A TrendWatch Perspective on the U.S. 3D Market

VFXWorld.com invited TrendWatch to participate in this issue featuring various perspectives on the 3D market trends. As you may know, at TrendWatch, we survey studio owners and senior production executives every six months to help industry suppliers and analysts keep abreast of industry and market trends and changes.

The numbers used in this article are from TrendWatch mail surveys conducted directly with U.S. studios/facilities, including: production companies, corporate film and video companies, broadcast/cable studios, visual effects and animation studios, post-production houses, audio recording /mixing studios, video editing /recording studios, Web/ interactive media companies, interactive ad agencies and design firms, as well as independent filmmakers.

Heres what were hearing:

• Business is finally improving. Studio decision-makers are cautiously optimistic about 2005;
• Competition remains a top problem especially for U.S. studios doing 3D work;
• The number of U.S. studios doing 3D work is declining;
• The complexity of 3D work continues to increase from hardware and software advancements;
• An industry-wide focus on productivity is increasing demand for investing in the right technology and hiring the right trained people;
• Employee training is now seen as a competitive tool to help keep key employees, improve productivity and collapse learning time for new-hires;
• As the sophistication of 3D graphics in games intensifies, game developers are recruiting talent from the visual effects industry.

Studio Owners Are Cautiously Optimistic About 2005

For the past several years, business in our industry has been tenuous for all but the biggest studios. In fact, in our summer 2004 survey of U.S. visual effects/dynamic media and broadcast/cable businesses, eight out of 10 studio owners reported economic conditions as their top business challenge.

This is not entirely surprising since eight out of 10 of the almost 43,000 vfx/dynamic media and broadcast/cable studios in the U.S. are small businesses that have less than 10 employees. From our research of the graphics markets over the years, we have observed that many small business owners believe business would improve if the economy were better. This has been the case in good times as well as bad and is symptomatic of other small business problems usually unrelated to the state of the economy.

The good news is that business is getting better. In this chart, we see the TrendWatch Business Conditions Index for current economic conditions steadily rising for the past 18 months. The TrendWatch Business Conditions Index (BCI) is our adjusted look at how business has been for the industry over time. It is indexed to the first year we conducted the Visual Effects/Dynamic Media survey in 2002. What is important about the BCI is not the actual number at any given moment, but the trend over time. Current business is looking up, and the industry also is cautiously optimistic about the future.

Competition Remains a Tough Problem

Even though business is better, studio owners face competitive challenges. Over half of U.S. studios/facilities say competition is a problem they must address. From what we see, advancing technology that is generally readily available and affordable fuels todays increasingly competitive market. In addition, some employees who have worked directly with clients have used their relationships to compete directly with the studios who have trained and fed them. As is often the case in this industry, whom you know can be more important for new business than what you know.

The top sources of studios competition are their clients, other studios (like them), agencies and freelancers. Two markets in particular stand out where competition is a problem post-production and vfx/animation studios. Post houses have been struggling as some clients have brought post in-house.

Vfx/animation studio owners say other domestic studios and studios outside the U.S. are their top competitors. We should not be surprised by either of these situations. Visual effects and animation studio owners say they are seeing more competition from studios outside the U.S. At TrendWatch, we receive many emails from studios in Asia, particularly India, that are looking for 2D and 3D production work. While offshore competition is not a big problem for other markets, domestic vfx/animation studios are being hit hard.

Competitive Markets Force Industry-wide Focus on Productivity and Training

When new technologies come into an industry, much of the focus is on the technology itself and its initial adoption and use as it replaces or displaces existing technology, systems and processes. The rate at which hardware and software advancements have increased the complexity and the possibility of what artists and studios can achieve is unique in this industry. This is one of those good news/bad news stories good news because as new films and commercials are released, expectations of what is possible increase; bad news since clients expect to see these hot new applications in their projects, too, even with ever-tightening budgets and production schedules.

So what does all this have to do with productivity? Improving productivity is one tool studios can use to collapse production and finishing schedules as they work to meet deadlines and maintain their razor thin bottom lines. Also, it is a tool to help meet tightening budgets. The big studios have been focused on productivity for years and have invested in developing proprietary systems and software that give them a productivity edge. Today we are seeing this focus on productivity move into the mid and small size studios.

These key productivity indicators help us track this industry-wide focus:

Investment levels in workstations, software and servers remain high, as studios have continued to invest in their creative and production capabilities.

Significantly fewer studios this year than last year are worried about managing production and upgrading their production tools. This tells us studios have made changes and investments in these areas and have begun to see productivity improvements.

The number of studios worried about keeping up with technological changes has dropped by 40% in the past two years. This worry for studio owners has begun to dissipate as their focus has shifted to new business opportunities. This is a sign that studios have made investments in new technology and learned how to use it effectively.

Twice as many studios today compared to two years ago see employee training as a problem they must address. As studios invest in, adopt and become efficient using new technology, they must also invest in keeping their people trained and productive. Trained and knowledgeable people can implement short cuts to improve production.

The Right Employees Are Key

The number of studios having trouble finding qualified employees has increased by more than 30% since the first TrendWatch survey in the summer of 2002. This is a multi-faceted problem for studios of all sizes. The industry is experiencing a supervisory and mid-level management shortage it is simply still too young to have a ready supply of employees with the experience and training needed to effectively supervise and manage projects and people.

Another facet of this problem is that some studios are not willing to pay market compensation rates for employees, which makes finding the right people a tougher challenge. Yet a third facet is that as technology and its use have become more complex, especially for 3D work, it has created a higher demand for more specific employee skill-sets and experience. Given the industry-wide focus on productivity, it is too expensive for studios owners to settle for hiring employees that do not meet all their needs.

3D Work Done by U.S. Studios/Facilities

With the focus on productivity, people and training, it is also important to look at the type of 3D work studios are doing. Overall, in the industry, eight out of 10 studios do very little, if any 3D work, and among those studios that do, most dont all the time.

Additionally, many studios may only do certain aspects of 3D. Currently, one in five U.S. studios says it does 3D modeling/ animation/rendering work. TrendWatch surveys show that a greater number of larger studios/facilities than smaller ones do 3D work. Nearly eight out of 10 animation/vfx studios report doing 3D modeling/animation/ rendering tasks, the highest of any of the markets we track. This compares to one third of the post studios and a quarter of the corporate studios that do this type of 3D work.

The number of U.S. studios doing 3D modeling, animation, rendering work has declined by 7% this past year. TrendWatch experts say this may be a result of a combination of factors: studios outside the U.S. taking work away, U.S. studios setting up companies outside the U.S. to handle their production work, industry consolidation, artists moving from the vfx/dynamic media markets into the games market (where 3D is very hot right now) and of course, the possibility that there is less 3D work being done today.

Trends Were Watching

Frankly, what worries us is the decline in the number of U.S. studios doing 3D work. Although this trend may be a sign of the globalization of 3D production, it does point out just how competitive it is in this part of the industry.

Another trend were watching is the increasing complexity of the 3D work created by studios today. Technology advancements in workstation processing capability paired with robust software capabilities have resulted in artists and studios ability to create and produce 3D work that is more complex. This is a tribute to both industry suppliers and artists who through technology and capability have continued to maximize the sophistication of what can be achieved today. It is easy to forget that not all that long ago, doing a full length all-CG feature was nearly impossible to achieve given the state of technology and its application. Studios literally created a craft. Advancements in 3D are not just about technology alone, but increasingly, we think, are more the result of how smart people apply the technology in innovative ways.

This level of complexity and sophistication has carried over to graphics cards and is resulting in a trend in the gaming industry where film-like graphics that present high resolution full motion images in 3D at film frame rates are now relatively common. One of the ways we can track this trend is to follow how developers are writing specific instructions to take direct advantage of the processing capability of todays hot graphics cards. As an industry, we have now entered an era where in the world of 3D at least, GPU capability is more important than CPU speed.

We expect this trend of increased sophistication and complexity at the GPU level to continue. The game market remains very hot and at the consumer level, gamers seem to have the capability to buy the latest and hottest computer hardware and graphics cards to maximize their gaming experience.

As the complexity of 3D and capability of graphics cards increases, it makes sense that the issue of productivity comes into play. Amidst complaints from studio owners of tight client budgets with impossibly tight time frames, one of the tools at their disposal is to make their shops more efficient. Making the right hardware and software investments is part of this equation. Hiring the right people is another. Getting employees trained is a third part.

From what we observe, employee training is one of the keys to improving studio productivity. As we might imagine, studios are learning that it pays to provide employees with the training they need to increase productivity and throughput. Training is no longer a nice to have activity, but is seen as a key factor in keeping employees from jumping ship. Training also provides a learning environment that helps keep artists challenged and excited about their jobs.

Another piece of the productivity puzzle is an artists ability to quickly and easily access work files. Trained, productive people have the capability to produce huge amounts of very large work-in-progress files quickly. As 3D work has become more complex, the demand for the right storage solutions has increased.

Planned investments for servers have doubled in the past 18 months. For studios that do 3D work, six out of 10 plan to buy servers in 2005, most of which will be with Windows XP and Mac OS X operating systems. As collaborative workflow continues to move into smaller studios, we expect demand for networked storage will increase. One in three studios that do 3D work already has networked attached storage (NAS) in place and almost one-fourth have a storage area network (SAN). Watch for these numbers to increase as storage costs continue to come down and the need for collaboration increases.

Another trend we are watching is the realtime 3D used in broadcast. Powered by sophisticated 3D software, broadcasters can now run 3D graphics in realtime, which gives them more flexibility in what they can automate on screen. Currently, 27% of small television stations (one to nine employees) use realtime animation, as do 13% of the larger stations with 20-plus employees. TrendWatch experts expect this trend to gain steam as more of this type of 3D becomes further automated for broadcast use. Storage demand will continue to increase in this market as well. Six out of 10 broadcasters plan to buy servers in 2005.

These are just a few of the trends we are tracking at TrendWatch. We think watching how new technology is adopted by the industry provides valuable clues as to how studios solve challenges and subsequently learn how to use the technology and people they have invested in to be productive and profitable. TrendWatch surveys track these technology transitions and from what we see, this industry, to its credit, has the capability to adopt new technology, and make money from it faster than other industries we have studied. It is a real tribute to the creativity and perseverance that exists among studio owners, their employees, freelancers and suppliers that make up the fabric of the industry.

Jim Whittington founded TrendWatch Inc. in 2001 to bring accurate market sizing and marketing segmentation to the visual effects and pro-video markets. In 1996, Whittington and TrendWatch partner Dr. Joe Webb created the TrendWatch market information brand in the graphic arts markets. TrendWatch was the first organization to create market size estimates for several U.S. markets, including: visual effects/dynamic media and broadcast/cable markets in 2002, creative markets (agencies, designers, commercial photographers) in 1997, Web design/development markets in 1999 and the global creative, printing and publishing markets in 1999. Prior to starting TrendWatch, Whittington created Fast Focus, a business strategy tool for entrepreneurial organizations. He consulted with many companies from major industry suppliers to privately held, family businesses to develop winning business strategies. Whittington is a national business strategist and marketer with 30 years experience in industry and management consulting. Whittington is also a certified management consultant and graduate of Montana State University.