Monday, February 11, 2013

Oh, the mess we’re in!

Oh, the mess we’re in!

The visual effects industry is still having problems and they’re getting worse. R&H looks like they're filling for Chapter 11. Why do companies have to underbid and close? Why are artists losing jobs without notice? If visual effects is helping to create most of the successful films of all time, why do we have so little leverage? Why do companies and artists have so little control over what’s happening?

Let’s take a look at the basics of business, which may provide some insights.

Law of Supply and Demand
If you have 12 people who want to buy a house in a particular neighborhood but there are only 3 houses for sale, that’s a sellers market. There is more demand than there is supply. The few homes will likely sell for their asking price or even higher. The buyers know that others are interested as well and if they wish to buy the house they have to be prepared to pay at least the asking price. Frequently there are multiple offers such that the house is sold to the highest offer. This is great for the seller who will make money.
Now if you had the opposite situation, 12 houses for sale and only 3 potential buyers, that’s a buyers market. Each homeowner who wants to sell their house knows that they may be stuck with their house for months longer if they don’t sell. Buyers will negotiate - there’s a house down the street almost as nice for a lot less. They will offer less than the asking price because they know the seller has few options. Many sellers will trim their price even before posting so they can try to make sure to sell their house. This reduces their potential profits and the price may be less than the homeowner paid for the house years earlier. They are losing money due to the amount of competition and because they know it will cost them even more if they have to hold onto it for another year.

The same principle of supply and demand is involved with many business and personal decisions. If something is rare then it’s likely to get top dollar when sold. If something is very common it will likely get a base price or less. Workers with specific skills or experiences that are rare will more likely be paid more than someone who fills a role that can be easily filled.

Balance and market size
If 10 car washes are built in a town of 1000 people then it’s likely all of the car washes will have difficulty making money. The car washes will try to lower their rates so they can at least get more customers but many of the car washes will lower their rates as well. And the rates will continue to go down in a desperate attempt to get more customers. They’re like fish out of water gasping for ‘air’. All the car washes will suffer. One by one the car washes will close. The one that remains open may do so because of location, quality, and deeper pockets of its owner or any combination of reasons.

If it’s a town of 100,000 people then there will be a corresponding number of car washes it would support. The size of market and the number of customers will drive the number of businesses that fulfill that specific type of business.  Anyone interested in starting a business has to first determine the size of the market and how much competition there already is. This has to be in the business plan and is used to get investors or to get a business loan from a bank. It would be difficult to find investors or a bank willing to put money into a business that is unlikely to be able to support itself. In the case of the car washes the investors and bank would likely refuse more car washes after the first or second have been built. They know the odds of getting their money back are nil if there isn’t a large enough market.

Free market evolution
With any new industry there is usually a rush by a large number of companies trying to take the lead. As the industry matures many companies will fall to the side. Some will merge and some will purchase other companies. At some point they will likely reach a balance. Over time some companies may come and go dependent on the health of the industry, how well the companies keep pace with their market place and where they sit. In most industries there are only so many companies and in many cases this number is relatively small. Now there may be some regional or local companies and there may be some niche market companies but by and large the industries tend to be dominated by a few companies. There are not 10,000 film studios. There are not 10,000 car manufactures. There are not 10,000 frozen foods companies or airlines or car rental companies or hotel chains. There may be 3 or there may be 12 but there certainly won’t big huge numbers. And while these companies are competitive they don’t need to underbid or run in the red for months at a time. They have a certain amount of leverage and have found their balance. Evolution is a combination of many things and if the market doesn’t support as many companies as they are in that particular business, then many will fold until the correct number of companies exists. It’s a painful process. If an industry has a large market place with too few companies, where these companies can not keep pace with the demand, then someone will step in to fill that gap using money from investors or other sources.

Visual Effects
Just how large of market is visual effects? Sure there are visual effects in most films now. There’s also television, commercials, video games etc. but let’s focus on films. The studios are now either making very expensive movies or very small movies with a gap in-between. They can only release so many films a year since they know that there are only so many theaters and so many viewers. Audiences only have so much free time and are overwhelmed with options to see and do already (television, video games, internet, sports, etc). A film has only a few short windows to make their profits (theater, DVD, Pay per View, etc). Sure they are in a library for the studio and continue to make some money but the studio want to do everything they can to make profits as soon as possible.

In the US there are 250-350 or so films released theatrically a year as I recall. How many would be considered visual effects films? No matter what the number is, not all visual effects companies are working at full capacity. Many are likely to have a hard time finding much work and others are only working at ½ capacity.

Given this there’s likely too much visual effects capacity in the world. There are at least 8 very large visual effects companies and dozens or more medium size visual effects companies. All of these companies vying for a relatively small amount of work. And even a portion of this work may already be assigned to specific companies. Weta will be doing all the Hobbit movies. ILM will most likely be doing Star Wars related movies. Just like the UK was pre-destined to do the Harry Potter films due to the incentives.  This results in companies all trying to underbid the other or at least cut their margins to the bone. In this scenario it’s a buyers market so the studios have all the control and the companies have very little control.

Imagine for a moment what the industry were to look like if there were only 3 or 4 visual effects companies. It would be a sellers market. More than likely they’d be working close to capacity all the time or at least getting a reasonable stream of projects. They’d be charging what it cost plus profits. They wouldn’t be underbidding. They’d have some leverage with the studios. This is similar to how things were pre-digital. There was much less work but a relatively small number of visual effects companies. Each was getting some work and none was trying to go into debt bidding on a show. Studios would have to ask when the work could be done by.

Un-natural Selection
And this points out the other problem visual effects has suffered from – unnatural selection. Evolution not based simply on free trade, where quality, cost and efficiency would be critical factors, but on politically manipulated trade. The incentives subsidies reward companies in some areas and penalize them in areas without the subsidies. This creates a constantly changing shift of selection. A company even with good quality and excellent efficiency could still fail because they cannot beat 50%+ subsidies. Matching them alone still isn’t enough for the studios. This manipulated market results in some companies in places that shouldn’t have visual effects companies or that would have resulted in smaller companies left to their own natural evolution. I know some people like to avoid talking about subsidies but it has had a major impact on the film business and visual effects. It’s hard to deny that they haven’t.

There’s also been some manipulation by individuals. George Lucas moved ILM to the San Francisco area and made a heavy investment. Peter Jackson setup Weta with a large investment in New Zealand. It’s not like a lot of studios and producers were saying ‘Gosh, we wish there was a large vfx company in New Zealand.’ A large visual effects company would have been unlikely to naturally develop there.

And with the subsidies comes the need for workers and artists. Artists are traveling the world to try to continue to work. And places with subsidies are pumping out more and more students and local workers whose entire career is based on government support and continues to need government support. This leaves others in areas without the magic wand of subsidies high and dry.

Visual effects as a business
All real businesses are designed  and started to make a profit. (With the exception of non-profits.)  Investors would have to have confidence that a company would be able to not only break even but also return profits. Otherwise they have their choice of investing their money into other more profitable businesses or other financial investments. Most start-ups require a business plan with a clear idea how much money they could make based on the size of the market. If a business is doing poorly then investors are likely to want to sell their share of the business or to close the business.

Yet most visual effects companies haven’t been started as real businesses. Visual effects artists started many because they were interested in having their own company. They wanted freedom, control and hoped to earn a living. Most were not started as large profit centers.  Some companies were started by wealthy individuals (George Lucas, Peter Jackson) to provide visual effects for themselves and their friends. The hope was the companies would pay for themselves. And if they turned a real profit all the better but they weren’t started as an investment strategy. Some visual effects companies are owned by post-production companies, film labs and other companies that tolerate a loss because it allows them to offer package deals where they can make up the loss in other areas. Some are funded by wealthy individuals who like to dabble or by companies who hope to sell or advertise a product (computer based). In many cases these are almost like kick starters where there is money donated with no requirement to return a real investment. As DD found out trying to get real investors was a problem and most who bought into the company were sold on the aura of visual effects and the stories of other much more potential markets (medical, military, etc)

If you went on Shark Tank (TV show with wealthy investors) and pitched a visual effects company as an investment they would laugh you out of the room.

If these were all real investors then a number of visual effects companies probably wouldn’t have even been started. And certainly investors would be skittish of investments that were totally dependent on subsides which may or may not continue. And of course they'd see no reason to invest in a company that could go out of business due to subsidies elsewhere, no matter how good the company is. Some would have been closed sooner. Those of us who do this tend to do it for love so we do all we can to keep the companies afloat. A businessperson would not invest in such a situation and would likely try to get out of it and it’s losses. They’d consider real business means of making it work such as merging with another visual effects company.

Pricing tiers
Some businesses set different tiers for themselves to get specific types of customers. There’s the Dollar Store, Target, Macy’s, Nordstrom’s, Neiman Marcus – Even though they might sell some over lapping products each has a different price point, quality level and different clientele. You can eat cheaply at a fast food place or go to a very expensive restaurant. But visual effects has a hard time doing that. Nobody really wants to work on cheaper looking shots. Lower budget films know they have some restrictions but they still want to get footage that looks as good as the large tent pole films.

Amateur hour
In the world of photography there are professionals. They shoot stock photos, weddings, portraits, news and other photos where they get paid. Still cameras have become easier to operate and less expensive so many amateurs have jumped in. Because this is a hobby and not their main profession, the amateur photographers aren’t concerned about making a real profit. They’ll shoot their friends wedding for $100 and costs of the prints. They send their photos into the stock libraries or provide them free to news services. The sales give them a little extra pocket change that’s fun. But they end up reducing the work for professionals, those whose livelihood depends on getting enough income to pay for the equipment and the studios. They don’t have another job that pays them and they don’t have an employer paying their health insurance. Any professional cat photographers are all probably out of work given the glut of cat photos on the web.

There are now people doing motion graphics and visual effects on the side. Some workers are now independent contractors working at home working for the same amount they made but they fail to include overhead or heath care costs so they end up losing and lowering the rates for everyone. Some productions are having students do the work. Students and newcomers are far too frequently eager to work for free. In the end this just reduces income for professionals and produces a downward pull on wages while the studios are pushing downward on the visual effects companies.

Small companies
Some people think the solution is to have a lot of small visual effects companies and do away with the large companies with their large overhead. It’s an attractive and romantic notion for many in visual effects to have their own companies.

Trying to get leverage with a few large companies working on large portions of movies didn’t work so how are dozens of small companies going to have any leverage? The studios would now have a hundred other places to go if you ask for too much or want to bill for changes. Leverage equates to payment, credits and other benefits. If getting the large vfx companies to unite has been impossible, how easy will it be to get 100 smaller ones to unite? If most of the problem boils down to too much capacity then how is simply having many more companies with the same capacity or more going to solve anything?

And while it’s true there is overhead at a large company consider the overhead of dozens of small companies. Each company is likely to have a supervisor and producer or a person(s) fulfilling that roll. Each will need some type of support unless they are doing it all themselves, in which case they aren’t doing visual effects portion full time. What about vfx editing and all the other misc items? Are you reviewing everything simply on your monitor even if it’s for IMAX release? Look at the credits of most movies currently. Many films already have 10-15 companies working on them, even with large companies in the mix. Look at the redundant titles of supervisors and other management positions. And some of those aren’t listed but actually worked on the production. Overhead savings by dozens of companies may not be that much different when it boils down to it. Especially since the studio may have to hire a company or two just to do R&D. The biggest overhead savings is on the down time when a large company has a large permanent staff and a large building(s).

At a certain point if you break the work in to a lot of small companies are you gaining anything for the studio that the studio can’t get setting it up themselves? If it’s just a few guys/gals in a large room with some computers, stripped of large pipelines and multiple disciplines, couldn’t you set that up in a warehouse and not have to pay profit to each company? As I noted in another post there’s nothing preventing a company from setting up a building all prepped and available for rental with basic pipeline and hardware already in place, just awaiting artists. The studios don’t want to do this since they don’t want the risk. They’d rather have the companies hold all the risk for them and to absorb a certain percentage of the changes and overages. Now there is a company or two that handles indirect management of multiple small to mid-size companies but the problem is they take a slice from the already thin margins and have now added in yet another layer of unnecessary communication.

Truth be told the fewer number of companies involved in a film the more efficient it is. When it’s at one company you have one place responsible and less communication necessary with the client. There’s only one set of management on the team and all people within the company are communicating efficiently using the same pipelines, processes and software. No conversions or modifications necessary.  Same models, same rigs, no need to adapt, no need to share proprietary code, etc. A lot of small companies would mean they’d have to willing to pass interchange all of their models and scripts. It would also mean a lot more communication time as each company has to be communicate and interface with several other companies and the clients.

So why do the studios break up the work so much?
They don’t want to be held ransom by any company so they split up the work because they fear the company taking advantage of them.
They split it up because the schedule is too short to achieve at one place.
They split it up to try to save a small amount on the matte paintings or wire removals or whatever. The added handling of these shots and communications, etc. tend eat up any savings that these less expensive places offered.
Sometimes other companies do offer specialized visual effects that another company may not be able to or not at the same quality level.

Do the studios really want to parcel the work out to a 100 smaller shops? No. It would be like a bad grocery shopping expedition. Drive here. Buy 3 apples. You want  5 so you need to drive to another place to get 2 more. Then you have to stop at the orange store. Next you have to drive to the frozen dinner store. And on and on. Right now one of the concerns studios have when they include small to mid size companies in their group of companies is what happens if the work expands? Because as we know that’s not unusual so the studios have to know if a place can actually ramp up and do more work with little notice. Some smaller shops have a physical limit of space. Some don’t have the work stations or capacity to handle more people.

Too many artists?
Some people have voiced that there are too many artists. That too many people are being educated in visual effects schools and trying to enter the workforce. And that’s why the industry is the way it is. The number of visual effects students is far eclipsed by the number of film students yet the film industry isn’t being destroyed by students. A large part of this is because there is a union for all other film workers (writers, directors, grips, cinematographers, etc) The studio has agreements in place not to simply start hiring anyone off the street. Believe me it would be easy to drive around LA and pick up people who would be more than glad to work for free or to pay to work. But the studios know that if they’re going to invest tens of millions of dollars or more, they don’t have time to teach on the set. They have to be as efficient as possible when shooting and can’t take the chance of problems. They’d rather hire an experienced professional who knows what has to be done and pay them more. They gather a small army of people and each one has a job and has the experience to join in and do what they need to.  Now that means that it is tough for film students to find real work in the field, especially on larger productions. And a large percentage of film students will never find work in the business. Others will pursue the dream for years. It’s a problem for some in visual effects because the companies are under so much pressure to get the prices down. Some managers don’t understand what the studios already know – experienced professionals are the best use of money and trying to save it on inexperienced people is being penny wise and pound foolish. Not that beginners shouldn’t be hired but they will have to start at the beginning and be in small numbers. And that’s why I caution students who are interested in film and visual effects. You have to know the odds and understand you’re going to work very hard to succeed in the specific business.

Maybe we should start treating visual effects as a real business. Maybe we don’t need more visual effects companies. Maybe we need less. Maybe our business skills and approach should start to match our love of the work. Visual effects companies need to stand up for themselves and take a hard look at their business. Would they be better off merging? Are they simply dragging down the rest of the industry? Maybe all visual effects artists will start to understand the impact and dangers of subsidies.

----David Cohen has a great article in Variety that covers visual effects business issues.
Ailing f/x sector spotlights creaky tentpole foundation

Why is the VFX business failing? Questions for Scott Ross

The Miracle of Visual Effects, will it continue?


  1. Good summary of where the industry is. You seem to be using "subsidiaries" where you mean "subsidies" though.

  2. You are correct. That's why I get for writing at the end of the day and using autocorrecting with my bad spelling. Tahnks.

  3. And of course I have fixed it.

  4. Great read! Puts things in a pretty good (and unfortunately quite grim) perspective. Thanks!

  5. Hello.

    What do you recommend on newbie in this industry, should i go or not. I read so many negatives for this.

    I want to be animator either for live action or game industry( i prefer game)

    But this really put me down my motivation to learn.

  6. Anyone considering a career has to research and be aware of the good and bad. They also have to be aware of the odds. For those who have a passion for the work it may not matter. Actors, musicians and fine artists are some of the careers that are based on freelance and who have an uphill battle. But they are driven to do it. That's a quote about if they can talk a writer out of writing then that person wasn't truly a writer.

    The flip side of course is how do you earn a living, raise a family etc. For some of the above activities you can do as a side hobby in your spare time. But VFX isn't like that. It swallows every hour you have and there's no reasonable way of doing it part time. It's also part of a whole.

    And that's why it's frustrating that the ability for anyone to get a job in this industry is controlled so much by political subsidies. If you live in a place that has and keeps subsidies then you have more stability. If you live in a location that doesn't have them or doesn't offer the best one then you may not be as fortunate. There will be fewer jobs in these area and so the bar will be even higher to be employed.

    It used to be if you wanted to work in films, even VFX, that you knew you would move to Hollywood. If you were to find a job it would be there and you could settle in. No there is no location that has a lock. The places will subsidies today may be out of business next year. Most have to ready and willing to move and travel.

    Each person will have to consider all of this and decide their passion, their risk and their lifestyle.

    Sad but true.

  7. An interesting read, but in the section "So why do the studios break up the work so much?" you omit to mention that this is a way of lowering the risk, or hedging a bet against any one particular company. I think this is probably one of the most significant reasons, and important within the context of this article.

  8. Risk- That's actually the first one. They don't want to be held ransom. I suppose I could added the word risk but this was their most important reason originally. They felt if there were troubles or if there were overages and it was at one place they couldn't simply shift it away. The only reason it's a risk now is becuase of the situation the studios themselves have created of causing companies to chase subsidies and underbid. If left on their own VFX companies would not be going out of business, especially during a project.

  9. Great post, very interesting insights.

    For Rhythm & Hues, my guess, as far as the problems go, is that they need(ed) to have a lot of permanent staff, because of the in-house developed tools (requiring training if they'd have new employees for each project).

    That should lead to very high fixed costs, and a need for constant workflow, even if that means underbidding.

    I would imagine that one of the results of R&H problems is that the industry will increase the flexibility of hiring & firing personnel, via, maybe, using more off-the-shelf, standardized tools.

    Or, there is a serious change in business models ahead for the VFX industry. Those effects houses that are left standing after the dust settles will probably give clues as to how the businesses are best run in the industry.

  10. You're correct that custom tools will have a higher overhead of support and training than a non-custom approach. However there's still quite a bit of pipeline and other custom work required at any vfx company.

    And custom tools were not what put them out of business.

    'Those effects houses that are left standing after the dust settles will probably give clues as to how the businesses are best run in the industry.'

    Unfortunately this is not true. Could R&H and most be run better? Absolutely but in most cases that's not the key reason. (They had been in business 25 years. If you make major business mistakes you usually don't last that long.)

    The subsidies are the driving force of R&H failure and other many other companies failures. R&H was forced to setup a company in Vancouver and other places. Not because they want to but because their clients demand it. Setting up a company, leasing, buying workstations, hiring people is not cheap. To load up a companies books with even more debt for no direct added profit is bad.

    The last places standing will likely not be determined by their business wisdom but more likely their usage of subsidies and cheap labor.

  11. Thanks for replying to my comment. You're saying that the risk used to be that the studios would be held to ransom in some way, but now that's changed -- to a risk that the studio will find itself in financial difficulties.

    I think it's unlikely that's a new consideration. The risk that the VFX house will be unable to complete the contract for some reason will already feature. Work gets pulled from even high-profile VFX houses which I see as the studio managing this risk in a hands-on way, and I expect they will continue to do so.

    I think the reason I'm commenting on your blog is that it (and many others) are reducing the discussion to a simple one of "subsidies have introduced risk to the VFX business." Not acknowledging any existing risk is (to me) an indication that risk management is not high enough on the agenda within a sizable part of the VFX industry.

  12. Very interesting post on the business side of VFX, Scott.

    I'm not an insider (merely interested), so I'm wondering: Given that VFX are a substantial part of the blockbuster production, what IS the actual worldwide market size? a few billion USD?

    Also it seems that beyond market manipulation (which you probably can't do much about!) you're mostly driven by cost reduction. Would that be a fair thing to say?

  13. Probably hundreds of millions. 15-20 films last year with sizable number of VFX. 600-2000 shots. Most at tens of millions. Then a lot of other films with effects. End result for the studios is billions of dollars since all the VFX films are at least 50 million and more likely 100-200 million to make, and with most of those earning reasonable profits that's a lot of money.

    Price reduction- unfortunately that's not a real option. Yes, you can try to be more efficient and that helps, but is is not a commodity. We're not making widgets.

    We're a custom service provider. Now if we could say we're going to come garden at your house for 1 hr or if we were going to give you a standard teeth cleaning you can put a price to that. With that in mind we could optimize to some extent.

    The problem is how much work you need to do , how many changes you need to make is all in the hands of the director. You have no fixed time so changes just keep happening. How do you predict that accurately? Especially since each film wants something new and different.

    And the majority of the cost is labor. Some places are already reducing wages or not providing health care or paying overtime. You can't really reduce it, you can only increase its efficiency but with random changes from the client it's impossible to do it without a certain amount of waste.

    And it's the same with films. You can only shoot so quickly with so small of crew. There's a finite limit. Sure, you may be able to roll of 2 hrs of film with 5 people in a day but not likely for something people want to see. If you have 500-2000 shots of very complex scenes that will take a large crew of people working a lot of hours. No magic fix.

    If the studios really wanted to reduce costs they could. They could stop looking at the work as a commodity . They could have the equivalent of a 1st AD and line producer in post. But it's easier and less money for them to simply ignore that and put the burden on the VFX companies.


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