Industry Report: Animation
The Global Animation Industry
by Tim Wescott – Screen Digest
03/10/2011 - Tim Wescott works in the TV department at Screen Digest (as Senior analyst), a London-based and European research company, spe¬cialised in media, which also covers cinema, DVD, computer games and broadband.
You recently wrote a report on the global animation industry. What does the report cover?
The report focuses on the production value of animation and on the revenues generated by ani¬mation. We decided not to cover computer games, which are in parallel with the TV sector. We did not look at special effects, or the production of com¬mercials, or short film animation production.
The animation industry, in business terms, is really about production budgets. So the report focused on the costs of making animation for TV, for film and DVD animation. We valued the market in terms of the value of production.
The other way of looking at the market is obviously via the consumer revenue. We also looked at box office, DVD retail and rental for animation on DVD DVD versions of animated movies, TV series as well as original DVD). It is a bit harder to talk about the consumer value of TV animation because, from the broadcasters’ point of view, the revenues they get back from the consumer is sort of advertising. It is harder to measure the revenue value of TV anima¬tion.
Which countries did you cover?
The countries covered in the report were the 5 major European markets: France, Germany, Italy, Spain and the UK. We also covered the US and Canada (a major producer of animation) and Australia. Those countries represent quite well the global market even though Japan, probably the largest animation market in the world, is not represented.
Can you explain the methodology followed to write the report?
The starting point was the very detailed annual data published in France by the CNC: number of hours, the production value, and how the funding breaks down between broadcasters, the CNC fund itself, tax breaks schemes and producers. It is a valuable resource for anyone who is covering the animation industry. The objective was to produce data which could fit together with the French data. We did that through a ground up study of anima¬tion production using public sources like trade magazines, company websites, company reports and 70 questionnaires.
What is the evolution of the animation industry in France?
Looking at the French data, which goes back a num¬ber of years, you can see how animation works. We cannot really talk about a steady increase or steady decline in animation production in France. It goes in cycles. There is a peak and then a decline for a couple of years, and then it goes up again. So it is very dangerous to try to say animation is in decline or animation is increasing. The 2009 report from the CNC has just come out and despite all the economic doom and gloom last year, and the media market’s crisis, the amount of productions in France increased.
But if you look at 2006, which was one of the peak years for animation, and compare that to the 1990s, there was slightly more animation pro¬duced in 2006, in terms of hours, but the value of it, in terms of Euros, actually went down.
Although we cannot extrapolate a sort of year-on-year trend, we can see that even in France, where there are plentiful resources of funding, anima¬tion producers have to work with less money and that is a global trend.
What are the global animation production trends in terms of hours?
There is not a steady rise or a steady fall, it is very much a rise and fall.
Canada, a major animation producer in terms of hours, was the largest producer worldwide in 2008, followed by the US, and France, which is defi¬nitely the largest producer in Europe.
Behind France was the UK, which saw an increase in production in 2008. There was a bit of a decline in Italy. Spain, Germany and to some extent Australia are markets where there is less of a pronounced rise and fall in the amount of production, and there is a fairly lower level of productions. Despite Germany being a large TV market and a very large economy, in terms of animation not a great deal is produced, a sort of fairly constant level of about 50 hours a year.
In the countries we looked at there is a fairly steady volume of around 800 to 900 hours of new televi¬sion animation produced every year, which is quite a considerable volume of new animation to be accommodated on TV channels around the world.
What are the global animation production trends in terms of value?
In terms of value, we got producers to tell us what their production budgets were. In France, that information is publicly available. The US is the country which spends the most in producing animation and there are two reasons for this: one is that on the Fox Network, there is a lot of ani¬mation produced for prime time. Series like The Simpsons, Family Guy, all have large network style budgets; the second factor is the involvement of Nickelodeon, Cartoon Network, and Disney, who also spend a lot of money producing original ani¬mation, so on a per half-hour basis, the US is the biggest market.
After the US come France and Canada, not far behind in terms of the amount of money spent in animation. Other countries have really cut costs, using new production techniques to reduce the amount of money they spend per half hour of ani¬mation.
Looking at the cost per hour, The US are close to 800,000 € per hour of animation, if you total up the low cost and high cost animation, whereas most European countries are well below that level. In Spain there are lower production costs for CG and digital 2D production. All animation studios have been under pressure to reduce cost. Nelvana, which is the big Canadian company, reduced their production costs by about one third in the last five years because producers everywhere are real¬ly under pressure, broadcasters are putting less money into their budgets, there are difficulties getting money out from the after sales market. So there has been a lot of pressure on budgets.
Who are the top animation producers?
Nelvana, owned by Corus Entertainment Inc., emerged as the biggest producer worldwide in terms of volume, followed by the two big US studi¬os: Walt Disney, which has a very well-established TV animation studio, and Nickelodeon Animation Studios, which is more recently established, obvi¬ously making series for the Nickelodeon Network in the US. There are also four Canadian companies: Cookie Jar, which emerged from the former Cinar, and is making animation both in Canada and in the US, Studio B Productions and Decode, which are both owned by a company called DHX media, and Bardel, another Canadian company, which covers a lot of productions with 4Kids.
Out of the Top-20 animation producers, there are 6 Canadian companies, 5 US companies, 3 from France, 3 from Spain, 2 Italian companies and 1 from the UK.
What are the trends in the television animation market?
The first trend is the decline of the traditional 2D animation, animation which uses cells and hand-drawn animation, which is replaced by digital 2D, Flash, Cell action and other technologies. In countries like Germany in particular, where even in 2005, the vast majority of animation was 2D, that has almost disappeared, replaced by digital 2D, and much more CG. CG was a very new thing in the late 1990s, nearly crossed this decade, but there has been a major shift to production using CG technologies like Maya for television. To a large extent those changes have been driven by cost sav¬ings on production.
The second trend is the long-term decline in fund¬ing by broadcasters. Even in the late 1990s, there were some markets in Europe where broadcasters would fully fund at least one animation special, like Wallace and Gromit, which was fully funded by the BBC. That does not happen anymore, broadcast is much more likely to only put in, if they put in anything, 20, 30, 40% maximum of the production budget. Producers really have had to get used to being entrepreneurs as well as producers, putting together most of their budgets, because they can¬not rely on broadcasters as much as before.
µThe third trend is the rise of co-productions with Asia where there are lots of new children’s chan¬nels being launched. To some extent that has been a real disappointment because although there has undoubtedly been an increase in the number of channels and the amount of animation on air, it actually means that there has been a decrease in the amount of money paid per episode of animation. A lot of these new channels just have much lower budgets than the incumbent players. Meanwhile the analogue channels, that did not have so much competition, have also reduced the amount of children's programmes, the amount of animation they put out or they shifted it onto lower cost digital channels, because their audi¬ences are fragmented, are spending, investing less money in original programmes.
Ultimately the emergence of digital channels will benefit producers, because the new channels will start increasing their audiences and their budgets. It has actually been quite a major reality check in the early stages, because of the two trends of audience fragmentation and much lower cost pro¬gramming. The other major factor is the growth of the big 3 US companies: Cartoon Network, Nickelodeon and Disney.
In terms of co-productions with Asia, we saw the decline of traditional 2D animation. The tradi¬tional production model for animation was that the pre-production work, the design would all be done in the West, in Europe, and the actual manu¬facturing would be done in studios in Asia, usually in Japan and South Korea. There has been a major shift to repatriate work to Europe and to produce at lower cost, either within the studio or with other partners in Europe. So there has been a radical change in the sub-contracting market in Asia.
US majors still subcontract things like The Simpsons, Family Guy. Basically all the animation is done by an overseas partner. There is still a 20% share of the budget which goes to the subcontract¬ing partner in Asia. Now Japan and South Korea are facing a lot of competition from other countries, in particular India and China, which have invested heavily in developing their own animation indus¬tries. They are competing for subcontracting work.
Because that work has become very competitive there has been more of a move on the part of Asian studios to do co-productions, particularly South Korean and some Indian studios. They are not just looking to do subcontracting work, they are actually looking for co-production partner¬ships where they would put in a share in the co-production budget and also keep a share of the rights. There has been quite a change on the part of Indian studios in particular from being much more aggressive moving to a proprietary model. One example is DQ Entertainment which does a lot of co-productions with studios in Europe.
Another factor of the growth of Asian co-pro¬ductions is official support from governments. The South Korean government is being very sup¬portive of export efforts, South Korean missions to markets like MIP, to promote Korean studios, Korean content. In China there has been a lot of encouragement to develop animation studios, new technologies of expertise. There is a lot of funding going on to build up the animation indus¬try infrastructures in those Asian markets.
How are the big US and Canadian producers evolving?
The big three producers that have networks eve¬rywhere are Disney, Viacom and Cartoon Network. They actually started in the US with the launch of Cartoon Network in 1992, then Disney Channel which being a premium channel became a basic channel. Both of them compete very heavily with Nickelodeon, which is really the market leader, a television in the US, which has a target audience from 2 to 11 year-olds. There is a massive competi¬tion; both Cartoon Network and Disney Channel are investing heavily in original animation, partic¬ularly Cartoon Network, to distinguish themselves against the market leader, to give cable operators, satellite operators a reason to carry that channel. Since the mid-1990s, all three companies have been rolling out international channel brands. They also launched secondary brands, Disney has Disney XT and Playhouse, Cartoon Network has Boomerang, Nickelodeon has Nick Jr., etc. They are competing not just for the US market but also for the international market, they are vertically inte¬grated business, they have their own animation production studios, they develop their own ani¬mation in-house, they finance it through their US and international networks and expose it through their DVD divisions, their licensing divisions.
They are very powerful global players, in the inter¬national market they dominate the pay TV, cable and satellite marketplace.
What are the differences between movie budgets in the US and in Europe?
Budgets for the US movies are considerably larger than the norm in other countries. Disney and DreamWorks usually put in 100-250 M€ into mak¬ing one of their animated movies, whereas the European average is closer to 5-10 M€. It is much more reasonable for European producers to go for low budget productions, because it is very difficult to generate money from even a major European market if your budget is more than 5 M€. In the US, the big studio movies not only get released in the US, they have a lot of marketing and distribution muscles behind them, but they also get released in every country where the US studios have distribu¬tion arms.
What about the revenues for animated feature movies
In terms of the revenues for animated feature films, the reason the studios put so much money into making animated movies is not only because if everything works out they will be very success¬ful at the box office, but they will also generate a lot of money from DVD sales. For a successful Hollywood film more than half of the revenues come from DVD retail, not just from the box office.
With the exception of France and the UK, Europe is not such a developed DVD market for animation. There is quite a healthy market in France, and in the UK, and a lot of those sales and rental revenues go to the studios, whereas other European markets are slightly less developed in terms of generating revenues from animation.
What are the consequences of the evolution of digital technologies?
The impact of digital on audiences is fragmenta¬tion. The availability of around-the-clock digital channels also has impacts on the DVD market and on pre-school children. Shows are available at any time and parents do not feel the need to buy DVDs for their kids.
Is the business model of animation evolving?
Animation producers or companies involved in animation have a choice between two business models: fees and royalties. Fees are revenues that a production company generates from doing work for hire, so either being hired to work alongside another producer on a project and just getting a fee for what they do or working on behalf of an IP (Intellectual Property) owner. Many animation pro¬ducers still work on this model. A lot of the Asian service studios do a good business doing that, they survive on the fees they get from other people. The drawback of that model is that if the property they worked on is very successful, they do not have any return on the work they have done. A lot of anima¬tion studios over a number of years have tried to build a royalties model onto the fee model, where they actually do get some kind of revenues from those properties further down the line, they do get a return on sales that are made to international TV broadcasters, DVD, licensing. Many studios in many countries arranged to shift that model from service work to royalties. A lot of the public support schemes in Canada and France and elsewhere, and the MEDIA programme in Europe, are really aimed at supporting independent producers in retaining more of the money from their IP, so they can build a more sustainable business.
IP can be a very good business if you own a prop¬erty which takes off, things like Noddy., Winnie The Pooh, etc. these are properties which are still on television and film, still doing very well, even though they were created a long time ago.
Revenues are highly changeable and it is very dif¬ficult to see a steady pattern of growth. If you have a successful children's property and if you do suc¬cessful licensing and merchandising campaigns, do not expect them to just grow and grow, they just go in cycles. HIT Entertainment, had a lot of problems when one of its series was cancelled in the US, and it lost lots of revenues from the US. The industry is very unpredictable in terms of revenues, and that has been a problem for inves¬tors looking to invest in animation. Digital TV has not provided the expected exponential increase in sales of animation as expected, and animation production has become a less rewarding business. Margins are been squeezed, broadcasters are put¬ting less money into animation, in the business model, there is a lot less room for failure than there used to be, so many animation producers are successful, but overall it has become a busi¬ness where it is much harder to build a successful business than it was a few years back.
What are the future trends of animation?
On the one hand, animation is heavily supported by public broadcasters; in Europe public broad¬casters still have the same mission, which is to originate programming for children. The children still want to be entertained and amused, and public broadcasters remain very committed not just to providing programming for that audience but also creating programmes. In the UK, the BBC has said that it is increasing its spending on chil¬dren’s programming by 50 M€ over the next couple of years. For commercial broadcasters children's programming and animation is harder, because there is very little revenue from the audience, you cannot generate much money from advertising as there have been constraints on food and drink advertising to children.
Some private companies may come back into animation: in Belgium one of the commercial broadcasters launched a new children's channel, so they have come back into the market. There are companies like German private Super RTL, a big player in children's TV, committed to the business because they see an attractive market in it. Then there are the cable players, the big three remain very committed to the market. In Europe, they are originating a very small number of series but they are taking pictures of European animation produc¬ers and putting more money into developing and originating programming. To some extent now the shift to digital terrestrial is reaching completion, there may also be more investment coming from digital terrestrial channels often operated by pub¬lic broadcasters because they have often been very successful in building an audience. Gulli in France, which is a children’s channel on digital terrestrial, is now by far the major player in the multichannel space. That phenomenon may happen in other markets as well.