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The Anime Economy - Part 2: Shiny Discs

by Justin Sevakis,

Part 1: Let's Make An Anime!
Part 3: Digital Pennies

As we discussed in the previous installment, getting the funds for anime is a tedious, laborious process of bringing together different companies, who form a "Production Committee," where they all chip in to pay for all the production costs up-front. Depending on the budget, the total for a 13-episode season can run anywhere from US$2 million to US $4 million.

Much as people love anime, nobody blows that kind of cash on a project and doesn't expect to make it back. And it's really important that they do -- people who get burned on a project are less likely to try again, and if you get burned on the same type of project over and over, you generally stop attempting it.

For some anime, typically the ones aimed at kids, selling merchandise is the most important way to recoup that investment. But most anime, especially the majority of it that now airs late at night, don't last long enough or don't appeal to enough people for merchandise to be all that useful. These anime must make back their costs almost entirely through DVD sales.

Part 2: Shiny Discs

DVDs, like any physical product, are a complicated business. The money a customer pays for a single disc has to go towards a number of costs, get split up among a bunch of different companies, and generally maneuver its way around a fairly complex system. But for making back the money of a production, there's simply nothing else like it. That's especially true in Japan.

The High Prices... Explained!

To a Westerner, the Japanese DVD market seems horribly overpriced. With the average disc running over ¥7,000 (US$92) and only containing 2-4 episodes of a series, the cost of collecting a single show can easily run several hundred dollars -- more than many American fans spend in a single year.

The prices actually stem from a business practice we used to have in America, too: rental pricing. Basically, back in the dawn of the home video business, the industry was constructed in a way where "niche" releases were only meant to sell a few thousand copies, mostly to video rental shops. Prices were high (typically $89.95 in America), but video shops benefited from having a wide and semi-exclusive selection of movies that normal people would never pay for. At those prices, only a few thousand sales could mean over a million dollars of revenue. Initially, video industry people didn't think there was much of a market in selling to collectors.

But the fans proved them wrong. Otaku of all kinds (not just anime fans) started buying the videotapes and laserdiscs, and they bought them at those high prices that were intended just for video stores. There was no reason to lower it. In fact, there were a few experiments to drop the price to a more affordable amount, but that usually resulted in a slight increase in sales -- not enough to make up for the drop in revenue.

When you think about it, that makes sense. Most Japanese people live in much smaller homes, and with many more people than their Western counterparts. In most cases, it simply doesn't make sense for Japanese consumers to build a big home media library. Only the hardcore fans of a particular product will usually want to bother owning a tape or DVD, and everyone else relies on rental shops. Media is a specialty market, not a mass-market one, so prices have stayed astronomically high.

The Japanese Otaku's desire to own anime even at high prices had an unexpected effect: as the rest of the economy tanked and video stores stopped buying every new video release, the otaku kept buying pretty much everything that got released. Before long, the few thousand fans that bought anime DVDs were supporting nearly the entire budget of a show. Even as the rest of the Japanese home video industry lowered their prices to varying degrees, anime stayed at the same high price. It's simply the only way most shows can ever make a profit.

Follow the Money

Before we begin, a caveat: all of this information applies almost entirely to late-night TV series, which make up the majority of anime being made today. TV shows that air in the evening hours that are aimed at kids are almost entirely intended to sell toys and video games; determining how successful they are is impossible without getting deep into each product line and knowing the royalty splits -- which is not possible. So for the sake of simplicity, we'll leave those out of the equation for now.

To see how all this works, let's see how the money breaks down.

Everything starts with the Suggested Retail Price. When the home video label sells to a store, they sell it at a discount. The discounted price (the "wholesale" price) makes up the store's profit margin. If they want to charge people less than Suggested Retail, that's their choice. It's coming out of their share of the money.

From there, you have other expenses. You have to pay a warehouse to stockpile the discs, and then ship them by the box to retailers. That's called fulfillment, and they charge about 5% of the wholesale price. What's left, the purple area, is called your "net revenue" -- and from it, you start paying YOUR people.

First, you have royalties to pay to three important creative people, who get their cut directly from every sale: the director (kantoku), the head writer (シリーズ構成 - series kosei, usually translated as "Scenario" or "Series Composition"), and the gensakusha (creator, see part 1). They each get 1.7% of net revenues. Another 1.7% goes to the performers of the opening and ending themes (assuming they weren't made just for the show), which gets paid through their music rights organization.

From there, you can pay yourself back for the money you spent in authoring, manufacturing and marketing the discs. Making the discs themselves usually runs about $1 per disc, but they have to be made in blocks of 1,000 or so. Marketing costs can be nothing, or they can run into the thousands, depending on how hard you try. (Some companies really splurge on fancy marketing stuff like DVD extras, and then have to get permission from the Production Committee to recoup what they spent.) And then, finally, you can start paying back the members of the Production Committee for the money they spent to make the show.

So how many discs do you need to sell in Japan to make a profit on a show? Let's start with a rough estimate as to how much of that pie eventually ends up in the hands of the Production Committee. 46% seems like a good guess.

That's not a lot of discs! The prices are so high that if you only sell a few thousand discs per volume, you can pretty much break even on the whole show. With that in mind, each sale becomes critically important to that production's profitability. This also explains why Japanese producers are so leery of anything that might allow Japanese fans to import a much cheaper American disc.

(Please note that the above is just an example. The actual number of units required to break even will vary drastically depending on the show's budget, and whether it has other types of income coming in, such as toy licensing.)

Since the company selling the DVD is usually part of the Production Committee (or at least, in very close communication with them), it's easy for a producer to gauge how interested Japanese fans are in the material, and on a fairly timely basis. Just as with American DVDs, new releases tend to sell a lot at first, and then slow down to a trickle as time goes on. That big initial rush is what Japanese industry insiders pay close attention to -- they're the biggest indicator of how successful a show ultimately is.

Japanese producers regard their discs as luxury items: products with high value to a select few individuals. They're quite aware that they're expensive, which is why it's expected that most discs will stay in print for a while, and generally don't come down in price. It's only after a few years of a disc being in print that most anime productions will become profitable, after all. Eventually enough people will buy them and the show will turn a profit.

Foreign Invasion!

DVD sales outside of Japan work entirely differently, for a number of reasons. The biggest one is that, when a local company releases a disc, financially it's like a whole new production. When a company like Funimation or Section23 licenses a show, they have new up-front costs, new recoupable expenses, and a longer chain of people-getting-paid. As a result, while markets outside of Japan can make a critical difference on whether or not a show is profitable, in most cases it's really hard to see the impact of a single sale, even for the people involved.

When a company like Funimation or Section 23 decides to buy the rights to an anime title, they first pay an up-front license fee, also known as a "Minimum Guarantee" (MG). This can range from a few thousand dollars per episode, up to tens of thousands. These fees are treated like net revenue from Japanese DVDs -- royalties are paid, and then it goes to the production committee.

In the ridiculous money-losing days of the anime boom, these fees often went up well over US$70,000 per episode. That's half of the cost to make the whole show! (This is why, for a brief time in the mid 00's, Geneon USA and ADV Films occasionally found themselves on the production committee. It was easier, since they were paying most of the costs anyway.) But those days are long gone, and the Japanese producers have stopped depending so much on license fees, which have dropped to a much more sane amount. They still would love to have that money, it's just not enough to make or break a show anymore.

Just like the production of the show itself, paying a license fee up front is basically a bet: essentially the distributor is wagering that they can sell enough copies to recoup that license fee. And in fact, until they do, they don't have to pay anything more to the licensor. That's why it's called a "minimum guarantee" -- it's the minimum amount that they would be on the hook for a given series. In the event the show makes money, the licensors get a royalty after that -- typically 20-30%.

And so, for the first few thousand copies sold, money from a DVD doesn't go directly to the producers of the show, but instead goes towards refilling what the distributor already paid for it, as well as their production costs (which can range from a few hundred dollars for a barebones subtitled DVD, to over US$10,000 per episode to produce a dubbed Blu-ray.) Every show that never recoups its money makes it harder for them to pay the MG for the next series.

A Market In Crisis

Here in the US, the wholesale system works in much the same way as in Japan, but with one giant exception: the retailer's share is MUCH bigger. That's because almost nobody actually sells discs for full retail price in this country, and while originally the retailers took that discount out of their margins, eventually the bigger ones were able to wrangle publishers into sharing the pain. Brick and mortar retailers have also used their decreasing shelf space to leverage bigger and bigger wholesale discounts. We'll get to the reasons for that in a second.

Music rights have to be paid in America as well (through performance rights organization ASCAP), and fulfillment costs are mostly about the same. Finally, we have net revenue, from which you pay yourself back for your marketing and replication costs before recouping your license fee. If that ever happens, then you get to pocket the difference, minus a 20-30% royalty back to the production committee. (Any and all money you pay the licensor gets treated just like net revenue from a Japanese DVD, royalties and all.)

Selling video in North America has gotten harder and harder over the years. With the advent of DVD in the late 90s, the Hollywood studios decided to get rid of "rental pricing", and concentrate entirely on the consumers building their own collections. This worked really really well for a while. Consumers got excited about building a big collection, and spent thousands buying every movie and TV show they liked, or thought they might like.

This, clearly, was unsustainable. After ten years of impulse-buying terrible movies, most consumers have cut back their purchases to just the essentials. To keep consumers buying, the entire industry cut prices over and over, to the point where most discs are so cheap they barely turn a profit. Retailers also started demanding bigger discounts to stock the product in the first place.

This is a promotional graphic from an actual Right Stuf sale. It's pretty much impossible to sell a DVD at 95% off without someone taking a major loss somewhere.

With streaming services like Netflix on the rise, as well as cable video-on-demand and downloaded movies, more and more consumers decided that owning media was simply not for them. For most people, the whole point of having a big DVD collection was having instant access to a wide array of fun things to watch. Rewatching them is not a high priority, and for most Hollywood fare, the films are mainstream enough that, should they someday wish to revisit a film or TV series, it would never be too far away.

This change in consumer behavior hit anime particularly hard, since during the industry's heyday, it depended on people collecting multiple volumes of a show they'd never seen. The idea of expecting people to commit up to $200 to collect a show they might not even like, in retrospect, seems like insanity. Nobody loves every show that much, and indeed, most fans got stuck with a large, expensive pile of regret.

Nothing kills enthusiasm like blowing a ton of money on something you hate. So fans cut back. Some just tuned out of the scene. Others started relying on fansubs. With sales in freefall, the US anime publishers, along with their mainstream DVD counterparts, tried to get people buying again. And they did it by cutting prices. A lot.

This is for full-retail price. Any discount would drop the price even further.

The thing is, people still wanted anime DVDs... Just, fewer people wanted less of them. Publishers, inundated with too many discs returned by retailers, started blowing them out for next to nothing. When they ran out, they'd print more copies in cheap packaging and kept prices really, really low. The fans who still were interested in buying discs had a field day with these bargains, of course, but while liquidating all those discs brought in a little money, it was basically a fire sale. Nobody was even coming close to making a profit at those prices.

The truth is, only a certain percentage of people REALLY want to own movies and TV shows. They're the passionate ones, the collectors, the people who really really love a show and want to make sure they have the best quality presentation possible, and no matter what happens in the future, they'll always be able to revisit it. Even the passionate people usually only feel this way about a handful of shows.

Everyone else just wants to watch. And there's certainly nothing wrong with that. It's the same with any other kind of TV or movies -- most people will never feel the urge to see them again. If we're to be honest, most of the people buying DVDs like crazy back in the early 2000s didn't care enough about any of those shows to own them forever. They were just buying them because... well... that's how people used to watch stuff. They don't anymore. That fad is over.

A Brave New World

This is old news to anime publishers. Even if the general public still wanted to walk into a physical store and buy an anime DVD, they'd have a hard time these days. With the number of DVD retailers dwindling, and the few that remain cutting back on their shelf space, anime has mostly been pushed out. With few other places to sell, publishers are now putting more and more of their efforts into online retail. With only a handful of sellers to deal with, there's less need to offer crazy wholesale discounts, and less worry about retailers ordering too many discs and then returning them.

The people buying anime DVDs are now mostly the ones looking to buy a specific show. Now that the logjam of liquidated stuff from 2007 has cleared and several shows from the past have gone out of print, fans are reminded that there's value in having a permanent copy of your own. Publishers are finding ways to boost this collector's value, with books and nice packaging, and ever so slightly bump their prices up. Most people watch the show for free, but the few thousand people who love it enough to collect make the whole venture profitable.

Gee, sounds a lot like Japan.

The More Things Change...

In a way, the anime market is lucky. Our fans are a lot more passionate than most other groups of consumers, so we can depend on a greater number of collectors sticking around. The anime market implosion also seemed to happen a year or two before the rest of the DVD market went, so things look like they're stabilizing for us while the rest of the market continues to drop like a rock.

But one unfortunate fact remains: there's a whole lot less money coming in than there used to be. In the next and final installment we'll take a look at some of the new, internet-savvy ways anime is trying to make money, and how well each of them are doing.

Note: Figures given are estimates and do not necessarily reflect any single release.

Cover photo by 401K

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