growth

I’ll be honest, this post was not used as an excuse to post a picture of Bubbles.

Over the past number of years, we’ve slowly seen animation come in from the cold as it were. Yes, Disney has had critical and commercial successes for years, but only within the last 10-15 has anyone else actually stood up and taken notice at just how profitable an animated film is. Not only does it rake in the dollars at the box office, they also tend to have some very long legs. Just look at the Lion King, 17 years old and still going strong.

Which leads to today’s post. With the obvious success of the technique, are we in the midst of an economic bubble in terms of animation? I mean, there is a difference between strong economic growth and unsustainable expansion. The question is are we in one or the other. Here’s 4 reasons for the latter point of view.

1. Revenues aren’t rising as fast as costs

Revenues for animated features have been rising at a relatively steady rate, but they have not risen at the same rate as costs. Naturally this is partly to do with the greater use of technology than in the past. CGI isn’t as cheap to implement as traditional animation, which could be shipped off to Asia for the real labour-intensive work. CGI on the other hand requires a very large upfront investment followed by the costs of the labour to utilise it.

Revenues are not rising at the same rate and the result is squeeze somewhere along the production line that will eventually reach a crunch point.

2. The Number of Players in the Market is Rapidly Growing

It’s elementary economics that once someone discovers a way to make money, at least one other person will attempt to emulate their success. Animation is no different. Today, there are no less than 4 large players (Disney, DreamWorks, Sony, Illumination) in the market and more are being added all the time.

When this becomes a bubble is when you see players who attempt to over-extend themselves into the market. We’re seeing this right now with various one-man bands and VFX studios that have figured they can have a go too. Of course, this is nothing new and has been happening since day dot. The difference is that the rate at which we’re seeing new entrants has substantially increased over the last couple of years. This leads us nicely to….

3. Competition is Becoming Intense

With more players in the market, this leads to increased competition in just about all aspects of the business, from artists, to technology to studio space to release windows. More competition is always welcome as it keeps everyone on their toes and ensures a more efficient use of resources. the only downside is that it also tends to weed out the smaller or inefficient guys.

Why would more competition signal a developing bubble? Well, with an increased demand and scarcer resources, costs for those resources tend to rise. Since competition is increasing at a faster rate than the market is growing, that is indicative of a bubble.

4. The Market is Limited And Changing To Boot

Right now, the market in North America is limited. The market is mature and it’s not getting bigger in the grand scheme of things. The growth markets right now are in Eastern Europe and Asia. the only problem is that those markets tend to have quite distinct cultures, and as a result, aren’t as open to Western films as the rest of the world.

Negating the fact that DreamWorks recently announced that they’re building a studio in China to capitalise on the local market, it’s clear that Western studios face a market with increased competition but not an larger space in which to grow. The result is that we’ll either see reduced revenues or studios being forced to reduce costs. Mark my words, $300 million movies are not sustainable in the long run, at least not right now.

Coupled to this, the changes in the market in general, thanks to the internet, mean that the industry as we know it may be vastly different in a few years time. The rise of streaming, the decline of traditional TV, and the new revenue streams that go along with them means that studios will have to adopt a different tune. Whether they are proactive or not in this regard will surely determine whether we’ll see the bubble burst.