The Anime Biz

It's transforming Japan's $100 billion entertainment industry. Can Anime become the next big export?

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Yumeta Co. hardly screams big business. The animation studio, producer of Beyond the Stream of Time, a TV cartoon about a time-traveling high school girl, is based in the Tokyo suburb of Kiyose, an hour or more by train from the city center. On arrival, you'd be forgiven for thinking you're in the wrong place. There's no sign on the door. Inside the cramped, nearly windowless building, the company's 30 or so jeans-clad staffers busily draw by hand the thousands of frames necessary for cartoons. They work quietly, pausing only occasionally to sharpen a pencil or skip a track on their iPods. "It's a lot of work, but that's how we do it in Japan," says Chief Executive Satoshi Yamaguchi.

Yet Yumeta's humble establishment is part of a business that has achieved plenty of fame at home and abroad: anime. This is the realm of iconic Japanese cartoons in which doe-eyed characters with waiflike faces have fantastic adventures that inspire devotion in millions of fans. (Indeed, the reason Yumeta's building bears no sign is that some fans are so rabid that they rifle through the garbage in search of discarded drawings.) Box-office receipts and DVD sales from anime films are expected to reach $5.2 billion globally this year, according to trade group Nasscom. And games, toys, and the myriad marketing tie-ins to anime characters and films represented some $18.5 billion in Japan alone, according to Digital Contents White Book, an industry guide. What's more, the images that roll out of Japan's studios inspire everything from Hollywood blockbusters to high fashion. Anime "has been hugely influential," says John Lasseter, executive vice-president and creative chief at Pixar Animation Studios (PIXR ), which produced The Incredibles and Finding Nemo. The influence is all the more extraordinary when you consider that the outside world sees so little of what Japan comes up with. "The Japanese have been the largest animation producers for years, but 99% of the stuff stays in Japan," says Lasseter.

He and other foreign media execs think the role of anime could expand much, much more. "It has the potential to be Japan's next big export," says Todd Miller, managing director for Asia at Sony (SNE ) Pictures Television. At the high end of the craft is Hayao Miyazaki. While Miyazaki eschews the label of anime for his films -- he associates the term with lowbrow fare -- he represents the apex of the genre for fans both in Japan and overseas. His Spirited Away won the Academy Award for Best Animated Feature in 2003, and his Princess Mononoke garnered widespread acclaim after its release in 1997. Miyazaki's latest adventure, Howl's Moving Castle, about a wizard called Howl and a young girl who finds herself trapped in the body of an old woman, has earned heaps of critical praise in advance of its nationwide opening in the U.S. on June 17. These three films, produced by Miyazaki's Studio Ghibli, are among the top-five highest-grossing movies in Japanese box-office history. A quirky theme park called Ghibli Museum near Tokyo lets visitors see how Miyazaki's films are put together, while kids can have their photos taken alongside statues of the movies' characters. "Miyazaki-san's films take us somewhere we have never been before, and fire up our imaginations with wonderful images," says Richard Cook, chairman of Walt Disney Studios (DIS ), which is distributing the film.

But Miyazaki is just a small part of the phenomenon. The genre -- characterized by rich, dynamic drawings, exaggerated expressions, and sci-fi and fantasy themes -- stretches back decades and has evolved so that it now caters to just about all ages and tastes. The earliest example is probably Osamu Tezuka's Astro Boy, Japan's first anime TV series, launched in 1963. Tezuka laid the groundwork for anime by studying Disney characters -- he's said to have watched Bambi 80 times.

Today anime is at the center of Japan's entertainment industry. There is the work of masters, such as Katsuhiro Otomo, who last year released Steamboy -- a much anticipated follow-up to his 1988 hit Akira -- and Mamoru Oshii, whose Innocence was nominated for the Palme d'Or at Cannes last year. Multibillion-dollar global TV and game franchises, such as Yu-Gi-Oh and Pokémon, have their roots in anime. There are TV shows such as One Piece -- about a crew of pirates who set out in search of buried treasure -- and Doraemon, about a time-traveling robotic cat. At the low end, anime includes countless productions aimed at adults that are hyperviolent and often pornographic. "The best part of anime is that it's not very formulaic," says 24-year-old Nathan Chang, who stood in line for 10 hours to catch a sneak preview of Howl's Moving Castle at New York's Museum of Modern Art on June 6. "Miyazaki's films have a lot of imagination, the way Disney used to."

The reach of anime is so broad that you might think the shops that produce it are like the Japanese auto industry, full of world-beating giants. Anime has strong links to manga, the thriving Japanese comic book industry from which it sprang. Japan's best-selling manga weekly, Shonen Jump, sells 3 million copies per issue -- roughly what Marvel sells in a month. Stroll the streets of Akihabara, the Tokyo neighborhood where anime fans browse the hundreds of merchants selling DVDs of anime hits, as well as action figures based on the films, and you would think there's plenty of money being made, especially by the studios that crank out thousands of anime TV episodes and dozens of movies a year.

Yet you'll find no companies as big or strong as Toyota (TM ), Honda (HMC ), or Nissan (NSANY ) in the land of anime. By rights the industry should have nurtured by now a company akin to Walt Disney Co., the media giant whose strength is based on decades of excellence in animation. But behind the fast-paced tales and rich images, there's a business that hasn't progressed very far from its roots as a cottage industry of sensitive artistes. Few anime operations have developed the slick marketing skills necessary to take on the giants of U.S. entertainment. "Because of the success of Ghibli, Pokémon, and Yu-Gi-Oh, there's a myth that the industry is profitable," says Yumeta's Yamaguchi. "But for every 100 animations, only around 10 make any real money."

Artistic temperament is one issue. Scale is another. Japan has some 440 anime studios, from big operations such as Miyazaki's Studio Ghibli, with 150 staffers, to tiny two-person shops scratching out a living making cheap and cheerful series for the kids' TV market. Even success stories, such as Production I.G., which created Oshii's first big international hit, Ghost in the Shell, and a critically acclaimed anime sequence in Quentin Tarantino's Kill Bill, Vol. I, earned just $4.6 million on sales of $52 million in the year through May, 2004. By contrast, Pixar posted net income of $141.7 million on sales of $273.5 million last year -- achieving margins Japan's anime producers can only dream of. "It's a difficult industry," says Hiroshi Kamide, an analyst at KBC Securities in Tokyo. "For most anime companies, success is very hit-and-miss, while earnings streams are ridiculously lumpy."

Just as problematic is a widespread lack of business savvy. While toymakers and TV broadcasters have made billions from marketing anime characters, most studios are run by artists who rose through the ranks of animators but have little experience in management. That has often led to a focus on production over profits and a failure to make money even with successes. Until recently almost all anime studios simply sold their programs to TV companies for a one-off fee, giving up any claim to further revenues from their creations. To make matters worse, the TV companies often sell animation series into overseas markets for a pittance. While $10,000 to $20,000 an episode is the norm for stylish shows aimed at teenagers -- and up to 10 times that much in the best cases -- kids' cartoons can be had for far less from companies hoping to bolster game and merchandise sales.

Then there's the issue of keeping the pipeline filled with eager young artists. In the past five years the number of full-time animators in Japan has declined to 3,000 from 3,500, estimates the Media Development Research Institute in Tokyo. It's easy to see why. Anime is still largely drawn by hand, which means a master animator renders one frame for each second of a film, with an assembly line of low-level "in-betweeners" drawing the other 24 frames. At some studios the pay for in-betweeners is appalling -- as little as $2 for a frame that can take up to a half-hour to draw -- meaning some artists subsist on about $700 a month.

That's driving the business overseas as many Japanese studios outsource lower-level work to Korea, China, and the Philippines. The 1,000 artists at Dongwoo Animation Co., Korea's biggest studio, did most of the work on the film and TV versions of Yu-Gi-Oh, which was masterminded by Japanese gamemaker Konami Corp. (KNM ). Two-thirds of the top Japanese animation studios outsource to Korea, according to the Korea Animation Producers Assn. The government, meanwhile, is spending about $10 million annually to help small animation studios. That's paying off as Korea's homegrown industry starts to flourish. About 30% of Dongwoo's revenues come from production of its own material rather than outsourced jobs for others, says President Kim Young Doo, and the company won the Grand Prix award at last year's Tokyo International Anime Fair. "I expect someone like Miyazaki will emerge in Korea within three to four years, when we hope to produce hits like Howl's Moving Castle," Kim says.

Outsourcing of low-level jobs isn't unusual in Japan, but the trend has some in the business worried. "Japanese production companies are training Korean animators of the future," says Toru Miya, a board member of the Tokyo International Anime Fair and publisher of manuals on industry best practices. Tellingly, a Korean version is about to be released.

There are some signs of change. Yumeta pays rookie animators a minimum of $1,150 a month plus benefits, and salaries are increased substantially after a year. Production I.G., meanwhile, says it no longer relies on workers from overseas. And the company has reformed its salary system, now rewarding animators based on the popularity of their work. This means that a handful of top animators are now making as much as $180,000 a year. "Of course, it raises production costs, but I.G.'s strength is our people," says CEO Mitsuhisa Ishikawa. "If you invest in people, they'll pay you back with high-quality animation."

Bullish anime fans say once studio execs realize that art alone won't pay the bills, the business could develop into a healthy export sector for Japan Inc. The government, after neglecting Japanese culture's commercial potential for years, aims to hike Japan's entertainment exports fivefold, to $13.8 billion, by 2010. Anime is expected to play a key part in that growth. To help, the government has undertaken several initiatives to support the sector, such as offering trade insurance for anime exports and putting $4.6 million into a small-business fund to back small animation and game studios.

The most successful studios have started looking overseas for help. Miyazaki's Studio Ghibli markets its films through Disney outside of Japan, while Production I.G. hooked up with DreamWorks LLC to release Innocence. Tokyo studio GDH is working on a cartoon series for U.S. television called Afro Samurai, starring Samuel L. Jackson, and has provided animation for a music video by rap-metal band Linkin Park.

Still, too many others have been unable to crack foreign markets, leaving distribution deals to Japanese TV companies. "To realize their full international potential, anime producers need an aggressive marketing strategy, like the major Hollywood studios have," says Miller of Sony, which last year launched Animax Asia, a 24-hour anime channel. One way would be to bump up promotion budgets to spread the message more effectively. There's certainly room for growth. Shrek 2 took in $437 million at the box office in the U.S., compared with $10 million in U.S. sales for Spirited Away, the most successful anime film to date. Miller thinks the Japanese also have to tap new distribution. "Some of these firms are very resistant to new technology, such as the mobile phone and the Internet," especially outside Japan, he says.

But the tech phobia may be fading. Some entrepreneurs are looking to boost efficiency by moving away from reliance on the hand drawing that has long characterized anime. At Yumeta, pencil sketches are scanned into a computer, then a technician adds color digitally. At GDH, characters are still mainly drawn by hand, but 30% of background scenes are now computer-generated. And for Innocence, Production I.G.'s animators drew the human and near-human characters by hand but used computer graphics for all the machines and backgrounds.

To expand anime's global reach, producers may have to rethink the kind of projects they make for the foreign market. "There are still gaps between Japanese anime and Hollywood animation, and we need to fill them," says Kazumi Kawashiro, CEO of Bandai Visual, a subsidiary of game maker Bandai Co., a backer of Steamboy. Sure, Pokémon and Yu-Gi-Oh crossed the divide in part because of their Japanese quirkiness -- and no one does sci-fi cartoons like the Japanese -- but for every hit there are too many misses. Even Steamboy, which took nine years to produce, hasn't been much of a success either at home or overseas. The $22 million film has taken in just $410,000 since its March debut in the U.S. and a mere $11 million since being released in Japan a year ago. One problem is that its story line, a retro-science fiction set in Victorian Britain, failed to grip fans of Akira, which brought director Otomo to international attention. Another example: Gundam, an anime series about galactic wars, is hugely popular at home, but it has been dropped from Cartoon Network's line-up in the U.S. "It's up to Japan's animation companies to make anime that's interesting for worldwide viewers," says Production I.G.'s Ishikawa. "If it's good enough, people will watch it." That has always been the formula for Hollywood. And it has worked for anime inside Japan. But to realize its global potential, this business still has lots of growing up to do.

By Ian Rowley, with Hiroko Tashiro in Tokyo, Chester Dawson in New York, and Moon Ihlwan in Seoul

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