TFPC didn't inform us before the strike; their demands are unreasonable, says Qube co-founder Senthil Kumar
As the Tamil film industry is battling a stalemate in the ongoing disagreement between TFPC (Tamil Film Producers Council) and DSP (Digital Service Providers) over the abolition of VPF charges and many other issues, Firstpost exclusively caught up with Senthil Kumar, co-founder of Qube Technologies, which owns the lion's share of screens (700 out of 1050 total) in Tamil Nadu, to discuss the nuts and bolts of digital cinema exhibition.
In the first of a two-part interview, we talk about VPF, various allegations leveled by the producers and their investment in the technology.
For the past few days, the definition of VPF has become a severe bone of contention. Theater owners maintain that VPF is Virtual Print Fee and that producer should bear the print charges. And, producers insist that it is Virtual Projection Fee and theater owners should absorb costs.
Even if you Google it, you will find the definition of VPF as Virtual Print Fee. Instead of a real print, it is the fee paid for a digital print. However, what we have been doing in India is slightly different from what people have been doing abroad, where VPF is done on a recoupment basis. In this case, you take the cost of the equipment, repairs, and maintenance for a particular period and you take all the VPF that you charge as income, and when you have realized a return of 7% on investment, you finish the VPF during that time. Roughly, it will take about ten years to do this if you charge a VPF which is 80-85% of the cost of the film print. Since the film print costs $1000-$1100, the VPF abroad is priced at a very high level of $850 so that you pay off the cost of the projector and everything as quickly as possible.
What is the difference between VPFs and ROI in Tamil Nadu and abroad?
In the US, the one-time fee collected as VPF for the full flat run of Tamil films is $850 per screen for D-cinema (2K cinema). In Tamil Nadu, the same thing costs Rs 21,750 (which was previously Rs 27,500) per screen. Moreover, the VPF cost per show is Rs 450 here whereas it is $150 during the weekends and $50 during weekdays in abroad. In comparison, their fee is much much higher because they wanted it to be able to pay for the projector and maintenance with the return for the investor. The interest rates in the US are meager; about 2-3% and that is why the recovery is fixed at 7% there, which is a decent rate of return for the risky investment of DSPs. Whereas in a regime like India where the borrowing rate is around 10-12%, we should end the VPF when the return on investment reaches 18-24%. If you look on that basis, we are running at a severe loss.
Tamil producers allege that VPF has been abolished everywhere else in the world.
It is not abolished altogether. Either, they are ignorant or trying to confuse people. I have personally shown Vishal, Prakash Raj, and a few office bearers of the producer's council invoices from the US for VPF which are just a month or two old for Indian movies. Not foreign films. Yes, it is starting to come to an end in many places now, but it is nowhere near. Maybe about 10-15% is over, but the majority of it is still going on.
Was there ever a sunset clause about getting rid of VPF? That is the central allegation leveled by the producers, who are now hellbent on not paying VPF anymore.
What they are demanding is completely unreasonable. Nobody ever told them that this VPF is for a certain period of time or whatsoever. Nobody had even approached the topic of abolishing VPF at all. We have long-term contracts with all the theaters where we have installed equipment. They had brought the subject of sunset clause only in February this year. We said that we are in the middle of this merger (Qube and UFO announced a merger in November 2017). We apprised them about some amount of cost savings that are going to come because of the merger. We also told that we would sit with them after the merger and discuss when we could end the VPF.
So, the producers are telling the world that we have fooled the theaters about the sunset clause. And, theater owners are saying, 'We are not idiots, and we also read our contracts.' Also, we have renewed our contracts in almost every theater at least more than once. How can we feel somebody continuously if we have renewed our contracts multiple times? All these arguments are being made to fool other producers and the public.
Producers are saying that they have been paying VPF for the past thirteen years and that is why they want it removed immediately.
This demand has come for the first time now. We also knew that one day we could make the advertisements grow enough to replace the VPF. But, they can never say that VPF is paid for the equipment. It is definitely not. Their arguments are fallacious. Twelve years ago, only 30 cinemas were installed. Installations in the majority of the cinemas happened just in the last five to seven years. Before that, digital cinema was still testing, film labs were still running, and film prints were going out in a majority.
What's the final offer made by the DSPs now? And what's the ultimate demand of TFPC?
Initially, the strike was announced in Andhra Pradesh. Tamil film industry extended support. That's how it started. They didn't even contact us to inform their demands before going on a strike. By mid-February, in our Chennai meeting, they sought a reduction of 25% in VPF. We agreed to provide 18-23% reduction, and this variation is due to the different shelf-life of films. So, we offered a discount of 80-90% from what they demanded. And this scheme of deduction was mainly provided because of the constant pressure from theater owners, who are long-standing friends and very seniors in the industry. So we had to give in. But all the other industries had agreed to our offer with minor tweakings but Kollywood.
Initially, the objective of the strike was to reduce the VPF charges. The demand from the TFPC was 25% reduction. Now, they are seeking a complete removal of VPF.
They (TFPC) never had a conversation with us before the strike, and we were neither informed. They announced it all of a sudden. We are the people who invented this service, and we're the ones who hold it out. They must have had a conversation with us before misinterpreting things and going on a strike. Their demand is completely unreasonable and is also 100% something that we cannot sustain as a company. We have invested nearly Rs 450 crores. You cannot suddenly come and say, 'We will not pay VPF anymore.' Also, we have such marquee, blue-chip investors as Nomura, Intel, and Cisco, who have never taken one rupee dividend from our company in the last 10 to 12 years since they joined us.
Producers say Qube has earned crores of money as profit and that they are losing nearly Rs 40 crores per year for VPF.
Anybody can go the Registrar of Companies and take the balance sheet of our company for the last ten years and see what we have made. You can also see whether we have given any dividend out. If at all we have made any profit, the percentage of it to our investment is roughly like a fixed deposit return. Jayendra, another co-founder, and I have been in this business for the past 30 years, and we have not taken a single rupee as dividend out of this company. We have also told the TFPC to designate an independent auditor to examine our books and see if we have made any profit at all. We are willing to be transparent. However, they are not ready to pay heed.
Stay tuned for our part two of the interview where we discuss the VPF charges in Tamil Nadu and the rest of India, the entry of a new digital player in the state, the mood of the theater owners, the losses incurred because of the strike, and the challenges ahead.
(Editor's note: An earlier version of this report inadvertently published images that were copyright of The Hindu. They have now been replaced with open source pictures. The infringement is regretted.)
Updated Date: Mar 27, 2018 21:17:16 IST