Executive summary. Key trends. Market overview

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1 Executive summary The animation and gaming industry have undergone a metamorphosis in the past two years. The ride has been eventful from the highs of 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 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 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. 15

2 The animation and gaming industry in India 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 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 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. 16

3 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 17

4 The animation and gaming industry in India Recommendations to the Government of India Given the high growth and employment potential in the animation and gaming industry the Government should take proactive steps to promote the industry. The key actions points for the government are: Restructuring of import duties for gaming console hardware and software so as to bring down the prices of console hardware. This will result in adoption of consoles, growth in gaming software sales and spur domestic game development market Pursuing the skill set agenda for improving quality of animation and gaming education, setting up standardized curriculum and nurturing talent so that quality of development in India can improve leading to growth in offshoring development. Provision of grants, rebates and tax holidays to preserve the cost advantage of India viz. cheaper South East Asian markets which are emerging as alternative destinations Mandating local animated content in commercial broadcasts during primetime giving a boost to domestic animated content development Removal of service tax and sales tax- The studios, which develop intellectual property in India, are subjected to a service tax of 10.3 per cent (Union Budget 2009). The software used for creation and production of animation, gaming and VFX attracts a sales tax of 4-5 per cent. Exemption from service tax played a major role in the development of the software industry and the same is needed for the animation and gaming industry Recommendations to the industry The industry constituents need to come together and drive focused initiatives to grow the sector. The key initiatives to be undertaken by the industry are: Improve quality and timeliness of project delivery Improve efficiency and building steady business pipeline Migrate up the value chain and end to end delivery Drive initiatives to grow the domestic market and develop local content Build wider distribution channels to increase market penetration Recommendations to NASSCOM To grow the industry, NASSCOM needs to be the thought leader in creating the industry information for animation, gaming and VFX and deliver world-class research and strategic inputs for the industry. NASSCOM also needs to encourage and facilitate members to uphold world class quality standards and enhance operational excellence. NASSCOM needs to engage with foreign industry associations, and continuously engage with all member companies and stakeholders to devise strategies to achieve shared aspirations for the industry and the country. NASSCOM needs to create special focus around creation and upholding of intellectual property rights. NASSCOM features the Indian animation and gaming industry in international animation events such as MIFA, Annecy, Amazia, SIGRAPH, GDC San Francisco -these activities will have to be enhanced further, and more events will need to be added to the list. 18

5 NASSCOM should develop and highlight success stories that showcase IP developed by Indian companies, and also those of captive/mnc companies operating out of India NASSCOM and the industry need to enhance the quality of talent available in India, and increase employability of the students passing out of training institutes. The first step towards this would be to work with the Government to set up the National Accreditation Authority for Education (NAAE) an independent body that develops standards for all aspects of educational practices Institutional programs, and certificates. The proposed board will decide on the modalities of a common entrance test, degree and diploma courses and other aspects of animation and gaming education in the country. This will enable world class levels of education in all sectors, standardize entrance and graduation examinations, and will also ensure quality benchmarks and uniformity of curriculum. NASSCOM needs to facilitate the introduction of long term degree programs that will help establish animation and gaming as serious long term career choices Further NASSCOM and the industry need to work together in engaging various stakeholders to address and to create a balanced perspective about animation and gaming as a career in India. NASSCOM and the industry need to partner with Central and State Governments to formulate policies and legislation. As an ongoing engagement with the Government of India for strengthening the Indian animation and gaming landscape, NASSCOM has been briefing the Ministry of Information and Broadcasting (MIB) on various initiatives, such as the proposal for establishing a National Institute of Animation & Gaming. The aim of this institute would be to help develop the much needed talent for this industry. Further activities include working with the MIB to support and promote the cause of various states who are considering the setting up Entertainment Parks / Animation Academy / Related infrastructure on PPP model, structure proposals on fiscal/tax issues pertaining to animation and gaming industry that need government intervention and encourage the use of local content. Future outlook The key trends which can shape the future of the industry are As offshore delivery model matures the cumulative effect of improved skill sets, quality of development, on time delivery combined with cost advantage and scale can lead to expansive growth Demand for domestic IP is expected to grow as animation and gaming seeps into Indian culture with local themes, better promotion and wider distribution Falling costs of gaming hardware and software will spur uptake in the domestic market and reduction in duties can significantly accelerate the market The entry of global majors and setting up of captive centers are significant milestones and as the momentum picks up this will transform the animation and gaming landscape In the near term the support from the government, competitiveness with emerging destinations and rate of increase in domestic consumption will decide the pace of growth of the animation and gaming industry. The future holds promise and potential is immense if the industry can be unshackled from the current constraints. 19