Tuesday, August 28, 2007

Geneon Taps Out

Anyone who follows Anime industry news has already read the press release from Friday about Geneon throwing in the towel and hiring ADV to do their retailer distribution and handle their sales channel.

...ADV will take over sales, marketing, and distribution functions for all Geneon titles effective October 1st. Geneon will continue to license and produce anime content for the North American market; the changes will affect only how the products reach the market. The notice that went out to retailers made the point. "This change will in no way impact the availability of current or future Geneon titles 'in the pipeline,'" it said.

We are still gathering information on the details. It appears a lot of the fine print has yet to be finalized, but that ADV is already starting to run the show behind the scenes. That's fine, since we have a great relationship with ADV, and they should be able to service the product very well.

ADV will benefit from this. In fact, they need the expanded sales opportunities Geneon's catalog will bring to the table to compete with Funimation. But, regardless of how the 'suits' try to spin this in the media (they will talk endlessly of BS Synergies and Strategics), it clearly does not bode well for Geneon. Outsourcing retailer distribution is not unusual in the Anime industry, but outsourcing control of your sales channel is something a company does as a last resort. It's what happens when you throw your hands up and decide that you no longer understand your market and want to wash your hands of the responsibility of making your company work within that market. Granted ADV will have much better resources for bringing Geneon's product to market. The real red flag is that they are doing this in the forth quarter before the holidays, which is generally a period (for better or worse) when you don't want to make any major changes that will disturb your sales channel - and that they are turning over control of their product line to a competitor. Remember a couple of years ago when Central Park Media, finding itself between a rock and hard place financially, did the same thing by outsourcing their sales channel and distribution to WEA (a 'music' distributor no less). I remember thinking that John O'Donnell must have been suffering from temporary insanity when he made that decision. Later, as CPM has virtually ceased to exist as an operating Anime Studio, we find out that he probably didn't have too much choice.

In the Anime world there is a very simple 3 step business plan that everyone follows:

1) Collect Underpants
2) ?
3) Profit

It's that pesky step #2 that seems to trip everyone up.

The truth (that no one in the biz seems to want to admit) is that the mass market portion of the Anime business that studios have developed over in the last 3-4 years and built a large part of their businesses around has been a disaster this year. Sales volumes are way off. Licensing and royalty fees from deals made in the go-go period of 2004-06 remain very high, forcing the studios to generate revenue from these titles any way possible. Fan's DVD & Manga shelves are getting full. Even with the cut backs in new releases over the last few months there are still too many titles (or should I say, 'too many marginal titles and re-releases') getting stuffed into the sales channel. Economic factors are creating more pricing pressures than ever before. Marginal fans have too many options for their limited entertainment budgets, and Anime is just not as 'cool' for them as it used to be. Many core Anime fans are turning back to downloads and fansubs more frequently to get access to the really good shows they want to see, but don't want to wait to be commercially released (if they ever are).

Mass market retail chains and book sellers are questioning shelf space allocations to Anime/Manga for the first time in years, causing the studios to make knee jerk reactions, like re-re-re-re-re-releasing old stale titles at rock bottom prices or quadrupling the number of serial manga issues released in a quarter in an attempt to spur interest and "keep up the appearance of demand". After all, if we stuff even more products into the sales channel, that will surely keep the home fires burning, right?

This year many of the older core fans have started to drift away from the genre, partly because there are far fewer quality releases to choose from than in the past, and partly because as they get older priorities begin to change. As these fans move away from the genre, they are replaced by younger fans that have been exposed to Anime in a totally different way than their predecessors, so many of them don't have the same enthusiasm for building huge (and expensive) video and book libraries, nor do they have the same sort of entertainment budgets that the older fans had.

Bottom line? Everyone is getting squeezed in one way or another.

Under all these conditions some consolidation will need to take place, both at the studio and retail levels. I feel like there are too many Anime retailers out there right now, and many are holding on by their fingernails either by subsidizing their margins with bootlegs or making the payroll this week by liquidating Anime at close to cost pricing just to keep the volumes up. Many retailers are relying more and more on sales gimmicks to keep customers coming back. The situation reminds me of the scene from 'A Bridge too Far' when, after holding the bridge at Arnhem by his fingernails for 9 days, British LC John Frost finally gets MG Roy Urquhart on the radio and asks when he can expect relief. Urquhart, taking terrible losses himself, tells him "I'm sorry Johnny, I'm not sure it's a matter of us coming for you, or you coming for us.", and then in classic British understatement Frost says "very well, we'll just wait for XXX Corps then." The last radio message broadcast from the bridge was - "out of ammo, God save the King".

Indeed (but I digress).

As one of the oldest US Anime companies, Geneon finds itself in the position of having as huge back catalog of titles to maintain in a sales environment increasingly dominated by new releases. Not quite knowing what to do with these, Geneon has had terrible problems in execution. I blame Geneon's Japanese management for that - they just don't seem to 'get' the US market, and in fact they have gradually become a rather unfriendly company for retailers to do business with since the change over from Pioneer.

Bad licensing decisions along with a bad marketing organization has caused Geneon to fall into a distant 3rd place in the US Anime industry. After years of maintaining excellent business relations with Pioneer USA, the management at Geneon has become increasingly out of touch with both the fan base and retailer channel, and I have frequently made mention of some of these problems in our weekly newsletters. Their distribution deal with Ditan earlier this year was an attempt to cut costs, and has been a disaster with them frequently having incorrect inventory numbers or not being able to fill re-orders for titles that have only been on the street for a few weeks. I remarked earlier this year to our inside rep at Geneon that it was getting harder and harder to maneuver the product line under these conditions, and whoever made the decision to hire Ditan to do their fulfillment should have been fired.

I now looks that will probably happen...

In the end, the move to ADV should be pretty good for us. One less vendor to work with, one less set of hassles to overcome. It may even cure a few headaches I've had to contend with. After all, it's all about the underpants - so we'll see how it pans out. -_^

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