When Popcorn Costs More than the Movie

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Image credit: PVR CInemas

Typical multiplex experience in Chennai – Popcorn: ₹180; Pepsi: ₹200. The all important movie ticket: only ₹120.

By Natarajan Ramalingam (@natrajdr)

While a cinema ticket in a multiplex costs ₹250 or more in other metros, the price caps set by the the state government in Chennai provides the same ticket at significantly lower costs. Sounds good, doesn’t it? Maybe, maybe not.

Tamil film industry has been entwined with the state politics for a long time – with prominent cine actors and writers becoming politicians on one hand and the use of movies as a medium for political messaging and image building on the other. Successive governments in the state have claimed cinema as “the primary medium of entertainment for the common man” . While the validity of the claim is difficult to prove due to the changing times and tastes of the public, the government however continues to make it.

This claim provides the legitimacy for the government to intervene and regulate the industry to make the medium of entertainment “affordable to the common public – especially the poor”.

The increase in popularity of vernacular cable TV during the early 2000s, led to a fall in occupancy rates in theatres. Faced with a consequent fall of the entertainment tax rate, the government allowed for variable pricing during the first two weeks of any movie’s release.

This variable pricing mechanism did not impact tax collection as much of the increase in pricing was in “black” and was pocketed by the cine distribution/exhibition industry. The politicians saw an opportunity in this space to show themselves as pro poor by regulating the prices – with minimal impact on revenue to the state.

On 1st Jan 2007, the State of Tamil Nadu, through an amendment to the Tamil Nadu Cinemas (Regulation) Rules, fixed the minimum and maximum prices that can be changed for cinema hall tickets. The fixed prices range from ₹4 for Non-AC cinema halls in municipalities and village panchayats to ₹120 in the AC multiplexes that are contained within shopping malls.

The implementation has helped keep the prices of cinema tickets quite low in the state – ticket prices at multiplexes in comparable metropolis such as Kochi and Bangalore range from ₹300 to ₹500. It is interesting to note that another state which has a strong connect between politics and the film industry, Andhra Pradesh, also have similar laws capping the price of cinema tickets.

But this has come with long term unintended consequences.

Cinema, by its inherent nature, is a very risky industry. Notwithstanding the risks of a movie being completed from the point of inception, there are huge risks on the success of the films that are released (people’s taste, popularity of the stars, novelty of the theme, etc). In such an industry, the model will be to capture increased profits in cases of increased demand (a “Hit” movie) – what finance terms as a “higher-risk-higher-reward” mechanism. The price cap prevents the industry from capturing a higher amount of reward except by way of having cinema on the halls for a longer duration. But video piracy has led to the reduction in the “shelf life” of a new movie.

Investments in developing new and upgrading existing cinema halls have fallen due to high costs of setup and the low returns therein. Moreover, the opportunity cost of land for smaller theatres have increased – due to the increase in land value and stagnation in ticket revenue. Theatres in small towns have put the land for other use – malls, apartments and such.

Most cinemas have looked for alternate sources of revenue – snack and parking fees in multiplexes cost more than the ticket prices themselves! While the cinema tickets themselves are cheap, the cost of the “transaction” of watching a movie is high.

No allowances for inflation-based increases were made in the regulation. While the labour and utility costs have increased with time, the price ceiling have remained constant even after 10 years. The cap has led to continued use of the practice of selling tickets in “black”.

In a separate but related move the government, to boost Tamil language, decided to waive off the entertainment tax for tamil movies with tamil titles. This has led to a situation where the government doesn’t have an interest in increasing the ticket price – as there will be minimal corresponding increase in the tax collection. This tax break and the price cap has meant that the exhibitors of other language movies make lesser revenue per ticket than their Tamil counterparts.

Contrast this with the neighboring state of Kerala. The state laws there do not provide the government with the ability to set prices – only decide on the taxation that can be applied. An open market – same entertainment tax rates regardless of language and content and the ability for the cinemas to be flexible on pricing – has enabled the cinema exhibition industry to grow. The number of screens in the state has increased from 408 in 2014 to 516 by late 2016.

The regulation from the state of Tamil Nadu has helped keep the prices low – much lower than what the consumers were willing to pay (if compared with similar consumers in other states). While consumers have been happy, in the long term this has squeezed the profitability of the cinema exhibition industry. The Madras High Court has recently directed the state government to take a “realistic and rational decision” on ticket pricing.

Is it time for the government to withdraw itself from regulating this industry to its peril?

Natarajan is a alumnus of the Takshashila GCPP, an engineer by education, manager by profession and an aspiring policy analyst out of curiosity (@natrajdr)

[This blogpost is part of an assignment of the Economic Reasoning coursework. For the assignments, students were asked to submit essays on identifying instances of price controls across the world; who the intended beneficiaries were; and what were the unintended consequences of the price control.]

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