Interview: Gen Fukunaga on the status of Funimation

ANN: Can you put in your own words what led to the decision for Navarre to sell Funimation?

Fukunaga: Basically, Navarre is in a situation where I think strategically they feel they should really focus on one business, because Funimation's business is totally vastly different on many senses from the rest of Navarre's business. As you may know, the rest of Navarre's business is PC software and software-oriented in general. So I think at the current size of Navarre and its future, I think it sees that the best strategy for them is to really focus on software, which is what all their management and expertise is in. From our point of view, because of that situation, there's always the question, “well then how much of that value is Navarre adding to Funimation and helping us grow?” So, from our point of view we feel it would be better to have partners that could help Funimation grow faster and get us to the next level. And so I think Navarre realizes their team really is not the team to help do that because it's just not their area of expertise. They're not in the entertainment industry, they're not even in the DVD or digital industry really – digital delivery of TV shows and things like that. I think it seems like this would be the best strategic way for both companies to go forward, and so that's what led to this decision.

Is there any chance at this point of Funimation becoming once again an independent company? Or is it absolutely going to be a sale?

Well the problem with being “independent” is that somebody still has to put up the money to pay Navarre for the company. Yes it could be independent if a private equity fund bought us, or wealthy investors, yes, sure, I guess it could be independent in that sense, but it's still a sale by definition, they still have to pay cash to Navarre for the company.

Can Funimation operate without a strategic parent that can give it resources that it doesn't have internally?

Navarre provides a great back-end service for us, distribution and such, but that is a turnkey operation that you can obtain from multiple sources. Those services are available by multiple different companies. Regardless, the idea here is that Navarre would continue doing the back end for us, even after the sale. That would probably be a scenario I could see occurring. Navarre sees that as a scenario could probably occur as well. Other than that though, what exactly would they be providing us? There isn't anything else, we basically function as an independent already.

There has been some speculation that the original owners of Funimation, including yourself and the Cocanaugher family, might be looking to re-acquire it?

That's pretty unlikely because we've got all sorts of other investments now, and we'd have to sell everything else we've invested in, and so that isn't likely to happen.

In this press release and elsewhere there's been a lot of talk about co-productions with Japan. Could you explain why that's necessary for the future of Funimation in the market?

Yes because the issue is that we feel that just like almost any industry, you need a certain number of “killer apps” in a sense to keep driving an industry forward. There wouldn't have been a PC industry really unless things like spreadsheet software came around that helped lock that industry, so there is usually something like that drive an industry to the next level. We just feel like it's hard to acquire a killer app out of Japan – meaning that Japan produces all these great shows, and of course none of them are known in the U.S. to a mass audience, they're not on a mass level in the U.S. – so we bring them over and we get decent sales, and that's a great little business there, but it's not selling a million units per release. It's not at that level. And so our only way to get to those kind of tentpole-like titles on a consistent basis – meaning multiple ones every single year, year in and year out – is we have to control that situation, and therefore we feel that the best way to do that is through co-productions. Because what we'll do is take a famous American brand that already has a big fanbase, and then make an anime of it. So we're not talking about a co-production as in just coming up with some new concept and producing it as an anime. That doesn't help us at all. We need the strategy.

So overall, what needs to happen for anime to reach larger audiences again, and what is Funimation hoping to do to achieve this?
A couple things. One, as we were talking about, we need to reach a wider and wider segment of people, and draw more people in to the genre. And we feel that the best way to do that right now is through these co-productions, where let's say there's a fan of some hot sci-fi novel or a fan of some hot video game or a fan of some hot U.S. television series, and then we make an anime of it. Well, then you naturally can try to get anime exposed to those different groups of people who happen to be a fan of those brands already but maybe not a fan of anime already.

The other way we're doing it is through a ton of exposure via broadcast; not just through the Funimation Channel, but also digital broadcast through our streaming network. Lastly, and I think this is something that's out of our control: Hollywood itself is actually starting to go down this direction by snapping up all the live-action rights to many famous anime, which could also help bring the medium up to another level, as big-budget live action anime adaptations are produced. As I said, that's out of Funimation's control, but by and large these are things we believe we can do to help expand the genre.

Related to what you just said about live-action movies, last time you and I spoke, which was I believe just under two years ago, you mentioned live-action movies. You were talking specifically about Dragonball at the time, and you said that the industry needed one big hit to give anime a push in North America. Since that time, as opposed to one big hit, we've had two big flops, Dragonball and Speed Racer. Do you think that's hurt anime, and do you think that's hurt the chances of further live-action movies?

Well, it may have hurt only in the sense that the gatekeepers of Hollywood don't understand the genre enough, and don't realize those flops were not due to the fact that the underlying content was anime. Those flops were due to totally different reasons. Speed Racer for example, isn't like what we're releasing, as you can tell. It's basically an old classic kids’ show. And it's not really like these shows we're releasing, like Soul Eater, Fullmetal Alchemist or Trinity Blood. It's a whole different thing. Its association with modern anime is pretty farfetched and a stretch I think. I don't know if it being anime helped or hurt or anything, it probably had almost no influence on whether the thing was going to succeed or not. For Dragonball, you're right. That should've worked, had the execution been correct. But as anybody who's seen the movies knows, neither Funimation nor any of the Japanese creative staff were invited in to help guide the direction of the content in that title. In fact we were totally rejected from assisting with that. So, you got what you got. When you're that off brand, of course it's not going to work. So, I think that's a very clear reason on that one. I think if somebody gave that another shot and did it right, then it could work.

Has there been any effect on your co-production plans after Navarre's announcement? If not, how are the plans progressing? When can we expect to hear actual news - first title announcements, etc?
 
We plan to announce our first co-productions in the next couple of weeks. Our partner just got the press release approved through their corporate system, and so we'll be announcing that in the next few weeks. We're going forward and plowing ahead rather quickly. Nothing's slowing us down. Navarre continues to fund us. With the co-productions, Navarre is actually funding us in general. They're not in any way reducing our budget or anything like that. We're moving right ahead with our plans.
The intent of any potential sale here is not going to be a fire sale. Navarre doesn't have to sell us obviously. It just seems like the appropriate strategy at this time. But if they don't get the price they want, they just won't sell us. They'll just keep us and everybody will be happy and moving along nicely. It's just that if they get the right price, then they'll sell us, because then, they can use that capital to focus on their strategies, and we can get a partner that will hopefully help us get to the next level. But that really means that we're looking only for a sale to somebody where the company is pretty much going to stay intact in every single way. Nobody's going to be leaving here. And I mean nobody - the management team, everybody is going to be the staying here.

Financially speaking, the last two years have been bad for the market, both the anime market specifically and the general stock market. What sort of discrepancy are you expecting between the original sale price of Funimation to Navarre and the price Navarre would sell it for?

I have no idea to be honest with you, because it's going to be a bidding process, where we're asking for bids. So we don't know where the bids are coming at. The flip side is that even if I had a good idea, we wouldn't be able to disclose that publicly anyways.

Additionally, over the last 2 years, the market has been hurt, major retailers, especially Best Buy, have significantly cut back on the anime they stock. What does the reduced shelf space mean to Funimation and the potential sale of the company, and how has this changed how you do business?

Well, just like when Musicland went bankrupt – and they were by far the number 1 anime retailer – the fans out there will find a source if they want the content. And so it quickly shifted over to Best Buy. Of course during that shift there's a small hiccup time.  Similarly, we are seeing a small hiccup right now because of the Best Buy shelf reduction. But the flip side is that we're seeing nearly a 100 percent growth in our online retailers in terms of sales. Like Amazon, for example. So we're already seeing a shift to online retailers happening. We're in the content business; if the content is good and there is a fanbase there, then we're hoping they'll figure out some way to buy it. Regardless of which type of store they get it from. But of course, the shrinking brick & mortar retail space isn't good news in the short term.

You just mentioned that if one outlet or one channel closes, the fans will find a way to buy the content they want, but what kind of effect does this have on exposure to new fans?

People don't become anime fans because they just happen to see a DVD sitting on a shelf somewhere. They'll pass it by just like I would pass by genres I don't ever watch. I think that most people become fans because one of two things usually happens: either a friend recommends it, and the friend really pushes seeing something, and then they like what they see; or they see it themselves through some kind of exposure mechanism such as broadcast. Those are the two biggest drivers really anyway. So what's happening in the anime industry that wasn't around 5 years ago, was in the old days you only have television broadcast as the only way to really drive that exposure, and so that was limited because the number of titles picked up were limited. But now with the internet what we're really seeing explode is a much bigger fan base being created as all these people are starting to watch anime online. And we're hoping that like just in the late 90s when this happened through the tremendous exposure on TV, this equivalent exposure now to the internet will then lead to purchasers of the content going forward.

Given the market's ups and downs and all the turmoil of the last 2 years, what have you learned, and what kind of surprises have there been for you?

I think in general we're learning a lot about the digital side of the marketplace. I think now after years of doing this, we feel pretty darn savvy in the digital space. Certainly years ago we were on a learning curve. That was all things digital, not just streaming, but download, or SDOD, or pay-per-view, digital goods and virtual items, the whole gamut of things. I think that side of it is relatively new, and that's obviously an area where we've learned a lot in.  Basically, there are a lot of upsides in the future for us in all those areas. I don't know if we've been hit with anything significantly unexpected from any angle. We've kind of seen things coming far enough out that we've planned for them rather well I think.

Any good surprises?

I guess one thing for Funimation that was a very positive is the success of our live-action titles. That's been a surprise. Titles like Shinobi and Ichi, great titles. Honestly, Shinobi and things like that are outselling pretty much all of our anime. Ichi is too, is outselling many of our anime. I think that's a pleasant surprise, the whole live-action area that we've entered in to.

Funimation's been been doing a lot of re-releases in different formats and re-prices. Some people have been comparing this to the flood of SKUs that came out before the bubble burst, especially from other companies. Do you have any comment on that comparison?

First of all, with the bubble, there was just a ton of SKUs that flooded the market like you said, and now, even with all of Funimation's releases, overall there are a lot fewer releases from all our competitors, and so the total number of releases going into the U.S. market is actually quite reduced from a few years back. The SKU count is actually lower still by quite a bit. In terms of our release patterns, one of the things that kind of forced a little bit of a push recently from us, is that we swallowed up two big catalogs – the whole ADV deal and the whole Geneon U.S. deal. That suddenly doubled our releases, but we're calming right back down to the normal pace we were at before. When you suddenly swallow up the 50, 60, 70 titles we got, you have to release them. So, those big catalog deals forced us in a situation where we're sending a lot of stuff out the door. Like I said, though, we're back to calming things down quite a bit now in that area.

The other thing that is different, I think,  from a few years ago is that back then, a lot of people thought -- and Funimation really did not believe in this, but a lot of other people in the industry thought just release anything anime and it'll sell enough units to be profitable. We're trying to really focus on quality titles, and we feel a bubble won't necessarily occur as long as we stay focused  – even with the number of releases they still are good titles. We're passing on a lot of titles nowadays. Sometimes we're wrong of course, on what we consider a good title and the market doesn't. Even titles that don't sell a lot of units, we felt that the anime had a really good story and was really high quality. So I think that also prevents the mistakes of the past from being repeated, where everything and its mother is out on the street and who knows if it's good or bad or whatever. That selectivity is probably going to make a difference in that area.

One last comment on our release schedule is that we have a very set pattern on how we release titles. We have our initial release, and we try to wait at least a year before we release a complete box set, and so on and so forth. So we do have a pattern that does delay subsequent releases of the exact same brand.

How has Bluray been performing?

Very good. It's a higher percentage of the total sales per title than Hollywood releases. There are some titles where we're just not releasing on Bluray right now. It's expensive, and some of the titles weren't in original HD. So it makes them pretty hard to release a lot of this stuff on Bluray unless we literally go through a very expensive process and digitally remaster them. If we deem a title profitable to go through that kind of expense to remaster, then we'll do it. But in general, yes, as a percentage of sales – meaning how many people are buying the bluray edition versus the standard edition -  than any kind of traditional Hollywood release.

Did you have any further comments overall?

I think in general this is a very good strategic move that was very carefully thought out by both Navarre and Funimation management. I think it's going to provide a bright future for Navarre because now they can not only really focus their core business but they can also use the capital from any sale to really beef up their software side; they have a lot of potential over there at Navarre. On the flip side, for Funimation, like we talked about, of course assuming we'll have the right partner, that's going to get us to the next level as well, especially since we're doing so many different things like co-productions, live action and all the digital stuff. It's not the same old ‘crank out a DVD and put it on a shelf’ business anymore by itself, so we've shifted into more of these other business models where the right partner could really help bring us up to a much higher level as well. I think the strategy is quite sound. The whole team here is excited about executing this strategy and seeing where it can take us.