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					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      CONTEXT OF THE PROJECT ......................................................................................................................... 3
     1.2      DEFINITION ............................................................................................................................................... 3
     1.3      OBSERVATIONS OF THE DIGITAL CONTENT INDUSTRY ..................................................................................... 3
     1.4      NATURE OF THE FIRMS WITHIN THE INDUSTRY ............................................................................................... 4
     1.5      IP DEVELOPMENT AND COMMERCIALISATION IS AT THE HEART OF THE INDUSTRY .............................................. 5
     1.6      ROLE OF GOVERNMENT .............................................................................................................................. 7
2.     INTRODUCTION AND METHODOLOGY..................................................................................................... 8
     2.1      BACKGROUND ........................................................................................................................................... 8
     2.2      READING THIS REPORT.............................................................................................................................. 9
     2.3      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      THE DIGITAL CONTENT INDUSTRY ............................................................................................................. 13
     3.2      INTERACTION BETWEEN SECTORS WITHIN THE INDUSTRY.............................................................................. 16
     3.3      KEY OUTPUTS ......................................................................................................................................... 17
     3.4      MAIN ACTIVITIES UNDERTAKEN .................................................................................................................. 18
     3.5      PROFILE OF COMPANIES IN THE INDUSTRY .................................................................................................. 20
4.     COMMONALITIES AND CHALLENGES WITHIN THE DIGITAL CONTENT INDUSTRY........................ 24
     4.1      OPTIMISM ABOUT THE FUTURE IS INCREASING ............................................................................................. 24
     4.2      THE DIGITAL CONTENT INDUSTRY HAS COMMON CHARACTERISTICS ............................................................... 25
     4.3      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      THE THREE PHASES OF IP DEVELOPMENT AND COMMERCIALISATION ............................................................. 32
     5.2      IP DEVELOPMENT AND COMMERCIALISATION FOR CONTENT CREATORS AND SERVICE PROVIDERS ................... 33
     5.3      IP DEVELOPMENT AND COMMERCIALISATION VARIES BY TYPE OF BUSINESS OWNER........................................ 33
     5.3      COMPANY SIZE IS THE GREATEST INDICTOR OF `TYPE OF PAIN’ FACED ........................................................... 35
6.     IDEA GENERATION................................................................................................................................... 39
     6.1      CREATIVE SKILLS ARE THE HARDEST TO FIND – AND EASIEST TO LOSE ........................................................... 39
     6.2      CREATIVE PEOPLE ARE HARDEST TO MANAGE AND MOST RESISTANT TO PROCESSES ...................................... 40
     6.3      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
8.     COMMERCIALISATION AND SALES ....................................................................................................... 54
     8.1      CUSTOMERS HAVE RAPIDLY BECOME MORE SOPHISTICATED IN THE DIGITAL CONTENT INDUSTRY...................... 54
     8.2      PRODUCT-BASED COMPANIES PREFER TO DISTRIBUTE PRODUCTS DIRECTLY TO CUSTOMERS .......................... 55
     8.3      EXPORTS ARE AN IMPORTANT SOURCE OF REVENUE FOR THE INDUSTRY ........................................................ 56
     8.4      LOWER BARRIERS TO ENTRY ARE DRIVING INCREASING COMPETITION AT THE LOW END OF MARKET .................. 58
     8.5      MARKETING AND MANAGEMENT SKILLS ARE IN DEMAND ................................................................................ 59
     8.6      TECHNOLOGY DIFFUSION AND ADOPTION IS RAPID AND REGULAR .................................................................. 59
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.




1
  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.
    © 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   Identify with the umbrella nomenclature of digital content industry, and
o   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.

o   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.

o   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.

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.

o   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.

o   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.

o   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.

o   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.

o   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.

o   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%).

o   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.
    © 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.

o   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.

o   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.

o   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.

o   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.


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.       Introduction and Methodology
2.1      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, three-
dimensional 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.        Profile of the Digital Content Industry
3.1       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 post-
                    production
          •         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.        Was based on existing definitions
     2.        Allowed the team to direct its focus on the nature and dynamics of firms within
               the industry, in line with study objectives

3
  DCITA 2004 (c) Creative Industries Cluster Study Volume 3: Research and Innovation Systems, Canberra, pg 13
4
  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.




7
  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
     © 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
                            Service                  & Animation           Content
                                                                          
                           Providers                                       Creators
                                                      Games

                       Interactive Multimedia                                      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,

12
   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.
   © 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%

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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.
       © 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%

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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.
       © 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%


     25%                            24%                                                      24%
                                                       22%

     20%

                  15%
     15%
                                                                                  11%
     10%


       5%                                                          4%



       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                    Characteristics
Turnover                     Exceeds $1M (especially in the $1-5M range)
Outputs                      More likely to be “Services”
Export                       As likely to be involved in export as not.
Overseas Office              Less likely to have one
Main Products                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%

  26%

  25%

  25%
                  24%                         24%
  24%

  24%
                                                                               23%
  23%

  23%

  22%

  22%
                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




16
   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).
     © 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                    Post-
                                           Production                Production

                                                    Visual Effects         Interactive
                Games         e-Learning             & Animation           Multimedia




             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   2-3mths   6 mths   1 year

                                  Post Production
                                                                                             NORMAL

                            Interactive Multimedia
                                                                                             SOMETIMES

                          Visual Effects/Animation

                                        e-learning

                               Film/TV Production

                                          Games




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 `consumer-
priced’ 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.        IP development and commercialisation
5.1       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%
                         63%

  60%


  50%


  40%


  30%                                                       26%


  20%

                                                                                      9%
  10%


     0%
                 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
                                                                                  1
               Commercialisation                                           Commercialisation
                  and Sales                                                   and Sales
                   (Customer)                                                 (Customer)
                                          Company develops
                                          own IP and sells

                                                                            Customer
                                                                            commissions and
   1             Company develops             2                  2          owns IP
                                                                                                      3
                 own IP and sells        Application
  Idea                                                          Idea                              Application
Generation                              Development                                              Development
                                                              Generation




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      Types of business owners in the industry and characteristics

Type of               Characteristics                                       Particular challenges
company                                                                     likely to encounter
leader
                      •    Motivated by operating the technology core to    •   Delegating authority
‘Technicians’              their business                                   •   Building scale
                      •    More interested in developing their own skills   •   Business planning
“I’m a                     and knowledge base than growing the
programmer – I             company
don’t do              •    While they may not think initially of
marketing.”                themselves as ‘entrepreneurs’, they have the
- Interactive              confidence and the resources to operate
multimedia                 independently as a business
company               •    Generally work alone or employ one or two
owner,                     other people and/or use a tight network of
Melbourne                  contractors
                      •    Tend not to be strong managers, nor do they
                           want to be

‘Freedom              •    Motivated by creative independence/lifestyle     •   Adopting and
Seekers’              •    Work hard to control their own destiny, work         enforcing process
                           when, where, how and for whom they want          •   Strategic planning
                      •    Are technology-savvy, and often technically      •   Achieving balance
“Our motivation            competent, but happy to leave that side of the       between selecting
is to do good              business to experts                                  profitable work over
work, and             •    Comfortable employing people and                     enjoyable work
make a profit,             commonly use contractors
but also              •    Tend to be inclusive and treat their staff as
because we                 family members. Acceptance (by staff and
want to work               clients) is important to them
for good              •    Tend to be less process driven and not
causes.”                   embracing of formal business planning
- Perth focus         •    Measure success by delivering great work,
group                      with a great team, for great clients
                      •    More focused on enjoyable work than
                           sustainable business or exports

‘Mountain             •    Motivated almost solely by achievement,          •   Retaining focus and
                           usually measured in terms of company                 commitment over
Climbers’
                           growth and profits. As a result, they tend to        long period
                           be the most high profile type of entrepreneur    •   Managing scale
“You get over         •    Tend to work more ‘on’ the business, rather          issues, including
doing the same             than ‘in’ the business                               recruitment
stuff. You            •    Self confidence and trust in own abilities       •   Expansion eg
either have to        •    Single minded in their focus, however than           breaking into export
sell the                   focus can be short-lived. More likely than           markets
   © Australian Interactive Media Industry Association                                        Page 35 of 64


Type of               Characteristics                                                Particular challenges
company                                                                              likely to encounter
leader
business or re-            others to move onto the next big thing should
invent it into             an opportunity arise
something             •    Do establish and adhere to processes
else,”                •    They work long hours, and expect a lot from
- eLearning                themselves and their staff
company,              •    Tend to have strong, but tough leaders
Hobart



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                          Processes          Intellectual      Business focus
(with growth  staffing                                              property
ambitions)
1-3 employees Business owner                     Informal           Undervaluing      Establishing
              ‘wears many                                           IP just to win    business and
              hats’                                                 the job           client base

                     More likely to be
                     ‘Technician’
7-8 employees        Hiring someone              Formalising        Preparing to      Extending length
                     purely to manage            HR and             draw a line in    of pipeline
                     people for first            financial          the sand (in
                     time                        processes          protecting IP)    Reducing reliance
                                                                    over revenue      on single or few
                     Finding the right                              certainty         customers
                     people
                                                                                      Revenue and cash
                     Entrepreneur                                                     flow
                     relinquishing
                     operational
                     control
                     Owner likely to
                     be ‘Freedom
   © Australian Interactive Media Industry Association                                         Page 36 of 64


                                                         Difficulties experienced

Company size Skills and                          Processes          Intellectual      Business focus
(with growth staffing                                               property
ambitions)
             Seekers’

15-20                Finding specialist          Introducing        Extracting        Niche strategies
employees            skills rather than          widespread         revenue from      Profitability
                     generalists                 processes to       IP rather than
                                                 organisation       for operational
                     Succession                  that resists       efficiency
                     planning
                                                 Replicability
                     Committing to
                     full-time rather
                     than contractors

                     Owner more
                     likely to be
                     ‘Freedom
                     Seekers’ or rising
                     ‘Mountain
                     Climber’
50+                  Management                  Level of       Defending             Innovation to stay
employees            hierarchy in                reporting that breaches              ahead of the
                     place                       finds what’s                         market
                                                 fallen through
                     Keeping and                 cracks (eg
                     incenting best              licensing all
                     talent                      software)

                     Leader more
                     likely to be a
                     ‘Mountain
                     Climber’


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

                                                                                 Expected
                                                                    50+
                                                                                 Actual
                                                          15-20

                                                    7-8

                                     1-3



                                                                          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    Reduce risk, and exposure to cash flow issues, increasing flexibility in being able to
         respond to ebbs and flows in industry
    o    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 Brisbane-
based 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)




                                                                          Application
                               Idea                                      Development

                             Generation




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                                               48%
     •    Management                                                    37%
     •    Marketing and sales                                           30%
     •    Software development                                          22%
     •    Finance                                                       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                               29%
       •    Management                                    26%
       •    Marketing and sales                           24%
       •    Software development                          24%
       •    Finance                                       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                            24%                                  9%

                                   Internet                13%                                   16%

             Books, magazines or journals                  12%                             14%

                        Clients, customers                11%                  6%

       Industry (IT/Media/Music/Advtg etc)           7%                8%

                              Competitors       4%               8%

                             Conferences        3%          7%

                                 Overseas       4%          5%

             Universities or research orgs.     4%         4%

                            Word of mouth       3%    3%

                                     Other            9%                      9%


                                          0%              5%          10%       15%         20%        25%    30%   35%

                                               Main Source                  Other 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 off-
         shore.”
                        - 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 spin-
off 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
                                                Service
       FEE FOR                                  Providers
       SERVICE

                                                            Content
                                                            Creators


                                                                         Content
             Low                                                         Creators
        Reliance

                          Low                                           High
                        Reliance                  OWN IP               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
     2004 (a), DCITA Creative Industries Cluster Study, Volume 1: Producing Digital Content, Canberra, pg 38.
20
     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                                                  65%
    •        Owners Funds                                                       34%
    •        Bank Loans                                                         18%
    •        Financing through forward sales                                    14%
    •        External investors                                                 11%
    •        Government funding                                                 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%
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   © 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’.

Figure 13         Grants and assistance from government received by companies


                            Received Government Grants/Assistance
  18%

  16%

  14%

  12%

  10%

   8%

   6%

   4%

   2%

   0%
               Export                         R&D        AusIndustry       Other Grants
        Development/Assistance




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-for-
service 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                              Application
                        Generation                         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%
                                                                                                             0%
                                            %


                                                  %


                                                           %


                                                                 %

                                                                       %


                                                                             %


                                                                                   %


                                                                                           %


                                                                                                 %


                                                                                                       %
                 1%


                       3%


                             5%


                                     7%

                                          10


                                                15


                                                         25


                                                               33

                                                                     40


                                                                           60


                                                                                 70


                                                                                         85


                                                                                               92


                                                                                                     98

                                                                                                           10




                                                      % 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                                     Europe
                America                                     (26%)
                 (23%)

                                                                          Asia
                                                           MEA           (33%)
                                                           (5%)




                     South America
                         (1%)
                                                                                                  Oceania
                                                                                                   (11%)




                                                             Worldwide
                                                               (1%)




The key locations within each of these sectors were specified as:

Region                        No. of mentions             Most           No. of mentions
                                                          mentioned
                                                          specific
                                                          country
Asia                          217                         Singapore      26
                                                          Japan          21
                                                          China          21
                                                          Hong Kong      17
Europe                        169                         U.K.           84
North America                 153                         U.S.A          126
Oceania                       71                          New Zealand    62
Middle East & Africa          30                          South Africa   15
South America                 7                           -              -
“Worldwide”/“Global”          9                           -              -
Don’t Know/Refused            2                           -              -


•   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    More Capital        Govt. Assist.   More/Better   Don't know   Nothing
   Export Markets                                           Training




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




                             Early                Early             Late
           Innovators       Adopters             Majority          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.        The pace of technology diffusion is more rapid for this industry
   2.        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 post-
production, 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




                              Early               Early             Late
           Innovators        Adopters            Majority          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                Film & TV Production
                                       e.g. digital
                                                                 Visual Effects & Animation


                                          New platforms
                                                                 Computer Games
                                          e.g. XBox2

                                                                 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             •    Assistance in mitigating the negative effects of growth. Potential
industry                              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)

Content Creators                 •    Funding for:
(creating own IP)                         o Pre-production
                                          o Production
                                 •    Facilitation assistance, particularly for:
Overall, high                             o Identification of and introductions to distributors overseas
expectations of – and                     o In-bound trade missions, providing an opportunity to explore
dependency on -                                 co-development opportunities
government assistance            •    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)


Service Providers                •    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
Overall, low                                 of products/services are in particular demand in local and
expectations of                              overseas jurisdictions)
government assistance            •    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

				
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Judy Beddoni Judy Beddoni Boss
About Hi I started learning about computers about 12 years ago and have learnt a great deal in that time. I keep going back like a sponge and soaking up all that I can learn as it is constantly changing.