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Animation and Videogames: Creativity and Market Failures in Japan's Content Industries

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Animation and Videogames: Creativity and Market Failures in Japan's Content Industries Animation and Videogames: Creativity and Market Failures in Japan’s Content Industries Andrei Hagiu Harvard Business School Temple University Japan March 20th 2007 Anime: a very creative Japanese industry… “To define anime simply as Japanese cartoons gives no sense of the depth and variety that make up the medium. Essentially, anime works include everything that Western audiences are accustomed to seeing in live-action films—romance, comedy, tragedy, adventure, even psychological probing of a kind seldom attempted in recent mass-culture Western film or television.” Susan J. Napier, Anime From Akira to Howl’s Moving Castle Japanese anime: 60% of TV anime series worldwide Pokemon example: 68 countries and 25 languages; aggregate size of Pokémon-related markets estimated at $200 billion …stuck in a suboptimal equilibrium Anime in Japan: ¥234 billion ($2.0 billion) in 2005 Fragmented industry (430 animation production companies) dominated by distributors (copyrights and financing) Lack of business and financial strength of animation production companies In 2005, Disney Co. had $32 billion revenues; Toei Animation had ¥21 billion ($175 million) revenues Disney and Pixar spend over ¥10 billion to produce one anime movie; Japanese anime production companies usually spent ¥0.2-0.3 billion (Studio Ghibli: ¥1-3 billion) Why? How can that be changed? The production committee system: financing and copyrights problems Investment Distribution Right Completed Anime for Video Distribute Video P. C. Member A: Anime Production Production Video Distribution Video Market Company Committee Video Sale Proceeds Company Fixed Payment (Less COGS and fees) Sales Proceeds Distribution of Profits P. C. Member B: TV Station P. C. Member C: Consumer Product Company P. C. Member D: Advertising Agency Videogames: an equally creative Japanese industry… …in a much better competitive shape Publisher/Developer 2004 Net Revenues Hit titles Electronic Arts $577 million NBA Live; Madden NFL; 007: Agent Under Fire Nintendo of America $231 million Super Mario Sunshine; Donkey Kong Jungle THQ $133 million SpongeBob SquarePants: Battle for Bikini Bottom; Evil Dead Square Enix $138 million Final Fantasy; Dragon Quest Activision $125 million Spiderman; Tony Hawk’s Underground Sony $116 million EverQuest Online Adventures Konami $77 million Yu-Gi-Oh!; Dance Dance Revolution Extreme Sega $69 million ESPN College Hoops; SEGA Sports NHL 2K3 Midway $59 million Mortal Kombat; MLB Slugfest Microsoft $58 million Project Gotham Racing; Amped: Freestyle Snowboarding Namco $57 million SoulCalibur II; Moto GP Videogames Ecosystem Tools & Middleware providers Developers financing, game st marketing software consoles and 1 Console maker party games Consumers Content proprietary content royalties providers nd rd 2 and 3 Publishers party games Questions to debate Where is the market failure in the Japanese anime industry? Copyrights Financing Employment contracts with animators Other? Why are Japanese videogame companies more competitive internationally relative to anime companies and what can be done for the latter? Thank you for your attention. Anime market segments TV anime series (¥35 billion in 2005): 6% of all TV programs; 90 TV anime shows (usually 30-minute) per week (e.g. Sazae-san) Anime movies (¥29 billion in 2005; ¥62 billion in 2004: high variance due to hits/misses): skewed towards big hits (Howl’s Moving Castle by Studio Ghibli + Finding Nemo by Pixar/Disney = 50% box office revenues of animation in 2004) Video/DVD sales and rentals (¥55 billion in 2005) Internet downloads (¥3 billion in 2005, but 300% annual increase from 2004): viewers usually paid ¥100 ($0.8) per episode which lasted for 30 minutes, or ¥315 ($2.60) for a movie Animation industry structure TV broadcasting stations Advertising agencies (Dentsu, Hakuhodo DY Holdings) Movie distributors (Toho, Shochiku, Toei) Video/DVD publishers/distributors (Bandai Visual) Publishing companies (Shogakukan, Kodansha, Shueisha) Sponsoring companies Animation production companies Production IG Founded by Mitsuhisa Ishikawa in 1987 (first hit: Red Photon Zillion) Turning point: Patlabor 2 - The Movie (1993), directed by Mamoru Oshii Production IG invested ¥50 million upfront – unprecedented move in the animation industry Subsequent hits: Ghost in the Shell (1995), Innocence - Ghost in the Shell 2 (2004) Strategy of gradual accumulation of copyrights: Overseas partners: Los Angeles office in 1997 (first animation company overseas) In 2000 obtained foreign distribution rights for Innocence in order to negotiate with Hollywood Production IG Systematize learning of animation production skills (manual on digital animation techniques) in order to accelerate innovation Among the first companies in the industry to recognize and reward creators based on the quality and productivity of their work Strong emphasis on original creations: 40% manga-based contents for Production IG vs. 60% industry average Other anime production companies Toei Animation Studio Ghibli GDH: Established in 2000 as a holding company uniting Gonzo and Digimation by Shinichiro Ishikawa (ex-BCG); turned profitable by 2003; IPO in 2004 Focused on “hobby” market initially: distribution mainly through videos and DVDs; video/DVD distributors less powerful than TV companies Set up international division in Los Angeles from the start to accumulate international distribution rights (cf. Production IG) and lucrative DVD rights Subsequently vertically integrated into DVD publication Raised ¥5 billion ($43 million) fund to sponsor its own content in order not to rely on production committees Decided to be a leader in digitization and bet on broadband and new technologies First anime movie for children (Brave Story) released in July 2006 in order to compete with Studio Ghibli. GDH owned 40% of the production committee, equal to Fuji TV’s stake Aggressive acquisition of channels and tools for anime production: G- Creators (content for new media), Future Vision Music (creation of anime music), Gonzo Rosso Online (online game development) Recent developments Association of Japanese Animation established in May 2002 by METI: initiate cooperation among anime production companies in order to obtain stronger intellectual property rights IPR became legally defensible through trust arrangements in December 2004. Mizuho Bank started securitization of profits deriving from anime copyrights (no physical collateral needed) Diversification of funding sources for anime production: Mizuho ¥20 billion fund for investing in new movies including anime; GDH-initiated fund for retail investors to finance a new TV series .
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