Going down with everyone else… The Great Anime Recession of 2008!?

whitehatazn-48.jpgIf you opened up a copy of the Wall Street Journal lately or looked at any website on the United States economy, the big evil word everyone is talking about is recession. Between the subprime mortgage mess and the ridiculous prices for gas, you can’t seem to avoid the big evil word of doom these days if you are an American. As for amateur investors like myself, these are times that really test our souls. Amateur investors don’t have the time or experience to manage through these tough times nor do they have the financial capital to make up for mistakes. With all this going on, many are concerned about the current state of the United States economy.

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I’m in despair! The U.S. economy, Ben Bernanke and the BCS has left me in despair!


So what does this need to do with anime? With all this talk about the anime industry (Geneon, fansubs, and whatnot…), I think some elements of the state of the economy in general will have an effect on the anime industry in the short term. Just like almost every other industry, the anime industry should be affected by the macro-economic events that occur around it. And using my amateur investing and economics analysis skills, I going to try to flesh this out a bit more. Both as an amateur investor and an anime fan, I feel that most anime fans (especially mainstream fans) don’t understand that their hobby is an industry and as an industry, anime is created to make money. With that said, I want to get this main point across:

Anime as an industry does not live in a separate world by itself. To completely understand the state of the anime industry means that one understands where the anime industry fits in the greater economic picture. Along with its internal problems, the anime industry will have to deal with the outside pressures from the overall economy.

I will preface this discussion/post/rant with a few caveats. One, despite the fact the a solid number of the anime companies in Japan are publicly traded, I will focus primarily the anime industry as it applies to the North American market. Yeah, I know. This is a bit of a cop out. But it would be just too hard to analyze at my level and I don’t need it for the points I want to make. Then again, the Japanese economy is a completely different animal than here in the U.S. and even the most seasoned American analysts can’t get the U.S. economy right. Second, most of the North American anime companies aren’t publicly traded which means most of the traditional means of industry measurements are not easily available. This why I hate most of the state of the anime industry discussions on blogs and in fan-run conventions. With the exception of Navarre SEC filings such as the required 10-K annual reports and things like the ICv2 White Paper (which is very limited in useful data), there just isn’t enough data from a financial analyst’s standpoint to make valid judgments on the anime industry in North America. Unless you are some kind of anime industry insider (which I am certainly not one), there just isn’t enough public information to judge where the industry is at.

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Public companies have become really important into understanding an industry for an amateur investor. The Sarbanes-Oxley Act of 2002 requires all public companies report almost everything including their balance sheets and executive share trades. The act also requires companies to regularly report to the public with annual and quarterly reports and encourages companies to make reports more readily available with online documents and open-listen streaming public conference calls. Unfortunately for the regular anime fan, the anime industry does not have this kind of exposure.

The last caveat is somewhat of another cop out: Since there is limited public data within the anime industry, I going to focus simply on how the current economic situation applies to the anime industry in the short term, not the anime industry’s internal situation in the long term. Also, I won’t provide suggestions as to how the industry can internally right itself for the long haul. There are plenty of blogs, forums and podcasts that already cover the internal issues anyway. For me to bring that up again will just be another regurgitating of the same thing. And I also don’t have any more suggestions for what should the anime industry do in the long term than what has already been suggested in plenty other places.

The United States economy is an interesting creature. For such a large country and population, the economy relies quite heavily on the consumer industry. In fact, about 80% of the United States economy is dedicated to services. So the primary reason why the economy will fail is if something major happens to the consumer. Recently, all signs for the cause point to the subprime mortgage mess. Loans were given to people with questionable ability to pay them back. When the consumer misses payments, the mortgage lenders can’t payback their loans to the banks, then banks have to write-down the lenders’ loans and now there is a whole boat load of cash that just disappears from the economy. Combined with the rising price of gasoline, consumers are now hard pressed to payback their debt. And ta-da, we have the recipe for a recession.

So how does the anime industry fit into this? The anime industry technically fits under the umbrella of the entertainment industry. And just like any other entertainment industry, the anime industry is heavily dependent on the expendable cash of the consumer. The consumer will be less likely to make purchases not critical to their livelihood (ex: electronics and movies) when the consumer is pressured to keep up with the necessary expenses. The anime industry will also be somewhat affected as the consumer begins to tighten their belts. Anime will start to drop in purchasing priority as consumers heighten the need to reorganize their financial needs (unless you are like Madarame from Genshiken who spends his rent and food money for his personal anime happiness).

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I wish tax rebate checks were that big… There are several ways to bring an economy out of recession. For the consumer oriented nature of the United States economy, most of the common techniques require jump starting the consumer’s buying habits such as reducing the interest rate, giving tax breaks or sending rebate checks to the consumer. I find this very funny. The consumer who might have overspent their excess cash which sent the economy into recession is the same person who needs to spend more in order to get the economy out of recession.

But the average anime fan is relatively young (in the teens or twenties). They shouldn’t be as easily affected by these recent events, right? That is somewhat true. At least from my perception from the anime cons I went to this past year, the anime fanbase is becoming younger. And yes, the teenage consumer is less affected by these specific events that occurred recently. But the teenage anime fanbase just doesn’t have nearly the financial capital to continuously pump money into the anime industry. Anime fans in their twenties, while more liberal with their spending, will be somewhat affected by the harder-to-get loans and gas prices.

If not directly affected with pressures on their wallets, anime fans should still see the effects indirectly. With the consumer as a whole not spending as freely, the retailers are being put into a pinch. Some signs of this can be seen with retailers missing their quarterly expectations due to a poor holiday season. And yes, anime DVD prices will drop in stores as retailers will attempt to remove their outstanding stock that they didn’t sell during the past holiday season. However, retailers will be more stringent on what to restock when the consumer is less inclined to buy. And considering where anime stands in the mindset of most retailers, anime isn’t on the highest priority to get restocked and we could see less anime on the shelves. For the hardcore fan like me, we are still going to get what we want. But for the mainstream, less anime on shelves means less compulsion to buy and less buying from the regular consumer means less organic growth for the anime industry.

Recession does a number of things to an industry. Some of these things such as M&A and consolidation may occur in the anime industry. We saw a bit of M&A recently when Geneon tried to deal with ADV before the deal failed and Geneon pulls out of the distribution business. Consolidation is more likely especially in product releases. There was approximately about 500 anime DVD releases in 2007 alone which is still a fairly large amount with respect to the average anime buyer. With the anime fan being more picky with his/her purchases and the retailers requesting less from wholesalers, more consolidation is expected in various forms. Consolidation could range from less licenses to less titles on shelves to less DVDs produced. This is something to consider as an anime fan. You may have the free cash to buy anime but there just may be less product to purchase.

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Even Tohsaka Rin laughs at the U.S. economy… There was an anime DVD sale at my local Fye recently where Geneon, Funimation and Bandai titles went for $10 less if the original price was >$20. I ended up finishing my Shana collection and got all the harder-to-find volumes of Fate/Stay night (~$130). I decided against catching up on my School Rumble and Mushishi volumes since I already spent enough. Along with ~$110 of anime related purchases earlier this month, I’m already well over the hard quota for this month that I set for myself during the new years and I still couldn’t get everything I want. Even with clearance sales, anime is still quite a substantial investment for fans.

So this is my stab at the anime industry and the somewhat special situation it finds itself in. Will there be a “anime recession” in 2008? The question is really whether the anime industry will consolidate so much so quickly that we can call it a recession in this year. My answer to all of this: Probably not. I can see anime being consolidated but not to the point were anime becomes significantly smaller than it is now. If it does, then I feel this is a result of the anime industry’s current business model and the internal problems that come with it. And not from the possible collapse of the American economy. I feel that anime fans like me will still find ways to feed our hobby even in tough financial times. What is apparent is that the anime industry has plenty of issues to deal with and needs to progress through these times with care.

So what do you think? I’m really interested hearing more sides of this. I tried my best fleshing this side out as best I could with my understanding of business (just to note: I work full-time as an engineer but I have business plan making experience from college and more than 2 years of amateur investing experience). So is this valid or invalid? Is there something I didn’t consider? Let me know what you think.

koneko-chan out…

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8 Responses to Going down with everyone else… The Great Anime Recession of 2008!?

  1. DrmChsr0 says:

    Less recession, more eventual demise and collapse of animu worldwide except Japan.

    When you have boneheaded fucks running around thinking heir actions won’t impact all that they love, you know something fundamentally wrong is going on.

  2. intro says:

    If you’re looking for financials, you can try 4Kids, stock symbol KDE, although I doubt it’s a bellwether of the industry. They’ve lost money for a while, and they continue to do so.

    Another is Funimation, but it is owned by parent company Navarre (ticker NAVR) and while the company as a whole is profitable, I haven’t bothered to look at whether there is any Funimation specific information in their filings.

    I don’t think there’s anything peculiar at all about a country like the US being consumption driven. There’s something to be said for being very biased towards consumption, but a predominantly export oriented economy is usually an indicator of either a small country (there aren’t enough consumers) or a developing one (there are consumers but they can’t afford to consume that much).

    As is usually the case, a lot saw this coming, especially if they know a bit of macro. It’s just that most of them chose to squeeze more money out of their investments rather than bail out a bit early.

    If you’re interested, there’s always the Wikipedia entry on the subprime mortgage crisis. I guess the gist is, lots of people borrowed money, in effect, but beyond their means to repay their debt. This was spurred on by the securitization of debt which was pretty much stamped with the investment grade seal of approval and passed on to people who didn’t know what they were getting into, and didn’t or couldn’t perform the research to find out.

    The result is that this thing is still blowing up and is not localized to the financial sector. Corporations, pension funds, and the like; these are parties that aren’t strictly involved in housing, but held these mortgage backed securities in huge quantities without understanding the risk. They thought this stuff was pretty safe, high-yield commercial paper that they could place their pension contributions in, or park their incoming cash for rates better than what they’d get with a boring savings account. Those parties are in for a bit of pain as well.

    Anyway, the US is consumption driven beyond its means. Subprime 2007 was directly caused by people borrowing lots and lots of money. The typical US consumer has negative savings, hence the typical US consumer is drowning in debt. There is some hard limit to how far one can drive a car on fumes, and the US may have hit that limit, in which case there is going to have to be a multi-year period of serious adjustment. Or I could be wrong. The US has thus far been very robust when running on empty.

    How does this all affect the US/North American anime industry? From a consumer perspective, maybe not at all. First someone has to figure out if the typical anime fan is an approximation of the typical US consumer with mountains of credit card bills, or a child of a typical US consumer. If so, then yes there is going to be a drop in sales, and a drop in sales may create a vicious cycle where there is less anime available, followed by even less sales, and so on.

    From a mergers and acquistions perspective, consolidation is going to occur only if things are really, really bad. In these conditions, companies get picked up for a bargain, or they won’t be taken out at all. I don’t think a company like ADV has the cash in the bank to single-handedly acquire 4Kids even if they wanted to, so they’d have to finance the deal somehow. How? With borrowed money. Is it easy to borrow money at the moment? Nuh-uh.

    And if 4Kids can lose money for a couple of years, they probably have enough money to burn for yet a couple years more.

    For 2008 and maybe 2009, I would expect maybe less titles due to a reduction in demand. Past 2009, the industry may have to cut costs (i.e. employees), followed by some consolidation, but only when everyone is absolutely losing their shirts.

  3. galen says:

    You must also factor in the rising costs of producing the anime. The US dollar has dropped in value compared to almost any currency; I’m not certain, but I’m pretty sure that includes the Japanese Yen. So in other words, the anime licenses are going to be more expensive now. Not to mention, the US industry is mainly service-based, meaning the manufacturing of all these anime products has been outsourced to other countries, which are now more expensive as well.

    The only bright side to this is that the US animes products are now cheaper for almost anyone else in the world. Time to start marketing to Canada!

  4. koneko-chan says:

    intro:
    It’s not so much about being able to look at the financials as to being able to look at their reports and listen into their conference calls. Consider who mostly reported on the Geneon fallout: anime industry insiders. Yes, they probably understood what was going on and expected certain things to happen. But to the anime fan, Geneon’s end of distribution letter to the retailers was a complete shock. Having a public industry could make the anime fan better aware of the anime industry’s state.

    Consumer-driven economy may not be as special considering where most of the first world is, but I highlight this because the United States has the most in it with the 80% service sector to GDP. This was something I just want to point out since I feel most anime fans wouldn’t consider it. The problem still remains: consumers are not spending as much in this critical time.

    Agreed, mergers and acquisitions are probably a last ditch effort. Also considering that the resulting company takes on all the assets and liabilities (debt) of the two previous companies. However, don’t count M&A activity out just yet because of holding companies (like Navarre with Funimation). Especially since company execs can tend to have more ego than common sense, I can see some corporation picking up an anime company thinking they can do better.

    galen:
    Another interesting dynamic: the value of the dollar and currency exchange. The dollar has gotten hammered which would make licensing more expensive. Although, I’m not sure how much the dollar got slammed against the Yen. This is interesting considering that the Canadian dollar has caught up and is staying with the U.S. dollar. Along with Canada also being DVD region 1 with the U.S., maybe Canadian anime market will bail us out since more Canadians are buying anime from the U.S.

  5. intro says:

    There are rude surprises everywhere (like in the financial sector). The best non-insiders can do is make some attempt at educated speculation, and there are some people out there that can, but I see more outright hysteria than grounded pessimism.

    I don’t think most industries are very transparent, but in the case of entertainment specifically, the players are sufficiently large that their ability to put out movies and TV shows is just kind of taken for granted. That we’re standing around talking about how the anime industry might collapse is an indication of how far it has to go, if it can get that far.

    Canada has like, a tenth of the population, and the US is still its largest customer. It might be better to look to the EU or Europe in general as a base of support or even growth for the next few years. With the USD rather cheap compared to the Euro, this would be good for US headquartered companies with European operations.

    I’m reminded by an entry that Jeff Lawson made about how the strong increase in anime production was related to something amounting to foreign investment, as there was an expectation that media companies would swoop in and buy the distribution rights to more and more series. If true, also expect the number of series to decrease, going forward.

  6. I agree with you. Life is like riding a bicycle – in order to keep your balance, you must keep moving. ~Albert Einstein

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