Sizing Up the Promise of Animation in Direct-to-Video

Making movies is, in part, about making magic more like, manufacturing magic but also, for those who want to earn a living, its about making money. Ergo: show business. While there is a sense of glamorous achievement in exhibiting ones films on the silver screen (a criterion, say, for Oscar consideration), most of the big bucks trickle in from a range of non-theatrical revenue streams. Among these, video/DVD is often regarded as an ancillary product or secondary distribution channel, but the format also serves nicely as a first-run venue for original titles.

To give some sense of the home entertainment market in the U.S., there were roughly 8,800 DVD titles (live-action and animation) scheduled for release during 2004, of which 13% were direct-to-home features; there were more than 470 direct-to-home animated properties for 2003-2004, comprising both features and compilations of episodic television. U.S. consumers spent $8.2 billion during 2003 renting videos and DVDs, and sales of videos and DVDs totaled $14 billion. These sales and rentals contributed to 60% of the revenues major studios earned from their film properties.

The fierce competition in the marketplace makes the sharing of financial information all but non-existent. When measuring revenue, industry groups that report on entertainment business often make calculations to extrapolate and compensate for non-reporting studios and retailers. For example, Wal*Mart, one of the largest retailers in the U.S., may account for 30% of a titles sales. Therefore, in tracking shipped units and point-of-sales information, industry groups gather data from nearly 5,000 storefronts and make projections to reflect the whole universe of U.S. specialty video stores.

The cumulative rental revenues for direct-to-home animated properties offer a glimpse of the home entertainment market. A sampling of recent titles includes:

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By comparison, most anime titles released on video/DVD are compilations of episodic television, or they have had a theatrical release in other territories before finding U.S. home distribution. The following is a sample of rental revenues for anime titles released in the U.S. during the last couple of years. Titles with a domestic theatrical release have been included to give a sense of the best-case scenario for this niche market.

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The Lay of the Land

The home entertainment market is potentially lucrative, but it is interesting to note that most direct-to-home projects are based on established brands with enormous consumer awareness. While the top 25 direct-to-home animated titles have earned $1.5 million or more in cumulative rental revenue alone, the top performers are based on existing franchises: film properties, television series, books, comicbooks and toys.

Artisan Entertainment, for instance, distributed the original title The Nutcracker Suite (2001) starring the Barbie doll. The production was successful in boosting sales of tie-in products from Mattel and other partners, such that sequels have followed each year: Barbie as Rapunzel (2002), Barbie of Swan Lake (2003) and Barbie: The Princess and The Pauper (2004). Similarly, DIC Entertainment has produced four direct-to-home videos as part of a plan to relaunch the Strawberry Shortcake franchise. Paramount Home Entertainment also recently signed an agreement with Hasbro to distribute direct-to-home titles based on the Transformers, G.I. Joe, Tonka, Duel Masters, Secret Central, Weebles and Candy Land toy franchises.

The majority of direct-to-home business comes through direct sales to consumers. As of October 2004, Disneys The Lion King 1-1/2 had earned $133.8 million in sales, beyond its $17.9 million in store rentals. Disneys The Three Musketeers, during its first seven weeks of release, had earned $22.5 million in sales and $6.4 million in rentals. In two weeks of its release, Artisans Barbie: The Princess and The Pauper had earned $7.6 million in sales and $1.6 million in rentals.

A titles performance depends on marketing, promotional campaigns and retail support. The first several weeks are critical to its success, as 80% of home entertainment business occurs within the first quarter (three to four months) of a titles release. The market is seasonal and cyclical, with over 50% of annual sales accounted for during October through December. The following numbers do not represent sales to consumers, but revenue earned by the distributing studio for units shipped to retailers.

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The Fat of the Land

Because production is less expensive than for theatrical releases, and therefore the profit margin is greater, studios find it a worthwhile investment to distribute direct-to-home animated titles. Financing is arranged through co-production agreements (allying with other companies to share the cost of services and expertise), co-financing deals (including presales with home entertainment distributors in different territories), negative pickups (bank loans against guaranteed presales), and internal funding.

While models for financing vary, co-production deals are common between the rights holder and the distributor. Depending on its available capital, the rights holder may largely fund production, with distribution partners in different territories contributing advance money against future royalties to cover the remaining costs. Royalties paid to distributors are typically 10% to 25% of the wholesale price of the video/DVD, with 20% being the most common cut. Sometimes, distribution partners are approached as investors; without having to bid for distribution rights in their home territories, and given the incentive of back-end profit participation, distributors may be able to invest more upfront than in a straight presales deal.

For traditionally animated, 2D features like Charlottes Web 2: Wilburs Great Adventure (produced by Nickelodeon and distributed by Paramount), or Balto 2: Wolf Quest and The Land Before Time: The Great Longneck Migration (produced and distributed by Universal Studios), the general production cost is $5 million to $15 million, with an approximate schedule of 70 weeks (38 weeks for preproduction, 36 weeks for production, and nine weeks for post-production). Thus far, the successful Land Before Time franchise has produced 11 direct-to-home features, earning over $1 billion for the studio.

Ben Hur, distributed by GoodTimes Entertainment, is a co-production of Agamemnon Films, GoodTimes and Tundra Productions. While Ben Hur came out in 2001, it seems to have longevity in stores. It is a 2D/3D hybrid, with a traditional look and feel. Bill Sondheim, president of retail and entertainment at GoodTimes, explained that for properties with evergreen sales such as Ben Hur, the initial release might account for 60% of its total business.

GoodTimes, the distributor of the successful Rudolph and the Island of Misfit Toys (2001), has recently released The Night Before Christmas, starring the voice talent of Kevin Kline. The CGI film is an adaptation of the work of childrens book illustrator Mary Engelbreit, who has been described as the Norman Rockwell of our times. For its direct-to-home features (70-90 min. length), with sufficient quality and some recognized voice talent attached, the production cost ranges between $750,000 and $1.5 million, says Sondheim. After acquiring rights to a property (e.g., a childrens book), and hiring scriptwriters and illustrators to work on the story and boards, the animation is outsourced to studios in Canada, Europe and China. Then the project is sold to international television and video markets, while GoodTimes retains domestic distribution rights.

For Rescue Heroes: The Movie, a CGI feature produced by Nelvana and based on the Fisher-Price toy franchise, Peter Maule, vp of home entertainment and retail at Nelvana, says that the ideal co-partnership extends across multiple revenue streams: broadcast television, home video and merchandising. While every financing arrangement is different, a common scenario may include a 50/50 share of production costs in the form of an advance. The higher the percentage of financial contribution, the more rights and territories are kept. Each company brings core competencies to the partnership, with agreed-upon creative input, to achieve the best product, says Maule. While the cost of production depends on the quality of the animation and the star power, a good CGI direct-to-home feature would be $5 million to $10 million.

The highly popular BIONICLE: Mask of Light, based on the LEGO toy franchise and distributed by Miramax, is a co-production of Create TV & Film, CGCG, Creative Capers Entertainment, LEGO and Wang Film Production. Bob Thompson, executive producer of Create TV & Film in London, and co-creator of the story for the direct-to-home feature, says that his production company was hired by LEGO to oversee the BIONICLE franchise. Much of the development, layout and elaborate preproduction work are done at Creative Capers in Glendale, California, before being forwarded to Taiwan for final animation. BIONICLE: Mask of Light was released worldwide in 27 markets more than eight weeks to have an instantaneous global presence.

BIONICLE 2: Legends of Metru-Nui was released in 2004, and it is poised to do equally strong business based on pre-existing awareness of the brand and its built-in audience. BIONICLE 3 is currently in production, on the horizon for distribution in 2005. The BIONICLE direct-to-home features are created on a one-year schedule from start to delivery, with overlapping preproduction (6 months), production (6-8 months), and post-production (3 months).

Jeff Tahler, vp of acquisitions at Miramax, said that big toy companies are in a position to secure their own financing and develop their intellectual properties in-house, thereby retaining a lot of rights when negotiating distribution and merchandising deals. Smaller operations that may not have the capital to develop their own properties can look for a co-production partner, and, with the right idea brought to them, Miramax may fully finance a project or provide a negative pickup deal. The general cost for a movie like BIONICLE: Mask of Light is $3.5 million to $5 million, says Tahler.

Nevertheless, Artisan is among the top distributors of original direct-to-home animated titles, including features based on the Barbie, Hot Wheels and Rescue Heroes toy franchises. Partnered with Mattel and Mainframe Entertainment, the first three Barbie titles have sold more than 10 million units, with Barbie: The Princess and The Pauper (2004) set to continue the perennial trend.

Artisan, as part of Lions Gate Family Home Ent., has also recently announced a deal with Marvel Enterprises to develop, produce and distribute up to eight original direct-to-home animated features based on the superhero characters of the Marvel universe, beginning with The Avengers in early 2006. Also due in stores in 2006, Artisan is co-producing a direct-to-home feature based on the popular PBS childrens character Arthur, and the company is distributing the first Care Bears movie in 15 years.

Mainframe Entertainment, which animated Hot Wheels: World Race and the Barbie movies, is partnering with Artisan and DIC Ent. to produce the CGI direct-to-home feature Inspector Gadget Saves the Day Maybe (2005). Encouraged by its successful reinvigoration of the Strawberry Shortcake franchise through direct-to-home features, DIC approached Mainframe to help with Inspector Gadget. Mainframe will handle home distribution in non-U.S., English-speaking territories such as Canada, Australia and the U.K, while Artisan will handle distribution in the U.S. The financing for production is coming largely from DIC, the rights holder, with Mainframe and Artisan contributing as distribution partners.

In a separate project, Mainframe approached legendary skateboarder Tony Hawk and entered into an agreement to produce a direct-to-home CGI feature, tentatively titled Tony Hawk in Boom Boom Goes the Circus (2006). IDT Entertainment, the parent company of Mainframe, will handle worldwide television and home distribution of the Tony Hawk movie. IDT is also producing other direct-to-home features based on Spawn and Stan Lee franchises.

According to Rick Mischel, ceo of Mainframe, the films are being produced on a one-year schedule, with about 12 weeks for preproduction, seven months for production, and two months for post-production. It depends on the complexity and length of the film, but in general they are being made in the range of $3 million to $6 million.

One final example of a toy franchise making the transition to direct-to-home animated features is Hasbros G.I. Joe. The toys were launched in 1964, and Hasbro is now producing direct-to-home CGI features to boost sales and strengthen the G.I. Joe brand as new characters are introduced. G.I. Joe: Valor Vs. Venom (Paramount Home Entertainment, 2004) was animated by Dallas-based Reel FX Creative Services, with outsourced contributions coming from the U.K., Canada, South America, Europe and Australia. An earlier project, G.I. Joe Vs. Cobra: Spy Troops aired on the Cartoon Network in September 2003.

The Little Polar Bear, a co-production of Warner Bros. and Rothkirch Cartoon Film in Germany, had a theatrical release in Europe before its home distribution in the U.S. Similarly, most anime features for the U.S. market based on television series, videogames or comicbooks may have a theatrical premiere abroad. Direct-to-home anime titles are often created as co-productions. According to Carl Macek, a producer with top U.S. anime distributor A.D.V. Films, the cost for production ranges from $10,000 to $40,000 per minute, with $15,000 being the average. Lady Death (2004) was written by Macek and bought by A.D.V. Films. The studio then sold distribution rights to foreign markets to secure funding, and worked with a boutique Korean animation studio, Sun Min, to complete the production.

For anyone interested in producing animation or running an animation studio, two introductory texts are Producing Animation by Catherine Winder and Zahra Dowlatabadi (Focal Press, 2001), and The Animation Business Handbook by Karen Raugust (St. Martins Press, 2004).

Greg Singer is an animation welfare advocate, eating in Los Angeles.