Steven Spielberg can give you to reach that kind of success.”

According to Eliashberg, “a good return on investment” in the movie business would be about 15%, and “Spielberg would be able to deliver that.” With the big bets Reliance is making in the movie business, it is taking “minimal risks” by partnering with Spielberg, he says. For a sample of 281 movies produced between 2001 and 2004, the return on investments at a studio ranged from -96.7% to more than 677%, Eliashberg noted in a June 2007 paper he co-authored in the journal Management Science.

Reliance is not the first Indian company to foray into Hollywood. Yash Raj Films, one of India’s leading studios, has collaborated with Walt Disney to produce a computer-animated feature film called Roadside Romeo, the story of an abandoned dog in Mumbai. It should be in the theaters in the next few weeks.

Anil Ambani with Amitabh Bachchan at the Venkateshwara Temple in Tirupati. Reliance has signed a deal with the Bachchan family for a joint venture to make movies starring the icons — Amitabh himself, wife Jaya, son Abhishek and daughter-in-law Aishwarya Rai. The project will start with funding of $200-300 million.

UTV Motion Pictures has already co-produced films like The Namesake with Hollywood studio Fox Searchlight and Japanese producer Entertainment Farm. UTV and Fox Searchlight also teamed up to produce I Think I Love My Wife. Another co-production, The Happening, happened earlier this year in a deal with 20th Century Fox. Now UTV is producing its first independent Hollywood film, The Ex-terminators (with technical help from Michaelson Films). UTV has also signed deals worth $37 million with Overbrook Entertainment and Sony Pictures Entertainment.

In the animation space, of course, there have been several tie-ups. Pritish Nandy Communications has signed a $25 million, five-movie contract with Motion Pixel Corporation. There have been many more such ventures where Indian companies are doing the back-end work.

What differentiates the Reliance deal from the others is, of course, size. Secondly, Spielberg is an international icon. India is moving from the fringes of Hollywood to center-stage. “India is getting more and more recognized and the acceptability of Indian houses globally is on the increase,” says Niteen Tulpule, associate director at KPMG, an international accounting and consultancy firm.

A Trophy Acquisition?

Two decades ago, Sony of Japan made history and generated a lot of adverse nationalistic sentiment when it purchased Columbia Pictures for $3.4 billion. That turned out to be a trophy acquisition, more for show than financial success. Does the Reliance deal run a similar risk?
It could. Spielberg is known to be extremely pricey. Recently, both Paramount and Universal Pictures refused to green-light a $130 million trilogy on cartoon hero Tintin. Paramount and Universal were working on a joint Tintin project, each with a 50% stake. According to the International Herald Tribune: “The pending deal with Reliance underscores some realities about Spielberg – mainly that he has become so expensive that few public companies can afford him. Spielberg’s standard deal, on par with other blue-chip talent, is 20% of a movie’s gross from the first ticket sold.”

“From Spielberg’s point of view, money obviously plays a big role,” says Tulpule of KPMG. “[But] Spielberg is the best brand around, so there is no question about the brand value. He also brings in industry best practices.”

Eliashberg says Spielberg “could very easily approach private equity and financial institutions.” But such funding is typically available on a project-by-project basis, while Spielberg’s need is financing for a whole slate of movies. “There are very few entities that can put up the kind of money [he] requires.” Also, private equity investors typically back studios that can then hire different directors for their movies, according to Eliashberg. “With Spielberg, Reliance is investing directly in a single director with a terrific track record, and very powerful brand equity.”

In the entertainment arena, Ambani seems well prepared to take risks. “We haven’t branded our E&M (entertainment and media) business ‘BIG’ for nothing,” Reliance Entertainment president Rajesh Sawhney recently told business daily Mint. “Once we connect all the dots, you will see [us] as a leading global player with interests across every single E&M domain.” The company is already worth a great deal. Early this year, international financier George Soros was negotiating for a 3% stake in the company; the valuation of the enterprise at that time was around $3.3 billion.

Eliashberg says Hollywood film studios have in recent years preferred bigger budget movies primarily because “they yield a better return on investment.” Movie makers have to try much harder to win audiences away from television and the Internet, he adds. “People stay home and entertain themselves; it’s easier to bring them to the theater with big budget movies.”

By partnering with a big name like Spielberg, Reliance is ensuring that it also gets access to the so-called “aftermarket” of TV and the Internet, says Gayton. “When you look at the U.S. market, the aftermarket is where all the value is; the theatrical market is not growing. If you are going to come here, why not come with that one brand like Steven Spielberg.”

Gayton notes that movie ticket prices are much too low in India, and that “the only way” to grow revenues is to go overseas. Also, while the Indian film industry produces more than a thousand movies a year and is growing 17%-20% annually, “it is still a fraction of Hollywood’s size.” According to Gayton, the Indian film industry’s revenue is about $2 billion including box office, overseas and ancillary markets, while Hollywood is an $11 billion industry, although its growth rate is just about 3%-5% a year.

“Getting into entertainment is a brilliant move from Reliance,” says Tulpule of KPMG. “This is a highly under-invested and under-corporatized segment in India and has huge potential. Distribution to global Indians is also becoming a big play. Reliance could also be looking at addressing not only the Indian diaspora but also the English-speaking audience.”

Gayton, too, argues that Reliance could use the Spielberg partnership to penetrate the Indian market both at home and overseas. “There are 25 million Indians outside India, and part of that is taken up by the aftermarket like the Internet and TV,” he says. “Also, when you put aside India and the U.S. market, you have the rest of the world. Spielberg has made movies that have delivered box office returns across the world in billions of dollars.”

Spielberg is not Ambani’s only Hollywood connection. At Cannes earlier this year, Reliance announced that it had signed deals to make films with the production firms of Hollywood stars Nicolas Cage (Saturn Productions), Jim Carrey (JC 23 Entertainment), George Clooney (Smokehouse Productions), Tom Hanks (Playtone Productions) and Brad Pitt (Plan B Entertainment), and filmmaker Jay Roach (Everyman Pictures). The total investment: $1 billion.

Gayton says those deals make sense especially because “Bollywood talent is pretty much booked up” for many years into the future. “In many ways, if you are going to feed this growing industry, you have to look outside of India to Hollywood,” he says. He adds that he won’t be surprised if Reliance uses Spielberg to make “a new genre of crossover films.”

Reprinted from knowledge@wharton