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