How Netflix Created a Boom in the Cartoon Industry

As the war between video streaming services heats up, the biggest battleground is being fought over cartoons like “Kung Fu Panda,” “Captain Underpants” and “Curious George.”

Hoping to draw in families and children, services like Amazon, Apple, Hulu and especially Netflix are ordering so many new animated movies and series that studios are struggling to keep up, producers say. That’s creating a rush of work for newer animation outfits like Kuku Studios as well as more established companies like Technicolor and Wow Unlimited Media, a Canadian animator.

The Takeaway
• Streaming services paying double of what networks have for shows
• Animation studios facing talent shortage
• Studios adapting gaming technology to help speed up process

“This is the biggest boom in kids programming production that we have ever seen,” said Michael Hirsh, chief executive of WoW, which makes cartoon series such as “Barbie Dreamhouse Adventures” for Netflix.

The emphasis on cartoons reflects an often-overlooked reality about streaming services like Netflix: Viewership is heavily driven by children. Sixty percent of Netflix subscribers globally watch kids and family programming, most of which is animated shows, said Melissa Cobb, vice president of Kids and Family at Netflix. Executives at another service say that families tend to cancel at nearly half the rate of the average subscriber.

Netflix is also interested in animated content because it travels well around the globe, said Ms. Cobb. Netflix over the past 18 months has assembled a team of about 40 executives around the world to commission and develop children’s programming, she said.

Meanwhile, its rival streaming services are also active in the market. Hulu last year announced a licensing deal with DreamWorks Animation for a slate of original series based on DreamWorks’ popular characters. In March, Amazon will debut “Costume Quest,” an original animated series by Wow’s Frederator Networks studio. Apple recently signed a deal with DHX Media for “Peanuts” shows for its new TV service expected to go live this year, according to a person familiar with the deal.

All are competing with Disney and Viacom’s Nickelodeon, both of which have a longstanding presence in the children’s TV market. Disney’s upcoming streaming service Disney+ is expected to have a big component of kids’ shows, although it is unclear how much it is commissioning new programs from independent studios.

Better Pay

But streaming services pay better. They’re offering up to $1.2 million per 30-minute episode, which is double what the traditional entertainment companies generally pay, three animation studio executives told The Information. Additionally, Amazon, Hulu and Netflix have allowed some companies to maintain the rights to sell merchandise based on their shows, so long as Netflix can own the worldwide streaming rights. Toys and other spin-offs from animated shows are one of the main ways producers make money from shows.

The boom is benefiting both big companies and startups. Animation production work has helped increase revenue at Technicolor’s visual effects division to about a billion dollars annually from around $35 million a decade ago, according to Vince Pizzica, a special advisor to the CEO of the France-based company.

Then there are smaller firms like Toronto-based 9 Story Media Group, which is currently working with Netflix, Apple, Amazon as well as cable networks and broadcasters. Today about 50% of 9 Story Media’s projects, which include “Magic School Bus Rides Again” for Netflix, comes from streaming platforms, up from 10% three years ago. The firm has increased its staff by more than 45% in the past three years to 800, according to Vince Commisso, CEO of 9 Story Media.

Additionally, the company just announced Monday that it had acquired an Indonesian animation studio, Base, to help with its computer-based CGI animation to keep up with the demand from the streaming services, Mr. Commisso said.

The animation boom is also creating opportunities for startups, like IoM Media Ventures, founded by the former CEO of DHX Media, Dana Landry. In November, he struck a deal to buy one of DHX’s animation studios, seeing the demand for animated content, according to Ben Mogil, a former Wall Street entertainment industry analyst who joined Mr. Landry at IoM.

The company will look to acquire additional studios as it seeks to ramp up its library. IoM raised money from the founders and “close associates,” said Mr. Mogil, although he wouldn’t comment on how much. Additionally, IoM hopes to make money by selling merchandise off brands created through the shows, Mr. Mogil said.

“I have turned down hundreds of millions of dollars of work because I don’t have the talent to do it.”

Talent Shortage

The biggest obstacle to industry growth is a lack of skilled animators with software skills necessary for computer-driven animation that is common nowadays. Already some studios are passing up assignments, unable to hire enough people. “I have turned down hundreds of millions of dollars of work because I don’t have the talent to do it,” said George Elliott, the head of Toronto-based Elliott Animation.

“The limiting factor is still the talent sitting in front of the screen,” said Technicolor’s Mr. Pizzica. Technicolor runs an academy to train people in visual effects software tools that are used in animation. It has campuses in London, Montreal and Bangalore and is opening a new one in Australia.

Elliott Animation has started looking into ways to hire employees from other countries. Currently the Canadian government gives tax credits to companies that hire employees who have worked in Canada for at least a year, but Mr. Elliott is putting together a group of studio executives to lobby the government to relax that requirement, he said.

Similarly, Toronto-based Corus Entertainment, which has its own animation studio that puts out such shows as “Backyardigans,” has started to look for talent in parts of Canada outside of Toronto, said Scott Dyer, who runs the animation studio.

Mr. Hirsh of WoW has been working with Sheridan College, which offers an animation specialty to increase its class size, he said.

WoW’s Rainmaker-Mainframe Studio has started adapting video game software, called Unreal Engine, to produce television series. “It does the work faster and it has an AI element,” Mr. Hirsh said. “The use of AI will become more popular.” DHX Media is also looking at implementing such software, said Josh Scherba, president at DHX.

The rush for more animated content has also pressured studios to turn around projects in quicker time, said Jay Williams, the head of growth at animation tech startup Super 78. His company markets animation software initially designed for theme park rides that they say can speed up production times for feature products substantially.

Producers are giving more attention to rising technologies like “real-time rendering,” once used specially for the gaming world. The technique uses gaming engines like Unity and Unreal to get an instant look at what a finished product will look like, without the typical laborious process of tinkering with the look.

Some companies are relying on that for one-off projects; VR animation startup Baobab, whose backers include Peter Chernin’s investment group, Advancit Capital and Samsung, used Unity and real-time rendering to make a short that recently played at Sundance. “But we’re still a ways from that being a widely used technology across the industry,” said Alex Woo, co-founder of Kuku Studios, which is producing an animated show for preschoolers on Netflix and also has a deal with the company for a feature film.

Jessica Toonkel is a New York-based reporter for The Information covering media and how the industry is being disrupted by technology. Before that, she spent seven years at Reuters covering a range of topics including media, mergers and acquisitions and financial services. She can be found on Twitter @jtoonkel.
Tom Dotan joined the Information in 2014 covering the media, advertising and streaming video businesses. He is based in San Francisco and can be found on Twitter at @cityofthetown.