Australian Digital Content Industry

Digital Content Industry Roadmapping Study Report and qualitative research by: Quantitative results by: April, 2005 © Australian Interactive Media Industry Association Page 2 of 64 Table of Contents 1. EXECUTIVE SUMMARY .............................................................................................................................. 3 1.1 1.2 1.3 1.4 1.5 1.6 2. CONTEXT OF THE PROJECT ......................................................................................................................... 3 DEFINITION ............................................................................................................................................... 3 OBSERVATIONS OF THE DIGITAL CONTENT INDUSTRY ..................................................................................... 3 NATURE OF THE FIRMS WITHIN THE INDUSTRY ............................................................................................... 4 IP DEVELOPMENT AND COMMERCIALISATION IS AT THE HEART OF THE INDUSTRY .............................................. 5 ROLE OF GOVERNMENT .............................................................................................................................. 7 INTRODUCTION AND METHODOLOGY..................................................................................................... 8 2.1 2.2 2.3 BACKGROUND ........................................................................................................................................... 8 READING THIS REPORT.............................................................................................................................. 9 METHODOLOGY & SCOPE OF STUDY ........................................................................................................... 9 PART 1 – ............................................................................................................................................................ 12 PROFILE OF THE INDUSTRY, SUB-SECTORS AND COMPANIES................................................................ 12 3. PROFILE OF THE DIGITAL CONTENT INDUSTRY.................................................................................. 13 3.1 3.2 3.3 3.4 3.5 4. THE DIGITAL CONTENT INDUSTRY ............................................................................................................. 13 INTERACTION BETWEEN SECTORS WITHIN THE INDUSTRY.............................................................................. 16 KEY OUTPUTS ......................................................................................................................................... 17 MAIN ACTIVITIES UNDERTAKEN .................................................................................................................. 18 PROFILE OF COMPANIES IN THE INDUSTRY .................................................................................................. 20 COMMONALITIES AND CHALLENGES WITHIN THE DIGITAL CONTENT INDUSTRY........................ 24 4.1 4.2 4.3 OPTIMISM ABOUT THE FUTURE IS INCREASING ............................................................................................. 24 THE DIGITAL CONTENT INDUSTRY HAS COMMON CHARACTERISTICS ............................................................... 25 DIGITAL CONTENT INDUSTRY SECTORS ALSO HAVE MANY ELEMENTS THAT ARE NOT COMMON .......................... 27 PART 2 – ............................................................................................................................................................ 31 IP DEVELOPMENT & COMMERCIALISATION................................................................................................. 31 5. IP DEVELOPMENT AND COMMERCIALISATION.................................................................................... 32 5.1 5.2 5.3 5.3 6. THE THREE PHASES OF IP DEVELOPMENT AND COMMERCIALISATION ............................................................. 32 IP DEVELOPMENT AND COMMERCIALISATION FOR CONTENT CREATORS AND SERVICE PROVIDERS ................... 33 IP DEVELOPMENT AND COMMERCIALISATION VARIES BY TYPE OF BUSINESS OWNER........................................ 33 COMPANY SIZE IS THE GREATEST INDICTOR OF `TYPE OF PAIN’ FACED ........................................................... 35 IDEA GENERATION................................................................................................................................... 39 6.1 6.2 6.3 CREATIVE SKILLS ARE THE HARDEST TO FIND – AND EASIEST TO LOSE ........................................................... 39 CREATIVE PEOPLE ARE HARDEST TO MANAGE AND MOST RESISTANT TO PROCESSES ...................................... 40 IDEAS ARE GENERATED INTERNALLY, AND GENERALLY NOT SUPPORTED BY FORMAL PROCESSES ..................... 41 7. APPLICATION DEVELOPMENT................................................................................................................ 43 7.1 IP THAT RESULTS IN IMPROVED ‘PROCESSES AND TOOLS’ IS MORE COMMON THAT IP THAT LEADS TO ONGOING REVENUE.......................................................................................................................................................... 43 7.2 COMPANIES WANT TO MOVE AWAY FROM FEE-FOR-SERVICE PROJECTS ......................................................... 44 7.3 IP PROTECTION IS STILL A ‘GREY AREA’ ...................................................................................................... 46 7.4 OBSERVATIONS ABOUT TECHNICAL STAFF AND SKILLS ................................................................................. 47 7.5 FINANCE FOR APPLICATION DEVELOPMENT IS DIFFICULT TO SOURCE EXTERNALLY .......................................... 48 7.6 SOURCES OF TECHNOLOGY WHEN DEVELOPING APPLICATIONS ..................................................................... 51 COMMERCIALISATION AND SALES ....................................................................................................... 54 8.1 8.2 8.3 8.4 8.5 8.6 CUSTOMERS HAVE RAPIDLY BECOME MORE SOPHISTICATED IN THE DIGITAL CONTENT INDUSTRY...................... 54 PRODUCT-BASED COMPANIES PREFER TO DISTRIBUTE PRODUCTS DIRECTLY TO CUSTOMERS .......................... 55 EXPORTS ARE AN IMPORTANT SOURCE OF REVENUE FOR THE INDUSTRY ........................................................ 56 LOWER BARRIERS TO ENTRY ARE DRIVING INCREASING COMPETITION AT THE LOW END OF MARKET .................. 58 MARKETING AND MANAGEMENT SKILLS ARE IN DEMAND ................................................................................ 59 TECHNOLOGY DIFFUSION AND ADOPTION IS RAPID AND REGULAR .................................................................. 59 8. 9. PERCEPTIONS OF GOVERNMENT’S ROLE............................................................................................ 63 © Australian Interactive Media Industry Association Page 3 of 64 1. Executive Summary 1.1 Context of the project The digital content industry is an important direct and indirect contributor to the Australian economy and society. It contributes directly through employment creation, capital investment and export earnings. Indirectly, it provides skills and capabilities to traditional as well as new and emerging industry sectors. Comparatively little is known about the dynamics and nature of firms in the digital content industry. A project was established to map the entities, assets and connections forming the industry. The project involved a quantitative survey (completed by 691 entities) and qualitative component (three focus groups and more than 30 depth interviews). The following report presents the findings of that research, and is intended to form part of the information base to be used by the Strategic Industry Leaders Group in helping develop the Digital Content Industry Action Agenda. 1.2 Definition For definition purposes of this report, companies within the digital content industry correspond to the following sectors: visual effects and animation (including virtual reality and 3D products), interactive multimedia (e.g. websites, CD-ROM’s) and software development, computer and online games, educational multimedia (e-learning) and digital film & TV production and film & TV post-production. 1.3 Observations of the digital content industry The industry is highly fragmented As noted by the Centre for International Economics1, the digital content industry is highly fragmented. This creates a number of challenges, including securing finance and discovering information about markets.2 The market is highly dependent on large distributors of content, including broadcasters. At the level of the firm, it is clear that the digital content industry does not operate in a single market. Rather, sectors within the industry face different market conditions and challenges. Interviews and focus groups revealed that companies generally categorise themselves, and their outputs, as falling into two categories: content creation and service provision. The industry is generally optimistic about the future Overall, companies interviewed were highly optimistic about business prospects over the next year. In most cases, optimism was based on the fact that sectors were coming out of difficult periods. This was particularly true in the interactive multimedia industry, where the shockwaves from the dot.com crash have dissipated. In general, most companies felt that the sector was more stable than it had been, and believed that the outlook for the next two to three years was likely to improve. Greatest volatility was expected in the computer games industry, as a consequence of new console developments that would create both winners and losers. Australian Digital Content Industry Futures, Prepared for DCITA by the Centre for International Economics, March 2005. pg 16 2 These issues are discussed in subsequent chapters. 1 © Australian Interactive Media Industry Association Page 4 of 64 Sectors within the digital content industry have features in common There is a significant amount of commonality across the digital content industry, both at the sector and company level. Common factors include: • • • • • • • • Creativity and intellectual property are central assets The industry is heavily reliant on technology infrastructure, and requires regular refresh to remain competitive The industry is susceptible to technology shifts such as platform and format changes The industry employs a high proportion of contractors, generally to reduce business risks by growing operating rather than fixed costs Companies are increasingly susceptible to global market conditions, particularly content creators who are unlikely to succeed on domestic demand alone Customers are becoming increasingly sophisticated, but are increasingly willing to pay for quality Recruiting rather than retaining people is a challenge, with skills in greatest demand being creative followed by management and marketing skills The smaller end of the industry is becoming increasingly fragmented. This is due to the rapid advances in technology, which have enabled sole operators to bid for, and win, projects that were previously beyond the capacity of a sole operator or micro business. Sectors within the industry vary significantly on some levels The digital content industry is not homogenous, and participating sectors are mixed in the extent to which they: o o Identify with the umbrella nomenclature of digital content industry, and Have a similar pipeline of work in advance Variations in the extent to which companies do or do not identify with the digital content industry nomenclature can be attributed to several factors. These include the fact that companies generally align themselves with their end customer (i.e. advertising); or strongly identify themselves with a particular sector, such as computer games and film. Contrasts in the length of the sales pipeline are most marked between the post production industry (typically short), and the content production sectors – particularly computer games and film production (typically longer). 1.4 Nature of the firms within the industry Profile of companies While the average turnover for a business in the digital content industry is just under $3m per annum, 61% of all businesses turn over less than $5 million. Almost half of all companies surveyed (46%) described their profitability as “satisfactory”. Only 8% described their company as “highly profitable”, whilst a similar amount (9%) described their company as “unprofitable”. More than a quarter of companies surveyed (27%) described their profitability as “marginal”. Highly profitable businesses tend to have higher turnovers, produce services rather than products and are exporters. They are also more likely to produce advertisements and print publications as a key output. According to the survey, companies in the digital content industry are not necessarily ”emergent”. Significantly, nearly half of all companies in the industry have been in © Australian Interactive Media Industry Association Page 5 of 64 operation before the recognised arrival of the Internet (1992). Of those companies, nearly a quarter has operated for more than 21 years. According to the survey, the average number of full-time staff employed by companies in the digital content industry is approximately 22. The number of full-time employees tends to be greater in more established businesses. In addition, for every two full-time staff members employed in the industry there is one part-time staff member. Approximately 6% of all companies surveyed indicated that they were listed on the stock exchange, and the majority of businesses (58%) did not expect a change of ownership in the next five years. 1.5 IP development and commercialisation is at the heart of the industry Almost two thirds of companies surveyed nominated intellectual property as their company’s “most important main asset”. This report focuses on issues and challenges at each of three critical phases of the IP development and commercialisation process: idea creation, application development and commercialisation. IP Phase 1: Idea Generation The phase of idea generation is a creative process, relying heavily on creative and other skills. Key findings from the study include: o Creative skills are the hardest to find – and easiest to lose Overall, a quarter of the industry indicated difficulties recruiting staff, rising towards a third amongst the larger entities and those producing software. Those who experienced difficulty found creative skills and then management skills the most difficult to find. Almost half of all companies indicating difficulties nominated design/creative as the hardest to source, compared to 37% who cited management skills. Companies said the danger of losing design and creative staff to overseas firms was very real, particularly in the computer games, animation and visual effects sectors. Creative people are more difficult to manage and most resistant to processes A common difficulty experienced by companies is the cultural issues associated with management of creative staff and processes. Company owners recognise that creative input is one of the most important, if not the most important, inputs. However, a number of challenges exist in balancing business goals and reporting obligations on the one hand, with maintenance of staff morale on the other. Ideas tend to be generated internally Most ideas for new products and services are sourced internally, rather than in collaboration with customers and third parties including universities and intermediaries. Companies are more likely to source new ideas from the Internet or magazines/journals than from their customers or clients. Companies in focus groups and interviews indicated that they spent considerable time on new idea generation. Even a number of comparatively small companies (<10 staff) had staff that worked full-time on research and development. o o IP Phase 2: Application Development Turning ideas into applications with commercial potential raises a number of issues around revenue generation from IP, the protection of IP, and technical as opposed to creative skills. Key findings from the study include: © Australian Interactive Media Industry Association Page 6 of 64 o IP that results in improved ‘processes and tools’ is more common than IP that leads to ongoing revenue The majority of IP developed by companies does not generate external revenue. Only 25% of companies surveyed claimed to earn revenue from IP last year, with this group over-represented by companies active in software development and music/audio production. Companies would like to move away from fee-for-service projects A clear aspiration for service providers is to generate IP that creates ongoing revenue streams. This is seen as a solution to managing the peaks and troughs present in project work, and to assist in building and managing cash flow. The vast majority of companies interviewed – most of them defining themselves as primarily service providers - had strategies in place to develop applications that they intended to license. The applications ranged from software programs, to animated characters and tools. IP protection is still a ‘grey area’ One in three (32%) of companies surveyed claimed to have had difficulties protecting their IP. Of those who experienced difficulties, over 40% described the problems they experienced as serious, with 20% describing those problems as “very serious”. Abuses of IP came from a number of sources including competitors, contract staff and clients. University and TAFE graduates were not considered “job ready” Universities, and TAFEs in particular, were not considered to produce students with sound technical, creative, business or team skills. Companies reported that graduates tended to over-estimate their own capabilities and had not been adequately prepared for the fact that technicians needed more than software competence to be effective team members. Graduates rarely had the requisite project skills, such as deadline sensitivity. Experienced technicians are difficult to find A number of companies indicated they had turned to importing international skills on a contract basis. This was particularly true for projects that required either rapid up scaling, or required highly specialist skills. Finance for application development is difficult to source externally The survey found that companies in the industry overwhelmingly relied on retained funds (65%) or owners’ funds (34%) for finance. The reason for difficulties in sourcing external funding was reported as straightforward: the risk profile for investors was not perceived as attractive. Government is an important source of funding for some Approximately 10% of all surveyed companies indicated that they received some sort of government funding. Companies with annual turnover of less than $100,000 were more likely to have received government funding (16%). Majority source new technology for application development internally While some companies actively search outside their own firm for new technologies to utlise when developing applications, most simply turn to technologies and know-how that already exist internally. Those that do search for new technology externally attend international conferences and participate in special interest groups. These activities also provide access to intellectual property, such as concepts, mathematics, theories, applications and codes, that can be leveraged by companies when building their own applications. o o o o o o o © Australian Interactive Media Industry Association Page 7 of 64 IP Phase 3: Commercialisation and Sales To survive and grow, companies need to sell their IP into markets. The nature of the markets being sold into, channels to those markets and marketing skills each affect the success companies can achieve in this phase. Key findings from the study include: o Customers have rapidly become more sophisticated In particular, customers are more educated about digital content, place a greater value on digital content and are increasingly prepared to pay for quality. Exports are an important source of revenue for the industry Almost half of all survey respondents indicated that they exported products and services. Exporters employed more people than average and had higher turnovers, particularly those in the $1-5m turnover bracket. Most companies (58%) indicated exporting accounted for 10% or less of their revenues (including 40% accounting for 5% or less). Key export destinations are the US and Europe. Lower barriers to entry are driving increasing competition at the low end of market Until recently, the most effective barrier to entry into the digital content market was the high cost of technology. While this remains true at the mid-high end of the market, it is less often the case at the lower end. Marketing and management skills are in high demand Although companies reported that creative staff were the most difficult to find, it is clear that commercial, marketing and management skills are also in short supply. Technology diffusion tends to occur rapidly One of the most significant and universal catalysts for demand was “generational” change in technologies. In particular, the development of new platforms and formats was seen as a pre-cursor to a rapid burst of development. o o o o 1.6 Role of government Recommendations for the role of government were outside the scope of this project. However, interviews and focus groups included some probing on the sorts of areas where Australian and/ or State and Territory Governments – or other bodies - could assist. The study found significant contrasts in the role of government desired by content creators and service providers. Content creators see government playing a clear role in funding development work, while service providers are more interested in general business development support from government. © Australian Interactive Media Industry Association Page 8 of 64 2. 2.1 Introduction and Methodology Background The digital content industry is an important direct and indirect contributor to the Australian economy and society. It contributes directly through employment creation, capital investment and export earnings. Indirectly, it provides skills and capabilities to traditional as well as new and emerging industry sectors. The industry also underpins companies’ distribution systems, providing the technologies and applications required for effective content management and end user interfaces. Comprised of a number of sectors, the digital content industry is strategically important in Australia’s progression towards higher value added products and services. Raw measures of inputs and outputs, though critically important, do not necessarily capture the industry’s full contribution to Australia’s status as a knowledge-intensive economy. Some digital content industry sectors are comparatively well established, such as film and television production, while others are relatively immature such as games development and interactive multimedia over new platforms. Despite the importance of the industry to Australia’s current and future economic position, comparatively little is known about the dynamics and nature of firms within it. This is in part due to the fact that the industry morphs quickly, and is highly susceptible to technology changes and global market conditions. These changes do not necessarily affect the industry as a whole, making the impact of changes harder to understand and respond to. A further impediment to seeking a detailed understanding of this industry has been the absence of reliable and disaggregated data obtained on a timely basis. While Australian Bureau of Statistics (ABS) figures have provided a baseline of data, this has not been sufficiently detailed to recognise the nature and contribution of individual sectors. A key question for governments, industry associations and companies is how to better understand the nature and contribution of the digital content industry, including the potential impediments to growth, both current and future. This project was established to map the entities, assets and connections forming the digital content industry, and to study the process of technology diffusion across the industry. The major classes of asset in this industry are intellectual property, software, designs and the like which are expressed in the forms of games, visual effects, threedimensional virtual environments and other products. The results of research undertaken as part of the project are compiled in this report. It will form part of the information base to be used by the Strategic Industry Leaders Group in helping develop the Digital Content Industry Action Agenda. The study was commissioned by the Australian Interactive Media Industry Association (AIMIA). Funding for the project was provided by AusIndustry (IAccP) and AIMIA. Further in-kind assistance and support was contributed by the Australian Film Commission, Animal Logic, Sean O’Brien (formerly of Fibre Pty Ltd), Massive, Content Strategies, Handshake Media, Queensland University of Technology, University of Technology Sydney, DCITA, Screen Producers Association of Australia and David Court (Content Capital Ltd) . dandolopartners is grateful to the companies and organisations that participated in focus groups and interviews as part of the project. © Australian Interactive Media Industry Association Page 9 of 64 2.2 Reading This Report This report is divided into two parts, and 8 chapters. The introduction sets out the context and background to the study, outlines the report structure and details the methodology and scope of the study. Part 1 – Profile of the industry, sub-sectors and companies Chapter 3 describes the profile of the digital content industry and its composition, at sectoral and firm level. This description draws on the quantitative data compiled by I-View and The Gist as well as the qualitative work and analysis by dandolopartners. Chapter 4 looks at the common and differentiating elements of the industry across its sub-sectors. Understanding similarities and differences is an essential underpinning of any policy framework. Part 2 – IP development and commercialisation Chapter 5 establishes a conceptual framework for examining the primary driver of the digital content industry: the development and commercialisation of intellectual property (IP). It uses a three-phase framework for examining the process of generating ideas, developing applications and commercialising and selling IP. It also considers how this process varies according to factors such as source of revenue, motivation of company owners and size of company. Chapters 6, 7 and 8 examine in greater detail each of the three phases of IP development and commercialisation. Chapter 9 summarises the suggestions made by focus group participants and interviewees about what role government, as well as other players, might adopt to assist the further growth of the industry. The scope of this report excludes recommendations development, and so these comments are provided in the spirit of feedback to policy makers and to ensure that the voice of those who kindly gave of their time in the course of this report is heard. 2.3 Methodology & Scope of Study This study was commissioned by AIMIA to better understand the nature of the digital content industry, including identification of potential impediments (current and future) to growth at the company level. It was not focused on developing recommendations, a role to be undertaken by the Strategic Industry Leaders Group (SILG). It consisted of three phases. • The first phase focused on collecting quantitative data by I-View through a telephone survey (691 completed surveys) and preparation of a report by The Gist. The questionnaire that formed the basis of the survey was developed by a steering group convened to oversee the project, and through consultation with Strategic Industry Leaders Group (SILG) working groups (investment, export, skills and training and R&D committees). This phase provided an understanding of the demographics of the industry. The second phase, led by dandolopartners, expanded on the findings from phase 1 by conducting qualitative research through focus groups (3) and in-depth • © Australian Interactive Media Industry Association Page 10 of 64 interviews (30+). This phase provided a better understanding of company level motivations and operations. • The third phase, led by dandolopartners, focused on analysis of both quantitative and qualitative findings, identification of major conclusions and development of a final report. Phase 1: Quantitative Research (I-View & The Gist) The quantitative component of the research was approached in two stages. Stage 1a: Data Collection Vehicle & Fieldwork (I-View) Duration: Weeks 1-6 (approx) Objective: Provide an indicative profiling of the digital content industry and its key issues. Activities: Developed comprehensive data collection vehicle Conducted quantitative phone survey with 691 companies Output: Disaggregated, tabular data tables Stage 1b: Analysis and Report Preparation (The Gist) Duration: Weeks 6-8 Objective: Provide a highlights report on the content of the data collected in Stage 1 Activities: Data analysis, including analysis of un-coded, open-ended responses Report preparation Output: Quantitative research report Phase 2: Qualitative Research (dandolopartners) The qualitative component of the research was approached in three stages. Stage 2a: Development of conceptual framework Duration: Week 1 Objective: Identify quantitative findings requiring additional exploration, and Activities: Desktop research Discussions with the Steering Group Output: Development of conceptual framework (detailed in Chapter 7) Stage 2b: Design/conduct focus groups Duration: Weeks 1-4 Objective: To determine the appropriate number and location of focus groups, and provide a company level perspective on relevant issues Activities: Designed discussion guides based on priority issues for exploration Conducted three focus groups with representatives of 20 companies in Melbourne, Perth and Sydney Output: Findings used to develop a targeted interview guide to explore issues, particularly those relevant to specific sub-sectors, in greater detail Stage 2c: Conduct individual interviews Duration: Weeks 3-6 Objective: To further explore issues raised in focus groups/quantitative study, including issues relevant to the wider industry and those that are particular to specific sectors Activities: More than 30 interviews with (primarily) digital content companies, research institutions and relevant organisations. These were undertaken in all Australian States. Output: Development of a detailed interview guide Identification of key themes © Australian Interactive Media Industry Association Page 11 of 64 Phase 3: Analysis and Report Preparation (dandolopartners) Duration: Weeks 5-6 Objective: Deliver a report that presents quantitative findings, consolidates data sources and develops conclusions based on the findings Output: Analysis of key issues Presentation of draft report structure Delivery of final draft report in April 2005 © Australian Interactive Media Industry Association Page 12 of 64 PART 1 – PROFILE OF THE INDUSTRY, SUB-SECTORS AND COMPANIES Comparatively few quantitative facts support our understanding of the digital content industry. This lack is a primary driver behind the research commissioned by AIMIA and funded by the consortium of parties listed in the Introduction. This chapter summarises the findings from that research. It looks at the industry at an industry level, from the level of the sectors that comprise the industry, and then looks at firm level findings. © Australian Interactive Media Industry Association Page 13 of 64 3. 3.1 Profile of the Digital Content Industry The Digital Content Industry Definition of digital content industry Although a universal definition for the ‘digital content’ industry does not exist, it is commonly described as ‘where arts, business and technology converge’.3 According to a DCITA Report4, ‘digital content’ is variously described as: • • • A particular set of product and service outputs within creative industries ("creative industries producing digital content"); A distinct set of industries or as a "sector" in its own right; and Online or networked content as distinct from tangible artefacts or physical modes of production or presentation, implying that the mode of distribution and access is a defining technical feature of the industrial activity. A report commissioned by DCITA5 characterised the industry as a combination of technology and production. It indicated that the sectors within the industry include commercial art, film and video, photography, electronic games, recorded media, sound recording, information storage and retrieval. Perhaps the most complete and detailed definition of the digital content industry was provided by Higgs and Kennedy6, who classified sectors based on a combination of the type of activity undertaken, and the end markets or customers for their products and services. The sectors identified are: • • • • • • • • • • Screen/Film pre-production, production and post-production Free to air and subscription TV pre-production, production and postproduction Broadband content development Online and interactive games Internet based marketing, design and advertising Internet based digital content publishing and distribution Experimental digital media Online education content development Mobile 3G content development and publishing Content creation and manipulation software Learning, rights and content management and other digital creative industry related software applications. • These definitions illustrate the lack of agreement about what is - and is not - included in the digital content industry. Rather than add further to this list, for the purposes of this report, the team developed criteria for using a definition best suited to the needs of this particular study. This entailed a working definition that: 1. 2. Was based on existing definitions Allowed the team to direct its focus on the nature and dynamics of firms within the industry, in line with study objectives 3 4 DCITA 2004 (c) Creative Industries Cluster Study Volume 3: Research and Innovation Systems, Canberra, pg 13 DCITA 2004 (c) Creative Industries Cluster Study Volume 3: Research and Innovation Systems, Canberra, pg 10-11 5 DCITA 2004 (c) Creative Industries Cluster Study Volume 3: Research and Innovation Systems, Canberra, pg 11 6 DCITA 2004 (c) Creative Industries Cluster Study Volume 3: From Cottages to Corporations, Canberra, pg 153 © Australian Interactive Media Industry Association Page 14 of 64 3. Was pragmatic and would enable us to segment the industry into sectors that companies themselves identified with. For example, companies producing visual effects for the film industry tend to identify themselves with the film industry, but rather see themselves as visual effects companies. The result is a limited number of sectors that companies themselves felt aligned to, as expressed in interviews and focus groups. The classification of sectors was developed to enable the team to identify issues and challenges that were unique to particular niches. For the purposes of this report, the digital content industry comprises companies active in the following sectors: • • • • • • Visual effects and animation (including virtual reality, digital design and 3D products) Interactive multimedia and software development, Computer and online games Educational multimedia (eLearning) Digital film television production Post-production It should be noted that digital content distribution, broadcasting and publishing has not been included in the working definition. While distributors, broadcasters and publishers are an important part of the industry; they were not the focus of this study. As will be discussed in section 3.4, advertising is not considered a separate sector of the industry. Rather, it is seen as an important ’output’ and key market for digital content companies. The importance of advertising as a key market for digital content is examined in section 3.4. Importance of the digital content industry The digital content industry (including distribution, broadcasting and publishing) is estimated to have generated output worth $18billion in 2002-03, as reported by the Centre for International Economics7. This represents approximately 3.3 per cent of Australia’s total industry gross product. The digital content industry is a significant employer. The industry is estimated to employ 289,000 people in Australia, with over a third of those people working directly in production, and the remainder in “embedded activities” and distribution. Industry employment is estimated to have grown by an average of 2.7% over the six years to 2002-03.8 Cutler suggests that in addition to direct economic and employment contribution, economic multipliers arising from the creative industries are significant. Digital technologies are important enablers as intermediate inputs to other industry sectors. This translates directly into the competitive advantage and innovation capability of other sectors of the economy. It also demonstrates that the digital content industry matters, both in its own right and within the context of national innovation capabilities9. Australian Digital Content Industry Futures, Prepared for DCITA by the Centre for International Economics, March 2005. pg 7. 8 Australian Digital Content Industry Futures, Prepared for DCITA by the Centre for International Economics, March 2005. pg 8. 9 DCITA 2004 (c) Creative Industries Cluster Study Volume 3: Research and Innovation Systems, Canberra, pg 13 7 © Australian Interactive Media Industry Association Page 15 of 64 Market structure and organisation As noted by the Centre for International Economics10, the digital content industry is highly fragmented. This creates a number of challenges, including difficulties in securing finance and discovering information about markets.11 Fragmented markets also tend to create a dependence on large distributors of content. The realities of operations at the level of the firm confirm these general market observations. The digital content industry does not operate in a single market. Rather, the sectors within the industry face different market conditions and face discrete challenges. Interviews and focus groups revealed that companies generally categorise themselves, and their outputs, as falling into two categories: content creation and service provision. “Our company (specialising in animation for television commercials and film) is very different to most of the companies in this industry. We produce our own content, and then sell it. The companies in this industry are either like us, or guns for hire that provide services for a fee.” - Production company Brisbane The distinction between content creators and service providers is not always clear. A number of companies interviewed saw themselves as both, though sometimes reluctantly. This was particularly true of content creators who used the fee-for-service model to bankroll their content development work. Figure 1 How companies see themselves in the digital content industry THE TWO PARTS OF THE DIGITAL CONTENT INDUSTRY Post-Production Film/TV Production Visual Effects & Animation Games Service  Providers Interactive Multimedia  Content Creators eLearning Channels to market: Distributors, Broadcasters, Publishers (Not the focus of this study) 1. Content Creators (who own their IP) Content creators comprise companies that primarily create and own their own intellectual property. These companies tend to be more reliant on government for financial support, and the end customers tend to be a small number of large, dominant players. Examples of sectors with a significant proportion of content 10 Australian Digital Content Industry Futures, Prepared for DCITA by the Centre for International Economics, March 2005. pg 16 11 These issues are discussed in subsequent chapters. © Australian Interactive Media Industry Association Page 16 of 64 creators are film production, computer game development12 and eLearning companies. For the purposes of this report, content creators retain their rights to IP, including the ability to license it. 2. Service Providers (who do not retain rights to their own IP) Service providers include companies that tend to work on a fee-for-service basis and generally do not earn ongoing revenue from their intellectual property. In most cases, these companies are less reliant on government funding, and end customers tend to be more fragmented. Examples of sectors with a significant proportion of service providers are post-production and interactive multimedia. The distinction between content creators and service providers is neither hard-and-fast nor useful in all contexts. For instance, an investor would be less concerned with the distinction than with the position of the company in the relevant industry value chain. The distinction is nevertheless useful in comparing the market pressures faced by each. Whilst these observations are necessarily of a general nature, the strong message to emerge is the relatively weak market power exercised by most firms operating as content creators, to be expected from such a fragmented industry. One of the key differentiators between the content creators and service providers is the role of government. In the case of content creators, government is much more likely to perform the role of major fund provider. Government in its role as content fund provider wields significant influence over content creators, particularly those that are focused on domestic markets. “There are only two film industries globally that are not subsidised by government: Hollywood and Bollywood. The reality is that if you are in film production in Australia then you need government support.” - Post production company, Adelaide Film funding, the New Media Arts Board of the Australia Council and the Industry Innovation Funds are all examples of government underwriting content creation. As previously outlined, although companies involved in distributing, publishing and broadcasting digital content play an important role in this industry, the focus of this study is on digital content creators and service providers. 3.2 Interaction between sectors within the industry While operating in different markets, and in some cases having different outputs, there are many points of interaction across sectors that warrant common industry approaches. Particularly important is the effect of convergence of broadcasting, telecommunications and Internet. This has blurred the lines between once separate components of the digital content industry.13 Another point of interaction and increasing convergence across industry sectors is in the area of skills. Initially, most companies suggested they recruit from within their own sector i.e. from with film or within games. However, on reflection they revealed that there was significant movement between sectors. For example, a large games company, The computer game industry is an example of an industry that is technically a content creator. However, one of the limitations of the local industry observed in several interviews is the fact that the industry rarely produces games for which it retains the rights to their IP. For example, the majority of computer games are commissioned by publishers and the developers rarely retain rights to development of the sequel, as an example. This fact is often used to demonstrate the significant challenge that remains ahead for the games industry. 13 Australian Digital Content Industry Futures, Prepared for DCITA by the Centre for International Economics, March 2005. pg 14. 12 © Australian Interactive Media Industry Association Page 17 of 64 considering individual employees, concluded that they had employed people not only from the games industry, but also from the film and TV industry (an animator and an artist). A visual special effects company recruited animators with fine arts, not technology backgrounds. 3.3 Key outputs Central to this study was the need to understand what types of products and services the digital content industry produces. The survey found that companies were twice as likely to describe their main outputs as “services” rather than “products”. Approximately 20 per cent of companies indicated they produced both products and services. Survey participants were asked to indicate what they saw as the “main end products their organisation produces, or to which it contributes”. More than half (53%) identified ‘advertising’ as the main end product, followed by `websites’ (44%) and ‘print publications’ (40%). Also significant was the number of companies that indicated ‘educational multimedia’ (31%), which was considerably higher than those indicating ‘television programs’ or ‘music audio’. Just over 20% of companies nominated ‘films’ as the main end product, with fewer listing ‘software’ and `electronic games’. Figure 2 Main products identified by companies in survey Main Products 60% 50% 40% 30% 20% 10% 0% ar e ns ra m te m es a ts io ed i m en ud eb si fil ftw at m pr og pl ic no t ap tim ga /a ab l io e s s s so el lic se w lm ul ic tp ub ve r ti on m us na ad pr in at io It should be noted that companies were able to nominate more than one `end product’ in answering the question, thus the total of all percentages in Figure 2 exceeds 100%. On average, companies nominated 2.9 different key outputs. Companies interviewed were divided over whether they needed to produce more or less outputs to increase profitability. A number of companies believed that specialisation was the key to success in the industry, and that sophisticated customers wanted to work with niche companies. ed uc te le vi ec t si ro ni c © Australian Interactive Media Industry Association Page 18 of 64 “Unless you can be a full-service agency, you need to be able to carve out a niche that you can defend. The early days are gone where you could tell a customer you could do everything. The only way that we will grow is if we can specialise and make a bigger name for ourselves in one thing.” - 3D Modeller, Melbourne For others, particularly smaller companies, specialisation was a dangerous strategy in an environment where conditions and technologies changed quickly. This was particularly true for companies working for clients in the advertising industry. “We thought specialisation was the way to go but our customers didn’t want it that way. We were butting heads with the advertising agency on campaigns, and eventually the customer said to us that we should recruit the skills we need to take over that part of the job. It’s worked well for us, and means that we are less susceptible if one part of the market dips.” - Production company, Brisbane Even those companies wanting to specialise recognised that they would be increasingly required to develop/produce for a number of mediums. For instance, visual effects companies that were interviewed provided services for work that was used in television commercials, films and websites. Designers suggested that previously their work was commissioned primarily for print publications, with the Web an afterthought. However, today it was more likely that a company wanting to develop a new corporate identity would start with the interactive environment, and then customise to the print environment. “We don’t know how to describe ourselves. We do viral marketing campaigns for companies and this often means we produce Websites, advertisements and games. If it can help a company get attention, we generally do it and customers expect that we will produce for a number of environments.” - Interactive multimedia company, Melbourne 3.4 Main activities undertaken Advertising is a large market for digital content. According to the Australian Film Commission14, it is estimated that advertising expenditure is worth $3B annually to the Australian economy. This includes $2.93 billion in advertising revenues annually for the free-to-air television industry (2002/03) and a further $93 million annually in advertising revenue for Pay TV (2003). In comparison, feature film production’s annual revenue is estimated at $366 million (2003/04) and production for television drama is estimated at $222 million (2002/03). Other significant markets for the digital content industry include: • Hire of video tapes $452m • Pay TV charges $267m • Online charges $104m • Box office revenues $907m Not surprisingly, when asked “What are the main activities of your organisation?” most cited ‘advertising’ and ‘communications or marketing’, followed by ‘design services’, ‘video production’ and ‘distribution services’. ‘Video post-production’, ‘e-commerce’ and ‘audio production’, together with ‘audio post-production’, ‘web-hosting’, ‘technical service provision’, ‘special effects’ and ‘animation’ were nominated less often. 14 www.afc.gov.au/gtp (as of April, 2005) © Australian Interactive Media Industry Association Page 19 of 64 Figure 3 Main activities nominated by companies in survey Main Activity 35% 30% 25% 20% 15% 10% 5% 0% es n er ce in g ng g n s n n s ct ffe le An im ce ce tin tio io tio ar ke vi vi od uc du c du c ve rti om m Se r Se r od c ho rv at io tio si ut st ic n s Pr o ro Se al Sp Ec W eb Ad m io n -p r Pr ig n t-p or Vi de o io ns tri b Au D Po s Po D is at Vi de ic A number of entities indicated they were involved in more than one activity, with the average company involved in 1.7 activities. It should be noted that although ‘film’ does not appear in its own right, a number of activities are associated strongly with the film industry. These include activities such special effects, animation, technical services, video and audio production and post-production. The affiliation with advertising The quantitative study found that the majority of companies classified both their main activity and main end product as ‘advertising’. As verified in the qualitative research, companies in the digital content industry tend to align themselves with, and define themselves by, their end customers. “I guess we are technically a design company, but advertising is our bread and butter and we definitely see ourselves as part of that industry more than any other.” - Interactive multimedia designer, Melbourne Advertising is the largest single market for content in Australia, and a key source of revenue for companies in the production, post-production, animation and special effects sectors. Companies in interactive multimedia identified particularly strongly with the advertising industry, as the re-design and re-development of Websites was often part of a larger branding campaign. C om m un Au di Te c o o hn ic st es ut di o ec ia © Australian Interactive Media Industry Association Page 20 of 64 3.5 Profile of companies in the industry Central to the study was the need to clearly identify the type, nature and size of companies that make up the industry. The following section details key findings relating to company profiles.15 Company Turnover While the average turnover for a business in this industry is just under $3m per annum (indicative mean = $2,881,912), 61% of all businesses turn over less than $5 million. Almost a quarter of entities interviewed (24%) either claimed not to know their turnover, or refused to provide it. Figure 4 Turnover by company reported in survey Turnover 30% 24% 22% 24% 25% 20% 15% 15% 11% 10% 4% 5% 0% <$100K $100 <$1Mio $1Mio <$5Mio $5Mio <$10Mio $10Mio+ DK/Refused Several companies interviewed reported considerable fluctuations in turnover in recent years. An interactive multimedia developer in Melbourne said a failure to recognise in the late 1990s that the Web - not CD-Rom – was the key to future revenue had cost it significant revenue. Others reported that company turnover was more relevant to service providers than content creators, who could spend up to two or three years developing a product before generating a commercial return. Company Profitability Almost half of all companies surveyed (46%) described their profitability level as “satisfactory”. Only 8% described their company as “highly profitable”, whilst a similar amount (9%) described their company as “unprofitable”. More than a quarter of all companies (27%) described their profitability as “marginal”. As mentioned previously, confidence in the industry was higher now than it was two years ago, and a number of companies were hoping that the rebounding market would mean not only more work, but more profitable work. 15 Conclusions about the company profiling information are detailed in Chapter 6. © Australian Interactive Media Industry Association Page 21 of 64 “When there wasn’t a lot of work around, you ended up in bidding wars and barely scratching out a living. It wasn’t a case of profit margins, but about covering your expenses and overhead.” - Film producer, Melbourne In contrast, a Sydney based animator indicated its customers had become more price sensitive. He suggested that the proliferation of Pay TV channels in the early 1990s ate into the free-to-air ratings, particularly in the children’s market. “With audience numbers falling, so did advertising revenue, and (in turn) so did the price that broadcasters were willing to pay for programs. This made it difficult to finance shows.” - Producer of animated children’s content for TV, Sydney According to the companies surveyed, profitability was more likely to be high or satisfactory for companies with higher turnover, those that produced services rather than products and those that nominated advertisements and print publication as their main outputs. Companies interviewed suggested that profitability was highly dependent on the number of staff employed, and that companies sometimes needed to “go backwards before they went forwards” by investing in specialist managerial and technical staff before they necessarily had the work to warrant it. Company feedback suggested that customers were increasingly willing to pay for quality, regardless of industry sector. The characteristics of the “highly profitable/satisfactory” businesses are: Indicator Turnover Outputs Export Overseas Office Main Products Characteristics Exceeds $1M (especially in the $1-5M range) More likely to be “Services” As likely to be involved in export as not. Less likely to have one Advertisements and Print Publications Years in Operation According to the survey, companies in the digital content industry are not necessarily young. Significantly, nearly half of all companies in the industry have been in operation before the recognised arrival of the Internet (1992). Of those companies, nearly a quarter of all companies have been in existence for more than 21 years. Companies that are less than 12 years old tend to be in design services and software development. © Australian Interactive Media Industry Association Page 22 of 64 Figure 5 Number of years companies have been in operation Years in Operation 27% 26% 26% 25% 25% 24% 24% 23% 23% 22% 22% 23% 24% 24% 26% 1-6 years 7-12 years 13-20 years 21+ years Focus group participants indicated that companies who had survived through the `Internet years’ had a capacity for reinvention. In particular, a number of companies that identified themselves as being in interactive multimedia had begun life as print design companies, then CD-Rom developers. “The next era is the mobile one, and we are looking to position ourselves with that industry to avoid missing the boat like we almost did with the Internet.” - Focus Group Participant, Melbourne Number of employees According to the survey, the average number of full-time staff employed by companies in the digital content industry is approximately 22 (calculated mean = 21.7). The number of full-time employees tends to be greater in more established businesses. For example, companies that have been operating for more than 21 years have almost half as many staff again as the average, employing 35.8 full-time staff. Companies operating for six or less years have an average full-time staff of 14.7. Interviews confirmed the correlation between age and number of employees. However, a number of exceptions to the rule existed, particularly in the interactive multimedia space where companies had been able to scale up quickly to fill the online niche. Examples include a Melbourne interactive multimedia company that had grown to more than 20 staff in three years, an Adelaide/Sydney visual effects and animation company employing 75 people and a Sydney interactive multimedia/advertising agency that had 21 full-time staff after only 18 months of operation. Staff size varies by industry: companies in the “communications and marketing” sector and those that produce software are likely to employ more staff. In contrast, newer, smaller turnover entities, those whose main activities include design services and video production, have smaller headcounts. Notably, the survey found that 40% of all entities in the digital content sector in Australia employ four people or less (full-time), and almost 60% have nine full-time staff or less. At the other extreme, 10% of companies employ in excess of 100 full-time staff. It should be © Australian Interactive Media Industry Association Page 23 of 64 noted that companies surveyed included large distributors and publishers of digital content, which are generally labour, rather than technology, intensive. On average, for every two full time staff members employed in the digital content industry, another 1 person is employed part-time16. The vast majority (77%) employ nine or less part-timers, with over 60% employing less than four part-timers. According to companies interviewed, the use of part-timers was less attractive than the use of full-time, contract staff. This was particularly true in the post production and games sectors, where entire companies were likely to be focused on a single project at any one time. “We are always on the lookout for good people in whatever capacity – full-time, part-time or contract. Sometimes we take on a person even if we don’t need them at that time, because we know how hard they are to find in Tasmania.” - eLearning and multimedia producer, Hobart Stock Exchange Listed Approximately 6% of all companies sampled indicated that they were listed on the stock exchange. Not surprisingly, these companies tend to be in the largest turnover categories (nearly 80% report a turnover of $10 million +). A number of interviewed companies indicated that listing brought new, and sometimes unexpected pressures. For example, the founder of a Melbourne games company said that prior to listing they were required to formally audit the licences for software on the company’s desktops, rather than rely on their informal reporting mechanisms. Expected Ownership Change The majority of businesses (58%) did not expect a change of ownership in the next five years. Those who did openly expect some change in ownership (32%) were more likely to produce software, and anticipated it would most likely occur via a merger with, acquisition by, or trade sale to, another company (68% of those expecting an ownership change). Those with turnovers of $5-10M were more likely to expect an ownership change. The next most likely reason companies expected an ownership change was a share market listing, which was expected by one in seven surveyed firms. This was more likely than average amongst larger entities and those producing software, followed closely by a change anticipated through growth/expansion (one in eight). Few companies interviewed expressed a desire to list on the stock market, or pursue a merger or acquisition. Two companies participating in the Melbourne focus group – Bluetongue Interactive and Eclipse Multimedia – had recently been acquired by multinationals (THQ and Delloittes respectively). In both cases, the change had brought with it the formalisation of process and greater certainty. More common was a desire for companies to retain complete ownership. There was strong resistance to dilute owners’ equity, an issue often faced in pursuing finance, and a feeling that it was preferable for companies to sacrifice scale for control. They were more supportive of the use of boards of directors, which a number of companies had instituted. “A board requires you to think about the business – to look at it from the outside in and to be objective. It also allows you to celebrate achievements.” - Full service interactive agency, Sydney The survey found that on average, companies in the digital content industry employed 22 full time staff and almost 10 (9.7) part time staff (a ratio of approximately 2:1). 16 © Australian Interactive Media Industry Association Page 24 of 64 4. Commonalities and challenges within the Digital Content Industry This section provides a summary overview of the observations and challenges observed at the industry level during the course of this qualitative and quantitative research study. The discussion includes identifying common characteristics across the industry along with sector differences, in addition to capturing views on the outlook for the industry. Most of the issues summarised here are discussed in more detail in later chapters of the report. 4.1 Optimism about the future is increasing Overall, companies interviewed were highly optimistic about business prospects over the next 12 months. In most cases, optimism was based on the fact that sectors were coming out of difficult periods. This was particularly true in the interactive multimedia sector, where the shockwaves from the dot.com crash have dissipated. In general, most companies felt that the industry was more stable than it had been, and believed that the outlook for the next two to three years was likely to continue to improve. Greatest volatility was expected in the computer games sector, which was preparing for a change of platform in the form of new console developments that would tend to create both winners and losers. A number of focus group participants noted that failure to respond to such platform shifts, including the move from CD-Rom to Web-based platforms, was one of the greatest determinants of companies’ ability to survive the post dot.com period. “We feel like we have come through the hardest times in the industry, and now it’s about capitalising on the ‘sweat and tears’.” - Focus Group Participant, Sydney “There is a feeling a genuine optimism in the industry at the moment. We had our best year ever last year, and feel like this one will be even better. It’s like the floodgates have opened up again after being closed for a while after the dot.com crash.” - Focus Group Participant, Melbourne Exceptions to the general optimism noted in the course of interviews was found in: • The film and television production sectors, where confidence was generally lower. The reasons for this were varied, but centred on the difficulty securing funding for content production and the impact of Australian dollar’s rise and consequences for export competitiveness. “We used to worry about looking for work about six weeks out, now we are doing it three to six months out because we know how little is around the corner. I don’t see it changing much for a while.” - Film production company, Melbourne • The eLearning sector, including uncertainty surrounding the future of The Le@rning Federation and limitations of the domestic market size. “The market in Australia is in a bad way. The Le@rning Federation made a bit of a difference, but at the end of the day they own the IP and so it’s never going to be a great money-spinner. We are looking at putting our focus into the UK market, as we feel that we can’t survive on what’s available domestically.” - eLearning company, Hobart © Australian Interactive Media Industry Association Page 25 of 64 Figure 6 Optimism of companies in digital content industry by sector OPTIMISM BY SECTOR WITHIN THE DIGITAL CONTENT INDUSTRY LEVEL OF OPTIMISM Interactive Multimedia Visual Effects & Animation Games Film & TV Production E-Learning (Domestic) PAST FUTURE Anecdotal evidence also suggests that for some companies, optimism (or pessimism) was driven by the health of demand side industries within their target market. This was noted by one Perth-based company, which was highly dependent on the continued health of the resources sector. 4.2 The digital content industry has common characteristics The digital content industry is made up of sectors – and companies – with much in common. The most significant commonalities are: 1. Creativity and intellectual property are central assets, both of which are difficult to value and sell to financiers 2. The industry is heavily reliant on technology infrastructure, and requires regular and expensive refresh to remain competitive “We replace our boxes (hardware) up to every nine months.” - Focus group participant, Sydney 3. The industry is highly susceptible to technology shifts, including platform and format changes “This year is a critical one for us, with the Playstation 3 and Xbox 2 to be released. Console changes are both eagerly anticipated and slightly feared.” - Focus Group Participant, Melbourne 4. Sectors within the industry tend to employ a high proportion of contractors in proportion to other knowledge intensive industries. In most cases, companies suggested that the contracting model allowed them to reduce business risks through growing marginal rather than fixed costs. © Australian Interactive Media Industry Association Page 26 of 64 “My record was having a single person business and employment of more than 100 contractors on a particular project. That’s the only way I can do a project of scale.” - Focus Group Participant, Melbourne “In our business you can’t afford to make that decision (to hire full-time staff over contractors). Apart from the nature of project work, a lot of people like to be able to work on a project for three to four months and then go surfing in Bali for two months.” - Focus group participant, Sydney 5. Companies across the industry are increasingly susceptible to global market conditions, particularly content creators who contend that domestic demand will not sustain the current supply market. The impact of currency change is particularly acutely felt in the film, eLearning and games sectors. “All the market opportunities in this area exist internationally. Domestically, The Learning Federation is about the only opportunity (but not attractive) as they own the end product and sell to schools directly. The UK government has 100 million pounds to spend on eLearning every year for the next three years.” - eLearning company, Hobart “The business model in Australia is flawed, and dealing with the free to air networks is difficult. We need to go overseas, but haven’t got the resources to be able to get on the radar internationally.” - Content producer, Brisbane 6. Customers are increasingly sophisticated, particularly in the interactive multimedia sector, where the market emerged from the post dot.com period with a greater understanding of how technology and content needs related to their business drivers 7. Commercial success in the industry relies upon the marriage of three very unique skills sets – ‘artistic creativity’ + ‘technical mastery’ + ‘business management’. This is often a challenging triumvirate of needs. “It’s a strange bunch of people that you tend to get. You have the creatives doing their thing, the technical people putting it into action and the commercial people making sure that you can pay their wages.” - Interactive multimedia company, Hobart 8. Recruiting rather than retaining people is a bigger challenge. The skills in demand varied from sector to sector, with animation and games development companies experiencing skills shortages and post-production and production companies reporting few difficulties securing all but the best talent. Universally, the skills in greatest demand were creative skills, though a number of examples existed of companies finding leading edge technical and management skills more difficult to source. 9. External financing is difficult to attract. Financiers see digital content as a relatively high-risk proposition. This is exacerbated by the small size of the Australian market and relatively small and immature risk-financing sector. © Australian Interactive Media Industry Association Page 27 of 64 4.3 Digital content industry sectors also have many elements that are not common The digital content industry is not homogenous, and participating sectors are mixed in the extent to which they identify with the umbrella nomenclature. Figure 7 Companies’ connection with term digital content industry by sector LEVEL OF CONNECTION WITH TERM ŌDIGITAL CONTENT INDUSTRY Õ Film & TV Production Visual Effects & Animation PostProduction Interactive Multimedia Games e-Learning DISCONNECTS CONNECTS This variation can be attributed to several factors, including: • • The extent to which companies generally align themselves with their end customer (e.g. advertising); and The extent to which companies strongly identify themselves with a particular sector (e.g. computer games and film). The findings are significant from a branding perspective, and suggest that selling the digital content brand to industry stakeholders may be more difficult than anticipated. Anecdotal evidence suggests a similar issue exists with the nomenclature `creative industries’, which makes policy sense to government, but does not necessarily strongly resonate with firms. “There seems to be a different name for our industry every year. First we had multimedia, then dot.com, then ICT and now digital content. The only description I care about is what our customers call us.” - Interactive multimedia company, Adelaide “I guess we would fit into it, but we don’t see it that way. We are in post-production, special effect and animation. (Digital content) is a typical government description that no one gets excited about.” - Post production company, Perth 1. The sales pipeline is a key point of difference across the industry There was significant variation in the length of contract/ revenue pipelines for companies across the industry. As a generalisation, larger companies tended to have longer project lead times, due mainly to the need for certainty to cover higher fixed overhead costs. There was consistency among interview subjects and focus group participants about the pipelines for particular sectors. By far the shortest lead times and greatest revenue uncertainty was for post-production companies, with several indicating that sales pipelines were as short as one to two weeks. This not only reduced revenue certainty, it also made hiring decisions more difficult and generally resulted in a greater reliance on contractors. © Australian Interactive Media Industry Association Page 28 of 64 “Right now, we only have five or six hours of studio time booked in for next week. (Despite this) “the business is actually pretty consistent, and generally only swings 10% up or down from month to month.” - Post production company, Perth The interactive multimedia sector also operated on short sales pipelines, with one company employing 80 staff indicating that they were always “six weeks from the wall”. Companies in interactive multimedia tried to mitigate the effects of this by securing ongoing maintenance work, which was generally less profitable but more reliable. Not surprisingly, the longest sales pipelines tended to be in the games and film production sectors that relied on large, commissioned projects. “We cannot afford to miss E3 (Electronic Entertainment Expo in Los Angeles) because that’s where the deals are done for the year. If you don’t get your act together there, you could be staring down the barrel of no work for six months.” - Focus group participant, Melbourne “We have 80-100% of total capacity confirmed one to two months out and 0% confirmed six months out.” - Web design and offline advertising, Adelaide Companies interviewed from the games sector said revenue certainty was a particular concern given that publishers often enacted their right to cancel development at an interim milestone payment. This occurred on two occasions for one Melbourne games development company, where the release of a similar product was seen as justification for the publisher to “cut their losses” and wind up the contract on payment of the next milestone. This situation also occurs in the games sector when a client loses the rights to use a brand or trademark, which occurred recently with the brand `Sponge Bob Square Pants’. Figure 8 Estimated length of sales pipeline by sector SALES PIPELINE FOR SERVICE PROVIDERS 2wks-1mth Post Production Interactive Multimedia Visual Effects/Animation e-learning Film/TV Production Games 2-3mths 6 mths 1 year NORMAL SOMETIMES Though geographic location did not emerge as a significant variable in the quantitative study, there was evidence that the nature of end customers in a particular area influenced firms. For example, participants in the Perth focus group suggested that the most significant source of demand came from the resources sector, and that its financial health was an indicator of favourable market conditions. 2. Smaller players are crowding the lower end of the market Smaller companies suggested the industry is experiencing increasing fragmentation. This is due to the rapid advances in technology, which have enabled sole operators to bid for, and win, projects that were previously beyond the capacity of a sole operator or micro business. © Australian Interactive Media Industry Association Page 29 of 64 The effect of this is felt most by medium-sized players of up to twenty employees, who reported a focus on moving up the value chain to avoid increasing competition with smaller, lower cost operators. The effects of this were particularly evident in interactive multimedia and post-production, based on the increased performance of `consumerpriced’ software and hardware. “We have taken the attitude that if a company wants to use a backyarder, then we’re not interested. They tend to be not worth the headaches.” - Film production company, Queensland “When a customer says to us they decided not to hire us because they found someone half the price, we say that’s great – can we come visit in six months?” - Focus Group Participant, Melbourne 3. Collaboration is only increasing slowly, and at a project level The low awareness of the benefits of collaboration in the digital content industry is well documented17. This observation was reinforced in the course of interviews. Interviews revealed that collaboration between companies was most likely: • For firms targeting international markets. In this case, the partnerships provided a number of advantages, including achieving additional scale to win larger projects, gaining access to the customer relationships of collaboration partners and supplementing the specialist skills required to win a particular contract. A number of companies mentioned that collaboration was less likely domestically because the market was too small, particularly for content creators, to warrant working with competitors. “We partner with firms when we need access to a customer relationship. This is particularly important overseas, and we have currently gone into an alliance with a UK company because they have existing business with one of our targets. It’s been a successful strategy here to get into financial services, and is the most cost effective and time efficient way to do it internationally.” - Content management systems company, Melbourne • Among smaller players, partnerships with other firms and, to a lesser extent universities and research institutions, were generally pursued to build scale. “We tend to work in collaboration as a rule, rather than an exception. We are particularly keen on cross border collaborations, as if effectively doubles our market when we want to pitch the final product.” - Animation studio, Adelaide “We work in collaboration with other companies, but have made a conscious decision recently to position ourselves as the project managers. That way you can manage the risks a little better, and usually get the opportunity to get additional work required as part of a project without having to tender for it.” - Producer (various mediums), Brisbane “Collaboration has its benefits. One of the biggest barriers to growth for small businesses is being perceived by clients as ‘small’. Collaboration provides that ability to say to clients that you have strategically outsourced that part of the jigsaw to ‘x’ company.” 17 DCITA 2004b Creative Industries Cluster Study Volume 2: Measuring Creative Content, Government Participation, Economic And Cultural Assets, Canberra, pg 35. © Australian Interactive Media Industry Association Page 30 of 64 - Focus Group Participant, Sydney In terms of future collaboration, a number of participants suggested that convergence of the film and games sectors would create opportunities for collaboration, and would be likely to involve the post-production, sound production and potentially animation sectors. However, there was a feeling that neither the games development nor the film sector had prepared itself to capture those gains. “We see a lot of potential in the future to source skills from the games industry, particularly designers and creatives that have been used to delivering to deadlines.” - Content producer (multiple platforms), Brisbane © Australian Interactive Media Industry Association Page 31 of 64 PART 2 – IP DEVELOPMENT & COMMERCIALISATION This part of the report introduces a conceptual framework to enable a detailed examination of the process companies go through to turn ideas into applications for revenue generation. This part of the report also examines how issues vary by the primary source of revenue for companies – content creation or service provision, the motivation of company owners and the size of the firm. This framework is then used as a guide for analysis in further sections of this report. © Australian Interactive Media Industry Association Page 32 of 64 5. 5.1 IP development and commercialisation The three phases of IP development and commercialisation The development of ideas into applications that can be commercialised in a wider market underpins the economics of firms in the digital content industry. Thus, understanding how IP is generated, captured and exploited is central to an understanding of the digital content industry. One of the most significant findings in the quantitative phase of the project was that almost two thirds of companies nominated intellectual property as their company’s `most important main asset’. Figure 9 Main assets nominated by companies in survey Main Assets 70% 60% 50% 40% 30% 20% 10% 0% 9% 26% 63% Intellectual property Business contracts Physical assets (bldgs etc) A guide to part two of this report Part Two of this report focus on the three phases of: • • • Idea generation Application development Commercialisation and sales A finding of this study is that IP development and commercialisation differs in critical respects according to: • • • The emphasis on content creation versus service provision The motivation of business owners The size of companies Each of these variations is considered in this chapter. This three part framework and examination of variations aids targeted policy making by: • • Separating industry wide issues from sector issues and from company issues Understanding at what point issues are most likely to occur, and are most difficult to overcome © Australian Interactive Media Industry Association Page 33 of 64 The application of the conceptual framework must be flexible enough to provide insight across all sectors in the industry while being sufficiently specific to provide insight into the most important issues faced by companies. 5.2 IP development and commercialisation for content creators and service providers The process of deriving revenue from the successful exploitation of IP varies between content creators and service providers. 1. For content creators, the approach (indicated in red) was from idea, to application, to market/commercialisation 2. For service providers, the approach began with the contract (market/commercialisation), and the idea and application were elements of fulfillment Approach taken by content creators Approach taken by service providers 3 Commercialisation and Sales (Customer) Company develops own IP and sells 1 Commercialisation and Sales (Customer) 1 Idea Generation Company develops own IP and sells 2 Application Development 2 Idea Generation Customer commissions and owns IP 3 Application Development 5.3 IP development and commercialisation varies by type of business owner. The process for IP commercialisation differs between content creators and service providers. The degree and type of emphasis on IP development and commercialisation further differs by the motivations of business owners. Much of the literature on business formation distinguishes between businesses that are essentially self-employment vehicles, and business with ongoing revenue streams independent of particular individuals. Businesses face different challenges and requirements at different stages of their development. This typology of business owners and drivers was borne out in the course of this project. Business owners typically fell into three broad categories, characterised here as ‘technicians’, ‘freedom seekers’ and ‘mountain climbers’ - each driven by very different motivations for being in business. These categories resonated with financiers, who added that for every mountain climber, the industry would have 10 freedom seekers and one hundred technicians. Their © Australian Interactive Media Industry Association Page 34 of 64 investment opportunities focused on mountain climbers. The three categories were seen by investors to be valid across all businesses, and not restricted only to firms from the digital content industries. The table below suggests some broad characteristics as being typical of each of the three categories. The divisions, their characteristics and typical barriers have implications for governments seeking to design programs aimed at small to medium sized businesses. Table 1 Type of company leader ‘Technicians’ “I’m a programmer – I don’t do marketing.” - Interactive multimedia company owner, Melbourne Types of business owners in the industry and characteristics Characteristics • • • Particular challenges likely to encounter • • • Delegating authority Building scale Business planning • • • • • Motivated by operating the technology core to their business More interested in developing their own skills and knowledge base than growing the company While they may not think initially of themselves as ‘entrepreneurs’, they have the confidence and the resources to operate independently as a business Generally work alone or employ one or two other people and/or use a tight network of contractors Tend not to be strong managers, nor do they want to be Motivated by creative independence/lifestyle Work hard to control their own destiny, work when, where, how and for whom they want Are technology-savvy, and often technically competent, but happy to leave that side of the business to experts Comfortable employing people and commonly use contractors Tend to be inclusive and treat their staff as family members. Acceptance (by staff and clients) is important to them Tend to be less process driven and not embracing of formal business planning Measure success by delivering great work, with a great team, for great clients More focused on enjoyable work than sustainable business or exports Motivated almost solely by achievement, usually measured in terms of company growth and profits. As a result, they tend to be the most high profile type of entrepreneur Tend to work more ‘on’ the business, rather than ‘in’ the business Self confidence and trust in own abilities Single minded in their focus, however than focus can be short-lived. More likely than ‘Freedom Seekers’ • • • “Our motivation is to do good work, and make a profit, but also because we want to work for good causes.” - Perth focus group • • • • • • Adopting and enforcing process Strategic planning Achieving balance between selecting profitable work over enjoyable work ‘Mountain Climbers’ “You get over doing the same stuff. You either have to sell the • • • • • • Retaining focus and commitment over long period Managing scale issues, including recruitment Expansion eg breaking into export markets © Australian Interactive Media Industry Association Page 35 of 64 Type of company leader business or reinvent it into something else,” - eLearning company, Hobart Characteristics Particular challenges likely to encounter • • • others to move onto the next big thing should an opportunity arise Do establish and adhere to processes They work long hours, and expect a lot from themselves and their staff Tend to have strong, but tough leaders 5.3 Company size is the greatest indictor of `type of pain’ faced Irrespective of the sector in which a company operates, the single most important common factor that keeps most company owners and executives awake at night is coping with issues that arise from business growth. There was strong agreement across respondents that managing growth was a key challenge that they felt both ill-equipped to meet, and keen to avoid. The difficulties coping with the effects of growth – including the need to employ `managers’ for the first time, hire specialist business skills, commit to the additional overhead of full-time employees, on-costs and training support was not limited to smaller companies. The critical growth periods tended to be moving from start-up (1-3 employees) to around 7 staff, then 15-20 staff to 50+. The issues raised by companies about difficulties coping with growth can be summarised as: Table 2 Difficulties experienced by companies of different size Difficulties experienced Company size Skills and (with growth staffing ambitions) 1-3 employees Business owner ‘wears many hats’ More likely to be ‘Technician’ Hiring someone purely to manage people for first time Finding the right people Entrepreneur relinquishing operational control Owner likely to be ‘Freedom Processes Intellectual property Undervaluing IP just to win the job Business focus Informal Establishing business and client base 7-8 employees Formalising HR and financial processes Preparing to draw a line in the sand (in protecting IP) over revenue certainty Extending length of pipeline Reducing reliance on single or few customers Revenue and cash flow © Australian Interactive Media Industry Association Page 36 of 64 Difficulties experienced Company size Skills and (with growth staffing ambitions) Seekers’ 15-20 employees Finding specialist skills rather than generalists Succession planning Committing to full-time rather than contractors Owner more likely to be ‘Freedom Seekers’ or rising ‘Mountain Climber’ Management hierarchy in place Keeping and incenting best talent Leader more likely to be a ‘Mountain Climber’ Processes Intellectual property Business focus Introducing widespread processes to organisation that resists Replicability Extracting revenue from IP rather than for operational efficiency Niche strategies Profitability 50+ employees Defending Level of reporting that breaches finds what’s fallen through cracks (eg licensing all software) Innovation to stay ahead of the market According to companies interviewed, failure to manage these issues not only created impediments to growth, but also often led to a reduction in firm size. Often, this was due to the fact that business owners felt more comfortable with a staff size that they could directly manage without outside assistance. Figure 10 demonstrates the growth pattern that companies reported during interviews and focus groups. It emphasises that growth is rarely steady and predictable, but rather companies reach particular stages of development at which they stagnate, retract or expand to the next plateau. The steps in Figure 10 also attempts to capture the points at which businesses interviewed reported as critical milestones. © Australian Interactive Media Industry Association Page 37 of 64 Figure 10 Business Growth Plateaus Reported by Companies BUSINESS GROWTH PLATEAUS NO. OF EMPLOYEES 50+ 15-20 7-8 1-3 Expected Actual TIME “I’ve been up to the 20 staff level and decided that around 7 or 8 was as many people as I could manage directly, and where I could guarantee quality control.” - Melbourne focus group participant “It’s not about conquering the world, it’s about getting to a reasonable size in the business to do great work and be proud of it. It’s also about working with great people and running a profitable business.” - Focus Group Participant, Sydney While these are no doubt generic business issues, there are a number of factors that heighten impacts in the digital content industry. Firms interviewed tend to: • Have a culture of contract staff, providing a bank of talent that can be turned on and off, providing little incentive for companies to commit to full-time personnel. This fluidity of personnel involved in the industry also means that it is more difficult for businesses to retain and re-use knowledge and experience (internal intellectual property) from project to project Rely heavily on creative input, and are necessarily more resistant to most industries to the introduction of processes Experience a `feast or famine’ environment. This is particularly true in industries such as film and games, which are highly susceptible to global market conditions Be small, making the introduction of formal standards and processes for information exchange more ad hoc than systematic • • • © Australian Interactive Media Industry Association Page 38 of 64 The smaller the company, more volatile the sector, the more reliant on contractors A feature of the digital content industry is the heavy reliance on contractors. The contractor model is seen to: o o Reduce risk, and exposure to cash flow issues, increasing flexibility in being able to respond to ebbs and flows in industry Allow companies to obtain specific skills for projects, including specific technology that is often contracted with the personnel “The fluctuating nature of the business we get requires specific skill sets. Plus the time and paperwork associated with setting up full time employees means that it’s just not worth it. And when the project’s over, you can’t get rid of them and you’re stuck with the overhead. Get a much higher level of candidate with contractors as well. That’s also how the guys want to work – they want the freedom.” - Focus Group Participant, Melbourne A small number of businesses interviewed preferred to employ full time staff as a means of retaining systems knowledge and maintaining company stability and security. A Brisbanebased digital content developer reported problems with contractors taking his code and passing it on to competitors. © Australian Interactive Media Industry Association Page 39 of 64 6. Idea Generation Commercialisation and Sales (Customer) Idea Generation Application Development The phase of idea generation relies crucially on the creative process, itself relying on creative, as well as other skills. This chapter focuses on issues relating to skills, intellectual property development and the source of ideas. 6.1 Creative skills are the hardest to find – and easiest to lose Overall, a quarter of the industry indicated difficulties recruiting staff, rising towards a third amongst the larger entities and those producing software. Those who experienced difficulty found creative skills and then management skills the most difficult to find. • • • • • Design/creative Management Marketing and sales Software development Finance 48% 37% 30% 22% 9% Extrapolating these figures at an industry-wide level, as many as one in eight companies has experienced difficulty recruiting design/creative personnel. Focus group participants and interviewees strongly reinforced the survey finding. They also suggested that while staff recruitment tended to be more problematic than staff retention, this was less true of creative and design staff. In particular, the danger of losing design and creative staff to overseas firms was very real, particularly in the computer games, animation and visual effects sectors. The attractiveness of overseas jobs included higher rates of pay – up to four times higher in some sectors – and the opportunity to work on leading edge projects. “The best talent always wants to work on the best project. There is a risk that if we cannot source interesting, cutting edge things to work on – or that Australia cannot attract those kinds of project – we will find it increasingly difficult to keep talent here.” © Australian Interactive Media Industry Association Page 40 of 64 - Animator, Sydney “Ours is a very difficult industry to recruit in. Our ideal candidate has a mix of arts, psychology, design and IT background.” - Animation and visual effects company, Adelaide Despite difficulties in recruiting and retaining, companies suggested that a key benefit of hiring creative talent was the fact that in general good creative people enjoy working as freelancers. A number of interview subjects suggested that far from being a disadvantage, the freedom, flexibility and creative variety offered by freelancing was attractive to creatives. This may contribute to the mobility of creative talent, and the high rates of migration overseas. “We just don’t have the skilled people here to do the work” - Focus Group Participant, Sydney “We are in danger of not being able to grow unless we go offshore to do it” - Focus Group Participant, Sydney A number of interviewees however, particularly those in post production, believed that there was a skills glut rather than skills shortage for all but the most specialised, highly sought after talent. 6.2 Creative people are hardest to manage and most resistant to processes A common difficulty experienced by companies, particularly those managing growth, is the cultural difficulty associated with management of creative staff and processes. Company owners recognise that creative input is one of the most important – if not the most important – inputs. However, a number of challenges exist in balancing business goals and reporting obligations on the one hand, with maintenance of staff morale on the other. Challenges include: • • • Instituting more formal processes to manage the creative process Convincing staff members that process is not the enemy of a `fun’ and dynamic workplace culture Encouraging creative graduates to spend the appropriate amount of time on a creative task, rather than over-investing Processes and systems were sometimes not put in place for fear of for damaging the creative culture within an organisation “We are struggling with putting formal processes in place at the moment. We started out as a company of young people and we prided ourselves on the fact that the environment was relaxed and that’s how we wanted to work. But we have outgrown that approach, and we are coming up against some internal resentment to new systems.” - Interactive advertising company, Melbourne The opposite was found to be true in the experience of one Perth company, whose representative described the difficulties with process as a `myth’. “In my experience, the only creatives that do not like formal processes are the ones that do not have talent. Good creatives like process because it’s a way to remove extraneous things from their plates, and allows them to focus on what they are good at. Systems and creativity should go together.” © Australian Interactive Media Industry Association Page 41 of 64 - Focus group participant, Perth Company interviewees said that while technical skills were comparatively easier to find, those with appropriate and high quality technical skills were in shorter supply. This particularly applied to graduates from university or TAFE with software aptitude but little else.18 New graduates required intensive input from employers to understand timelines and quality requirements, as well as specific software packages in many cases. This imposed a considerable burden, particularly on smaller companies. The survey did not suggest the same emphasis on creative skills, indicating that companies required greater opportunities for a range of skills, as set out below, where all but finance are clustered around similar levels of demand. • • • • • Design/creative Management Marketing and sales Software development Finance 29% 26% 24% 24% 6% Only 20% of survey respondents said there were no job roles requiring further training, and almost 10% could not say in what areas further training opportunities were required. 6.3 Ideas are generated internally, and generally not supported by formal processes Most ideas for new products and services are sourced internally, rather than in collaboration with customers and third parties including universities and intermediaries. Companies are more likely to source new ideas from the Internet or magazines/journals than from their customers or clients. Figure 11 Source of ideas reported by companies in the survey Sources of Ideas Internally, among staff or executives Internet Books, magazines or journals Clients, customers Industry (IT/Media/Music/Advtg etc) Competitors Conferences Overseas Universities or research orgs. Word of mouth Other 4% 3% 4% 4% 3% 3% 9% 9% 7% 5% 4% 7% 8% 13% 12% 11% 8% 6% 14% 24% 16% 9% 0% 5% 10% 15% Other Source 20% 25% 30% 35% Main Source 18 This is discussed in more detail in the following chapter. © Australian Interactive Media Industry Association Page 42 of 64 Several companies mentioned that working with customers on new ideas was potentially problematic, and that a buyer/supplier relationship was safer. A Perth post production company said that collaborating with one of their customers on a project ended poorly. “Because we were partnering with a client, it made it difficult to criticise and provide any negative feedback on the creative, in case it ruined the relationship.” The reluctance to work with clients on idea generation was not universal. An eLearning company from Hobart used formal surveys to guide product development, and worked actively with customers to generate modifications to products and services. The result of the company’s first survey of potential customers was used to select its first 10 titles for development. An Adelaide interactive multimedia company described the idea generation process as “a series of common client requests”. Client feedback was sought before ideas were taken to the next level. This was also the case with a Brisbane-based content producer, which discussed its ideas for potential new products openly with customers “earlier rather than later”. Companies in focus groups and interviews spent considerable time on new idea generation. Even comparatively small companies (<10 staff) had staff that worked full-time on research and development. For other companies, a percentage of the week or month was set aside for idea generation for the development of new IP - i.e., non-client work. “We try to spend about 20% of our time on non-client work.” - Focus group participant, Perth “One of the challenges for us has been spending the right amount of time on the development of our own IP. When the business started, before we knew better, we used to spend 50% of our time on client work and the other half on our own IP. The net result of all that work was a 10-episode deal with the ABC where they paid us $1000 an episode. We now spend about 20-30% of time on our own IP.” - Producer, Brisbane © Australian Interactive Media Industry Association Page 43 of 64 7. Application Development Commercialisation and Sales (Customer) Idea Generation Application Development Turning ideas into applications with commercial potential raises a number of issues around the different models used to derive revenue from IP, the protection of IP, and technical, as opposed to creative skills. Raising finance to support application development is also considered. 7.1 IP that results in improved ‘processes and tools’ is more common that IP that leads to ongoing revenue The majority of IP developed by companies does not generate external revenue. Only 25% of companies surveyed claimed to earn revenue from IP last year, with this group over-represented by companies in the software development and music/audio production sectors. Few Australian games development companies earned money from their own IP, but rather were commissioned by publishers to undertake projects. In this case, and many others raised as part of the interviews and focus groups, IP developed by companies is was more likely to be used to generate internal efficiencies and reduce the cost of future developments. “We are in an industry where if we can extract an extra 10 per cent of efficiencies out of a render farm that’s a massive saving for us. Contractually we always separate our IP (and) ring fence anything that will give us efficiencies in the future.” - Focus group participant, Sydney Several reasons for this emphasis on internal reuse were suggested: 1. Development of applications to assist in refining internal processes often occurs naturally, and as part of an existing project. This was particularly true in post- © Australian Interactive Media Industry Association Page 44 of 64 production, where companies commissioned to create a particular effect for which no off-the-shelf tool was available were able to use them on other projects. 2. Development of applications for ongoing revenue, including products that can be licensed, required a deeper understanding of the intended market. 3. Development of IP/applications with potential for ongoing revenue was rarely `sponsored’ by a client. As such, IP developed for ongoing revenue was seen as higher risk because the developing company had to bankroll the development work. 4. Slightly less important, though noted by some interviewees and focus group participants, was the fact that IP developed for internal purposes was more easily protected, and not necessarily through formal means. “We don’t produce software such as IP say, but we have strategic processes in place that are tremendously valuable to us – that’s our IP.” - Focus group participant, Sydney “Most production houses are developing their own tools and process to enable them to be more effective.” - Focus group participant, Sydney 7.2 Companies want to move away from fee-for-service projects A clear aspiration for service providers is to generate IP that creates ongoing revenue streams. This is seen as a solution to managing the peaks and troughs present in project work, and to assist in building and managing cash flow. The vast majority of companies interviewed – most of them defining themselves as primarily service providers - had strategies in place to develop applications that they intended to license. The applications ranged from software programs, to animated characters and tools. “You could say in the early days we were a vendor for hire, someone needed a TVC or a shot. We’ve got four projects we are developing internally, we’ve established relationships with the major studios and looking to finance projects offshore.” - Focus group participant, Sydney “(The) service side is fraught with dangers of going over budget. For us it’s all about the product side of the business… where there are greater margins.” - Focus Group Participant, Sydney Few firms felt they had got the balance right on IP development. Most content creators suggested they had to undertake fee-for-service work to `pay the bills’. Service providers wanted to create content to generate ongoing revenue to create additional certainty. An Adelaide post-production company interviewed established a spinoff venture to commercialise IP that had been developed as part of its client work. Products that it has commercialised include software, a colour management tool and a remote reviewing tool. A major driver for establishing a separate company was to create a structure to better protect IP, which they defend primarily through patents. A number of companies involved in service provision said they found it easier to protect IP such as source files. This was particularly true in the post production sector, where companies can protect some renders, source files, models and tools to create internal efficiencies. © Australian Interactive Media Industry Association Page 45 of 64 “In the early days, you had to give everything away…. They ‘bought the car, and expected to get the factory and the blueprints as well. Now, it’s a little bit different, but it depends on the product and client.” - Focus group participant, Sydney Figure 11 depicts where service providers and content creators would like to be in coming years. In both cases, companies would like to rely less on fee-for-service work. Figure 11 Current and desired revenue generation REVENUE SOURCE (CURRENT VS. DESIRED) High Reliance Service Providers Current Situation Desired Situation FEE FOR SERVICE Service Providers Content Creators Low Reliance Low Reliance Content Creators OWN IP High Reliance Companies found it difficult to quantify the proportion of effort allocated to application development over idea generation. However, most said they had informal processes in place to guide development work of IP. Brisbane content producer’s idea screening process Four key questions need to be answered: 1. What does the network say? 2. What is the audience for this – and are we developing a product for the audience, not finding an audience for a product? 3. What is the potential for export? Australia is not big enough to on-sell anything, so will we be able to make a buck elsewhere? 4. What is the competitive offering? Can we compete, who is doing it already, and are we really unique? A typical process for assessing the potential of a new idea, as tested in interviews and focus groups, was to conduct: • An initial assessment of the market for a product, usually done through conversations with customers or industry peers, and desk research, occasionally including attendance at an international trade fair © Australian Interactive Media Industry Association Page 46 of 64 • • • Analysis of potential competitive offerings An assessment of the time and effort that would be required to undertake the application work, including availability of skills internally to complete the work The export potential of an idea 7.3 IP protection is still a ‘grey area’ One in three (32%) of companies surveyed claimed to have had difficulties protecting their IP. Of those who experienced difficulties, over 40% described the problems they experienced as serious, with 20% describing those problems as “very serious”. Those who experienced difficulties were more likely to be in communications/marketing and design services, or to produce software and print publications. Abuses of IP came from a number of sources, according to companies interviewed, including competitors, contract staff and clients. In the case of competitors, companies said that abuses generally arose because a company lacked the resources to defend IP rights. Despite this, most companies agreed that the price of patenting was rarely worth it. “I don’t think it’s worth it to be honest (patenting). One it costs you a lot of money and two it’s probably useless if you don’t have a lot of money behind you. Unless you are stacked with cash.” - Focus group participant, Sydney In the case of staff, contractors were a particular concern for potential breaches of IP. A number of companies said that a motivation for hiring full-time, permanent staff was the reduced risk of IP ending up in competitor hands. Companies interviewed believed that IP was just as likely to be stolen by customers, as by competitors or staff. Amongst the specific examples mentioned was that of a Sydney based consulting firm specialising in digital content, which had recently defended a breach by a UK customer. In this case, the customer provided the Sydney company’s processes directly to a competitor that had agreed to do the job for a lower price. “We took a client in the UK to court. We have strategic processes in place that are incredibly important to us. A client in the financial sector in the UK decided they didn’t like the outcome, and took our processes and gave them to a competitor. We won…and we lost money on it.” - Focus group participant, Sydney Companies reported a general lack of understanding about IP, including: • • • What steps can be taken to protect IP, excluding basic copyright The value of protecting IP, versus the pay-off The defensibility of IP rights, including financial implications of mounting a defence These issues tended to be better handled by larger, and more experienced companies. Those in post-production, for example, suggested that they had become much more savvy about negotiating ownership rights of elements of a product with clients. According to company owners of larger companies, less mature companies tended to be less likely to firmly insist on IP rights for source files and masters, as they needed the revenue, and did not understand what they could fairly insist on. © Australian Interactive Media Industry Association Page 47 of 64 “We now ring-fence anything associated with that (IP) upfront (with clients) so that we don’t have clients coming back to us… wanting the models that they haven’t negotiated up front.” - Focus Group Participant, Sydney A high number of companies interviewed suggested that aside from basic IP protections, such as copyright over master copies, source files or images, the most effective strategy for companies was to divert energy that would have been spent on IP protection into innovation. Given companies did not think they could defend their IP, the next best approach was to stay ahead. “If someone is going to screw you over, they’re going to do it. It’s just one of those things. The only way to win is to be out in front of the market.” - Focus Group Participant, Sydney “You can’t really protect yourself in this game. All you can do is have the best quality content, and be in the market at a fair price.” - eLearning company, Hobart 7.4 Observations about technical staff and skills While the idea generation process was the domain of the creatives, the application and development process was the domain of the technician. Technical skills varied widely from industry to industry, and from company to company, though there was general agreement on a number of issues. University and TAFE graduates Findings from this study reinforced a key sentiment that technology students from university institutions are frequently not industry ready and require further specialised training, as previously identified19. Universities, and TAFEs in particular, were not considered to produce students with sound technical, creative, business or team skills. Graduates were viewed to have been taught a range of software packages – some of them out of date – and required intensive on the job training to reach an acceptable minimum standard. Several companies recruited fine arts graduates, rather than multimedia graduates, on the basis that creative skills could not be easily learned but technical ones could. The argument used by these companies was that intensive training was required for technical graduates, so investing in a broader skills set at the outset was more sensible. As was noted previously20, there is a question as to whether universities and TAFEs should be expected to perform this role. Companies felt that graduates tended to over-estimate their own capabilities and had not been adequately prepared for the fact that technicians needed more than software competence to be effective team members. Graduates rarely had the requisite project skills – including deadline sensitivity. “When graduates come out of university, they want to tweak everything to death, when we need them to pump the work out.” - eLearning company, Hobart 19 20 2004 (a), DCITA Creative Industries Cluster Study, Volume 1: Producing Digital Content, Canberra, pg 38. 2004 (a), DCITA Creative Industries Cluster Study, Volume 1: Producing Digital Content, Canberra, pg 38. © Australian Interactive Media Industry Association Page 48 of 64 Some exceptions were noted, particularly the standard of graduates coming out of Griffith University’s three-year multimedia course. The fact that the course offers students practical work experience with companies for 6 hours, 2 days per week for 6 weeks, prepares people ‘who have a great ability to meet deadlines’. This was cited as a critical success factors for new graduates. Notwithstanding that training, the course controller was seen as the single most important element in ensuring job-ready, high quality graduates. Experienced technicians are difficult to find A number of companies indicated they had turned to importing international skills on a contract basis. This was particularly true for projects that required either rapid up scaling, or required highly specialist skills. In response to this, an Adelaide visual effects company established its own traineeship program for university graduates. The program enabled them to get access to quality talent, at a reduced cost. Companies in the post production sector were particularly concerned about the intensity of global competition for top technical talent. “Visual effects team leaders who earn $120-140k here can jump on a plane, land in LA and earn four times as much – after all they’re facing the same skills shortage that we are.” - Focus Group Participant, Sydney” 7.5 Finance for application development is difficult to source externally The high cost of development was exacerbated by the frustration and difficulty sourcing working capital at this stage of the process. These difficulties were described in detail in a report prepared for DCITA21, and were in part due to the absence of comprehensive revenue and market data. The report suggested it was more difficult to source external funding for businesses, than for specific projects, a fact confirmed in interviews. One specialist in venture capitalist interviewed for the project said that the reason for under-investment in this industry was straightforward: the risk profile was not attractive. He suggested that despite suggestions to the contrary, the main issue in Australia was not a lack of capital – Australia has the fourth largest pool of funds under management of any country in the world – but rather the inherently risky nature of digital content businesses. “The Australian financial market is not geared up for investment in the digital content industry. For every Working Dog Productions that succeeds, there are 100 that fail. Investors look carefully at these odds in making their investment decisions. The reason that projects – rather than businesses – are more attractive for external investments is that they provide a means by which investors can spread the risk across a portfolio, rather than being dependent on the success of a single company.” - Venture capitalist Companies interviewed were almost universally resigned to having to source development funds internally. A Hobart eLearning company said they were currently seeking private sector funding of $400,000 for a project, but recognised that this amount was ‘under the 21 2004 (a), Creative Industries Cluster Study Volume 1, Canberra, pg 37. © Australian Interactive Media Industry Association Page 49 of 64 radar of most venture capitalists’. The company, however, was confident that it would be able to secure the amount from a consortium of private contacts. One company interviewed suggested that the best time to secure funding in the digital content industry was during recessions, when more conservative options such as the share market and property were less attractive to investors, though this view was isolated. For those without well-funded contacts the options for funding were limited. This was particularly true for content creators that relied heavily on a small number of potential investors. A Queensland producer that had dealt extensively with TV networks over a long period was exploring a new avenue for funding: telecommunications companies. By focusing on producing content for the mobile medium, the company hoped that it would be able to secure development funding, on an equity-sharing basis, from a telecommunications company that it had been in discussions with. “The industry should be more attractive than it is, but at the end of the day people who make decisions about investments aren’t necessarily the ones that know much about what we do. I don’t know whether we will ever get to the position where we are mainstream in the eyes of super funds and venture capitalists” - Games company, Melbourne The reliance on internal funds by digital content companies was confirmed by the survey results, which showed that funds were sourced from: • • • • • • Retained Earnings Owners Funds Bank Loans Financing through forward sales External investors Government funding 65% 34% 18% 14% 11% 10% The view of investors was that much of the digital content industry, like its analogue publishing counterparts, is difficult to make money from, and this was the initial constraint in funding. The difficulties were exacerbated by the relatively immature state of the institutions supporting risk capital for the digital content industry in Australia. Figure 12 Source of funds reported by companies in survey Sources of Funds (Business Entities) 70% 60% 50% 40% 30% 20% 10% 0% ed O w ne rs 'f un ds Lo an s st or s en tF un di ng Ea rn in gs Sa us te rn al In ve Ba ar R et ai ne d Fo rw G ov er nm Ex D on 't k nk R ef d no w le s © Australian Interactive Media Industry Association Page 50 of 64 Access to government funding Approximately 10% of all surveyed companies indicated that they received some sort of government funding. Companies with annual turnovers of less than $100,000 were more likely (16%) to have received government funding. Though comparisons with other industries have not been found, it is likely that this level of access to government grants and assistance as a source of business funding is relatively high. Of surveyed companies that indicated they received government funding: • • • 9% indicated that they had received funding from the Export Market Development Grant or other export assistance. These companies tended to be younger enterprises, and those operating in design services and software production. 7% had received a Research & Development Tax Concession. These recipients tended to operate in design services and software production. 4% of companies indicated that they had received ‘AusIndustry grants’. Grants and assistance from government received by companies Figure 13 Received Government Grants/Assistance 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Export Development/Assistance R&D AusIndustry Other Grants Approximately 17% of surveyed companies said they had received some other government grant or investment, i.e., excluding export assistance, R&D tax concessions or AusIndustry grants. Further testing in interviews revealed that companies sourced government assistance from a range of agencies, and from multiple tiers of government. Content creators indicated a reliance on government funds to assist with production costs. These included companies in the film sector, through the Film Finance Corporation, the eLearning sector, through The Learning Federation and television production sector, through SBS and the ABC. The Learning Federation was seen as a particularly important government initiative as it provided not only the funding required for project development, but also performed a leading role in setting industry standards. The Film Finance Corporation’s model of using industry professionals on secondment was seen as an effective model. The IIS program was also mentioned by several companies as being worthwhile, as was the case for the SMART program that encouraged collaboration between companies and universities. © Australian Interactive Media Industry Association Page 51 of 64 For service providers, the range of government programs accessed was extensive. A number of companies cited FIBRE as a particularly important initiative in the post production sector. Investors cited the Innovation Investment Fund (IIF) as a good model, and noted that the Commonwealth Government is currently reviewing the program. This may relevant for consideration by SILG in compiling its report. State Government programs were seen as a valuable source of support for companies looking for assistance with general business development programs. These include a range of programs offering assistance for business planning and export planning. Grants programs that were identified as valuable by one or more companies interviewed included: • Facilitation assistance, particularly introductions to other members of the local industry, was mentioned regularly. The assistance provided by the South Australian government was highly praised “Getting in touch with the South Australian Government was a great way for me to meet people in the industry and get networked quickly.” - Television producer, Adelaide • Multimedia Victoria’s game developers kits, which have since been replicated by the Queensland Government, have provided critical infrastructure to games development companies that could not have afforded the infrastructure independently Sponsorship to attend overseas trade fairs • An area of dissatisfaction among interviewed companies and those attending focus groups was the Austrade business model. The agency was seen to provide companies with a potentially valuable network and suite of services, but most felt that the fee-forservice model did not work and that Austrade did not really understand, or recognise the challenges faced, by the digital content industry. “Austrade are only interested in helping companies with ‘crating and freighting’ tangible products – that’s just not what we do! I need to travel overseas to get in front of customers and sell our services. But Austrade indicated they weren’t interested in paying for my holiday.” - Sydney focus group participant 7.6 Sources of technology when developing applications The issue of technology dissemination and diffusion is of particular interest to Australian Government policy makers. When sourcing technology to support the development of digital content applications, the majority of companies interviewed said they turn to technologies and know-how that already resides, or can be further developed, in-house. “Everything here is pretty much developed in-house.” - Interactive multimedia company For some, this inwardly-focused approach to leveraging new technologies when developing applications is driven by client expectations that in-house expertise and technologies already exists. With that, comes a lack of willingness by clients to pay for it. “Our clients don’t have the budget to allow… exploratory or consultative support. We © Australian Interactive Media Industry Association Page 52 of 64 have suggested technology support in the past, and have been asked why we don’t have the expertise in house to fulfill these requirements, which is their way of laughing us out of the boardroom.” - Interactive multimedia company However, a smaller number of companies actively search for new technologies and cutting-edge thinking. For example, one visual effects company with offices in two Australian State capitals, cited the importance of attending international conferences and participating in special interest groups as a way of keeping up-to-date with cutting edge technologies, and gaining access to intellectual property (like concepts, mathematics, theories, applications and codes) that can be built upon to develop their own applications. “Intellectual property mainly flows into the visual effects industry through SIGGRAPH (the Association of Computing Machinery’s Special Interest Group on Computer Graphics and Interactive Techniques). Algorithms published in SIGGRAPH papers allow us to make our own (visual effect) applications. Three feet worth of papers are published (by SIGGRAPH) ever year – it’s amazing what you can find.” - Visual effects company The visual effects company recently built upon algorithms published in SIGGRAPH papers to create: • A realistic water flow and seascape for the crash landing of a space shuttle in the feature film “The Core” • A realistic fire simulation for a scene in “Harry Potter’s Goblet of Fire”. Information & Technology Dissemination via Special Interest Groups A special interest group of the New York-based Association of Computing Machinery, SIGGRAPH’s mission is to promote the generation and dissemination of information on computer graphics and interactive techniques. Members include researchers, developers, and users from the technical, academic, business, and artistic communities. SIGGRAPH holds an annual conference on leading-edge theory and practice of computer graphics and interactive technique, aiming to a provide unique crossroad for a diverse community of researchers, developers, creators, educators, and practitioners. www.siggraph.org A number of companies interviewed said they had re-used a technology or application to meet the needs of clients across multiple industry sectors. In fact, some companies, particularly those in the interactive multimedia sector, felt their technology was applicable to any industry. “We reuse strategies and code blocks all the time. For example, we have used our viral strategies and re-skinned products to sell Men’s Skin care, 4WD’s, and Xbox games.” - Interactive Multimedia company “Our media platform is a facility that coordinates all media and information transactions, irrespective of size, number or what industry our client is in.” - Interactive Multimedia company © Australian Interactive Media Industry Association Page 53 of 64 Others have made a conscious business decision, when cashflow permits, to focus on servicing clients in only one industry. “While we did once re-purpose one of our tools to create an architectural visualisation of a building… we needed the cash… generally we are very focused on keeping our core business up and try not to pursue projects off topic.” - Visual Effects company Further, the majority of companies were unaware of their clients taking a particular technology or application that they had developed to use it for a purpose beyond its original intention. “We deliver a sequence of images. We don’t deliver the end technology. Clients seldom ask for the digital assets and models behind a scene to use or re-use later on.” - Visual Effects company © Australian Interactive Media Industry Association Page 54 of 64 8. Commercialisation and sales Commercialisation and Sales (Customer) Idea Generation Application Development To survive and grow, companies need to sell their IP into markets. This raises issues around the nature of the markets being sold into, channels to those markets and marketing as well as technical skills. 8.1 Customers have rapidly become more sophisticated in the digital content industry One of the most consistent observations, regardless of sector, was that customers had become more sophisticated in what and how they procured. This was particularly true of the interactive multimedia sector. Focus group participants attributed the growing sophistication to improved understanding of how technology relates to business issues, rather than of technology itself. Key observations about the customers included: • Customers are more educated about digital content The `mystery’ surrounding digital content, in some senses, protected the industry for a period. According to interview subjects, up until approximately two years ago there was comparatively little understanding from customers about available technologies, their limitations and the development process. Customers, many of them former developers and technicians themselves, are more sophisticated about both the technology and processes options available. While increasingly educated customers were more sophisticated negotiators, and thus put greater pressure on margins, many firms said this had created a more certain, clearly scoped environment for developers. © Australian Interactive Media Industry Association Page 55 of 64 • Customers place a greater value on the role of digital content (and new media) in the marketing mix A source of optimism for companies was the fact that the digital content’s role in the marketing mix was now firmly entrenched. Apart from the establishment of an Internet presence, which companies recognised as a business imperative, there was a period where digital content applications were seen as an add-on and luxury. In the development of marketing campaigns, for example, viral marketing via the Internet and interactive advertising were not considered mainstream. Increasingly, the presence of an online component to the marketing mix was seen as a benchmark for the sophistication of a marketing strategy. All companies did not share the observation that customers generally placed a high value on the importance of digital content. Participants in the Sydney focus group from the interactive multimedia industry, in particular, felt that they constantly had to justify the value of their product. It was a battle they often lost against traditional advertising mediums such as television advertising, which had more advanced, and readily accepted metrics for reporting on advertising effectiveness. “I find it difficult today to convince clients of the value of digital content. They are still prepared to pay $2m for a campaign, but they quibble over the price of a website at $20K.” “Measurability of offline advertising medium is just not there. We can’t compete with the smoke and mirrors of the traditional advertising industry.” “The revenues to be gained from online media buying are virtually non-existent (compared to television advertising), so there is no incentive for media buyers to use the medium.” • Customers are increasingly prepared to pay for quality Companies interviewed almost unanimously agreed that customers were increasingly willing to pay for high quality and value. This was attributed to the fact that: • • Customers generally had a greater appreciation of what represented quality The gap between perceived low and high quality had widened, particularly in the Web development space where first and second generation products were conspicuous 8.2 Product-based companies prefer to distribute products directly to customers Surveyed companies producing products overwhelmingly indicated `direct to the customer’ was the most often means of distribution. Far fewer companies used third party distributors and/or related distribution arms. © Australian Interactive Media Industry Association Page 56 of 64 Figure 14: Preferred distribution method of companies indicated in survey Distribution Methods 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Direct to customers Through third-party distributor Through related distribution arm 8.3 Exports are an important source of revenue for the industry Almost half of all survey respondents indicated that they exported their products and services. Those who exported employed more people and had higher turnovers, particularly those in the $1-5m turnover bracket. Qualitative evidence suggests the sector in which a company operates is a key determinant of export propensity. The games industry, as an example, earned almost all of its revenues from exports. This was increasingly true of the eLearning sector, which was particularly focused on the UK market where a major tranche of government expenditure on eLearning products and services was recently announced. Of companies that sold products and services overseas, exporting typically accounted for about 18% of their turnover. Few companies (2%) exported exclusively. Most companies (58%) indicated exporting accounted for 10% or less (including 40% accounting for 5% or less). Figure 15 Proportion of company revenue derived from exports 25% 20% 15% 10% 5% 0% 10 % 15 % 25 % 33 % 40 % 98 % 60 % 85 % 92 % 70 % 1% 3% 5% 7% 10 0% % of Export Revenue © Australian Interactive Media Industry Association Page 57 of 64 The main export destinations are the US and Europe The most common export destination cited was Asia, followed by Europe and North America. On average, companies appear to export to two locations or more. Figure 16 Main export destination for companies in the industry North America (23%) Europe (26%) Asia (33%) MEA (5%) South America (1%) Oceania (11%) Worldwide (1%) The key locations within each of these sectors were specified as: Region No. of mentions Most mentioned specific country Singapore Japan China Hong Kong U.K. U.S.A New Zealand South Africa No. of mentions Asia 217 Europe North America Oceania Middle East & Africa South America “Worldwide”/“Global” Don’t Know/Refused • 169 153 71 30 7 9 2 26 21 21 17 84 126 62 15 - Those that do not export do not know where to start Among the companies that do not currently export, a number suggested they would like to. Reasons why companies were not exporting, based on interviews and focus groups, included: Fears about the ability to adequately protect IP was perceived to be more real if a company was operating in a global market © Australian Interactive Media Industry Association Page 58 of 64 “Our first export deal was in the Middle East and it was quite gruelling - the whole contract negotiations made it more difficult without face to face. In hindsight we were probably over cautious at the start and at the end not cautious enough.” - Sydney focus group participant Difficulties assessing international markets, and particularly being able to get a granularity of detail that enabled them to proceed into a market with confidence “I would love to have information about the real buying conditions overseas. Things like Korea is buying children’s content at the moment would be really helpful, but I can’t keep a finger on that many pulses.” - Developer (multiple platforms), Brisbane Difficulties securing on the ground support, including sourcing distributors and people who could `vouch’ for a potential customer or partner The quantitative survey showed that the majority of companies feel ‘better access to export markets’ would most assist them grow their organisation. This was followed by more capital and government assistance. Figure 17 Requirements for growth reported by companies in survey Requirements for Growth 30% 24% 23% 15% 5% 4% Better Access to Export Markets More Capital Govt. Assist. More/Better Training Don't know Nothing 8.4 Lower barriers to entry are driving increasing competition at the low end of market Until recently, the most effective barrier to entry into the digital content industry was the high cost of technology. Even projects of small scale required significant up-front investment and constant refresh. While this remained true at the mid-high end of the market, it was not for all projects. Examples include the production and post-production of digital images (still and moving) for the Internet, inexpensive television advertisements and basic multimedia applications for the Web environment. As a result, companies were experiencing hyper-competition at the `low end’ of the market, which was fragmenting as sole operators established themselves with consumer-grade technologies. The effect of this was two-fold: © Australian Interactive Media Industry Association Page 59 of 64 • • Companies are consciously trying to move up the value chain. This enables them to avoid price-based competition and provides them with a greater chance of working with more sophisticated customers (and achieve greater certainty that they will be effectively procured), and Two clear classes of outputs are emerging – commoditised, low value outputs and customised, high value outputs. 8.5 Marketing and management skills are in demand Despite companies suggesting that creative staff were the most difficult to find, it is clear that commercial, marketing and management skills are also in short supply. Most company owners interviewed as part of the project indicated that they were responsible for management of the business. In some cases, this role was limited to strategic management, but often, particularly smaller companies, it extended to operational management. The need for management talent was most acute when companies were experiencing growth, and where staff numbers reached critical points as set out in Figure 10. A number of companies interviewed suggested they had resisted appointment of specialist business personnel because they: • • • Were concerned that they may lose control of the direction of the business Found it difficult to find someone with a combination of appropriate business skills and understanding of the unique qualities of the industry, including a reliance on creativity Were unable to offer a full-time position which was demanded by business management professionals, unlike creatives In the quantitative survey, a number of companies indicated an interest in more training opportunities for management (26%) and marketing and sales personnel (24%). For one Melbourne computer games company, project management skills – rather than business management skills – were in greater demand. The role required the ability to understand technical, creative and project management disciplines, as well as a good work ethic. This was echoed by other companies in interviews, particularly those in sectors facing extreme deadline pressures such as film production and post production, and interactive multimedia development. 8.6 Technology diffusion and adoption is rapid and regular Technology diffusion describes the way and pace at which technologies are adopted. This area has been the subject of extensive research and there is general agreement that the technology diffusion process can be graphically depicted by a `technology adoption curve’, as shown in figure 1822. 22 Everett M. Rogers, Diffusion of Innovations (5th Ed), 2003 © Australian Interactive Media Industry Association Page 60 of 64 Figure 18 Traditional distribution of technology adopters TECHNOLOGY ADOPTION CURVE Innovators Early Adopters Early Majority Late Majority Laggards TIME Companies interviewed as part of the project said that the technology adoption curve indicated in Figure 18 is generally true of the digital content industry. A number of companies indicated that their strategy was to adopt technologies early, taking advantage of the price premium they could command from customers and differentiation they could achieve. Innovative adopters of technology tended to make significant investments in `speculative’ technologies to remain at the leading edge of their respective sectors. The vast majority of companies interviewed as part of the project indicated that the decision to invest in a new technology was rarely speculative. Rather, the decision was taken to adopt a technology once the innovators had proved the technology – or when a customer demanded it. For some companies, investments in new technologies were delayed as long as possible. The final group of adopters – fitting the profile of the laggards in Figure 18 – were generally smaller in size and encouraged to make investments in new technologies once the unit price had dropped significantly. As described in previous chapters, the low cost of maturing hardware and software has provided companies with the ability to develop and refine content to a quality standard to satisfy some customers. This is particularly true in the interactive multimedia sector, where companies with relatively inexpensive equipment are able to satisfy less quality conscious customers. Although the general pattern of adoption in the digital content industry is consistent with the curve depicted in Figure 18, two clear differences exist: 1. 2. The pace of technology diffusion is more rapid for this industry New or disruptive technologies arrive more regularly in this industry than for most others Diffusion tends to be more rapid in this industry The time it takes for a technology to move through the adoption cycle tends to be accelerated in the digital content industry, as shown in Figure 19. While it cannot be quantified, companies suggested that it took as little as a few months for new, critical technologies to be widely diffused. An example of this is the software required for postproduction, which few companies believed they could ignore for any length of time without impacting on their bottom line. © Australian Interactive Media Industry Association Page 61 of 64 Figure 19 Distribution of technology adopters in digital content industry TECHNOLOGY ADOPTION CURVE Innovators Early Adopters Early Majority Late Majority Laggards TIME Normal Digital Content Industry Interviewed companies indicated that there were two reasons for this effect: 1. On the demand side, companies interviewed said that customers placed a high value on quality, which created significant demand for new technologies. According to companies, there is a high correlation between the quality of the end product or service and the sophistication of the technology used. “If you get the right customers, they are definitely prepared to pay the dollars for quality.” - Sydney focus group participant 2. On the supply side, digital content industry companies are organised in a way that allows for rapid diffusion of technology. In particular, the ability to tap into highly specialised, mobile skills available through the large contract workforce enables technology, and the skills required to exploit it, to be accessed quickly and easily. The contract workforce enables companies to secure specialist skills at a variable cost. “The nature of our business (means) we require specific skill sets… (and we) get a much higher level of candidate with contractors” - Focus Group Participant, Melbourne Interviews also indicated that companies within the industry have a preparedness to refresh technologies regularly. This is driven by the fact that technology is central to content creation and service provision in this industry. As a result, companies operating in the industry recognise that regular, and probably significant, investments in technology will be required to remain competitive. Disruptive technologies arrive more regularly in this industry Digital content companies, and their customers, use new technologies as a key point of market differentiation. This has a significant impact on the industry by forcing companies to keep up with `generational’ changes to formats, platforms, software and hardware. Companies suggested that one of the greatest challenges in the industry is the requirement to anticipate and quickly diffuse technologies. © Australian Interactive Media Industry Association Page 62 of 64 “There seems to be a format change every (few) years in this industry that you can’t ignore. It’s usually a balancing act – you know you have to invest in the new technology to compete but it’s so expensive that you can’t afford to do it until you have a big enough project to warrant the investment. The wide screen format and high definition TV are examples of technology changes we have had to respond to in the last couple of years. The only reason I travel to trade shows is not to do deals, but to get a first-hand look at new technologies I am going to have to prepare for.” - Post production company, Perth Figure 20 depicts the types of disruptive technologies that are currently, or are about to, have an impact on a range of sectors. Figure 20 Types of technology shocks causing demand in the industry TECHNOLOGY SHOCKS New format e.g. digital Film & TV Production Visual Effects & Animation New platforms e.g. XBox2 Computer Games Interactive Multimedia New software standards e.g. open source E-Learning (Domestic) The impact of technology shocks on the industry The power of `technology shock’ is significant in this industry, and brings with it potential risks, as well as opportunities. Because these shocks are out of the control of individual companies, forward planning can be difficult and investments necessarily speculative. The Australian computer games sector is an example of a sector that is currently anticipating the arrival of a technology shock in the form of new games consoles. The arrival of the PlayStation 3 and Xbox2 consoles in the next few months is likely to create winners and losers. The winners will be companies that are able to secure contract on the first generation of games for the new platform. These contracts provide reference sites and lay the foundation for ongoing work on that platform. The losers may be those that are unable to secure these contracts, although at least one company interviewed suggested that their strategy would be to avoid the rush and continue developing for superseded platforms. © Australian Interactive Media Industry Association Page 63 of 64 9. Perceptions of Government’s role The following section identifies the potential role of Government in assisting the digital content industry from the point of view of both content creators and service providers. Recommendations for the role of government were outside the scope of this project. However, interviews and focus groups included some probing on the sorts of areas where Australian and/ or State and Territory Governments – or other bodies - could assist. The table captures key responses from companies on this issue. The table includes issues that are generic across the industry, and those that were noted by content creators and service providers. The table is not intended as the basis for a set of recommendations for government, but rather as a means of flagging issues companies suggested were worthy of consideration. Table 3 Companies desired role for government Preferred role for government Companies across the industry • Assistance in mitigating the negative effects of growth. Potential roles for government were suggested as: o Mentoring and general business support to build scale o Business and marketing planning o Export assistance, particularly in identifying and locating distributors Repositioning Australia’s digital content capabilities in overseas markets, emphasising creativity rather than low cost (which is susceptible to movements in currency exchange) Funding for: o Pre-production o Production Facilitation assistance, particularly for: o Identification of and introductions to distributors overseas o In-bound trade missions, providing an opportunity to explore co-development opportunities Assistance to improve the attractiveness of the industry to external investors, including making the industry attractive in the same way that biotechnology and resources has. For some companies, particularly the games industry, there was a perceived role for government to widen the profile beyond film and television production Continuing role in sponsorship of standards (particularly in eLearning) • Content Creators (creating own IP) • • Overall, high expectations of – and dependency on government assistance • • Service Providers • Overall, low expectations of government assistance • Reduce cost of information discovery for: o IP protection, including how why, how and when to do it o Export market assessments (including knowing what types of products/services are in particular demand in local and overseas jurisdictions) Opportunities to better compete for government contracts: o Longer lead times for responses to project briefs o Recognition of advantages associated with smaller players (including cost and flexibility) “SME’s are consistently ignored for larger value (Government) projects” © Australian Interactive Media Industry Association Page 64 of 64 Preferred role for government • Improved training, including: o Accreditation of skilled staff in new content industry (to address perception that skills in this sector are particularly patchy) o Up-to-date technologies for TAFE and university training courses o Improved job readiness (including deadline-orientation and team playing) for technical graduates Tax reform, particularly: o Improving attractiveness of tax regime to local (but particularly overseas) investors, to encourage production in Australia that results in spin-off benefits o Reducing the depreciation schedules for technologies (where, in some cases, refresh occurs more than annually) • “Within our space, there are a lot of people looking at setting up in Fiji, South Africa, Cayman Islands… where they have established economic tax-free regions. You want to grow an industry, but you can’t if you keep pounding it with taxes” • Assistance for attendance at trade shows and conferences