How Netflix Is Disrupting, Empowering Japan's Anime Industry

The $8 billion content budget the streaming giant pointed to in its third-quarter earnings call could drastically alter the anime industry's business model.

Despite the global success of anime, the production houses in Japan often struggle to make ends meet, while many animators work punishingly long hours for infamously low wages. But the 30-title anime slate currently being produced for Netflix is shaking up the industry, shifting the business model and giving more creative freedom to animators.

Although anime features like Ghost in the Shell or Hayao Miyazaki productions have grabbed the headlines over the years, domestic TV series are the backbone of the industry, bringing in more than 10 times the annual revenue of theatrical releases, which amounts to more than $5 billion.

But the business model has not been a lucrative one for the production houses, which are typically left in the red after the initial domestic television run. Any profits for the studios come from sales of merchandise, DVDs and soundtracks. Those products are usually advertised via commercials paid for by the studios that run during broadcasts of the series.

Overseas sales have been an additional revenue stream, but Netflix's original content strategy is becoming a game changer. In the summer, Netflix announced a slate of 12 original anime series and an animated Godzilla feature.

The streaming giant followed that up on its third-quarter earnings call with talk of a content budget of $8 billion for next year. A sizable chunk of that is expected to go to anime series, though not all of them will be produced in Japan, as Netflix aims for half of its content to be original by the end of 2018. "We've more than 30 original anime projects in various states of production these days," Netflix chief content officer Ted Sarandos said on the call.

Budgets for individual projects haven't been disclosed, but it is an open secret in the Japanese industry that they are significantly larger than for those ordered by domestic TV networks.

The work in anime studios is notoriously tough, and many studios have been labeled "black companies" by the Japanese media for the low wages paid, particularly to junior animators. A major cause of that are the tight budgets dictated by the TV networks.

"Lately the media has been bashing the anime industry over working conditions; the TV stations have been reporting on it, but they're a big culprit," says Joseph Chou, a producer for Toei Animation on the 12-episode Knights of the Zodiac: Saint Seiya series for Netflix.

"Netflix is restoring it to a sane business model. You're looking at maybe a 15 percent margin rather than a 5 percent loss," says Chou, who is also president of Sola Digital Arts studio in Japan.

While Netflix isn't the only streaming game in town, it is the biggest. "There's Netflix, Amazon, Crunchyroll and Apple Studios all talking to people, as well as rumors there's another major player about to get involved," says Chou. "They're all scrambling to meet with everybody, but Netflix is the most aggressive."

Tokyo's TMS Entertainment had licensed content to Netflix from the time of the launch of its Japan service in September 2015 and began discussions about reviving martial arts anime Baki for the streamer in January this year. The 26-episode series is set to air weekly on Netflix in Japan beginning in summer 2018, and then be broadcast on domestic television, before being released in one go on Netflix globally later in the year.

"Netflix is producing dubbed versions in several languages and subtitles in more than 20 languages, with a release to around 200 countries in one go, which we couldn't do," explains Kotaro Yoshikawa, vp distribution and licensing at TMS Entertainment.

Netflix ordering directly from the anime studios also eliminates the need for production committees, a fact of life in the Japanese entertainment industry for movies and TV series. Involving anywhere from five to 15 companies, the committees help share costs and risk, as well as giving advertising agencies, TV stations and newspapers a stake in the production's success and an incentive to promote it. The downsides are a slowing down of decision making and some stifling of creative risk-taking because approval is usually required from all parties.

"There's no TV station involved to say what needs to be done to make something okay for broadcast," says Yoshikawa of working with Netflix. "Though we may still have to make adjustments, like reducing the amount of blood onscreen, for versions that will be broadcast on television."

Interestingly, not everyone in the industry is overjoyed at the prospect of total creative control. Keiichi Hara, director of Miss Hokusai and subject of the Animation Focus at this year's Tokyo International Film Festival, says he would consider an offer from Netflix, but has unexpected concerns.

"I work on commercial productions, so inevitably I get directions from companies, like TV networks, about the story etc. When I was young I used to get really mad about it. But working out ways to keep those people happy has been the source of some really great ideas," says Hara. "That kind of pressure actually helps creativity in some ways."

The orders for original content from Netflix and other streaming platforms, along with growing demand from China, combined with a shortage of animators, has the production pipelines backed up at anime studios.

Says Chou: "It's not a bonanza or a bubble yet, but nearly all the studios are full booked until 2020."