The Animation Options Blog

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THE GLOBAL ANIMATION INDUSTRY

The business of animation can be divided into two major enterprises: production and distribution. Production involves the development, financing and creation of animated content. Distribution involves the domestic and international marketing, licensing, promotion, physical reproduction, delivery and exhibition of that content. An animation distributor will typically license the rights to theatrical and broadcast exhibition, non-theatrical markets (such as educational markets, where applicable), home video (including DVD), cable and pay-per view channels and video-on-demand. Additional rights are licensed for soundtracks, games, toys, publications and other ancillary merchandise.

As a keystone of the global entertainment industry, animation is experiencing rapid development worldwide, with a compelling slate of multi-cultural intellectual property. Properties originating outside the United States are gaining distribution and finding financial success in the North American market and elsewhere, something that was rare a decade ago. The global nature of the animation business is particularly notable in the television industry, where co-productions are the norm. Licensing and financing considerations have made international co-productions and sales essential for producers seeking to maximize revenue streams. Interestingly, while the United States remains dominant in the realm of animated features, the U.S. market is considered secondary for certain television properties with strong international sales.

The global animation industry lies mainly in the U.S., Europe, Japan and South Korea, with China and India rising to prominence. Nevertheless, one may point to almost any country in the world for notable developments in animation within the last decade. The United States is the undisputed leader on the world animation stage. In the U.S. and Europe, the animation industry is worth billions of USD annually in intellectual property and related ancillary products. Canada is a main provider of global television production, with many co-production deals, a precedent of government support, and a track record of influential talent in animation studios around the world. In contrast, South America imports most of its animation content from the U.S., Europe and Japan.

As a major animation exporter, Japan has a precise industry chain and a mature operating mechanism. Japan’s animation industry ranks highly in the national economy, and the output value of Japanese animation products exceeds that of steel. Anime has a market value of nearly $2.5 billion USD in the United States alone, with global merchandising worth almost $5 billion USD. South Korea is second only to the U.S. and Japan in the output value of its animation industry, which has become one of the six “pillar industries” in South Korea’s national economy. By the same token, mainland China is aggressively building an animation industry with widespread state support. While lacking China’s level of government intervention, the animation industry in India benefits from production costs that are lower than almost any other country in the world.

Similarly, Spain offers the lowest production costs of any European country, while still maintaining a good quality level, most recently exemplified by Kandor Moon’s animated feature “The Missing Lynx”. The United Kingdom has a strong industry and audience for children’s animated television and DVD, while Germany is Europe’s third largest animation producer and largest TV market. France is the most prolific animation producer in Europe, with a strong system of government subsidies and tax breaks. Like China, France features strict quotas and regulations on foreign participation, which have alternately helped and hurt their animation industry. Eastern Europe, with a distinguished record of artistic achievement, is gradually catching up to the rest of the world in commercial animation production. So is the Middle East, with Israel taking a leading role. Finally, it is worth noting that Africa’s first animated feature film production, “The Legend of the Sky Kingdom” was released in 2002.

Around the world, independent animation has blossomed with the advent of digital technology and in response to the conventions of major studio filmmaking. With the increase in theaters, television channels and the use of digital satellites, the rapid growth of the Internet and a wide variety of other new technologies (including the latest advances in stereoscopic and large-format projection), distributors and programmers in nearly every country require more content than ever to fill consumer demand. China is a prime example of this phenomenon.

THE GLOBAL ANIMATION MARKET

Worldwide box office returns in 2007 amounted to almost $27 billion USD, a 5% increase over the previous year. Across all media, the global animation market was worth over $60 billion USD in 2006, and is projected to become a nearly $80-billion USD industry by 2010. 2008 saw approximately 100 animated feature films released worldwide, of which about 30 were produced or distributed in the U.S. This includes theatrical releases, and direct-to-DVD.

While the international landscape has historically been dominated by the major U.S. studios, animation is becoming a truly global industry that promotes communication and exchange among different cultures, with broad development space and co-production opportunities between various nations. The international animation market has come a long way since the first public screenings of hand-painted sequences on celluloid strips. In the middle and late 20th century, developed countries began to evolve from production-oriented societies to entertainment-oriented societies. Locally produced animation properties began to succeed not only in their home territories but abroad as well, particularly in the areas of broadcast television and DVD sales. Compared to live-action, animation travels well: consumers around the world love animation, and it is relatively easy to tailor animated content to regional markets. This is not an option, but a necessity: animation companies in any country require international revenue in order to break even on their proprietary content, whether in film, television, the Internet or gaming. Many major studios owe more than half of their revenues to overseas theatrical distribution and ancillary sales. In television, international partnerships are essential to fund production, and many series can succeed in international markets without ever finding a domestic audience.

Foreign language films are often grouped with “art house films” and other independent films in U.S. DVD stores and movie listings. Unless dubbed into the native language (as most animation commonly is), foreign language films distributed in English-speaking regions usually have English subtitles. Films of this kind typically receive a limited U.S. release in coastal markets such as Los Angeles and New York. Accordingly, the marketing, popularity and gross revenues for these films are usually much less than for major Hollywood blockbusters. In addition, cultural differences between foreign and domestic films affect theatrical attendance and DVD sales. Many foreign language films never receive a DVD release outside of their home market, but foreign films that are particularly successful may be acquired by the major distribution companies for international DVD release on specialist labels. Foreign films can successfully cross cultural boundaries, particularly when the primal story, visual style and cinematic spectacle are compelling. Live-action films such as “Crouching Tiger, Hidden Dragon”, “Amélie” and “Brotherhood of the Wolf” have enjoyed great success in Western cinemas and DVD sales. The first foreign film to top the North American box office was “Hero” in the fall of 2004, while Hiyao Miyazaki’s animated feature film “Spirited Away” won the Academy Award for Best Animated Feature in 2003.

The general pace of international roll-outs is quicker than in the past, especially from the United States. “Day and date” releases, in which films launch simultaneously around the world (pioneered by DreamWorks’ animated feature “The Prince of Egypt” in 1998), are increasingly common. Distributors and exhibitors continue to find new ways to expand the box office revenue pool. The growth of multiplexes in Europe and an increase in the number of screens in Asia and Latin America have all contributed to this expansion. Other factors include the privatization of overseas television stations, the introduction of direct broadcast satellite services and increased cable penetration. It is important to note that in the major European territories, typical television license fees surpass video license fees. In some instances, a license fee for animated feature films may be up to three times the amount paid by a video distributor for the same picture. Territorial value around the world is defined by media sophistication, ticket and rental costs, economic strength, expendable income, currency exchange rates, and of course – audience size. Following is a selection of the major international entertainment markets by estimated population as of 2008:

• China — 1,322,000,000
• India — 1,046,000,000
• U.S. — 303,000,000
• Indonesia — 238,000,000
• Brazil — 184,000,000
• Russia — 141,000,000
• Japan — 127,000,000
• Mexico — 109,000,000
• Philippines — 93,000,000
• Germany — 82,000,000
• Thailand — 66,000,000
• U.K. — 61,000,000
• France — 61,000,000
• Italy — 58,000,000
• South Korea — 49,000,000
• Spain — 45,000,000
• Canada — 33,000,000
• Australia — 22,000,000

(Interestingly, Australian audiences view more films than almost any country except the U.S.)

The 1980s and 1990s saw the emergence of a significant market in the form of home video. Films that performed poorly in their initial theatrical runs were now able to receive new life in the video market. The rise of the DVD format has become even more profitable to film studios, causing an explosion of “special editions” featuring extended versions, deleted scenes, “making of” segments, commentary tracks, and even original short films. Two key factors that affect home video success are the number of VCR and DVD players within a given territory, and the amount of content piracy in the region.

The Internet is by its very nature a global market that can be accessed from almost anywhere in the world. However, individual sites are not marketed equally in all countries, and computer usage, online access and download speeds vary from region to region. The Asia/Pacific region is the world’s largest Internet market, with most of the usage found in Japan, South Korea, China and India. While Internet users are quick to migrate to other sites when fees are charged for content, free access to online entertainment is commonly used as a “hook” for the advertising and sales of related products and services. Mobile wireless technology is also emerging as a potential distribution channel, though more in the gaming market than for animated entertainment. As opposed to web content, which consumers generally expect to access for free as they do television, there is evidence that a viable profit model exists for mobile game distribution and animated “mobisode” sales – with the potential of this market demonstrated by Apple’s highly successful $0.99 price point for music downloads.

Last, but certainly not least, the expansive global market for interactive gaming software encourages animation property owners to pursue this lucrative ancillary revenue stream by granting developers, publishers and distributors licenses for multiple computer & gaming console platforms on a global basis.

With respect to my January 2nd blog post “On The Chinese Animation Market”, here is some equal time for the good ol’ U.S. of A.

THE AMERICAN ANIMATION INDUSTRY

The U.S. film industry is primarily based in Hollywood, California but has spread to other North American regions in recent years. In 1894, the world’s first commercial motion picture exhibition was given in New York City, using Thomas Edison’s Kinetoscope. The next year saw the first commercial screening of a projected film, also in New York. In 1938, Walt Disney’s “Snow White and the Seven Dwarfs” was released during a lackluster period of filmmaking from the major studios, and quickly became the highest-grossing film to that time. Interestingly, “Snow White” was an independently-produced animation production that did not feature any major studio talent. The United States has been at the forefront of film and animation development ever since, with a well-documented history familiar to most, and too lengthy to fully recount here.

The Walt Disney Studios grew from “pioneering upstart” to become the defining and dominant force in animation, with an unparalleled record of animated features and short films. This success in animation ultimately grew to encompass live-action films, theme parks, broadcast television, publishing, and a wide spectrum of other revenue streams under the auspices of the publicly traded Walt Disney Company. The renaissance of animated features at the Walt Disney Company in the late-80’s and early-90’s, starting with “The Little Mermaid” and culminating with “The Lion King”, prompted a wave of aspiring studios to get into the game, usually with poor box office results. However, within the last decade the success of Disney’s animated feature films suffered from the inevitable ebb and flow of this cyclical industry, as Pixar and direct competitor DreamWorks made incursions upon audience territory formerly ruled by the Walt Disney Company. Disney’s purchase of Pixar in 2006 is widely regarded as a bold corrective measure, but at a cost of more than $7 billion USD, it is one which has yet to play out profitably. Meanwhile, the many other animation studios in the United States, large and small, make their marks where they can in film, broadcast, internet and wireless media.

The drive to produce a spectacle on the movie screen has shaped the American film and animation industry for better and for worse. Major studios such as Disney, DreamWorks and Sony depend on a handful of enormously expensive releases each year in order to remain profitable, relying upon high production values, star power and massive marketing campaigns to attract the huge audiences required. The average cost per film among the major U.S. studios was more than $106 million USD in 2007, with 1/3 of that amount dedicated to marketing costs. It is reported that at least 60% of the total budget for DreamWorks’ animated hit “Kung Fu Panda” was dedicated to advertising and distribution costs.

While a successful blockbuster can reap substantial profits, there is a considerable risk of failure. Most studios release films that both over-perform and under-perform in a given year. The major U.S. studios supplement their large-scale productions with independent films, created with relatively small budgets outside of the studio corporation. Independent films and animation projects typically emphasize a high level of creativity and innovation, leveraging on niche marketing and critical acclaim to garner an audience. A successful independent film can have a high profit-to-cost ratio, while a failure will incur relatively minimal losses, encouraging major studios to engage in co-production or distribution relationships with these productions in addition to their high-stakes releases. Some independent companies such as Miramax have in fact become well-financed divisions of major studios. The big studios can thus capitalize on the success of the “independent” distribution division, while the “independent” distributors maintain a certain level of autonomy within the larger corporate structure. The independent companies are able to produce animated films of comparatively smaller budgets for distribution in targeted viewer markets.

THE AMERICAN ANIMATION MARKET

In 2007, the North American domestic box office grossed over $9.6 billion USD on almost 39,000 screens, a revenue increase of more than 5% over 2006. Additionally, North American motion picture distributors generated more than $7.6 billion USD in worldwide revenues in 2007, an increase of almost 6% from the year before. Despite the growing popularity of foreign films, American productions still dominate the international film markets. While more than 60% of U.S. box office earnings come from overseas, non-U.S. films currently occupy less than 5% of the American market. In 2007, the domestic box office revenues for U.S. animated feature films totaled more than $2.9 billion USD, with “Shrek the Third” and “Ratatouille” accounting for more than $500 million USD combined. Internationally, U.S. animated feature films generated more than $1.8 billion USD. “Finding Nemo” has earned nearly $900,000,000 USD, over 60% of which is from overseas.

Movies continue to draw more people in the U.S. than theme parks and sporting events combined, with admission prices significantly lower than alternative entertainment options. The core consumer base for animated feature films is the family audience. Although family films in the U.S. (G & PG-rated) have historically outperformed more restricted content, the family market continues to be underserved. While the average profitability of G-rated U.S. films between 1989 to 2003 was $79 million USD, G-rated films accounted for only 5% of the market share during that same period. On a related note, an independent study of the U.S. film market between 1995 to 2006 showed that computer-generated animated films outperformed all other feature film genres by a 10:1 ratio ($153 million USD average domestic B.O. return vs. $15 million USD average domestic B.O. return). Also noteworthy is that while the overall number of movies released in U.S. theaters remained stable from 2006-2007, 18 more independent films were released in 2007 than in 2006.

The United States is home to dedicated children’s and animation networks that account for the majority of animation hours viewed. Formerly, the three broadcast networks of ABC, CBS and NBC dominated the television animation market with programming concentrated on weekday afternoons and Saturday mornings, but this paradigm has dissolved in favor of cable channels such as Nickelodeon and Cartoon Network which run animation at all hours.

The Internet is an important source of movie information. A study conducted by the MPAA and Yahoo! found that 73% of U.S. moviegoers use the Internet to conduct research before going to the theater. Moviegoers who research films online are more likely to see a movie on opening weekend, go to the theater more often, and see some films more than once in the theater. Internet advertising expenditures continue to grow each year, but television advertising remains the largest expense at more than 1/3 of total marketing costs. About 25% of marketing costs for U.S. films is dedicated to cable TV, radio, magazines and billboards, while another 20% is spent on other non-media promotional outlets and on market research.

On the home technology front, one in seven U.S. moviegoers has invested to a great degree in content delivery and/or hardware for their households. Contrary to conventional wisdom, this segment of moviegoers goes to the movie theater more often than their lower tech counterparts.

Two related items of interest came to my attention recently.

The first was Don Bluth’s post to the Animation Nation message board, fretting over the increased isolationism that he sees as a consequence of digital technology (if I’m reading him correctly):

Over the years, I have heard from many animation students who are interested in creating their own picture or their own studio. I believe the computer has been a great boon to our industry but at the same time has pushed each of us into a type of isolation. The feature film can never be made by one or two people; it will always be a team effort of people who talk to each other, inspire each other and explore the romance of an animated story. Someone once calculated the sheer man-hours that were involved in creating Pinocchio and came up with 400 years. That is, if Walt had done it all by himself! What I have loved in my career as an animator is the joy that comes from teaming with other people to build an animated movie.

Those of you that have had this experience will know what I’m talking about. The short will always be economically feasible, and can done by an individual; the computers have made that possible. But, how do we overcome the tendency towards isolationism which is the safe ground, and find a more gregarious way of working together to progress our art while we’re waiting for that “special feature” to be funded?

The second was an Ars Technica article forwarded by my friend, Cal Arts professor Michael Scroggins, questioning the need for university computer labs when the percentage of incoming freshmen with tricked-out laptops is approaching 100%:

What’s the point of running a university computer lab when all the students bring laptops anyway? That’s a question that schools have been asking themselves as computer ownership rates among incoming freshmen routinely top 90 percent. Schools like the University of Virginia have concluded that the time has come to dismantle the community computer labs and put that money to more productive uses.

According to the school’s Information Technology & Communication department, 3,117 freshmen enrolled in 2007, and 3,113 of them owned their own computer. Nearly all of the machines were laptops, with 72 percent running Windows and 26 percent running Mac OS X (six hardy souls ran Linux).

Compared to a decade ago, the increase in student computing hardware is little short of amazing. In 1997, 74 percent of incoming freshmen owned computers, but only 16 percent of these machines were laptops. The Windows chokehold on operating systems looked complete, appearing on 93.4 percent of all machines and leaving only 6.6 percent for the Mac.

Given these numbers, the school began to suspect that its labs might not be necessary, even though usage remained high. When it surveyed the programs actually launched on lab computers in 2008, it found that 95 of the time students spent in the lab was spent running “free” software like Firefox, Internet Explorer, Adobe Acrobat Reader, or Microsoft Office (the school has a campus license for Office and students can install free $10 copies on their machines). Expensive but niche programs like SPSS—the bane of social science students everywhere—were used only 5 percent of the time.

With labs closing down, the university hopes to save some cash. School vice president James Hilton told The Chronicle of Higher Education that it cost about $300,000 to run the campus computer labs each year, but the amount that the school actually saves will depend on how much it costs to provide alternative access to things like community printers and niche software.

To make specialized software available to students, the school says it will “convene a community to jointly review potential software delivery solutions.” Its ideas so far all appear to revolve around accessing specialized tools over the network, possibly through “software streaming” or some form of remote connection to dedicated machines.

The change also doesn’t mean that the university gets to reclaim all that physical space from the labs. As the university’s explanatory document notes, “ITC understands that students need collaborative space where they can bring their laptops and mobile devices to conduct group work, especially as the curriculum becomes increasingly team- and project-based.”

As for supporting this hugely diverse range of hardware that students will schlep to campus, the mind boggles at the tech support nightmares that will soon plague the dreams of IT workers.

These two pieces point to the paradigm shift that we are seeing as mobile computing becomes increasingly pervasive in our society while encompassing tasks of growing complexity. Though the majority of folks still surf the web at Starbucks or polish their Excel spreadsheets at 30,000 feet, a growing number of professional artists, writers, musicians, animators and filmmakers can be found “out-and-about” creating work. And this is a very good thing. Far from imposing solitary confinement, professional-grade computers have approached a threshold of portability (and even “wear-ability”) that enable digital artists to bring the studio into the field.

I recall my days as a painting major at the Cleveland Institute of Art, working in what is now referred to as “traditional media” (oils). At one point, I developed a case of artist’s block. I had figuratively painted myself into a corner with my current line of aesthetic inquiry, and didn’t know how to get out of it or what to do next. My mentor, Julian Stanczak, suggested that I take the day off and wander around town on foot without anything in particular in mind. “Don’t think, just look,” was his advice. Of course, I’m sure you can guess the result: I returned to the studio with fresh ideas and renewed vigor, based upon my experience of getting out into the world. Here was a case of an artist suffering from “solitary confinement” with brush and canvas - no digital “Big Brother” required. And frankly, we see can see this problem in animation studios around the world, be they traditional or digital. It is all too common to find professional animation artists who are not only isolated from the world (save for the occasional field trip to the zoo or studio visit from Tai the elephant), but isolated from each other. In fact, by the very nature of their craft, digital artists are among the most collaborative around - moreso than many of their “traditional” brethren who often work behind closed doors.

Which brings me back to Don Bluth’s post. In the first place, Mr. Bluth seems to be suffering from the very isolationism that he bemoans: animated feature films already have been created by one or two people. The fact that computing power enables increasingly smaller teams of artists and animators (including solo artists) to create feature-length films is a good thing. Bloated crews of 300+ (and the bloated budgets required to suckle them) are on their way out. Teamwork remains, but within a more feasible scope for the independent creator. And mobile computing makes this collaboration possible anywhere.

The Ars Technica article suggests a re-definition of what a “lab” will mean from now on: a convergence of ideas rather than an offering of hardware. Will students still meet in school labs? Of course they will. But they’ll also meet in coffee houses and friend’s apartments. They’ll take their laptops out into the field to record sounds, shoot video, write, draw and animate. They’ll engage the world instead of hiding from it. And this will only increase the quality of their discourse and of their art, as the silicon miracles which continue to transform our lives sublimate themselves further and further to the creative process.

There has never been a better time to be an artist, there has never been a better time to form a creative team, and there has never been a better time for independent animated features.

Two pieces of Motown news, breaking on almost the same day.

The first is that Detroit was named by Forbes as the 7th most miserable city in America for 2008 (down a half-dozen notches from first place in 2007, at least). Of course, I hail from #4 (Cleveland), my brother lives in #3 (Chicago), my maternal relatives are snow-bound in #8 (Buffalo), and I currently reside in Beijing (which was only spared from the list because it’s not in America). So I’m laughing “with”, not “at”.

The second piece of news is excerpted from Crain’s Detroit Business and features one of my earliest stateside consulting clients, Wonderstruck Animation Studios:

LANSING - The State of The State address was another stem winder, full of emotional ups and downs. Governor Jennifer Granholm laid out the bleak situation the state finds itself in, saying it will get worse
before it gets better.

“Things will get better,” Granholm said.

She laid out her plans to diversify the economy while modernizing the auto industry, and talked about growing new industries, like the movie business. It was announced earlier Motown Movies will convert a Pontiac truck plant into a studio, but she announced two others last night.

“Wonderstruck Animation Studios will invest $86 million to build a new studio in Detroit. Stardock Systems, a digital gaming manufacturer, will build its production facilities in Plymouth,” Granholm announced.

But it may have just been the pep talk. The real game plan will not be revealed until Granholm delivers her proposed budget to lawmakers next week.

A separate article by Crain’s reporter Bill Shea offers more details on the planned Detroit animation studio:

The vacant Detroit building formerly used as MGM Grand’s temporary casino will be transformed this year into an $86 million Hollywood-style digital animation and visual effects studio directly employing more than 400 people.

The Detroit Center Studios is a partnership between Wonderstruck Studios L.L.C. owned by film and video game deal-maker Michele Richards, a Detroit native, and Los Angeles-based real estate developers SHM Partners.

The state today awarded the project a 12-year, $16.9 million Michigan Economic Growth Authority tax credit and an $11.7 million infrastructure credit under the state’s new film incentive laws.

Detroit also is considering property tax abatements.

The deal calls for the studio to begin operation this year, with 413 direct and 287 indirect jobs.

Terms and financing were not released.

The site is owned by MGM, but it’s unclear if the film studio will buy or lease the facility, which will include sound stages, offices, screening rooms, a commissary, editing bays and other film infrastructure.

“It will be everything a filmmaker needs to come to Michigan and be well taken care of,” Richards said, adding that the project expects to use “every square inch” of the MGM site.

MGM bought and extensively renovated an old 75,000-square-foot Internal Revenue Service building along the Lodge Freeway to house its temporary casino until the new gaming facility opened in October 2007.

The film facility is being modeled on Los Angeles Center Studios, a SHM Partners project that turned an old Unocal headquarters into a modern studio, she said.

“It’s a very similar model, where you take a building not in use with similar infrastructure and some land that works just well enough,” she said.

The Detroit studio will be used for Wonderstruck’s digital animation and graphics work and for outside projects that need film production facilities.

The effort also will include a workforce training program aimed at engineers, artists and others already familiar with 3-D software applications, Richards said.

The studio also will bring in veteran Hollywood professionals with experience at Dreamworks, Warner Bros. and Walt Disney, she added.

Richards said she was involved in the worldwide marketing and distribution of the popular “Guitar Hero” video games, and a number of straight-to-video animated features.

Not involved in the effort is Richards’ husband John, who is head of worldwide creative for Warner Home Entertainment.

She declined to name the other principals, but said none at this point are from Michigan.

About a dozen other sites were considered by settling on the MGM property, she said, without naming any of the locations.

“We felt like most of them would take a long time to bring to market,” she said.

Opening a new animation studio is a tough row to hoe, especially in these economically challenging times. Yet, the very financial woes which have put so many animators out of work in Los Angeles and the Bay Area may in fact work to the advantage of Detroit, which - let’s face it - is not the most appealing geographic draw.

Governor Granholm continues the trend of many state leaders who offer economic incentives to bring film work into their backyards on the promise of job creation - hoping to exchange their rust belts for money belts. The carrot seems to be attracting the companies, but will the talent follow suit?

Perhaps. Where else can you buy a house for a dollar?

Things can’t be too cheerful right now at Disney Animation Studios. It’s bad enough that the artists have had to endure ongoing layoffs, increased hours and pay cuts. But now, while waiting for the other shoe to drop after the unfortunate box office performance of “Bolt”, they’ve had that shoe thrown at them by “Disney Legend” Floyd Norman, the Andy Rooney of animation, who writes the following for mouse-dropping-sniffer Jim Hill:

What can Walt Disney Animation Studios do to save itself? Ditch digital

I’m going to apologize in advance for today’s column because I’m sure that it’s going to make a lot of people angry. I have a plan that some might call radical. But it’s a plan that I’m afraid we need. Tough times demand tough decisions, and here’s one to consider: Get rid of digital animation at Walt Disney Animation Studios.

Yep. I said it. I think that WDAS should stop producing CG animated features and should instead concentrate on reviving hand-drawn animation.

Now, lest you think this is some kind of impassioned plea about the “purity” of hand-drawn animation — think again. This is not some geeky, fan boy rant about which is the better cartoon medium. Far from it. This is pure business stuff. Corporate strategy, some might call it. Tough things that you gotta do when running a business during tough times.

Animation has been going through a fair amount of turmoil over the past few years. Some “business geniuses” had the bright idea that animation was going through a paradigm shift. This was all because a new tool had been invented. A tool that gave us the ability to move objects in a computer. According to these suits, this brilliant new tool was what would move animation moving to the next level. Hand-drawn animation had reached its limit, they said. Digital animation was the new paradigm. Hand-drawn was dead, and rightly so.

Hold on a second. If hand-drawn animation is outmoded and passé, then how do you explain Disney’s ability to continue to sell “Pinocchio,” “Sleeping Beauty,” and “Peter Pan” in every new technology that comes along? How many times has Walt Disney Studios Home Entertainment repackaged & resold the Company’s old hand-drawn features on DVD with new added features or new digital transfers?

Kids watch these movies over & over again not because of the film-making technology involved, but because they’re good. The problem here isn’t with the mode — it’s with the message. The reason that any one film fails at the box office isn’t because of the technology. It’s all about whether the stories are any good; whether the characters resonate with an audience. We have to care whether the hero wins and the villain loses. Unbelievably, it’s as simple as that.

So you see, this is not really a discussion of the merits of one film production method over another. Each has its points and that’s perfectly fine. I embrace both, of course, with the nod going to hand-drawn. But then again, that’s just me. However, we’re not here to discuss art. We’re here to talk business.

Serious question now: Does The Walt Disney Company really need a digital animation studio? You bet your megabytes they do. Luckily, they own the finest digital animation studio in the world. A company that consistently turns out some of the greatest animated features ever produced, and will — in all likelihood — continue to do so. Now comes the next tough business question: Are two such studios really a legitimate need?

The trouble is, Walt Disney Animation Studios is already getting lost in the crowd. That’s the problem with digital animation. There’s nothing that truly distinguishes one film from another. At one time, WDAS was unique. It was the premiere animation studio in the world. It was what everybody who aspired to be an animator wanted to work. Walt Disney, along with his incredible staff, set the standard and raised the bar so high, competitors could only dream of hopefully coming close. Once the leader in a business it completely dominated, Walt Disney Animation Studios is now reduced to playing catch up.

Walt never followed the competition. He was always too busy leading

In this ever-growing field of animated films from numerous competitors both foreign and domestic, The Walt Disney Company still has a hole card. A card that’s evident even now as work continues on WDAS’ first hand-drawn animated feature in years. A movie that could restore Walt Disney Animation Studios’ identity and remind audiences around the world that the Company they remember from their childhood is still very much alive. That it is already beginning to awaken from a deep digital slumber like some beautiful princess in a fairy tale.

Once again, this is not an artistic discussion. This is not a debate over which medium is more viable, or what audiences prefer. This is a business decision that will be made one day, and that day is quickly approaching.

From time to time, I’ve taken heat from angry CG guys for being too critical of their recent movie efforts. Most seem to think I was beating up on them because I had a vested interest in hand-drawn animated features. In truth, I was never taking issue with the medium — rather the poor films that were being made. I have little doubt that — with today’s column — I’ll once again be accused of “computer bashing.” As nervous technicians fear future downsizing and the loss of their jobs.

That said, I still think that it’s time that Walt Disney Animation Studios grew up. It’s time that WDAS realized that it’s not the cool young kid on the block anymore. Get over it! So you’re not young, hip, or cool. Big deal. You’re still the great grand-daddy of feature animation. And that’s a very good thing to be. In fact, that may wind up being the very thing that saves Walt Disney Animation Studios.

So what to do? I think that WDAS should capitalize on its own historic legacy, remind would-be moviegoers of those not-so-distant days when hand-drawn animation was still considered magical. When the animators who worked at Disney were looked upon as artists. And it took decades — not months — to master this craft.

Finally, I have a question for all you executives and managers who keep looking at the bottom line. Which do you think is more expensive? Software and workstations or pencils and paper? Servers and digital infrastructure or wooden desks? Yeah, I know. There’s always digital post, but you get the idea.

Hand-drawn traditional animation is Disney’s past. But it can also be Disney’s future. What Walt Disney Animation Studios really needs to do is lead a modern renaissance of hand-drawn animation.

And when they do that … Guess what? The magic — because it is magic — will return.

In the interest of full disclosure, I should point out that I worked at Walt Disney Feature Animation (back when it was known as such) for 12 years, and that I am one of the “angry CG guys” that Mr. Norman has “taken heat” from in the past. Far be it from me to argue with a legend, but my Achilles heel is that I just can’t abide flawed reasoning - especially when it is presented in the guise of an objective, authoritative view that is in reality motivated by ignorance and prejudice.

Does Disney have its problems? Yes. Did the poor box office performance of “Bolt” help the case of the digital artists? No. Does it sting to have paid $7.4 billion dollars for a “quick fix” that is nowhere in sight? Unquestionably. Are the days of digital production at Disney Animation Studios numbered? Probably.

But shuttering digital on Riverside won’t “save Disney”, as Mr. Norman (and everyone else) will realize once it comes to pass. What will save Disney is a return to the fine storytelling tradition forged by Walt, fumbled by Eisner and intercepted by Lasseter. And the restoration of that tradition takes time, as someone who lionizes decades-long animation apprenticeships should know.

For someone who observes (correctly) that…

The reason that any one film fails at the box office isn’t because of the technology. It’s all about whether the stories are any good; whether the characters resonate with an audience. We have to care whether the hero wins and the villain loses. Unbelievably, it’s as simple as that.

…Mr. Norman spends an awful lot of time explaining how the expulsion of a particular media will solve Disney’s problems. Huh? I’m confused. If it’s the “message” and not the “mode”, then why are we focusing on the mode? Is it because the author of the article is a story guy, and that the real problem cuts too close to home? Or is it because of thinly-veiled prejudices, revealed through references to digital artists as “nervous technicians” (akin to someone claiming to have nothing against minorities because they respect “those people”)? Will shuttering digital help pull “Rapunzel” out of its seven-year story spiral? Doubt it.

Time will tell how audiences respond to Disney’s new 2-D effort, “The Princess and the Frog”. I hope it does well, and I hope the powers-that-be don’t make another snap decision on a par with the short-lived “traditional is dead” pronouncement. Mr. Norman likes to dress up his opinions in terms of a hard-nosed business stance, so let’s examine a few of these:

1. Does The Walt Disney Company need two digital studios? No. And yes. Does your family need two cars? No. And yes. “Need” is a very subjective word. If Disney finds that it makes business sense to keep making digital films in Burbank and Emeryville, then they indeed “need” two digital studios. The poor B.O. of “Meet the Robinsons” and “Bolt” don’t bode well on this front, but this will play out on a spreadsheet, without calling for CG heads on animation disks. Undermining Mr. Norman’s credibility on this front is how he conveniently flips from praising one digital studio as turning out “some of the greatest animated features ever produced”, and two sentences later goes on to pronounce: “That’s the problem with digital animation. There’s nothing that truly distinguishes one film from another”. Once again… huh???
2. The article uses the DVD home video sales of Disney classics such as “Pinocchio”, “Sleeping Beauty” and “Peter Pan” to justify the call for 2D over 3D, and to forecast the future success of 2D Disney theatrical releases. This remains to be seen. With all due respect to the classics (which I enjoy in my own personal collection of 2D, 3D and stop-motion animated films), “the kids” aren’t buying them. The parents are buying them… along with anything else they can plop a screaming child in front of for 90 minutes of peace and quiet. Will this pragmatic domestic survival tactic translate into box office gold? A princess and a frog are going to find out.
3. Mr. Norman maintains that traditionally-animated films are somehow cheaper than CG-animated films because servers and workstations cost more than pencils and paper - the same sort of simplistic thinking that caused animation executives to assume that CG-animated films would automatically be cheaper than traditionally-animated films. The reality is that 3D films can leverage on efficiencies far greater than their 2D counterparts, when planned properly. They can also burn through a remarkable amount of money when planned poorly. Or when the story department can’t get their act together.

Hand-drawn animation can truly be part of Disney’s future, but not as some “old-timey” relic of days gone by. As anyone who actually saw “Bolt” can attest, Disney Animation Studios has quite a bit to offer the digital world - a benefit not only to the folks up at Emeryville but also to the colleagues with pencils behind their ears down the hall in Burbank. Walt was not one to shy away from new technology, and never one to give up and concede defeat. Something every Disney Legend should know.

My best wishes for future success to ALL the fine artists at Walt Disney Animation Studios!

KG

Congratulations to DreamWorks Animation Studio and the “Kung Fu Panda” crew for their display of pure awesomeness at the 36th annual Annie Awards!

By taking 14 out of 24 voting categories in this prestigious animation industry event, the Dragon Warrior puts WALL-E on notice that he may not be adding an Oscar to his hardware collection this year.

As reported today by Variety, Sony Imageworks President Tim Sarnoff has left SPI after more than a decade at the helm. Sarnoff will not be replaced, while Executive VP of Production Debbie Denise and VFX Supervisor Ken Ralston will carry on with their respective duties, reporting to Sony Pictures Digital Productions President Bob Osher.

Sarnoff’s departure comes amidst recent news of Sony Corp.’s plans to layoff up to 16,000 employees worldwide in the face of a projected $1.1 billion operating loss - the biggest in the company’s history. While the cuts are expected to spare Sony’s Playstation division, the company plans to shed an unspecified number of “unprofitable or noncore” divisions from its portfolio, according to Leo Lewis of Asia Business. It remains to be seen where Sony Imageworks will fall in that assessment, and if Mr. Sarnoff is the proverbial canary in the coalmine.

…but it appears that the “Astro Boy” studio is in trouble, as reports roll in of Imagi animators being told not to report for work tomorrow. This dire news comes on the heels of a bleak American Film Market, impacted by a global economic crisis that has reportedly vaporized two-thirds of the $30 million in financing that Imagi Co-CEO Douglas Glen had recently obtained for the company.

Imagi’s cash flow woes are apparently accompanied by production pipeline and workflow issues, and compounded by communication problems between the Hong Kong, Los Angeles and Tokyo studios.

Here’s hoping they can pull out of the tailspin.

In the spring of 2008, I blogged on the important considerations of independent film distribution in “Disregarding Distribution”. Following are further observations on the subject.

STRATEGIES

The global animation industry is highly competitive, with much of a project’s success being directly related to the skills of the distributor’s marketing strategy, and the filmmaker’s solicitation of early feedback from potential distribution partners.

In the area of broadcast animation, the United States remains the largest and potentially most lucrative television market in the world. The traditional method of selling animation content to U.S. broadcast and cable networks is to license 13 to 26 episodes (a half-year’s or a year’s worth of shows) for a flat fee per episode, which gives the customer the right to air each show twice. Around the world, license fees paid to content creators have shrunk dramatically over the last decade, with networks sometimes demanding that producers cut their budgets as a precondition of acquisition. These fees, ranging from a few hundred USD to a few hundred thousand USD per half-hour episode, vary dramatically by budget, country, population, economic conditions and many other factors. The important point is that a considerable amount of most broadcast animation production budgets remains in deficit, and must be covered through international presales, co-production partnerships, ancillary sales or other means. Partly because of this, networks in the U.S. and around the world commonly become co-producers and co-financers in the productions they air, purchasing part or full ownership of the property, rather than simply licensing the rights to broadcast the show. As stake holders, they also receive revenues from international broadcast sales, home video & DVD, merchandising and other ancillaries. The total number of broadcast networks around the world is on the rise, and the growth in channels provides more points of entry for animated programming.

Of course, the best possible initial release for an animated feature film is release in theaters. In addition to its own potential revenue, theatrical release can generate demand for other media release platforms such as broadcast television and DVD, as well as consumer interest in ancillary products. For a film in initial release, the exhibitor will pay a percentage of the revenues from ticket purchases to the distributor (referred to as the “film rentals”). Film rentals customarily diminish over the length of a film’s theatrical run. Depending on the distribution agreement, the producers and investors are entitled to a percentage of film rentals, after the distributor recovers its distribution fee, marketing expenses and distribution expenses.

Other media releases for the film are calculated in a similar fashion. For instance, in the U.S., a home video company pays an amount to the distributor for the right to stock its video stores with the title. From these fees, the distributor will deduct its distribution fee, advertising costs and other distribution expenses in order to recover costs. The producers and investors then receive their agreed-upon revenues as set out in the distribution agreement. The same goes for television and ancillary rights. The total of the money received by the distributor from the exercise of all rights that it is entitled to is called the “distributor’s gross”. Every distribution agreement is different; however, there are similarities common to all. The distributor receives a distribution fee, which is the percentage of the profits that the distributor will receive from the gross. The distributor is then entitled to recover its marketing costs and distribution expenses. The remaining sum is payable to the producers and investors, and is generally called the “producer’s gross” or the net sum.

Independent animation producers have several ways of distributing feature films. For the widest distribution, they must partner with a major studio, although this means giving up significant rights. Typically, when major studios get involved early in the production, they finance most or all of the animated film’s development and production budget and also handle distribution. In return, they receive all rights (including the copyright) and control all creative, marketing and distribution decisions. While filmmakers can benefit financially from the guaranteed exhibition and broad audience reach provided by such deals, final compensation may be far less than expected once significant studio fees and expenses are deducted.

Fortunately, there are alternatives to this strategy for the independent animation producer to consider. Major studios and independent distributors (such as The Weinstein Company) can simply distribute an animated film, controlling marketing and distribution but not production. The distributor usually gets involved only after it sees the completed film, and production funding comes from elsewhere. In this scenario, the distributor takes approximately 35% of gross distribution revenues returned from the theaters, and then deducts expenses before remitting the remainder to the producer. While the relatively lower distribution take and the retention of creative control and copyright are attractive incentives to the producer, there is the very real risk of creating an animated film that is considered “unmarketable”. Distributors routinely reject films that they suspect will be under-performers at the box office due to lack of audience appeal or a clear market position.

A “middle way” is to negotiate with a major international distributor to distribute the animation production prior to completion. While the distribution cut is higher in this case (at least 50%), the distributor’s early involvement brings valuable market insight to the development and production process, includes an advance against revenues upon delivery of the completed negative, and provides the benefit of helping the producer to gain additional financing. Signed distribution agreements can be used as collateral for bank loans, and as incentives for other investors to join the enterprise. This type of deal is known as a “negative pickup”, in which the distributor receives distribution rights, usually in all media, for a specified length of time. When possible, it is in the producer’s best interest to negotiate options based upon performance milestones, which allow the distribution rights to return to the producer if the distributor fails to actively market the film.

Some studios and distributors may also choose to come on board as co-producers, which creates a level of involvement somewhere between owning all rights and simply distributing the film. The studio provides a degree of production financing, has creative input, oversees marketing and distribution, and shares back-end revenues, but does not take full control. The financial details of such arrangements vary greatly.

As these examples demonstrate, studios and distributors can license animated films at various points during the production process: while the film is being financed, during production, or after completion. The more that existing elements seem to point to box office success, the more likely a distributor is to pick up the film early in the process. However, distributors are generally reluctant to get involved early in the production process of independent animated films. The independent producer usually must finance and produce the film without any distribution presale money, and then try to find distribution through success on the international film festival circuit in venues such as Sundance and Cannes, or at markets where films are sold such as the American Film Market. The hard reality is that only a small percentage of companies pitching their films at festivals succeed in securing distribution deals.

Those independent animation productions that are fortunate enough to find distribution will often sign one deal for their domestic territory, and another for international territories. However, deals with major studios and distributors can encompass the entire world, with the major studios subcontracting to local distributors in countries where they may not have operations. Due to the fact that most animation properties do not turn a profit from theatrical release alone, distributors typically want rights to all media including home video & DVD, soundtracks and merchandising. In response, independent producers will usually license home video & DVD to the distributor, but retain rights to the revenue streams for soundtracks and other ancillaries.

Independent distributors have an advantage in releasing low-budget animated films, since they have the experience and patience necessary to handle the slower “platform” method of release. A platform release strategy involves opening a film in a select few cities, building on the film’s word-of-mouth, and gradually widening the release to add more cities and more screens to the release schedule. Positive buzz, festival success and strong reviews all add to a film’s platform.

RELEASE WINDOWS

The typical method of releasing animated feature films begins with domestic theatrical exhibition, which gives value to the various film “windows” (the period following a domestic release before a film can be released in other markets). Historically in the United States and Europe, the sequencing pattern for feature films has been to license international theatrical exhibition, home video & DVD, cable television distribution, broadcast television rights and other ancillary rights. As the rates of return shift among these different sources, changes are made to the sequencing strategy. It is important to note that the release windows for gaming and publishing ancillaries usually precede the initial theatrical release of a film by one to three months.

Distributors around the world plan their release windows with certain target audiences in mind. Given the high costs of film prints, even a relatively modest theatrical distribution of 1000 screens can exceed $2 million USD in initial expenses. For this reason, and as noted above, low-budget films will often receive platform release windows in selected major cities that feature substantial populations of cosmopolitan filmgoers. In this way, the film is given a build-up to a wider release that may occur several weeks later.

ANCILLARIES

Animated films and television properties generally turn a profit not on the initial theatrical or broadcast release, but through the exploitation of ancillary revenue streams. Animated films and television shows do very well on video and DVD, especially when the properties are well-known or appeal to a devoted niche market. For example, DreamWorks’s “Shrek” sold 2.5 million DVDs and 4.5 million VHS cassettes in its first three days on the market in 2001. Together the sales of these home video products totaled $420 million USD for 20 million units sold within two months. “Shrek’s” U.S. box office gross was almost $268 million USD, while its worldwide gross was over $480 million USD. Animated foreign films can experience similar success, although on a more modest scale. Japan’s Pioneer Entertainment released the anime hit “Akira” on DVD after restoring it at a cost of $1 million USD. The DVD release hit the number-one spot on U.S. home video bestseller lists. DVDs are subject to a high degree of piracy on the Chinese mainland, but as noted previously, this can serve as an ironic form of underground advertising for the animation property and its associated ancillary products.

Interactive gaming software is an increasingly important revenue stream for animation properties. This category can easily amount to 50% or more of all ancillary activity, and can rival the revenue of the core theatrical or broadcast distribution for animated films and television shows. Gaming software is also a good way to increase awareness for an animated property, especially when released prior to the screening or airing of the production. On 3D CGI productions, digital assets can be shared between the producers of the animation and the producers of the games. This is often done simultaneously, and can enhance the development of story and characters for both. Games often introduce new story lines and sometimes new characters that expand the world established in the original entertainment property. Platforms include PC, console, mobile and Internet formats.

While book and comic book publishing is usually not the top ancillary category in the United States, books and comics are still an important revenue stream in the West, and an extremely popular and profitable one in the East. Book and comic ancillaries generate awareness with the target audience, provide a means to extend story lines, backstory and character development beyond the original animation property, and enhance the brand image. Typical formats, depending on the age of the consumer and the nature of the content, include board books, story books, magazines, comic books and graphic novels, film novelizations (adaptations of the animation script) and derivative novels (“prequel” and “sequel” stories).

Many animation producers and executives take soundtrack sales into account when they plan the music for a film. By including musical acts that are popular with children and pre-teens (the primary purchasers of animation sound tracks), the producer can enhance sales of the album even among those consumers who have not seen the film. This marketing synergy can also work in the other direction: having a popular singer or band play an important role in the soundtrack can bring people into the theaters who might not otherwise see the film. Music videos are naturally an important part of this equation, and are often planned in conjunction with animation production to create tie-ins between the live action performers and the animated characters.

Toys are the main ancillary product category for most children’s animation projects, with dolls, action figures and board games among the most popular items. There is also an expanding market for collectible “urban vinyl” toys and cast resin figurines among teenaged and adult animation fans. Toys are often one of the first licenses granted for an animation property due to the long lead times required for product development and manufacturing. Some animation-based toy lines are narrowly focused. A licensor of a new, relatively unknown animation property might choose to self-distribute toys, or to license the sale of a small range of toys over the Internet. This approach allows the producer to test the market and gauge demand. For example, in 2001 the United States’ Cartoon Network chose to test a dozen products based on its “Samurai Jack” series, with sales initially limited to their website.

While home video, interactive games, publishing and toys are the primary ancillary categories for animation properties, the number of possible products is unlimited, depending on the nature of the content and its audience. Clothing, stationery, food and beverages are among the available revenue streams. Tactical considerations for maximum profits include the timing of product introduction in each country where the property is released, the product categories chosen, whether to grant exclusive or non-exclusive rights, and the choice of retail outlets. While under-stocking can reduce revenues, over-stocking can shorten the life of the product licensing program, and even have an adverse impact on the animation property itself by creating a negative consumer reaction.

Product placement within a film, common to American live-action properties, is generally not encouraged within animation properties, as it tends to reduce the “classic” status of the animated film. Threshold Animation Studios’ animated feature “Food Fight” launched a direct assault on this principle by setting a story in an American supermarket filled from top to bottom with name-brand household products, and using the fees charged to fund production. The ultimate results of this approach remain to be seen, but the negative online buzz from animation fans prior to release is noteworthy, as is the film’s difficulty in finding theatrical distribution. A commercial ancillary phenomenon common in mainland China is the inclusion of corporate logos in the end credits of feature films – in many cases from companies having nothing whatsoever to do with the production itself.

As you can see, the world of film distribution is “wild & woolly”, so it pays to familiarize yourself with it BEFORE you start production.

Begin with the end in mind.

Some late night observations on the Chinese animation market from my seat at the Library Cafe in Beijing…

China is the fast-growing animation market in the world. With a total population in excess of 1.3 billion individuals, potentially 500 million people in mainland China can be identified as animation consumers. Domestic Chinese box office returns have increased 20% between 2005-2007. Due to increased international demand, Chinese motion picture distributors generated more than $2 billion RMB in global revenue during 2007 - an increase of 5.7% from the year before. In 2007, the domestic Chinese box office totaled more than $3.3 billion RMB (over $482 million USD). Analysts project that the domestic Chinese box office will gross more than $4 billion RMB by the end of 2008 (almost $585 million USD), and more than $10 billion RMB annually by 2013.

It is estimated that 11% of the Chinese animation audience is under the age of 13, with 59% between the age of 14 to 17 and 30% over 18 years of age. China has 370 million children, more than the entire population of the United States. Today, approximately 18 billion RMB (almost $2.5 billion USD) is spent by animation consumers in China, but nearly 90% of that money flows straight out of the country to Japan, and to a lesser extent the United States and Europe. Despite its visual proficiency, recent Chinese animation content has demonstratively lacked domestic market appeal due to an emphasis on education over entertainment. Like most children around the world, the viewing preferences of Chinese youth seem to indicate that they relate better to entertaining stories that provide a vivid reflection of their feelings, problems and dreams. Rigid characters, and plot lines that lack the sense of fun and innocence that children hold so dear, are roundly ignored. Chinese animators in the 21st century face not so much a technological or artistic challenge as they do a challenge in compelling storytelling.

Despite this challenge, or perhaps because of it, the mainland market is uniquely poised for an innovative and profitable future. The gross earnings of China’s animation industry across all media have already exceeded those of its live-action film industry. Building on a remarkable animation history, the Chinese animation market has grown increasingly sophisticated since the pre-Cultural Revolution days, with an appetite for content that seeks to combine Chinese cultural traditions with Hollywood story structure for contemporary resonance. In recent years, provincial Chinese governments have rolled out substantial plans to develop the homegrown market for animation artists and companies, in keeping with the policies set forth by the central authorities. These developments follow the announcement made by Beijing’s State Administration of Radio, Film and Television (SARFT) in August 2004 to launch three new national children’s networks and more than 60 broadcast stations providing an increased volume of children’s programming. 2004 was set as China’s “Animation Year”, and the industry generated revenue amounting to tens of millions of RMB. In light of this evolving landscape, it is no surprise that domestic animation companies and foreign co-production partners alike are eager for a place at the table.

Domestic box office returns as reported for Chinese animated feature films in 2008 range from $1 million RMB for “The Legend of Countryside Hero”, to a record-breaking $30+ million RMB for “Storm Rider: Clash of Evils”, over a theatrical run of 4 weeks each. However, revenues from the domestic Chinese market alone are not sufficient to cover the costs associated with high-quality animation productions. Successful international distribution must be part of the equation. In fact, international co-production deals and distribution presales are vital to the support of Chinese feature films on the mainland. While U.S. cinema is “America first, global second,” Chinese cinema is by necessity “global first, Chinese second”. For the near future at least, earnings in the China market can only ever be a secondary source of income.

Live-action Chinese films such as “Farewell My Concubine”, “2046”, “Hero”, and “House of Flying Daggers” have enjoyed box office success and critical acclaim around the world. In 2000, the multi-national production “Crouching Tiger, Hidden Dragon” achieved massive success at the Western box office despite being dismissed by some Chinese film-goers as pandering to Western tastes. Nevertheless, it provided an introduction to Chinese cinema for many Americans and Europeans, and increased the popularity of many Chinese films that may have otherwise been unknown to Westerners. In 2002, “Hero” was made as a second attempt to produce a Chinese film with the international appeal of “Crouching Tiger, Hidden Dragon”. The film was a phenomenal success in most of Asia and topped the U.S. box office for two weeks, making enough in the U.S. alone to cover the production costs. The successes of these films blur the boundaries between mainland Chinese cinema and a more internationally-based “Chinese-language cinema”. The merging of talent and resources from China, Hong Kong, Taiwan and the West indicate that Chinese cinema is poised to compete with the best Hollywood films. While Chinese animation productions have yet to emulate the successful precedent of their live-action counterparts, it is only a matter of time before a Chinese animated feature enjoys breakout success on the world stage.

However, even international theatrical and broadcast success is not enough to maximize the animation industry’s profits (especially when broadcast revenues reimburse just 10% of production costs on average). In 1999, $21 million RMB (about $3 million USD) was spent to produce “Lotus Lantern”. The animated feature film nearly broke even at the box office, but failed to capitalize on any related ancillary products. However just two years later, the animated film “Crazy for Song” saw two-thirds of its profits come from the sale of related merchandise. And while the American cartoon “Transformers” was broadcast for free on Chinese television, subsequent profits from toy sales amounted to $5 billion RMB. Ancillary animation products occupy an increasingly large market space in China. The annual sales of related stationery products is more than $60 billion RMB (approximately $8.8 billion USD), while that of children’s toys, food and clothing is more than $20 billion RMB, $35 billion RMB and $90 billion RMB respectively. The annual sales of children’s DVDs and publications in China reach only $10 billion RMB annually, no doubt affected by the high degree of piracy on the mainland. The future development of these ancillary profit channels will depend upon effective regulation and enforcement at the state and provincial levels.

Piracy of Hollywood blockbusters is rampant in China, and also has a negative impact upon the theatrical profitability of Chinese films. However, the piracy of films on the mainland has resulted in an unconventional yet functional symbiosis between the Chinese film and television industries. While piracy makes most Chinese films unprofitable, television series and consumer products based upon pirated films are incredibly popular and profitable. Savvy Chinese film directors leverage upon this phenomenon by creating television series and ancillaries based upon the movie, which ironically receives free advertising through piracy.