VFX Crossroads: Causes & Effects Of An Industry Crisis
CreativeCOW presents VFX Crossroads: Causes & Effects Of An Industry Crisis -- TV & Movie Appreciation Editorial

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Let me tell you the story of a visual effects company that was iconic among its peers. It had worked on a long list of A list movies, kept a stable of talented artists, and was known for its superb technology. Then, one day, seemingly out of the blue, it closed its doors.

No, not Rhythm & Hues. I'm referring to Pacific Title & Art, founded in 1919, which began its life as a film-titling lab (The Jazz Singer to Gone With the Wind, Ben-Hur and onward) and later worked in digital visual effects, closed its doors in 2009 after 90 years of business.

The Jazz Singer was titled by Pacific Title & Art, founded in 1919, which closed its doors in 2009, after 90 years of business.
But the anecdote could have just as easily been about Digital Domain, Boss Films, Apogee or Cafe FX. Those are all companies on a list compiled by Phil Feiner, who was CEO of Pacific Title for 30 years. For him, Rhythm & Hues' demise was a painful reminder. "It's multiple deja vu for me," he says.

The exquisite irony of Rhythm & Hues declaring bankruptcy just before its work on Life of Pi won the venerable visual effects company an Oscar for Best Visual Effects defines a visual effects industry that finds itself at a crossroads. The blowback to Rhythm & Hues' bankruptcy – the 500-strong march on the evening of the Academy Awards, R&H VFX Supervisor Bill Westenhofer's attempt to call attention to the fact on national broadcast, and the blank green screen icon on many Facebook pages – is a reflection of frustration and anger among VFX artists.

Many of these frustrated artists are focused on outsourcing and subsidies as the culprits in wreaking havoc in the industry. While it's true that this has been a significant challenge to the VFX industry, its problems go much deeper and further back in time. The three original digital pioneers – Digital Productions, Omnibus, and Robert Abel Associates – went out of business within short order, leaving only the acronym DOA.

Of the four big VFX companies in the late 1970s – Boss Films, ILM, Dream Quest Images and Apogee – only one remains, and it's become a possession of a studio. "The whole business went poof," says Feiner.

Financial dysfunction in the VFX industry is rooted in its very beginnings, and the only way to truly understand what's going on in the VFX industry today is to go back to those pioneering years – when the industry was morphing from analog to digital – and find the crucial junctures that led the industry down a path to financial instability and ruin.

What we find is that VFX facilities have operated for years without standardized contracts and viable bidding practices. They have been and continue to be vulnerable to changes in technology and studio policy. And without any trade association, union or Guild, the VFX industry has not been able to stand together to effect change. (More on that in Part 2 of our series).

On Pi Day, a group of disgruntled VFX facility executives and artists met at a VFX Town Hall, held simultaneously in Hollywood, the San Francisco Bay Area, Austin, Vancouver and Wellington, NZ, to discuss the crisis. VFX artist Dave Rand reminded attendees that the VFX industry had its great artists, referring to Dennis Muren, ASC; its great technologists, referring to Jonathan Erland; but had yet to find its great business leaders.

Part 1 in this series on the VFX crossroads starts with the perennial problem of debt, and moves on to describe specific business practices and technology advancements that have turned the VFX industry from a playground for creative into a sweatshop and financial sinkhole.

But, as a quick glance of Feiner's list will show, Rhythm & Hues' end is just one in a long string of once-illustrious VFX houses that have closed their doors. What's going on? How can Oscar-winning work from a much-admired, long-standing company not protect it and its employees from bankruptcy? Why is the history of visual effects littered with defunct VFX houses that did often pioneering, stellar work?

This article is aimed at answering those questions, and the answers are complex. One hint: It's not just outsourcing, which has been much discussed in the press and online forums.

"Giant companies have gone out of business for many different reasons," says Bill Taylor, ASC, a pioneer in the VFX industry and former owner of Illusion Arts, which closed in 2009. To it, I add my own experiences closely covering the digital visual effects industry for nearly 25 years, including producing an all-day course on digital visual effects at UCLA Extension for five years, featuring presentations by top VFX supervisors.

Debt is the short answer of why VFX houses go bankrupt, and it's endemic in the industry. In fact, it's nearly impossible to run a visual effects facility in today's market without accruing debt. "Digital Domain and Rhythm & Hues were saddled with legacy debt," notes VFX pioneer Richard Edlund, ASC who was owner of Boss Film Studios and is now partner (with Helene Packer) of duMonde Visual Effects.

One of the enduring myths about the VFX industry is that because good VFX aren't cheap, everyone involved is making a lot of money. "Of course a huge number of dollars goes into VFX, but it is like the grocery business," says Taylor. "Three percent profit margins, 5 percent on a good day. The guys at the studios whose job it is to buy peas at the lowest possible cost have lost sight of the fact that there's a difference between margin and overhead."

The Visual Effects of "Battleship"
Courtesy CGRecord.com
Ang Lee isn't the first (or last) director to state that visual effects are just too darned expensive. Famously, director Peter Berg said in an interview that the budget of his Razzie-nominated Battleship was high ($200M), because the money was all going to [VFX facility] ILM. "The truth of the matter is that it costs what it costs," says Edlund. "Believe me if we could do it cheaper, we would. When you want to create a tiger that is indistinguishable from a real tiger, this is a very, very difficult problem that requires rocket science to solve."

It would be tempting to assign all the blame for VFX companies going bankrupt simply to bad management; after all, most VFX company executives have "street MBAs," and some have made questionable purchases or financial decisions. Indeed, bad management decisions do play a role in bankruptcy. But many other factors have led the VFX industry to be perhaps the least profitable sector of the film industry.

Once a company does get into financial trouble, one of the pitfalls is what happens next. "Companies looking for backing find what appears to be a white knight," says Taylor. "Then the white knight comes in and loads a whole lot of debt onto the company and then folds it, in order to lose the debt in the bankruptcy. It's a form of money laundering and should be illegal but isn't. If someone has the time and money to sue for fraud and the wherewithal to proceed with it, they might prevail." Pacific Title, for example, was taken over by an investment group led by a private equity fund and a stage-venture capital firm, and Digital Domain's leadership was taken over by John Textor, a managing principal of Wyndcrest Holdings, a Florida-based private investment and acquisition firm.

Even if the "white knight" isn't a financial predator, he may be a complete stranger to the film/TV industry. How many people have wandered into the industry looking for glamor and profit, only to hightail it out when they realize both are in short supply?

In the early days of digital visual effects, more than one company went bankrupt over a pricey technology purchase. Edlund's Boss Film Studios is one such example. "I paid IBM about $1 million for a parallel processing computer that's probably not as fast and capable as my laptop today," he says. "But the thing is that nonetheless you have these debts that hamper your ability to get ahead."

Illusion Arts, which did digital matte paintings, was one of the early exceptions, relying from the beginning of their digital work on Richard Patterson's system of desktop Macs and inexpensive software like Photoshop and After Effects, a system that worked for the kind of work they did. "It helped that we were not trying to create animated creatures," says Taylor. "It also helped that we stuck to a very simple business model: no debt and no receivables."

The late Robert Abel of Robert Abel and Associates (RA&A); VES Chair/Prana Studios Senior Vice President of Visual Effects Jeffrey A. Okun; VFX pioneer Richard Edlund, ASC who was owner of Boss Film Studios.

Since those early days, however, the equation has flipped, with cheap technology as a turning point in the VFX industry. VES Chair/Prana Studios Senior Vice President of Visual Effects Jeffrey A. Okun characterizes the result as "the commoditization of visual effects." "The price of hardware and software dramatically dropped in the late 1990s and early 2000s, and a lot of facilities stopped using proprietary software and went to off-the-shelf software that they modified," he says. "Before, it was a minimum $100,000 investment for a workstation and software. Now it's $3,000."

Bill Taylor, ASC, a pioneer in the VFX industry and former owner of Illusion Arts, which closed in 2009; Phil Feiner, CEO of Pacific Title for 30 years; and Rhythm &Hues VFX Supervisor Bill Westenhofer

Cheap technology has been a hard blow for an industry equated with technology, not artistry. "Before, we needed people with specific talents," Taylor says. "A talented matte painter is a rare thing and you can't buy software to do that. When the basic issues of lighting and perspective, paint and color can be taken care of with computer modeling software, you still need a person with good artistic oversight, but you don't need a good individual matte painting artist. Many of these [digital] shots are not very good. The lighting and geometry are convincing but they still don't look real – just real enough for studio executives who see them to think that they didn't have to go to Illusion Arts or Matte World."

John Dykstra; Gray Marshall, former partner in Gray Matter and currently Visual Effects Supervisor at Rod & Cones VFX; Digital Domain co-founder Scott Ross

The same goes for greenscreen compositing. "Once upon a time only a handful of people in the world understood bluescreen photography," he said. "Then, all that knowledge got put in a box with the label Ultimatte, and when the Ultimatte patent expired and everyone could use it, compositing became commoditized. There's still a difference in believability between a very good composite and a just okay one, but only a few experts can appreciate it."

Once upon a time only a handful of people in the world understood bluescreen photography.

Even as portions of the VFX business became commoditized – rotoscoping and tracking for example – character work and other high-level jobs remain the domain of a handful of top VFX shops. But the more low-level, routine work was what kept VFX houses in the black. The really difficult work required significant investment in R&D, which made it unprofitable, but VFX executives figured to make up the difference with rotoscoping, tracking, and dirt clean-up. When the studios sent those jobs abroad, they inadvertently shaved away at the VFX house's already thin profit margins. What's left – a lopsided dependence on paying the bills with the hardest jobs – has been a big factor in forcing some studios to close their doors.

Nor is it a given that today's hard jobs will remain the domain of a handful of top shops. Once a VFX facility's R&D does the hard labor of making something possible, they deliver a paper on their work at SIGGRAPH, and little by little, what was secret sauce becomes an algorithm for sale. "Section by section, craft by craft, visual effects has become commoditized," Taylor concludes. "Some things have not yet become commoditized but maybe some day software will be sufficiently advanced so someone can buy a box and create the tiger in Life of Pi."

There's no tiger-in-a-box today but, as Taylor points out, future software may enable many more to produce a big cat that the studio executives deem "good enough."

Image credit Todd Vaziri, FXRant http://fxrant.blogspot.com/2013/02/with-and-without-rhythm-hues.html
Image credit Todd Vaziri, FXRant

With their thin profit margins, visual effects facilities often live from job-to-job. But when the work is spotty and the costs are fixed, that can lead to making decisions that aren't good business practices but seem necessary to survive.

Okun relates an anecdote from when he owned a sound company many years ago. "We'd cost out a job and know what it would cost us, and we'd bid it out," he says. "The studio would come back and say, such-and-such a company is willing to do it for 5 percent less. We'd huddle and say, we can afford to eat 5 percent, let's drop our price by 10 percent. You do that thinking you're going to get the job, but instead the studio goes to another company and asks them to beat that price. The studio ends up getting a good price. But you have to ask yourself, am I a good business owner if I'm cutting the price?"

Anecdotally, says Okun, he's hearing of visual effects companies who take jobs at a loss. "It's been explained to me that if my monthly expenses are $100,000 and we have no work lined up, that's a $100,000 loss," he says. "If a job comes along for $50,000, the thinking is that you only lose $50,000 and that's a win. Some companies take the job to lose less money to stay in business long enough to try to make a profit."

How many VFX houses are stealing from Peter to pay Paul? Impossible to judge, but it explains the rapidity with which some of them go out of business, seemingly thriving one day, until the surprise announcement of its demise.

The fact that the studios needed to bail out Rhythm & Hues (to the tune of $17 million in loans) to complete work on projects in house (Universal's R.I.P.D. and Fox's Percy Jackson: Sea of Monsters) implies that the studio had been tripped up by this survival strategy.

Percy Jackson & The Lightning Thief, courtesy Fox 2000
Percy Jackson & The Lightning Thief, courtesy Fox 2000

It all boils down, says Okun, to a bigger issue: flat bidding, or what Gray Marshall, former partner in Gray Matter and currently Visual Effects Supervisor at Rod & Cones VFX calls "the consensual lie." "It's almost impossible to properly bid based on a page in a script," Marshall says. "Even if they storyboard or do previs – which can help get you closer for the big ticket items – there are so many things that crop up unexpectedly."

What he's referring to are the inevitable change-orders. "They say the script is written three times – in pre-production, production and editing," says Marshall. "VFX are also written three times and things change radically in all three stages. But nobody wants to hear it's going to be more." He recounts the story of when he was visual effects supervisor on the movie 21. "In the script, we had a scene of an environment with a green screen out a large window," he says. "I thought it would probably be 60 greenscreen shots, but I was told by the people who handled the bidding process to lower it to 20. But nobody had informed the editor so, sure enough, the cut comes in and it's got 80 greenscreen shots."

Marshall calls the model of "per-shot bidding" ridiculous. "You never know how it's going to be blocked...and then you're held to the shot number," he says. "The bid can be a starting point, but everyone knows it's going to change."

"When do the iterations stop?" asks Okun. "A friend of mine told me they built a castle, the castle was approved and put into a shot, Then they wanted flags. Next, they wanted the drawbridge to open. Then somebody said, wouldn't it be great if there were a water wheel in the moat. Somebody needs to take responsibility for saying, we'll do that but it takes more time and more artists and costs more."

Titanic VFX
Oscar-winning Visual FX crew from Titanic reviewing 3D motion capture data with director James Cameron. From bottom left: Brett Gassaway, James Cameron, Daniel Ma and Robert Legato. Photo by Digital Domain. www.imdb.com/media/rm2652871936/nm0499215
Flat bidding means just that, and VFX company executives hesitate to ask to be paid for overages. "Nice people will allow you to do a change order, but they won't like it, even if it's reasonable," says Marshall. "You're made to feel that you're not a team player." In the highly competitive environment of VFX, nobody wants to be thought of as 'not a team player,' so most VFX houses simply take on the extra work and lose more of the profit. "If you keep going back for overages, even if it's not your fault, all that will be left is the idea that this VFX company was hard to work with," Okun says. "They tend to forget we didn't ask for those changes, but we accommodate them. But instead of being viewed as a collaborative force, we become a problem."

Marshall wants what he calls a Cost Plus mode. "I've always felt that you should do your best to estimate the amount of time you need and tell the client, this should take X number of days, here's our rate card and here is how much a man-day costs in this discipline," he says. "You get paid for the days you work. What's important is that the VFX tracks those and can turn to the client and say, you're only 30 percent of the way through you're work and you've burned through 50 percent of your budget. What do you want to do?"

Double Negative logo
Offshoring the profitable low-level work was one blow to the VFX industry, but tax subsidies in other states and countries has played an even bigger role in stressing the VFX industry in Hollywood to the breaking point. State and national governments lure feature film (and TV) productions with significant rebates if the production spends the majority of its money there; the subsidies extend to digital visual effects. In the U.S., says an article in The New York Times, productions get $1.5 billion through subsidy programs in 45 states throughout the country. London is another example of how subsidies built a more robust VFX infrastructure. "[London VFX facilities] realized the only way to get a piece of the VFX pie was to collaborate," says Digital Domain co-founder Scott Ross. "They put Sohonet into place and the British government offered great tax incentives to the motion picture studios and London takes off and becomes the No. 1 provider of VFX for Warner Bros."

What worked to build a local or regional industry is volatile, however. All the Harry Potter movies not only shot in the U.K. but kept London-based VFX facilities Double Negative, Motion Picture Company, Framestore and Cinesite Europe very busy, but now that the Harry Potter franchise is over, they're facing tough times.

"Harry Potter & The Half Blood Prince," before and after courtesy Warner Bros Pictures and Art of VFX http://www.artofvfx.com/?p=171

Likewise, Vancouver – famous for luring a good hunk of TV business, including VFX, from Hollywood – is now losing work to another Canadian province, Ontario, that's made its incentives more enticing.

Ross sees the process as eventually even encompassing places like India, where the studios currently offshore low-level work for the best price. "Indians are entrepreneurial," says Ross. "Right now there are one or two major shops. Pretty soon, somebody will leave and open his own shop and cut prices."

To try to keep ahold of the work, numerous U.S. VFX facilities have opened up satellite shops in Asia or in states where the rebates have made production particularly enticing. But that's another expense in an already cash-strapped budget, with no guarantee of returns.

At the recent VFX Town Hall meeting on Pi Day, the discussion of subsidies drew the most vitriol from attendees. VFX pioneer and Director/Visual Effects Supervisor Scott Squires, who touched on many of the issues discussed in this article, had a lot to say about why subsidies are bad for the VFX industry. "It's hard to compete against a government providing 50 percent discounts," he said. "Subsidies don't change the number of jobs but just move them. VFX companies have the expense of setting up satellite places and VFX professionals have to move around the world...and it changes every six months where the subsidies are."

Squires also noted the high price paid by taxpayers for film/TV subsidies. "Louisiana is making less than 16 cents for every dollar of subsidies, including the multiplier effect," he said. "They are not beneficial to the taxpayer. It's an industry based on a house of cards – when the subsidies go away, the industry will collapse. Film subsidies require constant feeding, not to set up an initial business." Someone in the audience called out, "Subsidies are kickbacks…just call them what they are."

Phil Feiner, CEO of Pacific Title for 30 years, has compiled a list of talented VFX houses that have closed their doors.

Over time, the studios have "solved" their visual effects problem by making it an in-house department. That harkens back to the days when photochemical opticals and special effects were studio divisions. "In the pre-digital era, every studio had a certain amount of effects in-house," says Taylor. "It does raise a question: if the studios thought that VFX houses were making so much money, why don't they all own one?"

At one point or another since the dawn of digital VFX, several have. "There was Warner Bros. Digital," Ross recalls. "And Disney has had The Secret Lab (formerly Dream Quest Images), Imager Movers Digital, Buena Vista Effects and now ILM. They've been in and out of the business more times than I've been to the bathroom. They have learned how it's a difficult business."


After examining the business underpinnings of the VFX industry, it's easy to understand why so many VFX houses have gone out of business. In more recent years, democratized (i.e., commoditized, cheaper) technology, outsourcing and subsidies have hastened the process. Unless the current state of affairs changes, many more VFX houses are destined to go out of business, sell out to bigger foreign-run companies, or dramatically downsize.

It's not just owners of VFX facilities who lose. Perhaps the biggest losers are the VFX artists who are over-worked and under-paid than ever before. The volatile nature of the business leaves many unexpectedly unemployed, sometimes without past pay and always without overtime and benefits.

No wonder that the call has arisen to protect VFX facilities with a trade association that can demand fairer business practices with the studios, and to protect VFX workers with a union or Guild.

Part 2 in our series takes a close look at the move towards these goals, including a historical view of past efforts.

With the importance of VFX to Hollywood tentpole movies, the VFX industry isn't going to go poof. But what will it look like in three years or five? Follow up with Part 2 to take a look at how the VFX industry imagines its future.

VFX Crossroads Pt. 2: Can The VFX Business Be Saved?

VFX Crossroads Pt. 2: Can The VFX Business Be Saved?

In VFX Crossroads, Part 1, we took a close look at how the seeds of the VFX industry's dysfunctional business model were planted in its earliest days. Although outsourcing and tax incentives/subsidies are the culprits most often cited in today's news, we saw that the financial picture for VFX houses is far more complex than that. Here in Part 2, we look at some of the solutions proposed by leading voices in the VFX industry, including a VFX facility trade associations, a union or guild, and ending subsidies. The question is, is it all too little too late?

Follow Debra Kaufman on Twitter @MobilizedDebra

Image from Life of Pi: Richard Parker reacts to the sudden appearance of a school of flying fish. Photo: 20th Century Fox ™ and © 2012 Twentieth Century Fox Film Corporation. All rights reserved.

Jeffrey A. Okun. Image from The Visual Effects Society

Richard Edlund. Image from http://richardedlund.com/about

Bill Taylor, ASC. Image by Owen Roizman, ASC. ©A.M.P.A.S.

Gray Marshall. Image from Digital Artists Agency http://www.d-a-a.com/news/newsletter/graymarshall.htm