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Canadian animation studios face off against dollar parity

With the US and Canadian dollars hovering close to par for the last few months, several cross-border industries that benefited from the high greenback vs. low loonie dynamic are feeling the pinch, and animation is no exception. The decade of 25% to 35% in cost savings experienced by American producers who shipped projects to the territory - and the extra revenue generated by Canadian studios through the simple act of converting US to Canadian dollars - is over. Now both sides are left re-evaluating their business plans.
January 1, 2008

With the US and Canadian dollars hovering close to par for the last few months, several cross-border industries that benefited from the high greenback vs. low loonie dynamic are feeling the pinch, and animation is no exception. The decade of 25% to 35% in cost savings experienced by American producers who shipped projects to the territory – and the extra revenue generated by Canadian studios through the simple act of converting US to Canadian dollars – is over. Now both sides are left re-evaluating their business plans.

‘I think where you’ll see a large impact in Canada is service production,’ says Steven DeNure, president of Toronto-based prodco Decode Entertainment. ‘US companies may decide it makes more sense to stay at home or go elsewhere for service work,’ he adds.

And in some cases, the tide is already turning. 4Kids EVP of international sales Brian Lacey says the New York-based producer/broadcaster has redirected two 2-D animated projects that were slated to go to Canadian studios this year to Korea. He’s also currently scouting studios in China as an alternative source of production work. ‘When the dollar is one for one, it causes you to stop and say, ‘This isn’t worth it anymore because the cost of producing in Canada is more expensive,” says Lacey.

But several Canadian studios say they haven’t lost work, and are riding out the steep rise in value of the Canuck buck thanks to the well-stocked Northern talent pool, tax incentives, geographic proximity and ease of turnaround for which Canadian prodcos and service companies have become renowned.

Ron Estey, MD of 12-year-old C.O.R.E. Digital Pictures in Toronto – one of country’s biggest animation service shops – says he’s actually seen an increase in interest from his clients in maximizing existing tax credits since the dollar hit par and adds that the volume of animated feature and special effects work hasn’t slowed down. However, he’s tightened his production budgets, and is making an effort to save costs with new production management software and processes.

As for animation moving offshore, Estey says he’s seen projects over the last few years go to India in the hopes of taking advantage of low costs, only to come back to his shop to be re-worked due to a lack of skill in creative and production management in the territory. He also points out that TV animation work often runs on tight schedules, which Canadian companies can better accommodate. ‘You’ve got a slot and you need to fill it, so there’s a need to propel projects through the pipeline and then out with an appropriate level of quality,’ he says.

Lacey, who is overseeing 4Kids’ projects making their way to Asia, agrees that overseas shops have some catching up to do. He says the initial architecture of a series, including character design and personality, as well color palette creation, is still best carried out in North America. But he warns that Asia-based companies are extremely competitive and growing by leaps and bounds. ‘Technology is a great leveler,’ he notes. ‘Countries like India, Korea, Taiwan and China are becoming much more sophisticated in their ability to create.’

In the meantime, C.O.R.E. is gearing up to hatch its own IPs, something that is becoming a trend among Canadian shops looking to shed their dependency on service work. Its first project is in development now, and Estey says he’s seeing more animation, visual effects and post-production studios moving into proprietary work.

Four-year-old pre-production company House of Cool in Toronto, for example, is also setting aside time and resources as it looks to staff up and generate proprietary shows and brands. By next year, founder and president Ricardo Curtis says he hopes to have 20% of the shop’s production capacity devoted to making in-house IPs with the goal of quadrupling that number to 80% within the next three years. ‘We’re switching from a US service-based model to owning IPs that we control so we can determine what kind of dollars are coming in,’ he says.

But Curtis and his team still have to contend with the reality of the current climate. He says that House of Cool, which works mostly on features for State-side clients and gets paid in US dollars, has taken a 20% hit to its sales margins over the last year. And having a say over the type of currency the company gets paid in is one of Curtis’s short-term fixes to mitigate fluctuations; his bill of choice at this point is the stronger, more stable Euro.

Over at Vancouver-based Studio B, which at the moment is working on its own series Kid vs. Kat, producer Rob Simmons says the company already uses natural foreign exchange hedging to deal with currency fluctuations. And in cases where it makes payments in US dollars, Studio B is taking advantage of the favorable exchange rate, which helps balance out the decrease in revenues from US sales and service work. Simmons also locks in exchange rates at the outset of a production. ‘For shows with US production and broadcast partners, such as Ricky Sprocket – Showbiz Boy and George of the Jungle, we have already hedged against a rising Canadian dollar,’ he says.

Kevin Gillis, president of Breakthrough Entertainment, the Toronto-based studio that produces and distributes series such as Atomic Betty and Jimmy Two Shoes, says he also looks to hedge revenue in US dollars and builds currency fluctuation into co-pro contracts. He says Canadian companies are also taking a hit now from European broadcasters, who have a tendency to pay in US dollars.

Ideally, Gillis would like Breakthrough to stay on-track with its plan to produce shows wholly in Canada for the rest of the world. And up until the Canadian dollar achieved parity, his MO was gaining traction. However, he says that’s falling by the wayside. For example, Breakthough had been developing its new adult-skewing toon Producing Parker as an all-Canadian affair with national broadcaster Global. It will now most likely have to be completed as a co-pro.

‘What’s the single reason? We’ve got a dollar at par and the forecast on our investment is such that I need to bring the cost down,’ Gillis says, adding that, ‘for the maturation of the Canadian animation industry, it’s one step forward and one half-step back.’

For its part, Decode will be taking a hard look at projects with contracts that were signed a year ago and figuring out how to mitigate the loss on exchange. DeNure says the company will also be evaluating how exposed it is to the US dollar, and look at ways to increase efficiency on projects where there’s now less money available. Although he sees a short-term decrease in production for Canadian animation houses, in the long-term, DeNure believes original Canadian commissions will keep the industry buoyant.

As for the other side of the coin, co-founder and executive producer of New York’s Curious Pictures, Richard Winkler, says that American studios now represent an even smaller source of revenue for potential Canadian and European co-pro partners. But he notes there are bigger business trends and tectonic shifts guiding the industry. ‘The US provides a culture of entertainment that, for better or for worse, a lot of other countries and cultures look to.’ American writers and directors, he points out, are often sought out by European producers to give their projects a flavor that will travel internationally.

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