Investors: Hooray for Bollywood

BOMBAY, India —  The lavish sets, lush locales and energetic song-and-dance sequences of Indian movies are a far cry from the world of high-tech software and hard-nosed investing. But for some Silicon Valley entrepreneurs and venture capitalists looking for options after the bursting of the technology bubble, Bollywood represents a big opportunity.

“The pattern is the same as the outsourcing of IT [information technology] services to India: high-caliber services at a much lower cost,” said Vivek Wadhwa, chairman of North Carolina software firm Relativity Technologies.

India’s movie industry is the world’s most prolific, churning out about 1,000 films a year and providing a large section of the country’s 1 billion-plus population with entertainment.

So far, investors have brought in only a few million dollars, but experts say more is headed to an industry that generated revenue of about $856 million in the financial year that ended in March. While that figure is flat against a year earlier, revenues are forecast to grow at a compounded annual rate of 19% over the next four years, thanks in part to a rise in “crossover” films, or those that appeal to local and overseas audiences.

Investors are being lured by low production costs and the potential to tap the global market for Indian movies, which have won overseas acclaim in recent years. The industry’s international profile has been boosted by recent films with Indian themes such as “Bend It Like Beckham” and “Monsoon Wedding,” and “Lagaan,” which earned a 2002 Oscar nomination.

The cost of producing and marketing the average Indian film ranges from $2 million to $4 million, a fraction of the average cost of a Hollywood film that ranges from $70 million to $80 million, industry observers say.

Despite the glamour, this is still a risky business. Nearly 80% of films fail at the box office, and the industry ran up losses of about 3 billion rupees in 2002. In addition, the returns are nowhere near those of Hollywood films. This year’s top Hollywood earner, “Finding Nemo,” took in about $700 million in box-office revenue worldwide on an investment of $150 million. By contrast, Bollywood’s “Koi Mil Gaya” (“I Have Found Someone”) made about $13.2 million on an investment of $6.6 million.

Most Indian production companies are small and privately held, and exit routes for investors are hamstrung by low liquidity and players’ small market capitalizations.

Analysts believe, however, that with more corporations becoming involved in production and distribution, the tapping of global markets and the nascent home video market, the Indian industry will become a more viable investment option.

But the industry would need to guard against letting overseas investors take control, said Pritish Nandy, founder of film and television content producer Pritish Nandy Communications Ltd. “If U.S. investors take charge, they will convert an efficient, low-cost business into a high-cost business like Hollywood,” Nandy said.