DQ Top 20: Entertainment - Past Tense, Future Perfect

"Exactly when people are in turmoil, is the time that the entertainment
business has always been at its best. Because people dont want to be reminded
every day that they are under siege, or that theyre not having a great time of
life"Lionel Richie

Intertainment has had a huge impact the world over; however, recession stayed
like a dark cloud over the entertainment industry in FY10.What was striking in
the last financial year was that there were adoption of new technologies to
create an impact among the audiences. Yet, all said and done the recession
created Lights, Camera.....but not much action!

As per the PricewaterhouseCoopers (PwC) report on Indian entertainment and
media outlook 2010, filmed entertainment showed a negative growth (-3.4%) due to
the cash crunch faced by the industry. Key trends seen in the last year in India
were frequent multiplex strikes, regionalization of Bollywood and Hollywood
movies, digitization of single screen and multiplex theaters and the interest
generated for 3D films and 3D screens. It was however this interest in 3D
(especially after Avatar) that has led to increasing activities in the Indian
animation and VFX industry. While Prime Focus delivered much of the work for
Avatar, overall FY10 saw more and more high-quality work from Hollywood and UK
coming offshore to the Indian service providers. Coupled with Bollywood VFX
content too maintaining a steady stream as well as lots of scope in the
advertising scenario, the Indian animation entertainment industry bucked the
gloomy trend visible in the overall media and entertainment sector globally.

VFXBetter Effects Needed

Picture this! The overall market for VFX industry in India stood at
approximately Rs 300 crore, while the entire industry is worth approximately Rs
11, 000 crore. As per report from PwC, the total production cost of making this
years biggest blockbuster movie Avatar stood at $450 mn (excluding print and
marketing). However, few know the post-production/VFX cost for making this
moviea whopping $350 mn. That would be nearly 70-80% of money spent on VFX.
Simply put, the Indian market for VFX still needs to catch up with the Hollywood
standards. Quality rather than mere quantity needs to be the focus. There were
several Bollywood films this year that used VFX and SFX, however most of these
films failed to make a mark at the box office. (See Box Celluloid Fantasies of
2009). Indian firms are also pitching for work in the visual effects (VFX) arena
as the demand for the same is increasing. VFX constitutes majority of the work
in the post-production stage of films. Focus was mainly on low-end work like
wire removal, removing tracking markers, crowd multiplication, green matte
removal and compositing, and set extension. However that trend is now changing
and a lot of companies such as Prime Focus (VFX creators for Avatar), VCL, Crest
Communications, Rhythm and Hues, Big Animation, etc, are taking it as a big
challenge and coming out with some incredible concepts that could shape up the
Bollywood industry in times to come. This is perhaps the right time to invest in
films that deliver VFX and the upcoming and more relevant3D film and animation.

VFX in films can be used as a creativity tool helping in storytelling.
Filmmakers need not go to a certain place to shoot and here is where VFX can be
used to create a true to life backdrop of that place in the scene. A good
example for this could be the recent Bollywood movieDelhi 6 that used VFX to
merge Chandni Chowk in India with Times Square in New York. Companies such as
Prime Focus, Visual Computing Labs (VCL), DQ Entertainment, FutureWorks, Prasad
EFX, Prana Studios, Red Chillies VFX, etc, have realized the importance of VFX
and so have the directors and producers of the film. The Indian film
entertainment is certainly going to emerge in a new avatar.

The Challenges

One of the biggest challenges faced in India has been that of Intellectual
Property (IP). Outsourcers have been concerned with the protection of their
Intellectual Property in India. India is one of the few countries which have
failed to take stern action against its infringement. India needs to strengthen
its IP policy and ensure that companies operating in the outsourcing sphere take
stringent steps to take care of clients IP rights. Countries like Singapore and
Canada are giving stiff competition to the Indian outsourcing industry. They
have been able to do so due to the support of their governments. In Singapore,
the animation industry has made great strides due to the immense support
provided by the Economic Development Board of Singapore. It has even formed a
Media Development Agency to facilitate the same. India, though being the pioneer
of outsourcing industry, has not found much initiative being taken by the
government to promote animation industry. However, this is expected to change
with the Ministry of Information & Broadcasting announcing in FY10 a Center of
Excellence for the animation and gaming industry valued at Rs 60 crore in India.
Talent shortage has also affected the ability to scale up their operations based
on client demands. This can affect the clients confidence in offshoring large
chunks of work. Tie-ups with educational institutes are helping overcome this
difficulty.

3DThe New Vision

"Certainly every film Im planning will be in 3D," says Avatar director
James Cameroona strong statement as to where the industry would head forward in
the coming times. Movies in 3D has been a game-changer in the industry. The
concept is not new. In fact, most of us do not know that the coronation of Queen
Elizabeth II in 1953 was recorded for TV in 3D. Similarly in India, under the
banner of Navodaya films, film Chota Chetan was released in 1984. The movie was
a huge box office success and earned around Rs 60 crore during 1984-85. Hence,
an effective technology infrastructure to support 3D is required. India, which
is still in nascent stages in adopting technologies for 3D is, however, seeing a
change now with companies such as Prime Focus working on a few very interesting
projects. The demand for content has prompted companies such as Prime Focus to
work on projects such as 2D to 3D conversion, hybrid production from 2D to 3D.
The company is also exploring the production of 3D animatics, or cinematics,
to provide an extra dimension in commercials research testing by using motion
capture technology. India is seeing robust growth in skill based activities like
character modeling, key frame animation, 3D SFX and compositing.

AnimationMake it Indi(a)genous!

There are some examples of activity in the co-production of animation
movies, which involves participation of Indian studios across the life cycle of
animation film creation. Initially taking the mythological story route like
Hanuman, Bal Ganesh and Krishna, animation companies are expanding into
contemporary themes such as Roadside Romeo, Toonpur Ka Superhero and Sultan the
Warrior. These movies although did not fare well at the box office. Most of the
creators and directors believe that the mindset of Indian audiences has to
change for animation. Animation is not just restricted to children and that is
the mindset of the Indian audiences. There have been some good Indian scripts
for animation, however there are only few takers. The domestic industry is still
awaiting a mega success and superior returns but the efforts are on to develop
an indigenous domestic box office market for animation. All eyes of the Indian
animation industry are now on animation film, Arjun, a mythological character
from Mahabharata. Animation companies have also started focusing on building
original IP, which they can leverage in terms of merchandising and TV broadcast
revenues. As per a Nasscom report, broadcast channels are showing a preliminary
level of interest in increasing the share of local content.

OutsourcingThe Edge for India: Recession in America has helped some Indian
animation companies to do better as most of the work had been outsourced
considering the low cost for implementing a project. While 80% of the project
was still the rest 20% was the offshoring work. Geographically, Visual Computing
Labs, a division of Tata Elxsi, expanded into Europe and US as customers in
these countries have now realized the importance of outsourcing due to factors
such as better quality, less cost, and, above all, high commitment in terms of
turnaround time shown by the industry. It embarked on a strategy to expand its
presence in Hollywood set up a studio in Santa Monica, LA designed for US-based
film and TV production companies; and also hired VFX veterans Oscar-winner Joel
Hynek, BAFTA nominee Tricia Ashford and Treva Blue. The domestic business,
however, was flat for the company due to the recessionary phase affecting their
overall business. Except New York and the animation film Arjun, it did not have
a large domestic project in its kitty.

Prime Focus is another such company that had a good FY10. The company focus
was on 2D to 3D conversion, high-end VFX, and workflow and asset management. 3D
market was a key driver for Prime Focus in 2010 with their huge success for
Avatar accounting for 11% of their total revenues. The company sees a major
transition happening in Indiaone is the digitization and secondly the
transition from tape to tapeless environment. Some major projects that were
successful for the company includes Alice in Wonderland, Avatar, and Clash of
the Titans. The company also worked on VFX, CG and DI for several Bollywood
films last year including My Name is Khan, Raavan, Housefull, Badmaash Company,
Tum Mile, Blue, Paa, etc. The company follows the Worldsourcing business model
that enables their customers to tap Prime Focus resources across geographies
with some major cost and time saving benefits. Such a model helps negate the
need for multiple vendors, and include a focused, client dedicated team to run
the account, offering increased efficiencies and value.

What helped Prime Focus sustain this Worldsourcing model was how it finally
integrated its acquisitions done over the last few years. This included Post
Logic Studios and Frantic Films in US and Clear and VTR in the UK.

As per the PwC report, Indian companies are undergoing strategic alliances
and partnership with the global counterparts which have fueled the demand for
the production services in India. International production houses are relying
more on Indian animation studios and this is set to help growth of the segment.
India offers tremendous cost arbitrage in the areas of pre-production to
post-production. A 30 minute animation film can be made at almost 1/4th the cost
of producing the same in the West. With surging investments in state-of-the-art
equipment, more companies would look to target India as the outsourcing hub.
Recently, Mumbai based Crest Animation and US based Lions Gate Family
Entertainment announced their second movie titled Norm of the North planned to
be released in 2012. Currently, they are producing Alpha and Omega due to be
released in October 2010. Companies such as DQ Entertainment, Crest
Communications, Toonz Animation, Prana and Paprikaas are engaged in end-to-end
outsourcing work. Animation and VFX industry will see larger investments in
studios to provide better quality output to the domestic and outsourcing market.
Many international companies like Walt Disney, Sony and EA have already set up
captive centers for animation, VFX and mobile gaming related work in India. The
other major player who will emerge bigger in FY11 is Anil Ambani-promoted
Technicolour India; it completed the integration of Paprikaas Animation Studio
during FY10 and recently appointed industry veteran Biren Ghose as its country
head.

Exports

Like the IT-BPO sector, animation and gaming has a high potential in export
of services on IP. Animation, as an industry in India, is covered under STPI,
but STPI companies have to make sure of an export commitment of more than 75%.
Thus, Indian studios focused on developing content for Indian markets and
developing local movies do not get the benefit. The net result is subsidizing
the production cost of the foreign shows, and making the Indian content far more
expensive. Creating original content in India attracts custom duty, sales tax
and income tax. These taxes are stifling the development of local studios and
local content. Studios, which develop intellectual property in India, are
subjected to a service tax of 12%. The software used for creation and production
of animation, gaming and VFX attracts a sales tax. The high-end machines used
for production attracts an import duty. All these taxes substantially escalate
the development costs in India and deter studios from developing intellectual
property/original Indian content. Exemption from service tax played a major role
in the development of the software industry. Similarly, the animation and gaming
sector also has the potential to grow if content could be developed locally and
exported globally.

SweatshopsIndias the Hub

Besides the high-end offshoring work, India is fast becoming a sweatshop for
the global animation and gaming industry. While at one place the Indian industry
expects a good growth rate, on the other hand there are several hurdles and
challenges such as dearth of quality talent in animation and VFX; piracy
affecting gaming industry; expensive hardware delaying the penetration of
console gaming and lack of quality studios for high-end animation. To meet
demand from North America and Europe, Indian firms took on low-end production
work. But thats not the lucrative end of the market, and most have not yet
moved on to invest, co-produce or retain intellectual rights, the areas where
bigger profits can be made. The industry has to think that unless India itself
does not become a big consumer of animation, it cannot grow fast. After all,
animation is not just about wire removal and chroma keying. Innovation would be
a buzzword in the industry in the next few years.

Let the Games Begin

The overall gaming industry is segmented into PC, online, console and
mobile. As per Nasscom, the Indian gaming industry is presently at a crossroad,
with multiple avenues available for revenue generation but only a few leading to
profitable and sustainable growth. The slow growth of domestic demand across
platforms and a heavy dependence on low-end outsourcing from international
markets, has limited revenue growth. Traditional business models, with
advertisement revenue dependent online game portals, download mobile models and
hardware dependent PC/console games that have constraints in the Indian context.
The most positive outcome of the four segments within the gaming industry has
been for the console gaming. However, this market was predominantly dominated by
the grey market since the actual markets had high pricing points and faced
distribution inefficiencies. Strong brand push by players such as Sony
(PlayStation) and Microsoft (XBox) have yielded results. Since console games are
retail driven, it is, therefore, important to allow customers to become familiar
with them. In most retail shops nowadays, there are machines installed where
consumers can just plug-in and play games on the consoles. This has actually
resulted in cross-over sales in urban markets in particular. Mobile gaming
continues to be the platform with maximum reach and penetration.

With around one lakh downloads a day, resulting in over 36 mn downloads a
year, it is believed that over 3 mn users are engaged in mobile gaming every
month. The mobile gaming market in India is dominated by GSM mobile operators
who enjoy a 75% market share. There are a lot of opportunities to be tapped in
this sector with mobile connections doubling on a month-on-month basis. The
Nasscom report suggests that the consumer online gaming market was estimated at
$8 mn and is expected to grow at a CAGR of 76% to reach $73 mn by 2012, based on
the revenue mix from subscription and advertising. Currently, advertising forms
the major chunk at 85.9% of the revenues from online gaming in India. By 2012,
this mix will shift more towards subscription revenues, accounting for 60% of
online gaming revenues. The PC gaming market is expected to grow at a relatively
slower rate as the other gaming platforms on PCs (online gaming) gain
popularity. By 2012, the consumer PC gaming segment is expected to lose its
market share and contribute a mere 3% to the total gaming market. This reduction
in its revenues share can be attributed to the fact that PC games are available
at a lower price point as an effective measure to curb piracy.

Going Forward

There is a need for government intervention for the entertainment, animation
and the gaming business. The industry has high potential for growth as is in the
case of IT-BPO sector. It is believed that the industry would require more than
45,000 professionals over the next few years. Setting up of special economic
zones, standardizing the curriculum for animation and gaming education, and
implementing policy measures to enable skilled expert talent to be easily hired
in India to train resources is the need of the hour. Studios that develop IP
should be exempted from tax. Exemption of service tax can play a major role in
the development of animation and gaming sector in India if content could be
developed locally and exported globally, as has been the case in the software
services industry.

PC Suraj

surajp@cybermedia.co.in