As the world's third largest box-office territory behind the US and UK, Japan is a hugely influential player in the international sales business. And until a few years ago, Japanese distributors would regularly stump up 10%-12% of the budget of heavyweight independent films.

So it is not surprising Usen Corp's recent announcement that its subsidiary Gaga Communications is withdrawing from acquisitions and production has created a ripple of anxiety throughout the industry.

A pioneer of Japan's indie distribution sector, Gaga epitomised the deep-pocketed Japanese buyer which would send huge delegations to Cannes and make eye-popping acquisitions. But as Usen's announcement highlights, the days of big-spending Japanese buyers are over.

It is not that distributors have stopped buying - but they are paying less and being much more selective.

'We can't say foreign films aren't working - some still make money - but the market has become much more specific,' says Asmik Ace acquisitions manager Joe Ikeda. 'Domestic (Japanese) films are tailor-made for the Japanese audience, but with a foreign film we have to find the elements that can sell. It's not just about quality, but more about how we can position it.'

Overcrowded Japanese market

Japanese buyers have long complained that US sales companies charge too much for product. Local films have had a huge upswing at the Japanese box office since 2004 - accounting for 53.2% of the market in 2006 and 47.7% last year - leaving less room for foreign titles.

The Japanese market is also overcrowded, with the number of releases growing to 810 last year compared with only 640 five years ago.

As a result, the average running time for each release has almost halved to around five weeks. While this is still longer than in other Asian territories, distributors say p&a costs are spiralling as they focus on first-weekend results for each film.

The strength of local product is also having an impact further down the food chain: free TV does not acquire foreign movies as broadcasters have also shifted their attention to local films.

And while pay-TV and DVD are still buying, the former is fragmented and the latter is in decline. New media is ramping up but distributors describe the revenue as 'still peanuts'.

All of this will be familiar to distributors worldwide - the difference is that sellers have counted on Japan to pay high prices. Once an alternative presented itself in the form of local product, foreign films were left on the shelf and prices started to plummet to around 5% of the budget of each film.

In Gaga's case, it may have been out of touch with what competitors were paying. It is understood the company paid around $27m for Japanese rights to The Golden Compass which is now on release. Add a hefty p&a spend and the film's $33m tally to date looks slightly less profitable.

However, Gaga's withdrawal has as much to do with its parent company's strategy as it has with market pressures or the performance of individual films. Gaga was acquired by Usen in 2004 as part of the broadband giant's diversification into the content business.

In 2006, Usen also set up a $283m fund to acquire and produce content via Gaga and other partners which was destined for its ad-supported broadband platform GyaO.

Although GyaO has been successful in attracting subscribers - it had 17.9 million at the end of February - the fund was dissolved in January after raising just $57m and Gaga's half-year losses of $4.9m were weighing heavily on Usen's books.

When Usen president Yasuhide Uno announced Gaga's withdrawal from acquisitions at last month's shareholders meeting, he also said it would be kept alive as a distributor.

But it is not clear where it will source films. Uno spoke of personally investing in an external company that would produce and acquire product for Gaga, but details were sketchy. Usen did not return calls by press time.

Some analysts believe Usen's decision simply reflects changes in the market, which mean theatrical distribution will not always be at the top of the food chain.

'We've seen the evolution of distributors where before they could sell downstream to people like (satellite broadcaster) Wowow, but now some of these guys have started going out and buying for themselves,' says Peter Anshin, president of Asian Entertainment Finance Associates (Aefa). '

Also, new platforms like GyaO are realising they can buy directly and don't really need a theatrical distributor like Gaga.'

As for those hunting for theatrical distributors to step into Gaga's shoes, it will be a long search. Japan is dominated by the local studios but Toho-Towa is busy with its Universal output deal and Toei and Shochiku have been focusing on local product.

Meanwhile, consolidation has cut the number of mid-sized indies - Nippon Herald was absorbed into Kadokawa and Toshiba Entertainment has left the business. If Gaga also quits, the major players will include Kadokawa, Asmik Ace (in which Kadokawa has a 20% share), Showgate (established when advertising giant Hakuhodo bought Toshiba's film interests) and the relatively new Movie-Eye Entertainment.

Some of these mid-range distributors are active buyers - Asmik Ace's acquisitions last year included Charlie Kaufman's Synecdoche, New York and The Diving Bell And The Butterfly; Movie-Eye snapped up Elegy, 1408 and Shoot 'Em Up, while Showgate recently stumped up for Stephen Daldry's The Reader from The Weinstein Company, among other titles. But they all talk of conservative buying strategies and intend to handle only 12-15 releases a year.

'We have to pick carefully - for one thing we don't have enough people to handle 20-plus films,' says Movie-Eye Entertainment president Kaz Tadashiki. A former Gaga acquisitions chief, Tadashiki says he bought around 30 films a year for his previous employer but found this was not the best approach.

'We buy at script stage and look carefully at the track record of the director and producer to see if they're reliable,' he says of Movie-Eye's acquisitions strategy. 'So many films are announced and never get made.'

Buying more selectively

There is also more emphasis on finding films with a marketing hook. Ikeda explains that The Diving Bell And The Butterfly performed well because it is a tear-jerker, which appeals to Japan's female-skewed audience, and the marketing team played on the fact it is based on a true story.

'There's growing interest in Japan in what's happening in the outside world, so documentaries like An Inconvenient Truth and Earth also perform exceptionally well,' Ikeda says.

Apart from buying more selectively, Japanese buyers will also be searching for risk-averse acquisition strategies. Expect to see more buying partnerships being established to spread risks, and more inventive financial structures as distributors launch acquisition funds or spin off buying activities.

Some buyers are also experimenting with making equity investments in films rather than acquiring rights - Asmik Ace tried this with Francois Girard's Silk and also has an equity position in Fernando Meirelles' Cannes opener Blindness.

But not everyone is convinced. 'We don't know if it's profitable - you have a share in global revenues but have to just sit and wait,' says Movie-Eye's Tadashiki. 'We have no control in what happens outside Japan.'

Additional reporting by Jason Gray.