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The Macro Economy's Impact on Animation: Will Wile E. Coyote Dodge the Anvil?

Longtime animation industry exec Buzz Potamkin examines the world economy, and shares his thoughts on how the problems will affect animation.

Economists and commentators are increasingly citing Wile E. Coyote to explain the macro economy, with Nobel-laureate Paul Krugman first hoisting the anvil in 2007. Cartoon image courtesy of Warner Bros. Animation. Graphs courtesy of Project X.

Throughout the last two years the worldwide economy has deteriorated significantly; whatever caused this, and who, is most likely of less concern to the animation community than the impact on the future of our particular bailiwick. Will the macro economy stabilize without too much more extreme pain and soon return to rosy health? Will the Obama stimulus package work as hoped? And as Treasury Secretary Timothy Geithner's latest plan goes forward, have we saved the banking system from itself, or is PPIP (Public Private Investment Program -- released last month) just another acronym on the road to something else (like BRIR -- Banks Really In Receivership), and soon to be consigned to the ash heap of history like the too-late, too-unfocused, too-much-in-favor-of-the-bankers programs from his Bush-appointed predecessor Hank Paulson? Most important, will the animation industry thrive and prosper?

There is every indication, but no guarantee, that The World as We Knew It will continue with some modification as The World We Will Come to Know. Definitely not as much glitz as the last two decades, most certainly with far too much pain in the near future, but the collapse of capitalism is not at hand. If the panics of 1873, 1893 and 1907 as well as the Great Depression didn't do it, what we're in now won't either. There will be changes (e.g., barring the bank door after the assets have fled), but our favorite yet bloodied vertically-integrated media conglomerates will survive and flourish again in the near, or more likely distant, future.

The World as We Knew It is driven by consumer revenue, about 70% of U.S. Gross Domestic Product (GDP) by recent figures, and this is especially true of animation. All the money that comes into entertainment animation (features, games, TV, online) can be traced back to the consumer: box office, DVDs, game software sales, MMOG/MMORPG ad revenues and fees, L&M tchotckes, advertiser support, cable network subscription fees, you name it. No matter where this money appears to originate, it essentially comes from the pocket of some consumer, and the consumer isn't feeling so great right now, nor are many businesses whose lifeblood is consumer sales.

The ratio of Debt-to-GDP is now higher than during the Great Depression.

The World as We Knew It floats on a sea of U.S. domestic credit, tens of trillions of dollars of it ($50,000,000,000,000 plus), approximately four times larger than our yearly GDP -- an amount of debt nearly uncountable (and to many, unimaginable in size): mortgages and home equity loans, car loans, credit cards, student loans, business loans, municipal and corporate bonds and other familiar debt obligations, some governmental, but overwhelmingly private. The swirling foam on this sea of debt is asset-backed securities (ABS include CDOs, CLOs, CMBSs, CMOs, RMBSs, ad infinitum, a you-don't-want-to-know-what-they-are alphabet soup), which are now called "legacy assets" by the Treasury but were known until recently as "toxic assets" -- as toxic they indeed are, having poisoned the banking system and bringing it to near paralysis.

And the wind-driven froth on that foam is the credit default swap (CDS), unregulated and unmonitored quasi-insurance on those multiple forms of debt (perhaps better stated as a naked gamble, with supposedly rock-solid PhD'd risk analysis that turned out not quite as solid as your local bookie's). An in-house CDS gambling den was directly responsible for the largest single financial failure in history, AIG, of course, at a current cost to us of nearly $200 billion, including the infamous bonus pool -- which is actually miniscule in comparison to the total (less than 1 one-thousandth or < .001) and a perfect example of how we sometimes focus on the biting gnat while ignoring the rampaging elephant.

The World as We Knew It generates massive wealth, but it appears that throughout the Bush years it mainly benefited those in the financial industry, reminding me of an apocryphal bon mot: The real work of Wall Street is to transform middle class pension funds into the bankers' bonus pool. It seems to have been the case in the recent bull market and credit bubble: $2 trillion in fees comes close to matching the current estimate of repairing the banking system.

The World as We Knew It thrives on international trade, both goods and services, including runaway production. International trade isn't doing so well these days: unsold imported cars are being stored anyplace there's flat land, Japanese exports in February were down 50% year-over-year, Port of Los Angeles container traffic (TEU count) was down 35% over the same period and the Baltic Dry Index (trust me, it's the metric of international shipping costs) fell more than 90% before recovering (the dreaded dead cat bounce) to settle at minus 80% or so. I could go on, and on, but I think you get the idea.

The World as We Knew It is a glutton for fossil fuels, and peak oil is real. The current recession is masking peak oil artifacts; any return to economic "normality" will bring them forward again. As I write this, the West Texas Intermediate Crude Oil (WTI) price is already up 50% from its low earlier this year; it will fluctuate, it may actually drop to new lows, it will go up over the long term. Its inexorable rise will (as it did last summer) pinch the consumer, and not fondly.

The World as We Knew It gives us bearable 5% unemployment and reasonable 3% GDP growth per year; both are gone for the near term. Prognostications are all gloomily downside, so the March 2009 Congressional Budget Office (CBO) set for the next 12 months is as good as any other: minus 3% GDP this year, with unemployment peaking at 9% early next year; both figures include the modifying effect of the stimulus inputs. (Unfortunately, for the many members of the animation community in California, the unemployment rate there is already 10.5% and may well hit 12% or higher -- that hurts.) Any macro economic projections beyond 12 months are, to me, winging it into unfathomable territory; there are just too many critical factors oscillating to strange rhythms, and there will be many surprises to come.

Credit cards and consumer loans are a problem, but not in comparison to either

The World as We Knew It promises constantly rising home prices; we all know how that storyline unfolded. It's still not over, and the malaise has spread to commercial real estate (offices, malls, warehouses, etc.). For homes, the decline will continue unabated for the near term, with a bottom perhaps in late 2009, or maybe next year. Commercial real estate is late to the game, and its bottom is probably 12-18 months later. There is one major financial difference between those two markets, and that the is source of funds: home loans are mainly securitized in the wider market (the basis of the credit crisis), while much of the troubled funding in commercial real estate is on the books of small and medium banks, essentially regional not national, and the weekly Friday FDIC bank-takeovers have been featuring these smaller entities, with more to come. (Surprisingly, the bottom in housing may be reached sooner in California, as the decline started there earlier -- one of the earliest markets to show decline was San Diego, so one might look there to see the bottom form, which it isn't doing yet.)

The World as We Knew It is the creator of Hollywood as we knew it, and that isn't the Hollywood we'll know for the next few years. As Schuyler Moore (author of "The Biz") recently wrote in The Hollywood Reporter, "Our industry is in economic trouble, and it isn't ending soon." Harken back all you want to the "Hollywood did OK during the Depression" mantra, but it isn't the same Hollywood -- back then it was all box office, and today virtually nobody breaks-even on box office. Far more important today are DVD sales, TV deals, L&M deals and ad sales -- and all of those are under severe strain. Add to that the near-total disappearance of outside finance (hedge funds, European banks and formerly generous sovereign wealth funds have more than their share of troubles, thank you), and one doesn't need a crystal ball to see contraction in the overall Hollywood biz.

Interestingly, animation fares better so far: DreamWorks Animation is holding up better than its competitors, with Disney not too far behind.

Finally, The World as We Knew It includes entertainment animation, which is where I will concentrate my own crystal ball gazing -- I don't know enough about the military industrial complex's use of CGI to opine, and while I see that architectural CGI is in a bad way (the AIA Architecture Billings Index is down in record-low territory; around 33), once again that isn't my world; same for CAD/CAM.

I have always believed that kids' media (and by extension, animation) is the early mover of all media demographics: along with porn, it was the first demo to break out in sell-thru home video; it was the first network TV category to be overwhelmed by increased production for syndication; it was the first syndication category to be overwhelmed by increased production for cable networks; it was the first TV category to computer-produce entertainment series; and it was the first to successfully produce a hit feature film in CG.

We've also been the canary in the coal mine, and seen our oxygen dissipate faster than we care to remember. Although we may not have realized it then, in retrospect we were lucky to have gone through our own recession earlier this decade, coming down from our own bubble in the 1990s. The leaner (but hopefully not meaner) industry that survived is far better prepared for the next few years. Back then, budgets and staffs were cut unmercifully in TV, and feature animation became more affordable, along with direct-to-video franchises. (Don't blame me if your earnings are lower: I wasn't there, it isn't my fault. And you're still doing better than your construction worker neighbor.)

Animation production also has the momentum of a very large mass, far more so than most other forms of production, with schedules measured in years -- two for TV/games, three for TV/feature and five for a feature -- somewhat insulating animation from the vicissitudes of fast-changing macro economic data. Properly closing down a major studio semi-produced feature or series, or a major semi-produced game, is much like stopping an ocean liner -- very slow. The economics of cancellation are not inviting; all the costs are sunk costs, and the sunk costs are gone. Back in the mid-'90s, I was involved in the cancellation of a partially produced series, because the suits weren't comfortable; the savings were miniscule in the totality of the studio, the crew felt unjustly betrayed, and the absence of the full complement of episodes killed any chance of later syndication -- cutting off one's nose to spite one's face, so to speak.

The good news is that the totality of the animation marketplace is far greater today than even in the 1990s; it's just in a different place. While classical TV animation is down with the destruction of syndication (cable has not fully picked up the slack, most certainly not in the 65-episode series), major-financed feature film production seems as healthy as ever, online is reaching critical mass (some Euro animation producers are now exclusively online, no more TV) and games appear to be doing fine overall. In fact, Nielsen just reported that in the fourth quarter of 2008, games (presumably including MMOG/MMORPG) represented more TV viewing time than all but four major networks -- more than The CW, more than the cable nets, and (really surprising) 32% of the usage minutes on the Wii were women 35 and over - all I can say is, "Wow!"

Regarding actual employment, however, accurate head counts and salary information are well-guarded secrets industry-wide, but from what is available it appears that head count stability was reached last year in L.A.-based features and TV. Sure, projects come and projects go, and drawn animation is way down, but the sort of unemployment faced by the aforementioned construction workers is not likely in those branches of animation. As for games, online and non-L.A. work, there is virtually no reliable information beyond the sad situation at a few studios previously covered in AWN news, but that bad news was more studio(s) specific and not to my mind industry-based.

So what is the bad news? The macro economy will continue to decline for the better part of this year, most likely into next. Advertising revenue will be tight for any ad-supported venue; consumer purchases of L&M products will suffer overall; mortgage, credit card and employment related problems will cast a pall over the consumer; anger at AIG bonus-babies and other overpaid bankers will distract us all; and other non-animation divisions may drag some of the major players below their comfort threshold -- and we all know what suits can do when they're not comfortable.

The World as We Will Come to Know It won't be as agreeable as it was for a few years. Rates will probably not increase significantly, and hours will be long. Jobs will be there -- perhaps not enough in the formerly sexy show-biz areas to absorb the excess in those areas from a few years ago, but online and games should be expanding. And while you won't be making your fortune from flipping houses, you shouldn't have to look for work flipping burgers.

Buzz Potamkin is a former major studio senior executive, and has been over the last 40 years a producer, executive producer and/or director on numerous award-winning series, specials and commercials.