Over the past weekend, we saw thousands descend upon Baltimore to attend Otakon. As always, the event was met with much pomp and celebration by enthusiasts that were eager to fill and explore every square inch of the Baltimore Convention Center. Tens of thousands of tweets and Facebook updates were posted, cosplay photos flooded social media timelines, and every detail was lain bare for the world to see.

Amid the glee and chatter, we saw the industry trot out their major announcements and acquisitions, as they tried to close off convention season with a bang. FUNimation threw out one heavy hitter after another, with their announcements of titles like Lupin III: The Woman Called Fujiko Mine and Akira. We saw Sentai Filmworks reveal Nakaimo, while NIS America made a somewhat baffling announcement in acquisition of Umineko: When They Cry.

Sometimes, though, the most interesting chatter comes about after the lights go out and the masses begin their long trips home. on Sunday evening, FUNimation Marketing Director Lance Heiskell posted the following to Twitter:

“That’s nice, but what does that matter?”

Well, dear reader, take a seat. Heiskell’s comments reveal a bit more about the inner workings of the industry as a whole. Specifically, they show that a multi-tiered structure has appeared within the market itself.

With the current distribution structure, we can place the industry players into two distinct classes: The larger, mainstream organizations, and the smaller boutique sellers. The smaller organizations, which include entities like NIS America, Sentai Filmworks, and Media Blasters are the veritable cottage industry that is romanticized through popular conversation. These are the companies that work from title to title, constantly picking and choosing the titles within their budgets, with the hope that it’ll be the one to help them grow further. They hope for a title that can reach 5,000 sales, and see 3,000 as a high water mark.

“Boring… what does this have to do with the comment?”

Well, dear reader, it explains the conditions under which these companies must operate.

Our hypothetical title: Samurai Girls.

Let’s argue for a moment that wholesale price of a 13-episode series is about half of the suggested retail1. So,with this logic, a series like Samurai Girls has a suggested retail price of $69.98. Wholesale pricing dictates that Sentai would see roughly $35 from selling the product to a retailer. Now, from this $35, we must discount costs of production, shipping, and warehousing of surplus. So, let’s say that’s about $5 per disc. Now, let’s argue that the original licensor takes a 10% royalty of each gross sale on top of this. This would be a total of $8.50 off the top of the gross profits from each disc sold. This leads to a net profit of roughly $26.48 for each set sold to retailers.

Now, let’s argue that Samurai Girls is a typical high-performing show, and say that it sold that estimated 3,000 copies. This would lead to net profits of $79,440 for the title as a whole. This money will likely go into operational costs, such as paying staff, paying rent, and licensing other titles. Depending on the cost of the license, this can be incredibly profitable, or a disappointment at market for the company.

Heiskell’s tweet mentions that 3,000 sales wouldn’t be enough to justify dubbing a title, which is entirely true. While I don’t have exact figures, industry quotes place the overall dub cost at roughly $10,000 per episode. So, for a 13 episode series, we’re looking at $130,000 for a full translation and dub. To recoup those costs alone, we’d need to see at roughly 6,000 sales with the current pay-scale. Now, let’s argue that the company (hypothetically) paid $30,000 for the license, and $5,000 to translate. This would add another 1,322 sales to the total, leading to 4,322 total sales required just to break even, let alone profit.

“So why can’t they let FUNimation do it, then?! They have a reputation!”

Patience, reader. I was just getting to that. Anime, as a medium, is incredibly elastic in its demand. Depending on the subject matter, the genre, and even the title, there are a multitude of factors that influence a show’s ability to generate revenues. While there are some who are conscious of who releases a title and base it as a reason for purchase, the greater market sees it as a non-factor.

With this in mind, FUNimation is a much larger company, which dubs everything it releases. Now, to dub everything, from Murder Princess to Eden of the East gets expensive. using ballpark quoted rates as an example, we’re looking at anywhere from $130,000 to $250,000 added to the average show’s2 run, depending on length. On top of this, they consistently release a much higher overall volume of anime into the market than the boutique market. Also remember that FUNimation sells their titles with an MSRP of $49.98, leading FUNimation to take in roughly $24.99 per disc. Removing the $8.50 flat cost to cover royalties, manufacture, and shipping, this would leave us with $16.49 per disc in profits.

So, with this in mind, FUNimation needs to be able to carry a balanced ledger. To accomplish this, while being able to acquire new titles, we need to look at a specific profit point on the average title. At the same time, the company needs the ability to keep rolling forward in the case of a non-performing title (like Big Windup, for example). Let’s say this figure is a 20% margin, give or take. This means that, to have a title reach this given threshold, again assuming licensing, translation, and marketing are sunk, we’ll need a total of $156,000 to meet our thresholds. This would require 9,460 sales to achieve. Now, as with the ADV example, let’s argue that total base costs for the license and translation totaled $35,000. This would add another 2,123 sales to the goal point, which would give us a total of 11,583 sales to meet the goals set.

“But FUNimation keeps actors on the payroll!”

That’s a great point, reader. It’s one I had forgotten to account for in my initial modeling. So, let’s expand upon this.

Keeping actors on the payroll, assuming they’re consistently working, will see a large savings over a title-by-title contract. Let’s argue on a conservative end, that this will save 30% per title. So, this would bring dubbing cost down to $7,000 per episode. So, with this in mind, our hypothetical show would cost a mere $91,000 to dub. Add this to the hypothetical $35,000 in fees,and the total cost comes to $126,000. Assuming we still reach the same 11,583 sales, we would be seeing a revised profit of $65,003.67, a three-fold increase over our previous estimated profit margin.

Of course, this assumes that the actors work consistently. Without a steady flow of product, the in-house actors will eventually cost more per episode than outsourcing. Because of this, profits will need to be constantly rolled into new product acquisitions. On the plus side, this ensures that riders, titles added to a licensing contract as a requirement for more desirable shows, become somewhat less difficult to swallow. Since it ensures that the actors will be working, which in turn sees that their cost of utilization remains optimized, these titles will become more of an asset in the short run for the company.

A title that does 3,000 at Sentai or Media Blasters won’t do much more with FUNimation, due to the factors that influence elastic demand. Adding a dub doesn’t guarantee sales would reach a break-even point, let alone profitability, so the company does continually pass on these titles by virtue of forging ahead in the market. The trade-off, though, is that entities like FUNimation manage to amass the capital to get more new, high-performing titles due to their business model. And, while we see companies like Sentai and Media Blasters floating through the market, we rarely see them rise up with that same meteoric “oomph.” While they’ll sometimes acquire something that will print money, like Sentai with Persona 4 (Blu-Ray issues aside), the overall market seems to be comfortably settled into the dual-layer structure that’s formed in today’s market.

1: For the sake of simplicity, we will be using a generalized model. We’re assuming that costs like translation, acquisition,and marketing are sunk costs that were already logged on another balance sheet.

2: This does not count long titles like One Piece or Fairy Tail, which will grow exponentially more expensive.