Xd productions Corporate Summary December 2006 The Company

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XD Productions

Corporate Summary
December 2006

The Company
XD Productions SA was founded in 1998 by Jacques Peyrache, a pioneer in the 3D animation industry and part of the team which invented the process of motion capture. In response to the economic realities of the European television market, the company developed proprietary motion capture technology to industrialize the process of 3D animation production, departing from the high-cost, labour-intensive process of 3D key-frame animation. To date, 4,000,000 Euro has been spent in the company’s R&D program and has resulted in the creation of the most cost-effective 3D animation production tool in the world, The Cyberdome, the first and only real-time, markerless motion capture system.
XD Productions SA is based in Paris, France, where it has its head office and a 400m2 studio and research and development lab. A second, 500m2 studio is located in Angouleme, France. The company employs 12 permanent staff, including a 4-person R&D team, and up to 20 freelance 3D artists at any given time. Jacques Peyrache, founder and CEO, owns 80% of the company. Charentes-Libres (a subsidiary of Sud-Ouest Groupe) owns 10% and key employees own the remaining 10%.
The company is engaged in the mutually re-enforcing activities of technology innovation and 3D animation production. In its technology business, XD Productions is in the final phase of streamlining the user interface for The Cyberdome motion capture system in preparation for its worldwide debut in the interactive computing technology and 3D animation markets at Siggraph 2007. The company plans to follow up The Cyberdome’s debut with the release of its Virtual Video Cloning software in Q2 2008 which will expand the market for The Cyberdome from 3D animation studios to the entire video studio market.
On the production side, XD Productions has established itself as a leading producer of quality 3D animation for children’s television in Europe. It is currently engaged in 4 principle projects:

  • The Virtual Tales series, which began with the production of a feature-length pilot for the series entitled ‘Little Moses’, and was followed by the 44 minute 3D animated TV special ‘The True Story of Pinocchio’ and the 90 minute 3D animated feature ‘Merlin the Enchanter’.

  • Creation, production and delivery of character animation for 40 13-minute episodes of ‘Tribal X’, a 3D series for TF1.

  • Development of the first 3D special series ‘1001 Nights’ consisting of 4 90-minute episodes.

  • Production of the first TV series hosted by realistic human clones, a scientific news primetime program ‘Rayons X” in 200 3-minute episodes plus 5 90-minute TV specials.

The Market
3D animation represents a multi-billion dollar market which includes television, home entertainment, computer and video games, and theatrical films. Some recent data serves to illustrate the size and strength of the 3D animation market:

  • The number of DVDs sold to US dealers for sell-through in 2005 was 1,114.2 million units (Motion Picture Association of America).

  • In 2005, 4 of the top 5 selling DVDs in the United States were animated features. (Motion Picture Association of America)

  • Total consumer spending on DVDs in 2005 was $23.32 billion. (Adams Media Research)

  • US computer and video game dollar sales in 2005: $7.0 billion. (Entertainment Software Association)

The Cyberdome’s originality lies in two basic principles of its approach to animation, reconstruction and composition of 3D images: multi axes HD video shooting and real time 3D moving reconstruction from real images. The Cyberdome records the movements of a real actor in 3D using a fixed multi-camera dome while calculations of images on parallel networks occur in real time.
The system produces animation through optical motion capture based on the actor’s silhouettes. This markerless, non-invasive approach represents a new achievement in motion capture technology which has previously relied on markers placed on the actor’s body which restricted movement and systematically created high operating costs due to data cleaning requirements. The Cyberdome is also 10 times more cost-effective than standard 3D key-frame animation.
The software developed in tandem with the physical Cyberdome structure enables automatic constitution of 3D databases allowing real-time visualization at 25 images per second of 3D rendering, as well as management and composition of images, schemes and episodes within a database facility. The system is further able to create visualization of image compositions from virtual cameras resulting from the positioning of characters and objects in three dimensions whether real or artificial.
The Cyberdome system has also made advances in the motion capture field with respect to recreating subtle expressions of emotion, accurate lip-syncing and capturing the subtle dynamics of clothing as characters move. These advances have led to a level of representation of idiosyncratic tendencies and individual personality far beyond the scope of past approaches that captured only the basic motion of the human body, creatng new possibilities for animating characters with depth of individual personality.
The Cyberdome will become the first Virtual Video Cloning system in the world with the release of the Virtual Video Cloning software in Q2 2008. The system will allow studios to transcribe in real-time a real actor into a 3D computer generated universe. This will allow a few 3D technicians to control the video shooting virtually, from unlimited camera angles and within any 3D background. For example, an actor being filmed in a Cyberdome in France, may in real time be giving a tour of a castle in England, in a 3D virtual space in which the actor and building are reconstructed in real time. Alternatively, a doctor could give a virtual tour of the human brain, or an astronaut guide viewers around another planet. Virtual Video Cloning creates new creative and technical possibilities for the video industry. From an operational point of view, the typically large number of operators and technicians required to conduct a traditional video shoot is dramatically reduced, since the shooting is done by the fixed-camera Cyberdome, and the image presented to the viewer is contolled through an unlimited number of virtual cameras.

Management Team
XD Productions is led by founder and CEO Jacques Peyrache. He was the Director of Image Research at French television network TF1 from 1982 to 1987. Later he founded and was Managing Director of Pixibox, the world leader in 2D digital animation from 1987 to 1995. He implemented the ‘PEGS’ digital standard in the international animation industry. After two years in the United States for Pixibox, he was appointed Managing Director of Medialab, a subsidiary of Canal+, world leader in motion capture technology, from 1995 to 1998. In 1997, he invented The Cyberdome, and to realize its potential he formed XD Productions in April 1998. In the course of his career, Jacques Peyrache has been the Executive Producer of more than twenty internationally recognized animation series accounting for more than 300 hours of TV programming such as ‘Donkey Kong’, ‘Spirou’ and ‘Bamboo Bears’. He was also entrusted by Walt Disney Studios to realize the digital treatment of a theatrical-length feature film: ‘Goofy Movie’.
Laurent Juppe is a founding partner of XD Productions and acts as the company’s studio manager. He possesses a post-graduate diploma in Artificial Intelligence and Fuzzy Maths. After serving as an engineer in a major oil company, he served as the manager of the Real Time Animation department at Medialab from 1995 to 1998 before co-founding XD Productions.
Phillipe Souchet has been R&D manager at XD Productions since its inception. He is a specialist in solid modeling and computer graphics algorithms. Prior to joining XD Productions, he was head developer for the French studio of Sony Psygnosis and developed many worldwide video game titles.
In addition, XD Productions has an R&D working relationship with the L3I lab of the University of La Rochelle which is home to 16 Professors, 23 Assistant Professors, and over 20 PHD students. The lab is one of Europe’s leading centres for fundamental research in artificial intelligence and 3D imagery including specifically computer modeling of human behaviour and the creation of learning man-machine interfaces.

The Future
XD Productions has a three-fold growth strategy:

  1. Expansion of its core production business through a Cyberdome Network and international co-productions resulting in a 100% increase in annual studio revenue by 2008;

  2. B to B technology sales: penetration of the worldwide professional 3D animation studio market with the Cyberdome motion capture system followed by expansion into the video studio market with the release of the world’s first virtual video cloning software in Q1 2008;

  3. Complete development of a B to C toy by Q4 2008 – Animakit – for interactive gaming, interactive television and interactive virtual communication and education.

1. 3D Animation Production
On the strength of the technical maturation of The Cyberdome, XD Productions is in a position to propogate a Cyberdome network through international co-production partners and double its production slate over the next two years. XD Productions’ latest major achievement in 3D animation production, the 3D HD feature-length film ‘Merlin the Enchanter’, received the honour of being broadcast by ARTE in both France and Germany on December 24th, 2006, in primetime. The honour of this broadcast date and time is a testament to the film’s technical and artistic merit. The film has also attracted the attention of several major North American distributors for worldwide television and home entertainment distribution. XD Productions expects to have solidified a worldwide distribution agreement for ‘Merlin’ by Q1 2007.
XD Productions is developing a 3 film co-production agreement with Canadian partners for the co-production of 3 new films in its Virtual Tales series. On the basis of this agreement, XD Productions is seeking to establish a Canadian subsidiary in Q1 2007. The Canadian subsidiary will co-produce the three new Virtual Tales, enabling XD Productions and the new Canadian subsidiary to leverage the tax advantages of the Franco-Canadian Co-Production Treaty and to position the films for immediate North American distribution. The subsidiary will allow XD Productions to position itself more broadly as a premiere 3D children’s content producer within the lucrative North American market. The subsidiary will also serve as a base from which to conduct North American sales and marketing operations for technology sales and provides a ready international partner for co-development and application of interactive television and gaming technologies beginning most immediately with a Franco-Canadian interactive television project XD Productions is developing with ARTE and its Canadian subsidiary co-owned by the CBC, to commemorate the 400th anniversary of the founding of Quebec. The tax advantages and market positioning will further enable XD Productions to co-produce future projects including potentially theatrical features for North American release.

2. B to B Technology Sales
The Cyberdome motion capture system will make its worldwide debut at Siggraph in Q2 2007. The system will be the world’s first real-time markerless motion capture system and is significantly less expensive to operate than the current leading system. The cost-advantage of The Cyberdome will be the spearhead for penetrating the 3D animation studio market. By Q4 2007, new Virtual Video Cloning software will be validated and will debut at Siggraph Q2 2008. The virtual video application of the technology expands the market for Cyberdome from approximately 500 3D animation studios worldwide to tens of thousands of video studios including television channels and video production studios, to which Cyberdome will offer new creative possibilities and significant cost-savings by automating the labour-intensive, low-productivity process of video production.
3. Animakit
Animakit is the adaptation of the real-time markerless motion capture and virtual cloning technology of Cyberdome to consumer applications for interactive gaming, interactive television and interactive virtual communication and education. Children will be able to animate characters through their own body movements and hence interactively drive game and program narratives as well as communicate generally in virtual online communities. The goal is to develop by the end of 2008 a toy that retails for no more than $200 and consists of a ‘magic box’ or console, software and one to four intelligent web-cams, all of which is easy to set-up and use and which is compatible with any standard home computer.
I. Interactive Games

Through Animakit, children all over the world will be able to tell and share their own stories by creating their own animation and interact in a new generation of online games. Online and console video games represent a multi-billion dollar market. Animakit is well positioned to take advantage of the latest trends in this market, in particular, the trend away from the standard push-button controller interface to greater participation and interactivity as witnessed in the release of accessories such as Sony’s Eye-Toy for their Playstation consoles and even more significantly, by Nintendo’s tack towards interactivity as the core differentiator of their systems. Nintendo’s success with its DS system, which allows children to draw and touch the screen of the handheld device, followed by the release of the Wii system in 2006 with its unique remote control that, for example, invites players in a tennis game to swing the remote as though they were swinging a racket, demonstrate the growing importance of more interactive interfaces and games.

Animakit represents the next generation of interactive gaming, where children are not only allowed to perform particular movements as part of a game narrative, but can act out the entire narrative and completely animate characters. The much wider scope for interactive participation by the player creates the possibility for much greater control of the game narrative and correspondingly much more robust game narratives, resulting fundamentally in a richer gaming experience. What is more, Animakit will be completely online-capable, so that children can play games in virtual online communities.
In addition to system sales, parallel markets for games and characters will be created. Children will be able to purchase games and characters online through dedicated websites, or alternatively, children will be able to purchase games on CD ROM, or some other conventional format to be determined. Any character from any popular story, television show or film can be adapted to the Animakit platform. Even real people, such as the child him or herself, may become the character. Children will be able to create their own stories in magical 3D universes.
II. Interactive Television

The fact that Animakit is not simply a gaming console, but is also in essence a home studio, means that children can create their own animation content. By enabling children to create their own animation, a new market for child-produced, interactive television is born both for internet transmission and conventional broadcasting. With falling broadcaster license fees and the growing number of regional and niche broadcasters, the possibility of having children produce their own television is attractive from both a cost point of view, since production costs are effectively eliminated, and from a ratings point of view, given the success of television shows such as American Idol which are driven by audience participation. Animakit takes the concept of audience participation to a whole new level, where people do not simply vote or respond to what is presented, but author the show themselves. Children will be excited to see their work broadcast on television, creating a new creative phenomenon.

In addition to the Animakit toy designed for home use, an institutional version will be created which will be somewhere between the toy and the professional Cyberdome, for use in schools, studios, theme parks, children’s play centres and other suitable venues that will enable children to create under trained supervision more sophisticated animation suitable for television broadcast. This will allow studios and other businesses to invite children to create their own animation and television content.
By providing children with the ability to create their own animated television content, the possibility is created for the first ever global, online, children’s interactive television channel. XD and its Canadian subsidiary will establish and host this online channel. The model is similar to the successful concept of YouTube which hosts millions of videos and attracts millions of views daily, except that the new Animakit online channel is driven by animation created by children and there is greater integration between the content production and the hosted virtual broadcast space.
III. Virtual Communication and Education

A further application of Animakit will be to cross-cultural communication and virtual education. Children will be able to interact with their counterparts all over the world in virtual online communities through the universal language of animation. Where there are no teachers or schools, virtual teachers may teach through the Animakit technology. Simple phone line connectivity (not even broadband) is all that is required to enable communication in virtual spaces through Animakit. For only a few hundred dollars, a virtual school may be set up instantaneously, provided there is only a telephone line and adequate electricity, overcoming the years it will take for many children still today to be able to see the inside of a real school with a real teacher.

Competitive Position
1. 3D Animation Production

XD Productions is the most cost-effective producer of high-quality 3D animation in the world and well established as a leading studio in Europe. The company’s latest 3D feature, ‘Merlin the Enchanter’ was produced for a budget of 2 million Euro compared to the average budget for a 2D feature in France of 4 million Euro and a budget of $60 million for ‘Shrek’.

2. Motion Capture

The main competitor for Cyberdome in the motion capture market is the Vicon system, which relies on tracking markers placed on an actors body. The marker-based approach is capable of producing accurate data but requires a large amount of data cleaning to correct instances of marker occlusion which occur during a capture session. This cleaning translates into high operating costs. Data obtained through the markerless approach of Cyberdome requires significantly less clean-up resulting in a lower operating cost. The marker-based approach of the Viccon system also requires mapping of markers and reflected beams at every frame, 24 times a second. While they have software specifically designed for this mapping, the large amount of processing that is required cannot be bypassed. The much ‘lighter’ capture of Cyberdome which uses silhouettes, enables the system to run in true real-time, a key feature which enables a higher quality of capture as the actor and director have immediate feedback and visualization.

3. Virtual Video Cloning

There are currently no virtual video systems in the world and XD Productions will be the first to create the new virtual video market. It is expected that the virtual video market will become highly competitive but XD Productions will be able to exploit its first-mover advantage.

4. Interactive Television, Gaming and Communication

Animakit will create a new interactive television market for children and redefine the level of interactivity in computer and video games. It will not compete directly against the main video game consoles of Sony, Microsoft and Nintendo but be an alternative type of interface and user experience, marketed to parents with a strong educational aspect, creating a gaming brand synonymous with content that is safe and suitable for young children and which encourage pro-active creativity and problem-solving. Animakit also has the potential to serve as a communication and education tool. There is currently no comparable product to Animakit.

1. Production

The main risks with production are over-costs and production delays. These are largely mitigated by XD Productions’ Mamie software, specifically designed to manage high volumes of animation production across international co-production partners and by management’s extensive production experience.

2. Motion Capture

There are no technical risks as the system utilizes standard HD video cameras and PCs. Similarly, there is no maintenance risk or risk of obsolescence. The commercial risks are limited to market acceptance and competition within a well-structured market. Warranties are available from French state agencies Coface or IFCIC.

3. Virtual Video Cloning

The system utilizes standard HD video equipment and PCs, limiting the maintenance risk and risk of obsolescence. Hardware limits may affect the resolution capability of the system, but this does not pose a significant threat to the commercial viability of the system. The Virtual Video market has not yet been established. It will likely be very competitive owing to its potential size, with competing solutions likely appearing on the market. Further development is required, the risk of which will be mitigated through XD Productions’ management and experience in R&D planning.

4. Interactive Television, Gaming and Communication

Animakit requires 18 months of development. There are significant scientific and technical risks. Technical milestones may not be achieved. For every technological deliverable defined in the Animakit development plan, at least one alternative approach has been identified. There are also significant financial risks in the event of delays and over-costs. These will be mitigated by a well-defined governance and oversight structure put in place from the beginning of the project. Work package leaders, the project coordinator, the project executive committee, the scientific council and the project’s governing board will have clearly defined responsibilities and communication, conflict-resolution and decision-making activities will be facilitated through a system of internal reporting established at the outset of the project. There are also significant financial and commercial risks associated with the final exploitation of the product owing to market competition from large companies well established in the gaming industry, market acceptance, and potential financing needs associated with manufacturing, distribution and marketing.

Total revenue in 2006 was 2,530,000 Euro and will be 4,285,000 Euro in 2007 and 7,484,000 Euro in 2008. The company projects rapid growth to continue in its production business and B to B technology sales after 2008, in particular based on the release of the Virtual Video Cloning software. Animakit represents a potential opportunity for sales of B to C systems and related games and products of $100,000,000 to $300,000,000 annually.

Funds Sought and Utilization
XD Productions is seeking $3,000,000 in investment. $500,000 will be utilized to establish the Canadian subsidiary and $2,500,000 will be utilized to complete development of Animakit by Q4 2008.

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