Growing Indian Animation

One could easily slip and go sprawling on all fours, like a character in a cartoon show, on the polished granite floor at DQ Entertainment’s office in Hyderabad, India. This newly minted building houses 700-odd tightly packed animators churning out the stuff that kids love: cartoons, television shows, and full-length animated features for deep-pocketed but cost-conscious Western clients like NBC Universal, Walt Disney, and Mattel.

A rapid sequence of images creates the movement of characters within an animation. Just a few seconds of movement requires hundreds of drawings, and the animators at DQ spend hours perfecting that motion. Contrary to common perception, animated movies and television series are still very much the literal handiwork of artists. A two-hour animated movie takes thousands of man-hours to complete, and hundreds of people work simultaneously to produce it.

Because of high labor costs in the United States and Europe, even the largest production houses now outsource production work to Asian countries where jobs can be completed at one-fourth the price, says Jacques Muller, a Frenchman who until recently worked for Walt Disney. Due to a shortage of animation talent in India, DQ CEO Tapaas Chakravarti recruited Mr. Muller to teach his employees in a four-month-long session on “classic” cartooning.

Despite that scarcity, India’s animation sector has quickly gone from almost nonexistent to bagging large orders from the most elite members of the club: Walt Disney, Pixar, Mattel, Sony Animation, Universal Studios, the Cartoon Network, and Imageworks. DQ, founded three years ago, now has more than 100 Indian competitors and counting: Paprikaas (see Work of Art), Toonz Animation, Crest Communications, Maya Entertainment, Silvertoon Studio, Pentamedia Graphics, and JadooWorks, among them.

Slave and Master

India’s animation industry clocked revenues of $285 million in 2005, and trade group Nasscom predicts numbers could reach as high as $950 million by 2009. (See India Animation to Reach $950M).

So far, the relationship between Indian animation firms and their customers has clearly been that of slave and master—the master sends the storyline, the drawings of the central characters, even the angles from which the viewer should perceive each frame, and “Indian artists just follow the reference sheets,” says Rajat Sharma, an analyst with Frost & Sullivan. Meanwhile, management works to elevate the workers’ status from mere outsourcing drones to more autonomous designers.

Forty-five-year-old Mr. Chakravarti has learned that smaller animation production companies are the key to gaining more value. Brand names like Sony and Walt Disney will only outsource work, while smaller firms are willing to co-produce a title. Under these terms, DQ would become an investment partner in the new film or series, retaining a portion of the intellectual property and sharing the rewards when the production hits the screen.

DQ’s investors also want their rewards. The company has received $9 million in private equity and venture capital funding from five companies: International Finance Corporation (IFC), an arm of the World Bank, TDA Capital (an associate of U.S.-based Templeton Group), Gary Wendt Capital, iLabs Funds, and India’s IL&FS Investment Managers.

For now, DQ mainly does work-for-hire, but Mr. Chakravarti still beams as he recounts his recent wins. There’s a big Disney project in the works, but he won’t reveal the title. DQ artists are collaborating closely with 70 customers in 14 countries: They’ve done all the production and compositing work for Mattel’s new Barbie movie, and are now working on a comedy show called Ron White that’s being spun off into a TV series. DQ and a South Korean firm are jointly working on The Boondocks, a TV series from the Sony Animation stable based on the edgy newspaper comic strip by Aaron Magruder. The firm is also collaborating with companies in South Korea, China, and the U.S. for a Nickelodeon project called Tak. Altogether, DQ is working on 28 new projects in various stages of progress. More are expected.

The Slog for Survival

Mr. Chakravarti rattles off these names casually, as if it required no effort to get the business. But the truth is that Indian animation firms have worked extremely hard to get the big orders, charging rates that only ensure survival, slaving for quality, and slowly earning the trust of customers.

All while dealing with a shortage of trained animators. To overcome this, DQ has spread its centers across eight locations in India, and added two in China and one in the Philippines. DQ employs more experienced Filipino animators at dollar salaries, more than double what Indian animators draw, say industry observers.

“Productivity improves hugely with experience in this industry,” says Mr. Chakravarti.

Competitors Toonz Animation and Paprikaas also have international talent from across the globe at senior levels in their creative teams. There is no clear count, but about 100 Indian animation companies outsource labor to studios. And many of them are working toward generating original content, not only for the local market but for exports.

Mr. Chakravarti is determined to take DQ to the next level. “We need to now reap the rewards, balance work and profit,” he says. To that end, DQ has set up a production company called Power Kidz in Mumbai to look after the distribution rights of titles in south Asia. “When we license a series, it becomes a long-term business model, not a one-off outsourcing deal,” says Mr. Chakravarti.

DQ has won the rights to distribute several of its co-productions in the Indian market, and is mainly selling the content to local television channels. Among these are Choose your own Adventure, co-produced with Mike Yong Productions of the U.S., and Petpals, And Yet it Moves, Ratman, and Little Leonardo, all with Italy’s Rai Fiction.

With more series co-produced, revenues are expected to shoot up. Mr. Chakravarti expects revenues to touch the $100 million mark by 2008, a big chunk of it coming from the content distribution strategy. The privately held company won’t reveal current revenue figures.

Living Forever

PlayStation and Xbox are not distributed in India by their creators because the local market is not yet big enough, but DQ is on the road to produce games for these 3D consoles. DQ has already started work on the Skyland series, an action adventure sci-fi TV serial featuring a heroic young brother and sister team searching for their parents in a new world order, for the PlayStation and Xbox. Mr. Chakravarti expects this business to yield $30 million to $40 million in revenue in the next three years.

But before that, he says he plans to take the company public, though he won’t reveal any details. Going public may be necessary to gain access to more funds. “To make original content, one requires not only universally appealing storylines and characters, but also large investments,” says Deepak Kapoor, PricewaterhouseCoopers’ Indian entertainment & media practice leader.

To realize returns from such a large investment in original content, one must ensure that the product is aimed at larger audiences—hence the requirement for universally appealing content. Indian service providers have thus far come up with primarily Indian mythological characters, which have limited universal appeal. “Thus Indian animation producers demonstrate limited credentials, which in turn restricts their ability to garner larger investments,” says Mr. Kapoor. Though the industry has evolved from pure vanilla outsourcing to co-productions, for making a full-fledged original production, the growth is likely to be gradual, he feels.

For DQ, despite striving for original content, the outsourcing deals will not cease. Nor does Mr. Chakravarti see anything negative about them. In fact, he relates with quiet pride that one of his favorite book series as a child—Curious George—is being made into an animated series for the first time for NBC Universal by the folks at DQ.

The final dream: to create a character in India that will live forever, and fetch royalties forever. The challenge DQ and other Indian companies face is to find that character before Disney or Sony do.