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.

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.

No, that’s not me sucking the marrow from the bones of my enemies. It’s an image of guanxi in action.

Guanxi (”relationships”) is the foundation of business in China: nothing happens without it. Most Americans understand the value of networking, but the Chinese take the importance of personal connections to a whole new level. The currency of guanxi is reciprocity, which has its roots in the Chinese notion of filial piety: paying tribute, honoring your hosts and guests, giving gifts, doing favors, sharing meals, picking up the tab (especially when it’s substantial). This notion has been extended in modern times to include relatives, friends, their friends, and business associates - both active and potential.

Your ability to exist harmoniously within the Chinese social network is paramount, and your prosperity is directly tied to this reality. So when you drink bone marrow from a straw, or consume powerful glasses of baijiu (120 proof Chinese firewater) in rounds of toasts to your companions, you’re not just checking off items on your “bucket list”… you’re doing business.

If I needed any confirmation of this, I got it when I raised a glass to my host from the Ministry of Culture, and asked what his advice was for Americans aspiring to do business in China. “Exactly what you’re doing now”, he replied as we polished off our drinks.

In short: if you can say “hello” and “thank you” in Mandarin, use chopsticks, eat anything that’s put in front of you, hold your liquor and smile the whole way through - you can get things done in China.

Mitt Romney came with an impressive resume. The former venture capitalist, 2002 Winter Olympic Games chief and Massachusetts state governor was on top of the issues, had formidable financial and political resources, and was the toast of Washington lawyers and lobbyists.

And yesterday, he announced his withdrawal from the 2008 U.S. presidential campaign.

Why? Because his accumulated primary delegate count was woefully and undeniably inadequate to attain the Republican party’s nomination. And why? Because despite his gifts and his resources, Mitt Romney failed to resonate with the voting public. He failed to deliver a clear message, and he failed to inspire trust.

There is a lesson here. In business as in politics as in life, resonance and gravity are critical. Trustworthiness and the ability to inspire are essential. Talent and material resources are required, make no mistake. But when push comes to shove, clients and employees are more likely to “push” for someone they trust - someone whose demeanor, words and actions resonate with them – than someone who merely has a good pedigree.

In your business dealings, do you equivocate… or do you resonate?

P.S. - In the interest of full disclosure, and in the spirit of resonance, I voted for Barack Obama in the California primary.