Online tooners seek new business model

The gold rush that sent so many people flocking to online animation has given way to a Klondike meltdown, where the late and less-hearty are forced to come down off the mountain and sell their pick-axes.

The recent failure of online entertainment startups Pseudo.com and the much hyped but unlaunched POP.com is making venture capitalists second-guess the viability of online entertainment, forcing Netcos to streamline their business models and operating budgets.

In September, after spending millions on development deals with top talent like Tim Burton, Shockwave.com, a spinoff of Macromedia (makers of Flash online animation software), axed 20 employees and announced a shift in direction toward interactive games rather than linear Web shows. Another entertainment site, Z.com, laid off half of its 100 employees in October, a move explained as the only way to secure additional funding.

Damon Danielson, CEO of animation content provider Dotcomix, predicts, “A lot of people who don’t have business models are going to be washed out.”

As companies shift direction, they find that a partner one day is a competitor the next.

“I’m getting pretty used to competition,” says John Evershed, CEO of content syndicator Mondo Media, which receives funding from Shockwave and sells a series for another syndicating studio, Honkworm.

“We believe that the Internet in and of itself is a viable medium,” says Evershed, explaining that Mondo syndicates its content to 50 different partners.

Licensing the same shows to different kinds of sites, it collects $500 an episode per site (more for exclusive runs). Mondo is also using the increasingly popular “advertainment” model, selling direct sponsorships to advertisers like Altoids, who pay top dollar to have their animated ads play before Webisodes.

While plenty of ‘Net toons have become hits with audiences (see chart), the cost of creating, producing and distributing them still exceeds revenues generated by online advertising and syndication.

The buzzword du jour is transmedia, describing ultimate payoff in the development of Web-originated properties in other media, like UrbanEntertainment.com‘s “Undercover Brother,” which is being developed as a live-action feature by Imagine Entertainment and Universal, and Mediatrip.com‘s “L’il Pimp,” being developed as a feature by Joe Roth’s Revolution Studio.

Animation site Icebox.com is banking on this concept. Although its talks with Artisan Entertainment to make a direct-to-video version of its edgy toon “Mr. Wong” have fizzled, it plans to Icebox’s “Starship Regulars” into a half-hour TV show.

Wireless and handheld devices are also a huge growth area for animation. In South Korea, cell-phone users collect and trade digital animation loops of characters such as “Hoola Boy” and “Nasty Santa,” created by New York-based animation studio JibJab and distributed to consumers by Sus4.

“You want to be able to pre-purpose your content so you know how its going to look online, on TV or on a (personal digital assistant),” says Sam Register, VP of Cartoon Network Online, who predicts, “Interactivity and gaming is going to be the killer app of the converged world.”

“Each property needs to have its own business plan,” says Eric Calderon, development executive for AtomFilms.com. “Any one form of entertainment doesn’t get paid off by one kind of screen,” pointing out that the average feature film passes through theatrical distribution, pay-per-view, cable and network TV, and homevideo to generate multiple revenue streams.

AtomFilms is taking this approach with its library of shorts, often making sales to TV and airlines before debuting a property online. But some properties are leaping in the other direction, such as “Capitol Ill,” a web toon that AtomFilms sold to Fox to air on “MAD TV.”

“Until we see the advent of more microtransactions and the success of subscription models, we can’t pursue the kind of animation development we want,” says Ken Williams, CEO of Stan Lee Media, whose 7th Portal property is being developed as a feature film and theme park ride.

“Our strategy is to take our animation franchises and put them through the value chain that is represented by traditional media, where the markets are already mature,” Williams says.

Stan Lee Media recently cut 19 people from its staff and began outsourcing production.

To cut costs, many companies are scaling back or eliminating inhouse crews, and sending work to contract studios in Asia and Canada. Honkworm.com, a Seattle production company specializing in online animation, recently launched an international division in Vancouver.

Ian Verchere, president of Honkworm Intl., says “the fact is that the American dollar buys $1.50 Canadian, so the savings go to production costs.”

“But its not just the economic benefit,” he adds, referring to the freelance talent pool that allows him to run a lean and mean “virtual” studio. “There is a critical mass of people here, a strong core of skilled animators and programmers.”

Atomic Cartoons in Vancouver and Funbag in Ottawa are two of the Canuck shops doing a lot of the outsourced work.

This trend doesn’t concern Steve Soffer, co-president of Flip Your Lid, a content production company in Burbank with eight web animation series in production. “Overseas animation has been going on for years. I think that people have learned that to get good content, you need to do part of production here and then go overseas.”

Whatever the business model, content is still king. Sam Register of Cartoon Network puts it bluntly, stating, “A lot of people have been making a lot of crap. The quality has to go up.”

Johan Liedgren, founder of Honkworm concurs, saying, “So much of the content being made in Flash looks like it’s cooked in the same kitchen.”

Machi Tantillo, executive producer at Oxygen, stresses the importance of real characters and stories.

“People are multitasking, watching content while doing other things, especially women,” Tantillo says. “If the content is enlightened and well rounded it will have broad appeal.”

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