The Animation and Gaming Industry in India: A report by Ernst & Young

The animation and gaming industry have undergone a metamorphosis in the past two years. The ride has been eventful from the highs of 2006-07 where expectations were immense to the lows of end 2008 where the industry hit the brakes on the backdrop of global financial meltdown. In the interim the animation and gaming industry has spread its influence across platforms, evolved new business models and emerged as the prominent sunrise industry in the country. This report attempts to encapsulate the evolution of the industry in the last two years, identifies the key growth drivers, examines the challenges, provides recommendations to the government and charts the road ahead.

Key Trends

The significant changes which shaped the industry in the last few years were:

• The shift from a pure offshoring services industry to the growth of domestic consumer market. In gaming, the mobile and console segments contributed to domestic consumption and animation entertainment segment took early steps towards domestic box office success.
• The services market, on the back of successful project deliveries moved up the value chain especially in animation with end to end animation movies being produced in India.
• Growth of sub sectors like custom content development where animation is used for education, training and simulation purposes and also the console gaming market with the entry of global majors like Sony & Microsoft.

Market overview

Animation

The global animation market was estimated at USD 68 billion in 2008 and is expected to grow at a

CAGR of 10 per cent to reach USD 100 billion by 2012. The animation industry in India was estimated at USD 494 million in 2008 and is expected to grow at a CAGR of 22 per cent to reach USD 1 billion by 2012. The animation industry in India can be divided into the following key segments:

• Animation entertainment
• Animation education
• Custom content development and multimedia/web design
• VFX

In absolute terms, custom content development and multimedia/web design is the largest segment today, followed by animation entertainment, animation education and VFX. In 2012, custom content development and multimedia/web design is expected to remain the largest segment, followed by animation entertainment, VFX and animation education.

The growth drivers in the animation industry in India are:

• There has been an increase in the size of the domestic animation market as well as the outsourcing market.
• Cost arbitrage is the key driver for development of foreign movies in India.
• Proven credentials, international quality and on time delivery capabilities are helping Indian companies get offshored work from foreign studios.
• The industry has moved from a pure offshored model to co-production model in some cases. The Indian studio brings in the manpower and infrastructure to develop the movie and the international producer will finance marketing, distribution, etc.
• The increased interest of Bollywood and regional cinema industry for animation has also helped the industry.
• With Internet advertising growing along with bandwidth, more complicated multimedia content is being developed for the web.
• The growth of new media and interactive platforms.

Gaming

The global gaming market was estimated at USD 36 billion in 2008 and is expected to grow at a CAGR of 10.5 per cent to reach USD 53.6 billion by 2012. The Indian gaming industry was estimated at USD 167 million in 2008 and is forecasted to grow at a CAGR of 49 per cent to reach USD 830 million by 2012. The gaming industry can be divided into the following key segments:

• Online games
• Massively multiplayer online role-playing games (MMORPG)
• Casual
• Mobile games
• PC games
• Console games
• Regular
• Handheld

In 2008, the console gaming segment is estimated to account for the largest share of the Indian gaming market, followed by mobile gaming, online gaming and PC gaming. In 2012, console gaming is expected to retain market share and still account for the largest share of the Indian gaming market, followed by mobile gaming, online gaming and finally PC gaming.
The growth drivers in the gaming industry in India are:

•  The growth of the gaming industry from 2006 levels is primarily driven by increased  consumer spending on gaming.
•  The services side of the business is propelled by captives set up by international publishers of    mobile game development, BPO support for MMORPG games and development revenues  from PC/console game production, game art, etc.
•  By 2012, the movement up the value chain in services, resulting in more end-to-end offshoring  work, is expected to contribute to the growth of revenue from development services. Domestic  outsourcing is also expected to pick up, especially in the mobile and online gaming segment.
•  Original IP development in domestic and international markets, which is at a nascent stage,  will  gain  in significance in coming years.
•  Falling console prices and increasing mobile and broadband penetration are expected to give a  fillip to consumer markets.

Key Challenges

Animation

Despite the significant progress made by the industry the growth is shackled by many issues and
challenges. In the animation sector prominent challenges are:

• Lack of quality resources, limited training institutions and non standardization of curriculum resulting in talent crunch
• Limited domestic demand for animation due to limited promotional budgets and restricted theatrical distribution
• Lack of funding for the sector and scarcity of long-term project financing for animated movies.
• High infrastructure costs for studio layout, pipeline setup, render farms etc. restricting scale of animation companies.
• Lack of incentive to develop local IP with the economics favoring offshore development versus investments in indigenous IP creation.
• Majority of the animated content in television is adapted foreign animation leading to low uptake of domestic TV animated serials
• Lack of wider distribution and retail points for animated home video /DVD content
• Relatively smaller VFX budgets and restricted use of VFX in Bollywood and regional cinema

Gaming

The gaming sector has the following challenges:

• Lack of trained man power in the industry who have the skill sets to develop end to end games and have worked in advanced NGN pipelines
• Infrastructure related issues like high cost of consoles, non availability of adequate bandwidth, non availability of SDKs etc
• Pirated copies of gaming software and tampering of consoles in still wide spread in the country
• Acclimatizing the Indian population to gaming which is relatively a newer form of entertainment and not integrated into the Indian culture.
• Lack of original Indian IP and quality games with local themes which can spur the Indian market
• High import duties for gaming hardware and absence of well defined policy for the growth of gaming industry