The economics of Brazil's film industry have never been better.
When the gritty police thriller, Elite Squad II, was released at cinemas across Brazil in early October, it wasn't much of a surprise that it took in a record R$14 million (US$8.23 million) of box-office receipts and attracted 1.3 million movie-goers in its first weekend. As the sequel to the 2007 hit -- which earned it a Golden Bear at the Berlin Film Festival the following year -- there was plenty of hype and hope, while also providing yet more evidence that Brazil's industry is not only evolving, it is getting richer.
Indeed, the economics of Brazil's film industry have never been better. When it comes to media and entertainment in the country, investments are growing as local and foreign investors are betting on an ever-expanding middle class that has time and money to head to the mall for a movie and popcorn, or pick up some films to watch at home. In 2009, 113 million Brazilians went to the movies, up from 89 million recorded during each of the previous two years and close to 2004's record breaking 117.4 million, according to Filme B, a Rio de Janeiro-based industry research company. Brazilians spent R$970 million (US$570 million) at the box office last year, an increase from the R$700 million spent annually in 2007 and 2008 and more than double the R$357 million Brazil's box offices brought in 10 years ago.
But Brazil's budding film entertainment business is still a long way from what it truly wants to be -- Latin America's answer to Bollywood. India's Bollywood produces and markets thousands of its own movies and over 90 percent of the movies Indians see are from Bollywood, not Hollywood movies. In Brazil, less than 14 percent are from home. To change that, experts say, Brazil wants not only a bigger flow of foreign and local capital, but also much more infrastructure supporting the industry.
LIGHTS, CAMERA, MORE ACTION
Brazil's government set out to inject new life into its film industry some six years ago with a federal law enabling private investors to acquire stakes in Brazilian movies. Since then, investment firms in São Paulo, like Grupo Lacan, and big banks have been setting up new investment products called "Funcines." BNY Mellon is in the process of underwriting one such fund, according to Brazil's stock market regulator, CVM. As of September 21, the value of Funcines in the market hit R$130 million (US$76.5 million), up from R$100 million in 2009. Once BNY's underwritten project is up and running, 2010 will mark a record-breaking year for private capital being invested in the industry.
"The industry is going through a major transformation and the biggest part of that change is coming from the government," says Bruno Wainer, director of Downtown Filmes, a mid-sized Brazilian distributor, which financed the acquisition of distribution rights of local and international films through a partnership with Grupo Lacan.
Nearly all of Brazil's movie market is in the hands of the government's audiovisual laws. Production companies of all sizes find a script, or write one themselves, which they then send to the government for financing. Private investors are largely protected from losses if a film is a flop because the government picks up a lot of the tab. Critics charge that this leaves Brazil with a more European model of movie-making, left to the whims of directors, rather than an American model, aimed more at assuring profitability and further revenues through marketing and DVD sales.
As for the Funcine system, it allows companies to dedicate up to 3 percent of their federal income tax for funds investing in cultural programs. Some companies put that money into the theater, others into museums and a growing number into cinema. Another country that runs the funding of its film industry along similar lines is Mexico. Besides direct funding in film projects through government entities, Mexico also has a scheme for funding vehicles, called "Efecine."
In 2004, there was only one Funcine in Brazil, which raised just R$3 million and was set up by government-controlled Banco do Brasil. By the end of this year, there will be an estimated R$180 million invested in three new Funcines, according to the CVM. The funds have a short shelf life, usually three years. Nearly all of them invest in movies that have already been given a green light by the producers and are close to being fully funded. Funds like those managed by Grupo Lacan are strictly for Downtown Filmes. Lacan raised more than R$150 million for Downtown over the last three years. Other Funcines invest in stakes in movies they deem commercially viable. New ones in the works are considering investing outright in new film companies.
"The government has learned how to use public resources wisely," says Downtown's Wainer, referring to the scheme's tax deterrent. "[A Funcine] adds value to the sector and helps a lot of mid-sized companies that are trying to grow market share organically," he says. "The sector is maturing and we are seeing more serious analysis being done on film projects. There's still more to be done, but we are moving in the right direction."
That's happening at a time when the future of media and entertainment across Latin America looks bright. According to a report by consultancy PricewaterhouseCoopers (PwC), consumer spending in Latin America's film entertainment sector is set to expand with a compound annual growth rate (CAGR) of 5.2 percent over the next five years, increasing to US$3.1 billion by 2014, with Brazil accounting for more than one-third of the total. In comparison, PwC forecasts that China's consumer spending on film entertainment will record a 16 percent CAGR, to US$2.6 billion, and India 12%, to US$3.4 billion.
"The scale and opportunities are better in India and China, but we prefer it down here," says Vinicio Espinosa, chief operating officer of start-up film company Corisco Films in Rio de Janeiro. Prior to moving to Brazil, Espinosa spent two-and-a-half years in corporate development in search of loans for MGM Studios in Los Angeles. "It's a matter of taste, and know-how. The growth here is very robust in our view," he says. "Investors will always pick the country they know best and we know Brazil."
Still, Brazil remains a relative unknown in showbiz. The country doesn't have the A-list stars like Hollywood and Bollywood do. Only one Brazilian movie star has crossed over into Hollywood with some success -- Rodrigo Santoro has carved out a decent living as a supporting actor and won an MTV Movie Award for Best Villain thanks to his role in 300 in 2006. Santoro also played Raul Castro in Steven Soderbergh's two-part film Che, in 2008 and 2009, about Latin American revolutionary, Ernesto Che Guevara. The most famous director is Fernando Meirelles. He owns O2 Filmes in São Paulo and has made globally released movies with Hollywood stars, like Ralph Fiennes and Rachel Weisz in The Constant Gardner and Julianne Moore and Mark Ruffalo in Blindness
"Because of the long history of government incentives keeping the business alive, movies are not yet treated as a commodity [in Brazil] like they are in Hollywood," says Nicholas Bernstein, CEO of Corisco Films in New York. "The money these film companies make is all in advertising, as is the case with O2 Filmes…. But we recognize -- and I think [O2 Filmes] recognize -- that there is also tremendous international potential for Brazil to write and produce commercial films for the local market, which have some appeal in markets outside of Brazil, too, " he says. For example, Meirelles's first major film, the crime-drama City of God, cost around US$2.3 million to make and brought in US$50 million worldwide. Another critically acclaimed Brazilian film, Central Station, cost US$3 million to make, with US$35 million in worldwide sales.
Last year, Argentinian film company Costa Films -- owned by Eduardo Constantini, a real estate magnate-turned-film maker -- acquired independent Brazilian film studio Bananeira Films to form Costa Films Brazil. Its recent movie was Lula, the Son of Brazil, a feature about the life of president Luiz Inacio Lula da Silva. The most expensive Brazilian film ever made, costing R$17 million (US$10 million), it is set for worldwide distribution early next year and is the country's 2011 Oscar submission.
Constantini is arguably one of the region's most ambitious young producers. In 2006, he joined forces with Mexican financier Alex Garcia and The Weinstein Company, one of the most successful independent film studios in New York, to set up a Latin American film fund. Its first co-production was Elite Squad in 2007, Brazil's first-ever crime-drama box office hit.
Yet Hollywood blockbusters dominate Brazil's marquees. Only two Brazilian movies have made it to the top 10 of box office sales in the first nine months of this year, according to Filme B: One about a band called Titãs, the other about Spiritist leader Chico Xavier.
BOOM OR BUST
What the industry is counting on most is a Bollywood-style boom for local film. Yet, even if more movies were made in Brazil, it doesn't mean they are going to be profitable, experts warn. Even Bollywood can be a money-losing operation for film investors.
"It is still very hard to get returns of film investments in India," says Alisdair Ritchie, director of research at U.K. based Dodona Research. "While cinema has growth potential in Brazil, we are seeing most of the investments coming from building a screen presence and some in co-productions with major U.S. studios like Disney," which co-produced the Brazilian version of its hit, High School Musical.
More Brazilian-style stories are being produced these days, and becoming cultural hits, like the comedy smash about a couple changing their sexual and social roles called If I Were You and later If I Were You 2. Successes like those locally made movies are bringing people to the cinema.
"It is extremely important to have Brazilian-made movies because certain demographics are not interested in Hollywood-type stories," says Valmir Fernandes, president of Cinemark International, a Texas-based operator of 425 theaters and nearly 5,000 movie screens throughout the Americas. "If you don't provide this market with a Chico Xavier, you don't bring them into the cinemas and then we are missing a tremendous opportunity. They won't see the new movie trailers and are less likely to come to the movies," he says.
Cinemark entered Latin America in 1993, with a cinema in Santiago, Chile. Reporting a 12% increase in group turnover for the first six months of the year to US$1 billion, Latin America accounted for some 30% of the company's revenues in of the first half of 2010, compared with 24 percent in 2009. Brazil was responsible for 52 percent of its Latin America profits in 2009. Cinemark is building around five to eight projects annually, either upgrades or entirely new cinema complexes throughout Brazil, including new 3-D screens. They have 428 screens in Brazil today compared with 286 in Mexico.
Cinemark isn't the only cineplex operator with eyes on Brazil. Cinépolis, Mexico's largest cineplex chain and with more than 2,000 screens throughout Latin America, entered Brazil in July and plans to open eight theaters before the end of the year, according to the company.
As Cinemark's Fernandes notes, "Mexico is a more developed market with screens in every city. Brazil is no way near that, so this side of the industry sees Brazil as a better opportunity."
Earlier this summer, the government was at it again with new incentives. This time for companies likes Cinemark. In June, President Lula signed a provisional measure for a program called Cinema Perto de Você (A Cinema Near You), which aims to encourage more cineplexes to be built in smaller cities and towns with reduced or exempt taxation and special government financing for building new cinemas.
But whether that's enough to unlock the floodgates remains to be seen. "We are seeing some money flowing into Latin American private equity markets," says Keyer Patel, a Mumbai-based partner at Fuse Capital, a digital media and communications firms in California. Patel set up a deal this year with U.S. production company Relativity Media to create Relativity Media India, Fuse's first Bollywood investment. Patel says Fuse isn't doing the same in Latin America, but that has more to do with the fact that none of its board members have expertise in the region than any other factors.
When it comes to Brazil's potential for becoming another Bollywood, Patel has his doubts. "It's all relative. Film investments are high risk in any country," he says. Brazil's market is growing. Its economy is growing. Its pool of television and media talent is enormous. But so are others.
Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the Wharton School of the University of Pennsylvania.