Indian filmmaker Rakeysh Omprakash Mehra sees his industry undergoing major changes, such as institutions replacing private financing, increased use of digital technology, a breakdown of the star system and its inefficiencies, and the emergence of a more professional, level playing field. Mehra is best known as the writer, producer and director of the 2006 blockbuster, Rang De Basanti. At the recent Wharton India Economic Forum in Philadelphia, Wharton operations and information management professor Kartik Hosanagar spoke with Mehra about the changes in the film industry, including the controversy over intellectual property rights and royalties.

An edited transcript of the conversation follows.

Kartik Hosanagar: Congratulations on all of your recent successes, including Rang De Basanti. Originally, you were in advertising and then you made a career transition into filmmaking. What drove that transition?

Rakeysh Mehra: It was like flowing with the water. Nothing was pre-decided. I just went along from one profession to another until [I found my] calling, and I guess cinema was it. Having discovered cinema — and I am still discovering it — it gave me a lot of happiness and satisfaction. I could also express myself through the medium, much more than I could have done anywhere else.

Hosanagar: I would have thought you could have expressed yourself through advertising as well.

Mehra: I had a lot of fun in advertising. I started producing commercials. Then I started directing. A lot happened when MTV moved into India [in 1995]. They gave me the task of “Indianizing” MTV. It was great fun … making the first commercials with [film actor] Amitabh Bachchan. At that point in time [in advertising,] there were only models and non-cinema personalities; celebrities were not common. At the same time, there were huge technological breakthroughs in advertising…. [Also,] a lot of international commercials came over because India was   booming economically. The automobile industry, including Japanese cars, came to India, and we started shooting for it. But in advertising, you are always working under a given brief. Your primary job is to sell. That is a very limited expression. Technically, yes, you can express yourself.

Hosanagar: That makes sense. Let’s talk about your films. Your second film, Rang De Basanti, was a phenomenal success and among the top three highest-grossing Hindi films ever. What were some of the factors that led it to its success?

Mehra: Actually, when I was conceiving the film and making it, and even during its release, I could have never thought that this film was going to shape up the way it has. It became more than a movie. It went on to occupy the subconscious of the nation.

There are millions of reasons for the success of the film. But once you are going with it, you are going with your instincts — a small voice inside you, which is the loudest. That drove me into writing the script and then taking it forward — producing and directing the film. You can do justice to the subject when you are really dying to say something, dying to express yourself. Then, you are drawing out of your own real life. The soul originates from your childhood, your youth, your school, your college, your profession, what you have seen in life and what you imbibe from life and learn from life. And then you give it back.

Hosanagar: You mentioned there were a million reasons why it was successful. There could have been reasons why it could have failed. On that note, I want to look at the business of cinema. It is a head-driven business. Most of the profits in the industry are concentrated among a few movies, and certainly their success is highly unpredictable. A lot of folks at Wharton have studied these kinds of head-driven businesses — be it movies, music, start-ups, venture capital, product releases and so on. We are always trying to understand what contributes to the success of these head-driven businesses, and can you predict that in advance? Are there best practices to filmmaking? Are certain things crucial to making something successful? Or is it always that you make the movie and it is a hit or a miss, and you have no clue what is going to happen?

Mehra: There are various factors that are always part of a successful film. Obviously, you can’t predict the quantum of success. Essentially, we all work with inner glass ceilings — to break through those is the challenge. Raising the bar is where the challenge lies. To kind of be a game changer in your own game is where the fun is.

One has to start with scripting process — it’s the writing and the content which defines it. You can have a good script and you can make not such a good movie, and yet it will be successful. But to start with, if you don’t have a good screenplay and a good story to tell, you can get the best artists, the best cast and the best technicians behind the camera, but it will not reach out to the audience. If there was one [key] ingredient, it would be the content and the writing.

Hosanagar: I completely agree. But one interesting contradiction is that in Hollywood, close to 10% — and sometimes 12% or 15% — of the budget is spent on developing the story, the script and so on. In the Indian film industry, that is sometimes as low as 1% or 1.5%. Do you think the Indian film industry is under-investing in development?

Mehra: Absolutely. I can’t agree with you more. We need to place a lot of emphasis on development budgets and not necessarily on the film you will make. While you research many models of cars, it is just that one car that comes in front, and all that money you invested in development need not necessarily convert itself into the finished product. So, yes, you are so right when you say that we should invest more and more in developing content. Out of that conten,t you will find something you can take forward and put on the assembly line.

Hosanagar: I see some parallels with other industries that are focused very heavily on research and development. They often make the most of their money through licensing. Qualcomm in the U.S. is a technology company that fits that bill. Is there an opportunity for a purely development-focused firm in India whose job is to produce stories and scripts and license them?

Mehra: Yes and no. Since no one has tried it, we don’t know the answer. Once you try, you have your own learning curve. With a lot of ideas, you reach a roadblock half-way or almost near completion. I’ve always felt it is better if a part of your overall budget is put towards content development. If you are a studio house or a production house, you can invest in that part, and out of there take content and finished screenplays and put them forward, rather than starting a specialized house there.

Hosanagar: Switching gears, I want to talk about recent technological innovations. Digital production has brought down the cost of filmmaking considerably, and digital distribution is also new in India. Companies like UFO Cinemas and others offer digital distribution that allows simultaneous release in multiple markets. What impact would this have on filmmaking and the industry in general? Is the adoption of these technologies still fairly limited, and if so, why is that?

Mehra: We have been hearing [about] digital for the past 15 years. It’s not like it just sprang up.

Hosanagar: But do you produce in analog film reels? Or do you do digital production for most of your films?

Mehra: These days most of the films are made [in] analog, and then converted into digital.

Hosanagar: So, a film is primarily produced in analog, converted into digital and edited in digital. [You then] reconvert it back to analog and distribute it in analog.

Mehra: We distribute it both in analog and digital. In India today, digital prints are gaining momentum — almost 50%. India has taken the lead in digital projection. In terms of actual shooting and utilization of digital cameras, they still do not give you the same results as film, not only in India but worldwide. In Hollywood also, digital movies are either Indy films that are low budget or those that have to be made faster. This has given new filmmakers a lot of elbow room. There are issues [with] conversion from analog to digital and digital to analog. But film does give you a certain depth.

Hosanagar: From an outsider’s perspective, the movie industry is heavily relationship-based, and one really needs to be in that industry to participate. How open is the industry to new entrants? Can people with new and creative ideas easily enter and bring about innovation?

Mehra: Yes and no. It was a very closely held industry [until] five years ago and a good 20 or 25 years before that. I don’t know the history before that. It was an industry which was clannish and relationship-based. It was difficult to break into it. Even if you were breaking through, you were doing paddles in an arts cinema house and so on. But today it is completely changed. And it is changing rapidly by the hour.

It is no longer a cottage industry; it is more open and [has] a level playing ground for everybody who enters, because financing has become structured. When the size of the business grows and the finance becomes structured and comes from institutions, banks and companies listed on the stock market, the whole game changes. The people who understand the business of films [are not] emotionally attached to relationships. They are more attached to the results. How will the film be monetized? How is it going to be marketed and distributed? What kind of product is it? Are we raising the bar? Is the content changing? All those things come into play tremendously. New talent is born every day. There are new actors. There are new directors. There is a new kind of writer. There are breakthrough subjects. [All that doesn’t] have the momentum one would like to see, but yes, the big thing is already there.

Hosanagar: Over the last seven or 10 years, a lot of the financing in the Indian film industry has come from multinationals, including investors in the U.S. and Wall Street. Has that dried up now, given the recession in the U.S. and the impact on the financial services industry in the U.S.?

Mehra: Not really. When it all began, the funds came mostly from the U.S. and [elsewhere in] the West. But now things have changed as India itself is a consumer market. We consume most of what we produce ourselves — almost 80% to 90%. So, even the money is being generated from within the country. We find Indian institutions like IDBI (Industrial Development Bank of India) and Indian banks looking at financing movies. Even [international] distribution houses and studios are entering the Indian distribution [industry]. The big five American studios are in there now. It is a lot healthier, with the flow of funds getting more organized.

Hosanagar: What is the most important or interesting innovation in the industry in the last 10 years?

Mehra: There have been two key changes. The industry was driven by a star system around five years ago. That system has broken. The whole star system has fallen. Earlier, you would find a star actor doing many projects at the same time. There were instances where actors had signed up for 10 to 12 films and had 10 films on the floor. As a result, all of them used to suffer, because time was limited. But now, better and healthier contracts have come in, and an actor is doing one film at a time. One technical crew gets into a movie, finishes it, gets out and [then] gets into another production. The breaking of the star system has been instrumental towards [creating] better cinema.

The other key thing is the clean finance that has come into the business. People who understand money manage the financing. It’s not an unorganized way of giving money at high interest rates. You can actually plan the entire budget and your cash flow [in line with] the milestones the film achieves at various stages. [The milestones are] developing scripts, pre-production, actual production and shooting of the film, post production, the marketing and the selling. So, at every stage, [a portion] of finance can move in. You don’t need the entire [funding] at one time. And because it is not some moneylender [financing it], everything is structured. There is a timeline to your cash flows — inflows and outflows. That has brought about a paradigm change in the whole industry, in the way we think [through] the projects, in the way they are implemented and in the way the content is shaping up. That is a very healthy sign.

Hosanagar: There has been a lot of controversy lately about intellectual property issues. Are rights properly attributed? Are people given their due credit? Is the industry doing enough in terms of managing IP carefully, in terms of paying for rights and attribution?

Mehra: The subject of intellectual property is cloudy. First, we have to understand what IP is. How do we separate it from royalties? How do we separate it from publishing rights? When you create something you create intellectual property, and then it is monetized. For a long time, the money was being confused with IP. IP is unique. It is something you create. It is original. Money is not unique. Money is a common commodity. So that confusion needs to be sorted out.

The government of India will table a bill in [the current session of] Parliament wherein writers, directors, composers, music directors and lyricists will have copyright. But, then again, there is some ambiguity about it. Copyright is part of a contractual engagement. You can discuss it over the table and you can let go of it. [You can] assign your copyright for a sum of money. So essentially, it is evolving. Clarity will emerge as we go along. It is a step in the right direction, though. We ourselves have taken the initiative. I have myself written almost 700 letters to the ministry [of information and broadcasting], to the home minister, to the law minister [and] to the prime minister’s office, [and] gotten all the organizations together.

My take in this is that cinema is a new medium, a new art form. It is a collaborative art form where, unlike finance, you compose a song or individual art. The director partners with a writer and takes it to a producer. The producer would then underwrite the risk of making the movie. Then, in walk the cinematographers, the choreographers, the action directors, the editors and so on. Everybody should have a part of the royalty. The percentage of royalty will depend on the project’s market viability and your standing.

All this will evolve, but it is a good idea to have a point system where you can share your royalty in perpetuity. This will bring in a lot of transparency into everything. But a lot of questions have to be answered. How do we understand what the actual monetization was and how the money flowed? Only once you can account for that money — including in terms of how the exhibition works and how the money comes back to the producer — can escrow accounts be opened and banks can be instructed to pay people lifelong. We can learn from the U.S. as to how they have implemented things. We can also learn from the mistakes of the West. And then [we can] evolve our own “Indianized” system for the sharing of IP and royalties.

Hosanagar: Thanks so much for your time.

Mehra: My pleasure.