I caught up with Gen Fukunaga, CEO of FUNimation, the afternoon of July 5th at Anime Expo 2008. He was busy with the line of people anxiously waiting to meet the recently announced cast of Ouran High School Host Club. We found space to interview in a busy third floor hallway of the Los Angeles Convention Center. Also in attendance was Jackie Smith, FUNimation Senior Public Relations Manager. While the interview was recorded, certain sections of the audio were difficult to transcribe due to the excessive background noise.
Part 1 Highlights:
• Geneon and ARM both approached FUNimation on their deals and didn’t happen overnight.
• The focus on 13 episode box sets will reduce FUNimation workload and help absorb the additional titles.
• 13 episode box sets require a 25% sales bump to make similar profits and 6 months for enough people to notice.
• Blu-ray is doing better right now for FUNimation in anime than the general blu-ray market is for Hollywood.
• Regarding the R1 issue, FUNimation has not seen any reverse importation back into Japan.
• In terms of genre, for FUNimation it’s still action/ adventure. Hands down.
• Gen Fukunaga’s love of anime traces back to Uchu Senkan Yamato and big robots.
• FUNimation owes its start, at least in part, to Nintendo and the John Elway Quarterback video game.
Highlights to look forward to in Part 2:
• Mr. Fukanaga’ advice for someone looking to break into the anime industry.
• Surprise anime successes for FUNimation.
• More on Mr. Fukunaga’s views on fansubbing.
[RQ]- Thank you again for speaking with us… I guess the one thing we are all dying to ask is that you had a lot of announcements [Geneon and ARM] over the last couple days. What was the process like?
[GF]- Well, a lot of attorneys were involved. As you can imagine, whole teams of them. At least 4 were on my side. The process was that we were approached basically in both cases, Geneon and ARM. They just came to us and said would you please like to handle these titles? And we said, well, sure we’d love them. So okay, let’s do a deal, and it kind of grew out of that.
[RQ]- Over the last few months?
[GF]- No, it’s taken at least… Geneon’s conversation started last fall, when they shut down. And there’s a four month hiatus for a while… Four or five months hiatus, where their corporate had decided to freeze everything and not talk to anybody. And they opened it up again all of the sudden in the last month or so and closed it very quickly, when they made the final decision. The ADV case, that has taken… Well, I think they approached us last fall as well, I believe.
[RQ]- Was it continuous talks the whole time?
[GF]- That one was continuous talks. No. I think they approached us this year...
[RQ]- That was February, wasn’t it?
[GF]- Yeah, I think they approached us early this year actually.
[JS]- Was that ADV or ARM?
[GF]- Well… ARM was just earlier this year, and that was continuous talks.
[RQ]- Okay, so that was continuous talks as opposed to…
[GF]- Geneon was frozen, talked to nobody for about five months. In between starting negotiations, they froze it, and then they made a decision. They had a bidding process, they went after multiple people to bid, simultaneously. More of an auction in their case.
[RQ]- For Geneon?
[GF]- Yeah, they’re getting an auction.
[RQ]- And ADV was a little bit more of…
[GF]- ARM came straight to us… I don’t think they saw an alternative, I guess.
[RQ]- It’s certainly a lot of titles. Have you made any operational changes?… Certainly, 50+ titles is a lot for anyone to take over. What operational changes have you made?
[GF]- Well, we had anticipated closing one or both of these deals for quite a few months. So we had already started gearing up, hiring people that sort of thing anyway… There’s a lot of operational things that we don’t have to touch.
Such as in the Geneon case. They’re doing 100% of the production work. Creating and authoring the DVD, everything. We’re only doing marketing, and distributing, and selling of the products. There’s not a lot of overhead change, for example, to sell one more title. When you go to Best Buy and say here’s our twelve titles this week, instead you say here are thirteen titles this week, or fourteen titles. Overhead comes in marketing where we were staffed up, staffing up, or have already staffed up actually. And making sure we’re ready on the marketing end…
Regarding the brand engagement, I was more talking about not the day to day marketing of the DVDs so much as the big initiatives that really heavily boost brand engagements. Through social networking, internet VOD, free VOD over the internet,… and other digital assets. Those kinds of various mechanisms, which are big initiatives- FUNimation channel. So those are big long term initiatives that would spike brand engagement up other than just trying to market a DVD.
Today’s market, very impossible to compete in today’s market if all you’re doing is tossing out a DVD out. Even if you support it with marketing, you need the other brand engagement areas to beef that marketing even further.
[RQ]- … You’re talking about gearing up, but there are some fans that are a little worried that this might be a little much. What do you have to say about that?
[GF]- …We’ve always completely believe in high quality, though. It costs us a bit more to do a lot of our dubs. It costs us more to do a lot of our packaging. And it shows, I think, in the quality of our box work, our artwork, our dubbing, our subtitle work is definitely accurate.
A lot fans don’t even understand that of that subtitle work out there- we’ve done studies with our experts. They’re not accurate… The fans are watching inaccurate subtitles off the fansubs. Ours are definitely accurate, the original. We have PhD’s in Japanese language studies that do our translations. So there’s a big difference there. We’re really about quality, and we’re not going to sacrifice quality just because we have more titles is the bottom line. So if in a few cases it just takes a little bit longer to get a title out,… then so be it.
To be honest with you, we are geared up to push all these titles out fairly quickly because we want to get into the fans’ hands. Now, regarding your concern though. You’ve got to understand that this is happening at a time where the market, our release strategy has shifted for a lot of titles from individual volumes of four episodes each to thirteen episode half seasons. So you’ve now gone from a traditional six release model to a two release model. Two half season sets to get out a whole series.
That makes a huge difference in terms of effort because now our marketing team only has to gear up for one big launch. Once you have bam-bam, release of the whole series, that’s it. The whole series is out. You don’t have to worry about six releases. So our whole infrastructure has a one-third number of releases than before. So in some sense, as we’re transitioning to having less work there, these titles will help fill the workload we need to keep our people busy. So in actuality, it’s not as bad as you think.
[RQ]- …You mentioned in your keynote [address] a 25% bump. Can you elaborate on that a little bit more? How did you come with 25%?... You said over six months, right?
[GF]- … In which bump? In what?
[RQ]- Sales. Singles versus box sets.
[GF]- In my keynote, I said if don’t start seeing a consistent 25% increase in sales going to a season set strategy, it’s going to flip right back to the volume strategy because there’s not enough money being made. That’s just part of what we have to hit.
So far, our first title Aquarion, is getting in that area. But only have a test case of one, right? People really aren’t accustomed to seeing it that way, so we think that percentage is probably low compared to what it will look like six months from now. Once people get used to it,… the people don’t realize is that half the fan audience doesn’t even realize it’s out there in season, that first run… We’re cautiously optimistic that we’re going to hit those numbers based on the initial Aquarion release. But if it doesn’t maintain that, it’s like what I said in the keynote. Then that strategy will reverse on a dime because none of us can make any money if it doesn’t get that bump.
… The 25% number’s obviously just a pure mathematical calculation of exactly how much it costs to run the business. The difference in price. When you calculate it all in that’s about what we calculated the bump has to be to make similar profits.
[RQ]- The time frame came about from?
[GF]- The time is what we just feel until people get used to this kind of strategy, so that could take six months or so for enough people to understand that FUNimation has gone to this strategy. That’s why we felt about six months from now we’ll have a much better gauge because we’ll have several more titles launched that way, not just Aquarion. That’s why.
But I still said in the keynote that big A titles are not going to come out that way. You can’t afford it because the licensors charge too much money to ask for those titles. You can’t bring them out, you see.
[RQ]- The timing of both the Geneon and the ADV announcements… your [industry] panel is later today. Were you worried about them overshadowing anything you might be saying in the panel, or releasing?
[GF]- No, because I don’t think we’re announcing a lot of new releases at this panel.
[JS]- No, not today. We did have that concern… We didn’t want any of the titles that are going to be coming up pretty soon to be overshadowed by this other information…
We have two great titles that we’re going to announce this summer. We want to make sure they get the attention they deserve.
[GF]- They’re probably going to get announced at Otakon, and other cons instead. What we did was we led into this con with announcements instead of saying them all at this time. Such as, we announced Heroic Age a few weeks ago as you know. A few other titles, we announced them pre con instead. Now there’s this gap so that we can announce ADV and Geneon at this time.
[RQ]- …For a little while, we were expecting an announcement a day…
[GF]- I think the big announcement that’s going to come is Sprint… We’re going to have an official press release.
[JS]- You should get a press release on Monday about that. But definitely, it is a done deal. We’ve got some other details…
[GF]- That’s why Monday we’re having an official release. But obviously, it’s somewhat big news because we’re the first anime company that’s gone to two of the most major mobile carriers, AT&T and Sprint now. Launching product live,… that’s pretty significant because those guys don’t make many deals.
[RQ]- You mentioned after your keynote working with some Japanese companies on blu-ray. How has blu-ray been received in this country?
[GF]- Very nicely. Blu-ray is doing better right now for us in anime than the general blu-ray market is for Hollywood.
[RQ]- … Do you have any numbers?
[GF]- The reason is somewhat obvious. Our demo, trendsetter type people, are also the ones that have the newest equipment, the HD screens, the latest technology. Our trendsetter group- a lot of them are technophiles. You get the idea. They’re the group that’s come to buy blu-ray players. Because of that match, that’s what’s happening… We’re seeing, at lowest, a little under 10% of the sales are coming from blu-ray, compared to standard run. In some cases as high as 20% to 25%.
[RQ]- That much of a bump?
[GF]- I don’t know if it’s a bump or cannibalization.
[RQ]- Have you had any feedback of any problems with reverse importation?...
[GF]- There’s no region code on blu-rays. We have not seen any reverse back into Japan… For example, the classic is Dragon Ball, is out on blu-ray being sold at a huge price in Japan, standard def and with no blu-ray. We’re not seeing our much less expensive blu-ray going over there.
The same with Shinobi. We just launched Shinobi on blu-ray, and that has been a blowout success on blu-ray. It’s so good, that Amazon has put it on its uber super sale. They’re selling it below cost. Below what we charge them… For the same thing we charge Amazon, they’re selling it $10 for blu-ray. Loss leader, and it’s not going into Japan though. But because of that pricing,… that’s probably one of the reasons the numbers are outrageously high on blu-ray for that title. … On Shinobi we might hit 45% Blu-rays sales, it’s already sold 25% of our standard def sales.
[RQ]- Has the blu-ray market really shifted your focus of which titles you are going after?
[GF]- No. We still firmly believe that great content is based on how good the story is, the character development is. We’re also very focused on genre because certain genres sell way better than others. That underlying show content has to be there first and foremost, regardless if it is filmed in HD or not. That’s really the most important thing. If it meets that criteria, all things being equal, yeah of course we’d rather we go for the HD content over standard def content. All things being equal…
[RQ]- You mention genres. In light of all the new titles, has your focus shifted there at all?
[GF]- … We’re a business so we have to focus on what title sells the best. In terms of genre, it’s still action/ adventure. Hands down. No doubt about it. Not even close. No dispute. Action/ adventure is what sells DVDs right now.
We say all that, but then we pick up Ouran Host for example. Well, it’s because there are these gems, like Fruits Basket was for us a long time ago. There are these gems you just can’t pass up because the… story is too good. We may or may not sell as many DVDs as we want. But if our fans want to keep having us buy them they should buy the DVD because that’s the only way I can keep justifying buying titles like that... If we really see strong content- School Rumble, or Ouran, those kinds of titles, yes, Negima! We pick them up.
Shuffle! actually, is selling very well for us. That’s one of our surprises in the spring, is Shuffle! I think it’s topping most of our titles right now. Many of our titles. It’s like, in our top four titles right now. Shuffle! is kicking butt right now, oh yeah. It’s good. People like that show. Fans love it.
[RQ]- …[Discussing marketing and promotion of] the titles that you acquired from Japan?
[GF]- Obviously, on titles we acquired from Japan, we have a full marketing program against every title. The more rights we have on the title, the more marketing we’re willing to do. Meaning, we really need those digital rights. Which everybody’s giving us know, but I’m just saying it’s a critical matter. To do that, we have this whole campaign around the title. We’re releasing digitally, we’re going to try to release on broadcast, we’ll try to release on DVD, we do the marketing, we do the conventions, we do the operation anime. The full gambit on those titles. Now, we are responsible for all rights around that brand. We’re going to do the full rights management push on it.
Titles that have not performed as well for FUNimation, to be honest, were the ones where we only received the DVD rights. Because we can’t turn on our big, expensive marketing machine. We just can’t turn it on for DVD rights only. Those titles struggle a little bit in our library because we can’t turn on the rest of the infrastructure.
Fortunately, in most cases, FUNimation owns all the rights. It’s not really a big issue. These all get marketing full court presses. If you don’t see it, it’s probably because there’s a rights issue.
[RQ]- … As opposed to three companies, it’s essentially one company handling a lot more of the content, or at least distribution. There’s a lot of questions about what this means for some of the other things you have going.
[GF]- Plus, VIZ and Bandai are still very strong and have a lot of good titles. It’s a three company race right now. Those guys have always been well behaved companies. I feel that all three of us are well behaved companies that are looking out for the long term interest of the industry. It’s a good three to be left, let’s put it that way. Our mindset is a bit more similar, I think. Us three are.
[RQ]- … certainly, the market is crowded. Like you were just saying, it’s certainly a lot easier when you have a three horse race versus a five or ten horse race. How has the acquisition [of FUNimation by Navarre] affected the relationship with your parent company? Has it helped at all in certain areas? Can you speak to that at all?
[GF]- How has the acquisition of Navarre of FUNimation helped us?
[RQ]- Yes, … it’s been a couple of business cycles now. You have enough time to see the difference.
[GF]- It’s been three years. It’s been actually quite excellent. There’s no doubt they really helped us improve our back end distribution of home video product. That includes everything from pricing to inventory controls. Proper inventory management at retail to even the financial aspects of dealing with retail. Getting better terms, that sort of thing. It’s the whole group of anything it takes to essentially get a widget out the door. Have inventory sold, pick-packed-and shipped, retailers’ return, do the math, accounting. All of that work has taken a big step up for us thanks to Navarre. That’s been a great help. Really, that the main thing they were trying to do anyway as far the acquisition, obviously. The main goal was achieved, I believe, for both of us.
[RQ]- Any cultural changes within the company? It’s been a couple cycles now, you can say.
[GF]- No. Those guys, Navarre, were really smart enough to leave us alone, basically. They realize, [speaking for Navarre] “We don’t know anything about anime. You guys, as long you’re hitting numbers. Go, go, go.”
So they just let us go, go, go. And fortunately, we haven’t been really handcuffed in any way, to be honest with you. They’ve really been great corporate parents, in that sense.
[RQ]- As a personal question, you spent a summer in Japan-
[GF]- A whole year, the 8th grade.
[RQ]- Was that the genesis? You grew up in Indiana, right?
[GF]- Born in Japan, grew up in Indiana.
[RQ]- What was it about the experience that said this is something I want to come back to someday?
[GF]- Well, I was there at the right age to see all those great anime. That year I was there, which kind of dates me back a bit, it was Uchu Senkan Yamato, that was the hot show in Japan, Star Blazers. Loved that show. I loved the big robot shows too. Remember, back then, there no so such things as robot shows in America. To an 8th grade kid, it’s like wow! To be honest, I never thought I’d be in animation industry since my whole background is high technology. Electrical engineering, and all that.
But because I was entrepreneurial, when I decided it was time to start a company and I started looking for good high tech ideas, the whole anime thing came back into the back of my mind. I realized, you know what? They’re starting high tech companies, let’s take a crack at anime because I just could not logically figure out why in the world that stuff that’s so good is not here in this country. I just couldn’t figure it out. It just baffled me, really, to be honest with you. It was almost like a challenge. So instead of going down the high tech route I just decided I would take a shot at this first.
[RQ]- … What did you say to your friend to get him to sell his farm? I remember reading one of your bios, that you actually got a friend of yours to sell his family business?
[GF]- Oh, no, not sell. He just recently sold it. So he was sitting on a lot of cash. His whole family, not just one person. My friend was part of a family group, two sons and a father. One of the sons is a great friend of mine. That family, the Cocanougher family, well I think one- Remember, I worked with the guy at IBM so he had certain faith in my [abilities as] a business person, I think. Thank goodness! And he still didn’t hold that against me, which is shocking to me actually.
What actually triggered this was that they had invested a few year before that, they were one of the first people importing were importing stuff from Japan, and were a huge success. This group, this company, they invested in through a relative, a distant relative. They were one of the first importers of this thing call Nintendo, that they never heard of. Well, you can imagine what happened is that they did the games for Nintendo and some of the first games, like John Elway Quarterback, were theirs. So, they helped invest in that and it was a great success.
So what actually triggered them, when I approached them, was I was talking about anime and all that, they weren’t actually interested in all that. They just heard one thing in their mind, which is it was the #1 video game in Japan, and other territories. So that’s all they heard in the pitch. They said, oh, the #1 video game. Well, that’s going to be easy. We’ll just bring that over like we did with Nintendo. And that’s what made them invest. They figured everything else was gravy. Home video or any of the other things we did with the Dragon Ball franchise was gravy. But they wanted that video game.
I did the whole thing. I did the whole financial spreadsheet, business plan and everything. They looked the whole thing over. What they thought was the video game was going to save the whole thing. If everything else went south, if you couldn’t get it on TV, if nothing sold, that video game was still going to work. That’s what they thought. So that’s how they capped their downside in their mind. They liked the rest of the plan. It was a good plan. Investors like to know if things go hell in a hand basket what’s the one thing they’ve got they can put their finger on. Venture capitalists think about that all the time. What’s the one thing that will make me money at least if the hard work [doesn’t pan out.]
[JS]- Get their investment back.
[GF]- Yeah.
[RQ]- Did the John Elway part of it make money?
[GF]- Their other business? Their other business made a lot of money.
[RQ]- … When you talk to somebody who would love to work in this industry. And they look at you, as one of the pillars [of the industry], saying “this guy made it. I may not have an MBA from Columbia or anything, but I have a passion for it.” What do you say to them?
Look for the answer to this question and more in Part 2!
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