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Animé, piracy and profits
The Japanese-style animation business has figured out a way to live with piracy and keep fans buying
December 13, 2005: 6:35 AM EST
From FORTUNE
John Ledford's AD Vision commands a quarter of the U.S. anime market.
John Ledford's AD Vision commands a quarter of the U.S. anime market.

NEW YORK (FORTUNE) - Movie execs this Christmas have one common request on their list to Santa: an end to piracy. But just in case he doesn't deliver, the showbiz world is doing whatever it can on its own to crack down, from placing spies in theaters to look for rogue video tapers to Sony recently bundling a program on its CDs that closed its music to copying -- but also opened up customers' PCs to all kinds of viruses.

As mainstream showbiz continues its cat-and-mouse quest to protect its intellectual property, one tiny niche has figured out a way around the problem: Anime, the Japanese style of animation that typically features saucer-eyed women and giant mechanical men, and manga, its print cousin.

Though small -- the retail market for both is worth just $625 million this animated world is growing rapidly, with sales up 13 percent between 2002 and 2004. More, they've managed this growth by doing what Hollywood seems increasingly incapable of: winning over fans instead of fearing them.

The numbers in mainstream entertainment are bad: Hollywood box-office receipts are down 7 percent over last year's middling performance. Goldman Sachs forecasts virtually no growth in DVD sales for the major studios in 2006 and an outright decline in sales the year after that. The networks have seen a 7.4 percent drop in TV viewings by 18- to 49-year-olds so far this fall compared with last year.

Yet with anime and manga, its fans -- known as otaku -- keep showing up, cash in hand. (Translated literally, otaku is Japanese for "your household." But for obscure reasons, otaku morphed in modern Japan to connote a scarily hard-core fan; in the U.S. it's more benign and relates only to fans of anime and manga.)

This tidy little corner of the show-biz universe makes for a rare example of an entertainment niche that does more than not alienate its customers: It has found ways to keep them buying and buying.

In the process, anime and manga firms have taken on forms very different from Hollywood studios or publishing houses. They more closely resemble the constantly updating startups of Silicon Valley. Their ethos is to get the product out to the right people -- whether it's on a DVD or over a mobile phone or downloadable -- and see what happens. And if the fans are into file sharing (which they are), keep the lawyers leashed and find a way to make piracy work for you.

"Companies in this space live and die by their ability not only to produce quality product but to retain street cred with the audience," says Mike Kiley, editor-in-chief and co-founder of Tokyopop, which dominates manga in the U.S.

One of the ways they do that is by tolerating the folks who have the potential to put them out of business: pirates trading anime online. And not just trading, but competing to see who can create the best subtitled version of a particular show.

This is open-source TV programming. "Fansubbers," as they're called, can spend more than a dozen hours collectively just to get a half-hour show ready for English speakers. TV watchers in Japan start the process by recording an anime show and uploading it to the Net. Bilingual fans around the world translate the dialogue and post an English version of the show on the Internet using BitTorrent, a piece of software that allows large files to be downloaded quickly

Companies in the industry watch to see what's hot online -- using the fansubbers as a first indicator to what might play well in the U.S. The more a show is being fansubbed, the more likely it is to be a hit. Once a U.S. company licenses the show, most fansubbers -- operating off a strict code of conduct -- scour the net to make sure their versions of the show don't show up anymore. That way, they say, they're ensuring that the companies that bring anime to the U.S. can make money on their DVDs -- and spread the religion.

So far, it's working. In Baltimore last summer, some 22,000 anime fans -- many dressed up as their favorite characters -- paid up to $55 each to attend the Otakon anime convention. By the second day of the three-day event, Baltimore's convention center had sold out and the scalpers started offering up tickets. Even women are starting to get into the once male-dominated action. Female fans now make up about half the attendees at the conferences.

True, it's a rather, shall we say, "elite" subset of fans who'll dress up in public as the miniskirted title character from Sailor Moon, but anime really has gone mainstream. The Cartoon Network's Adult Swim -- a late-night block of adult-oriented cartoons -- has managed for the majority of the year to be the top cable draw for 18- to 24-year-olds.

What draws them in? These cartoons all have a soap opera appeal: Plots build over the course of an unusually long season (typically 52 episodes), as characters die, fall in love, do dumb things.

On the manga side, sales have more than doubled since 2002, to $125 million in 2004, according to pop-culture market analysts ICv2.

Responding to the interest, CosmoGirl last summer began running its own manga strip on the back page of every issue. "We started hearing girls say their favorite books and favorite things to read were manga," says Ann Shoket, the magazine's executive editor. "The girls have drawn their own manga for us. Not just one weird girl -- a lot of girls."

In the U.S., the market for anime is dominated by AD Vision, a Houston-based importer and distributor, with a $150 million slice, or almost a quarter of total sales. A college dropout, CEO John Ledford started Gametronix, the predecessor to ADV, in 1991, importing Japanese videogames and hawking them out of a small storefront in Houston. The following year he bought the rights to the movie version of the videogame hit Devil Hunter Yohko.

Ledford spent around $55,000 licensing the work and producing it for the U.S. He made his money back in 90 days and never looked back. "I said, 'Hey, that's pretty good, let's try it again.' "

Since then, ADV has released more than 700 anime series on DVD. ADV gets about 90 percent of its $50 million in wholesale revenues from DVD sales, yet Ledford is determined to deliver content via whatever medium the fans want. "That's video-on-demand, that's mobile, that's going to our Web site and being able to buy an episode from us for four bucks."

Ledford thinks the key is simply keeping the fans happy -- make sure you do that and the fans will do much of your hard work for you. "The hard-core fan base is very rabid," he says. "They will get behind you as a company. You don't have to spend a dollar in marketing; you just have to be friends with them."  Top of page

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