Straddling two sunrise sectors of the Philippine economy — the Information Technology and Business Process Management (IT-BPM) and the Creative Industries — are the animation and game development subsectors. As part of the Frost & Sullivan Study commissioned by the IT & Business Process Association of the Philippines (IBPAP) in 2015, a detailed Roadmap 2022 for these two sectors benefiting from the abundant creative talents of Filipinos was formulated. It would be very instructive to review the SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis contained in this document even if there will be a need to update some of the data because of the discontinuity occasioned by the COVID-19 pandemic that wreaked havoc on the global economy. In the overall IT-BPM industry, the animation industry was one of the first to be outsourced. Major US and European studios started outsourcing their work from the 1970s because of the availability of talented animators, including Filipinos, in other locations for a fraction of the cost. Sometime later, the Japanese anime industry followed suit. The Philippines got a significant part of the business.
In 2015, the market generated revenue of $19.5 billion. It was expected to register a healthy compound annual growth rate (CAGR) of 7.1% to reach $31.5 billion in 2022. The movie and TV animation market contributes more than 60% whereas digitally distributed animation accounted for the fastest growth. The increasing adoption of smartphones and tablets, especially pronounced in the Philippines, is leading the growth of digitized animation. Animation outsourcing is widespread among major animation studios. In the overall animation creation process, most of the less creative work is outsourced to low-cost outsourcing hubs while the rest of the work is done in the United States, Europe, and Japan. The Indo-Pacific region is the fastest growing market where a significant amount of work is outsourced, not only to India, China, and the Philippines but also to other emerging destinations, such as Malaysia and Indonesia. Other non-Asian countries in the outsourcing pool are Poland and Brazil.
According to Frost and Sullivan, the following five major trends will increasingly affect the overall animation outsourcing industry:
1. Asia will continue to be the global hub for animation outsourcing work. Some 75-80% of all US-based animation programs are outsourced to Asia mainly for reasons of cost. Industry sources estimate that the cost of developing a full-length animated film is about five to eight times lower in India or the Philippines than in the United States.
2. 3D is the future; 2D, however, still has a large market. Many studios are building capabilities in 3D animation as they invest in human resource development and technology to capitalize on current and future opportunities. When the study was prepared, 2D still accounted for more than 70% of the total animation revenue.
3. The coming of age of digital animation. The Internet, through video sharing or streaming digital sites such as YouTube, Dailymotion, and Vimeo, has long been a platform to deliver animation content. This includes either old re-runs from TV and cable companies or independent studios showcasing their works, typically for free. The advent of video on demand (VOD), however, especially through subscription model-based VODs, such as Netflix, Hulu Plus, Amazon video, and iflix, has opened a new frontier for the animation industry.
4. Moving from purely outsourcing to hybrid business models. Animation outsourcing is a low-risk business but also a low-return business model. Some larger outsourcing studios are delving into a mix of collaborative animation services where they form partnerships with other animation studios, locally or abroad, by leveraging each other’s expertise to create original content where they share their intellectual property, or enter a more ambitious business model where they perform all development work from scratch inhouse.
5. New emerging animation destinations will disrupt traditional outsourcing destinations like the Philippines. With the backing of their governments, countries such as Poland, Malaysia, Singapore, Brazil, and Chile are beginning to build their capabilities in new-generation animation segments, such as 3D and visual effects (VFX). With competitively priced services, these new animation outsourcing destinations are expected to impact the businesses of traditional animation markets, such as India, China, and the Philippines. This a major reason why the next Administration must be very proactive in supporting the various players of the Philippine animation sector with both subsidies and tax credits. TESDA (the Technical Education and Skills Development Authority) can also play a significant role in addressing the human resource requirements in the animation industry, coming out in partnership with business and the academe with all types of short courses for reskilling, upskilling, and retooling our young who have inherent artistic and digital talents.
In 2015 when the Frost & Sullivan study was conducted, there were certain perceived trends that were unique to the animation sector, independent of the general IT-BPM sector. These trends are expected to have intensified during the pandemic, with the acceleration of digitalization in all aspects of the economy as well as the increased importance of home entertainment during the long lockdowns necessitated by safety measures occasioned by the pandemic. As regards the suppliers, studios perform various types of animation work, including traditional hand-drawn animation, 2D, 3D, special effects, modeling, caricatures, medical animation, and the CG format. The extended boom that lasted until 2019 spawned hundreds of animation companies, employing thousands of artists, animators, and technicians using state-of-the art equipment and techniques such as SGI, sound effects (SFX), and motion-capture software and facilities. This trend will be favorable to the local animation industry especially after President Duterte signed into law a measure introducing amendments to the Foreign Investment Act of 1991, opening the SME sector of the country to foreigners who can now own 100% of any business with a minimum paid-up capital of $100,000. Many startups from all over the world in the field of animation can invest in the Philippines, thereby transferring the most advanced technology in this sector as well as contributing to the upskilling, reskilling, and retooling of Filipino workers in the most developed fields of animation.
This greater freedom for small-scale foreign startups to invest in our animation sector is especially significant because many small and medium outsourcing participants are actually located outside of North America and execute outsourced animation projects, more and more of which outsourced jobs are shifting to the Indo-Pacific region. A major factor behind this shift of computer animation production to the Indo-Pacific region is the availability of low-cost computer animation platforms especially in the ASEAN countries. The European region, especially France, has witnessed an upswing of animation producers, e.g., Xilam and Superprod, relocating back due to the incentives offered for locally produced content. Given this trend, our animation industry should make a special effort to market our outsourcing services to countries in Europe, going beyond our traditional US and Japanese markets.
The trend of major animation studios outsourcing animation is irreversible. As developed countries in North America, Europe, and Northeast Asia (including China that is already suffering from the rapid ageing of its population) suffer from the demographic crisis, labor shortages in these countries will widen the difference in manpower costs, giving a distinct advantage to countries like India and the Philippines that are still enjoying their respective demographic dividends. Even before the pandemic, we already were witnessing many entertainment companies like Disney and IMAX outsourcing an increasing amount of their animation production to the Indo-Pacific region. The mass appeal of movies relying on computer graphics has been driving studios to expand their output while keeping their costs down. From traditional (celluloid-based) animation to VFX and computer animation (CGI), the global outsourcing animation industry is growing as an increasing number of studios around the world look for cost-effective production options and as the number of viable overseas studios increase.
Our local animation industry should be aware of the fact that most animation outsourcing contracts are focused on artwork, rather than technology-oriented outsourcing, with 70% artwork and the remaining 30% technology focused. The major animation outsourcing segments are as follows:
a.) Custom content development (enlisting content created for corporate, higher education, aviation, medical sectors); the exponential increase in online instruction during the pandemic will surely lead to more demand for animation services in the educational sector as hybrid learning will be part of the new normal, especially in higher education;
b.) VFX (visual effects for television or motion pictures); and,
c.) Animation entertainment (animation for motion picture, television, advertising stakeholders).
(To be continued.)
Bernardo M. Villegas has a Ph.D. in Economics from Harvard, is professor emeritus at the University of Asia and the Pacific, and a visiting professor at the IESE Business School in Barcelona, Spain. He was a member of the 1986 Constitutional Commission.