Animation industry at a crossroads

The animation industry is, well, in suspended animation. What started as an action-filled arena in early 2000, with a huge promise, appears to have meandered into wilderness somewhere along the way.

With a revenue pie of around `1,200 crore – which is shared by at least 50 active companies – it remains a poor cousin of the IT-BPO industry, which boasted revenues of `5.5 lakh crore last year.

It all started with the American studios recognising the creative talent available in India at a lesser cost. These studios started outsourcing work to the Indian animation experts, who had their own outfits with equally creative people.

But today, most of these animation units have shut shop, while the remaining few are unable to break the small and medium enterprises mould.

What gives?
Blame it on a lack of capital and government focus on the sector, and burgeoning costs, say industry experts.

“In a way, we missed the bus. Now, most of the projects are going to Malaysia and China. There are many 3D projects being done in Malaysia. There, the advantage is the Malaysian government is stepping in as an investor whenever the local companies bag an international project. It is not a grant. It is a pure investment and the government takes its share later. The advantage for the company is in terms of ready availability of the initial capital that is required to kick off a project. We are told the local government is funding about 50% of the entire project cost. Additionally, the Malaysian industry is present as a single unit at all the international conferences and the government is sponsoring them. All these measures are helping the Malaysian industry grow,” said Rajiv Chilaka, founder and managing director of Green Gold Animation.

Green Gold’s own situation is representative of the larger story. Though founded in 2001 and employing around 250 people now, the company’s annual revenues are around `20 crore – even that is largely because of a single successful project – Chota Bheem.

Going by Chilaka, without Chota Bheem, the company might have shut shop by now.

To make matters worse, animation has no industry body yet and is represented either by Nasscom, which is an umbrella organisation of software sector, or Ficci.

“It normally takes about five years for any animation company to start seeing the revenues. But, during those five years, the companies need some handholding. Unlike software companies, the animation companies are formed by creative people. They know how to make something more creative or how to narrate a story more creatively, but most do not know business or how to sell a product. This is where the industry needs to have government support. The support is also required by the government’s initiative to mandate the telecast of a certain percentage of TV content in the form of India-made animation content. Most of the channels today depend on imported content dubbed into a regional language,” said D Sravan Kumar, a senior functionary of another animation company.

On the content side, detractors have long criticised local animation as being dependent on mythology or unable to go beyond grandma stories, though some argue that the success of series like Krishna vindicates the belief that mythology still sells.

As such, the odds appear to be stacked against the industry.

“Domestic work has been caught in a different cycle altogether as there are people who want to watch animation content that conform to international level/ standards. However, the number of such people who will pay high ticket prices to watch such content is too small, so a producer investing `70-80 crore in an animation movie will only be able to recover `10-15 crore odd from the release and other ancillary revenues. So there is a huge gap between costs versus revenues and unless that equation has been fixed one cannot have a widespread domestic release that is viable enough,” said Raghav Anand, segment champion - new media, Ernst & Young.

Analysts feel the industry size would definitely grow if the government had a digital media strategy and also an intention to promote animation in the education sector, rather than limit it to entertainment.

A Ficci-KPMG report has projected the animation and VFX industry size for 2012 at about `3,600 crore and the gaming industry size at `1,800 crore. According to the report while local characters are gaining popularity, a number of shows scripted and conceived in India are being executed in destinations like Indonesia, Singapore and Argentina, where animation costs are reported to be more economical compared with India.

“The global animation and gaming market is expected to grow from $122.20 billion in 2010 to $242.93 billion by 2016. This represents a compounded annual growth rate of 13% from 2011 to 2016. In comparison, the Indian animation industry is estimated to be `1,130 crore, which is a small percentage of the world animation market. This gives the industry tremendous growth potential. It is estimated that the Indian animation industry will grow by a CAGR of 16% and will be `2,397 crore by 2016,” the Ficci-KPMG report said.

A K Madhavan, chief executive officer, Crest Animation Studios, is not in agreement that animation projects are moving out of India.

According to him, high-end jobs continue to come to India. It is the low-end jobs that could be going to countries like Malaysia, Thailand. In fact, the quality and volume of work is much higher here than in most other Southeast Asian countries.

The biggest challenge, however, is finance.

Animation services companies require constant funding, and at regular intervals.

But banks are not forthcoming enough in funding the projects despite the notable success some animated movies have had at the box office, to say nothing of home video sales and merchandise. The banking and financial sector still hasn’t understood the way business happens in this space.

“A price-pressure situation came into play primarily in the low-end volume projects once studios started to evolve. Being more cost-effective, a few other destinations in the southeast Asian region started eying this low-end volume business. As a result it became necessary for Indian animation companies to evolve and get into the mid- and top-level of work that didn’t require as many people vis-a-vis the low-end volume assignments. This in turn has impacted hiring activities as only a certain number of people can be absorbed for that kind of work. That was the scenario in the last two years which is why you see some of these negative news coming in. Where animation was supposed to be the next big thing like IT that’s not how it has really played out,” said Anand.

Given all this, it is likely that only a few players will survive in this market in the years to come. Mergers and acquisitions (M&As) are a distinct possibility, too, said Madhavan.

He feels, greater support from the government is unlikely anytime soon and hence, the animation industry will have to come together and find a way out.

“Animation companies will have to design different structures to deal with the financial challenges. Crest Animation, for instance, has partnered with the distributors and producers of animation films and this approach has worked really well for us,” he said.

Anand appeared to concur. According to him, animation, unlike the IT industry, is creative plus technology and it has three growth cycles. Initially when it started, low-end volume is what was largely coming to India. Subsequently a lot of companies came into play thereby creating huge employment opportunities and demand for manpower in this space as a result we had a host of animation schools and colleges churning out students.

“The third phase that we are entering now is really a phase where some of the animation companies are also sharing the risk. As a result, we are now seeing a shift from pure production related activities to now actually owning the intellectual property (IP). And in case of projects from international markets, companies are trying and co-investing in certain IPs. The animation house in India which was traditionally doing outsourcing work would now be a co-producer of a series and taking between 40% to 50% risk depending on their capacity,” said Anand.

“Five years ago, all the quality work would be done out of London and India would deliver the low-end volumes. Now, some of the quality work has started to come to India and low-end is going to other cost-effective destinations,” he added.

Anand remains optimistic that work that requires some experience to execute will find its way to India.

“If only a handful of players have to succeed then the market forces can pretty well find their way. However, if the industry has to grow in a broad based manner, there are 3-4 things needed,” he said.

First, there should be promotion for domestic content in television, cinema theatres etc. and there should be specific incentives around that.

Second, there should be specific incentives (tax breaks etc) for companies/ entities doing the outsourcing work.

Third, for producers getting their work out of here, there should be incentives for them as well which will eventually motivate them to look at the Indian animation services providers.

And finally, there has to be quality training of people while their time in the institutes so that they get absorbed for high quality work after having completed their respective courses. “And there has to be government support in this area as well,” said Anand.