It's NOT just business

It's NOT just business

At last year's VES Production Summit I was approached by the owner of a small vfx shop asking why I didn't cover some of the good or successful stories. He mentioned his company and another company (both in California). I said "Good idea, I'll want to talk to you and the other company to get more specifics". To which he replied he didn't want their company named in the post.

While newspapers and magazine write more and more fact-less articles, I certainly don't want to. Writing about a vague, unspecific company that is doing ok in this industry is of little value unless we can learn some specifics that can be applied elsewhere and hopefully raise the bar for all.

I also talked to this person about several issues, including underbidding. To which he replied, "Well, isn't that just business?"  (shoulder shrug)

NO. NO is the answer, it's not 'just business'.

I talk to others and sometimes the response is "Well, isn't that just globalization?".

NO. NO is the answer, it's not 'just globalization'.

"Well", some have said, "You had to move before so it's no different now"

NO. NO is the answer. It is different than moving to one location at the start of a career.

And I talk to some in this industry and they fear being blacklisted for saying anything about any problems. They fear even doing so anonymously.  (see http://thevfxwatchers.com or http://www.glassdoor.com/  for the lack of vfx company reviews). They fear signing a secret union card or donating anonymously to ADAPT, who is trying to neutralize the politics controlling our industry. Hear no evil, see no evil, speak no evil.

You could just as easily shrug your shoulders at a senseless, horrific death and simply say "Well, every dies." That excuse works very well and enables people to not attempt to do anything. Not my problem - until it is.


Business
Is it really just business to underbid? To bid lower than it actually cost the company? To lose money on every project, year after year? No, no company can run forever losing money. And yet some vfx 'businesses' have tried to do this and are learning the hard way that isn't a good tactic. And in the end it's the employees that end up taking the fall.

Amazon continues to lose money every year with the notion that they're in it for the long haul, yet they've been losing money every year. They're doing so because investors have been optimistic, just as they were before the dot com crash. But now investors are starting to have second thoughts. Amazon's main focus has been to underbid as many companies as they can and to try to crush others, including authors in some cases.

And many businesses these days make it the point they should squeeze out every single dollar because of the shareholders, regardless of moral issues or people issues. They must purely focus on profits regardless of anything else. Even if it's illegal in some cases.

Walmart deals with large volumes so demands the biggest discount from every supplier. And at the same time they try to pay the workers as little as they possibly can (minimum wage for most and then only if it applies).  The US taxpayers spend billions every year paying for Walmarts 'success' by subsidizing Walmart workers so they don't starve. Same with McDonalds and other businesses. This is money that should have gone to education, health or road maintenance. You as a taxpayer are making up the difference because the corporations are not paying fair wages in many case and they're ducking out out of paying corporate tax rates. Walgreens had planned to do a corporate inversion where a company essentially changes their mailing address to another country to avoid paying any US taxes. (Guess who has to make up the difference when that happens?)

There was a US corporation that bribed countries to continue using leaded gas, even though it was proven to deadly to citizens, including children, along with a long list of problems. And yet they did it for profits. After all, it was in another country so no problem for those executives making the decisions and approving the bribes. Of course it's a thin line between bribing and lobbying, something that happens all the time in US.

General Motors knew about a problem that caused a number of crashes and deaths and yet the corporate executives did nothing for years. After all, they have to make a profit.

These types of stories come out almost on a weekly basis and the notion is that everything must be sacrificed for profits. Think of the poor shareholders. Don't bother thinking of peoples lives or the workers.

Even in LA the media companies continue to think short term and will continue to decimate the future for the chance to squeeze a few more pennies out now.  They don't even realize they're hollowing out part of their core business.

You send out enough work overseas and soon you won't have anybody left to do the work locally. This has applied to a number of industries and the US can no longer do much manufacturing of any type simply because the lure of profits was too great. And those experiences and skilled workers left or moved on to other areas to survive.

This has already happened in visual effects. Pacific Title in Burbank (part of Los Angeles) was having a hard time even finding compositors for a project. Few vfx compositors are left in LA to answer the job ads.

Don't be surprised if skilled film crews start becoming much more difficult to find in Los Angeles for those pickup shots or simple inserts. One of the industries that Los Angeles is known for is film making and television. Yes the tourists coming for that are typically seeing something as relevant as a dinosaur in a history museum.

And it's not because filmmaking is going away nor is it because it's cheaper elsewhere- it's been outsourced because other states and countries have paid for it to be outsourced to them (at the encouragement of the media companies).

Because it all comes down to making the world right for the shareholder (and the CEO making 300x the salary of his workers), regardless of anything else. This also provides the CEO and executives the excuse that all their decisions they make are for the good of the shareholders and that they take no responsibility for the ultimate price paid by others.

Does it have to be like this? Are shareholders the only reason for companies? Sixty years ago it wasn't.
An except from an excellent article by Robert reich

“The job of management,” proclaimed Frank Abrams, chairman of Standard Oil of New Jersey, in 1951, “is to maintain an equitable and working balance among the claims of the various directly interested groups … stockholders, employees, customers, and the public at large.”

Johnson & Johnson publicly stated that its “first responsibility” was to patients, doctors, and nurses, and not to investors.

What changed? In the 1980s, corporate raiders began mounting unfriendly takeovers of companies that could deliver higher returns to their shareholders – if they abandoned their other stakeholders.

The raiders figured profits would be higher if the companies fought unions, cut workers’ pay or fired them, automated as many jobs as possible or moved jobs abroad, shuttered factories, abandoned their communities, and squeezed their customers.  


Visual Effects
Frequently there is news of a new visual effects company starting up. They start up because there are unemployed visual effects artists who are optimists. They figure the start up costs are not that high any more and they have a new twist on the business model (typically another broken model). And you hear about the closing of big visual effects companies but there are many more closings of small/midsize companies that you may not hear about and that aren't covered in the news. In many cases those new companies close silently within year or  two. Other times it's a company that's been functioning for years but the cost and impact of foreign subsidies have taken their toll.

Custom Film Effects is one such company and here is the letter they sent out a few weeks ago:
------------------------

Dear Clients, Friends and Associates,

Please excuse the mass mailing.

As of August first Custom Film Effects will suspend operations and join the ranks of VFX companies that have gone out of business. Like the others before us we are not closing because we produced substandard work, or because we treated our clients poorly. We are closing because we are unable to compete in a business environment so affected by tax credits in other countries and states as to make the VFX business here in California impossible. We all work in this town, we all know the environment we are working in. I could give you the stats on how our business has declined over the past 3 years. I could share all the attempts at finding a viable model for continuing operations in our present state. But, this would not change the outcome. Since January this year the fall off in our business is unprecedented and we can no longer sustain. 

I am grateful for the fifteen years of trust and support that our clients have afforded us. I look back at the shows, the relationships formed, the talent that has passed through the studio and I feel so fortunate. CFE had a great fifteen year run.

We will be placing our machinery in a small editorial facility in Culver City. These bays will be offered for rent to freelance VFX artists on a per project basis. We have some great talent showing interest in this business model. This is all very formative at the moment, more info to follow.

Thank you all for a great run……..m.d


Mark Dornfeld | Custom Film Effects | 

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As a follow up note Mark expressed his thoughts (slightly edited by me):

This is such a mess. Our last show through the studio was another rescue job from a house in Canada. The work was so bad and so late that we wound up redoing everything but 8 shots. We delivered 92 shots on an impossible time line and when I was delivering the last of the show at 3am on a Saturday morning, it really occurred to me that I didn’t want to do this anymore. We were able to zero out our debt, pay our employees and move on. I am so sad, I had a core group of artists in this studio that had been with the company for 15 years and one employee that came with me when I left Disney. At one time we had 30 people working here and were able to provide medical and dental insurance we also had several IA union employees. 

Obviously I am closing CFE so I do not see any future in VFX production in LA. Just no reason for it to return.

Just for the record I am not in favor of tax payer dollars filtering into multi national corps on any level. Bad use of tax dollars when you need schools and roads and stuff like that. This is all badly broken. The film industry grossed over 11 billion dollars last year. Why are tax payer dollars  needed and who really reaps the benefits. Our legislators claim to support local economies yet the steel fabrication for the new Oakland Bay Bridge was done in China. Bridge sections were brought over on barges. I can't decide what pisses me off more. Sending tax dollars directly to China or subsidizing multi national corps. We are not the only industry affected by poor legislation and legalized corruption, it’s all over the place.

This is all just so sad. So many people, so many families have had the rug yanked from under them. I feel so powerless. 

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So no, it's not just business.

The reality is the political and business problems of the visual effects industry affect all vfx workers (and their families), regardless of where they are located. Some in the UK are finding their jobs are shifting to Montreal. No place is immune or unaffected by these problems.

I'll cover the other issues noted above in future posts.

I also received correspondence from some individuals (working globally) and plan to fold those notes into a future post.

For those attending SIGGRAPH this year be sure to check out ADAPT talk being held there and check the ADAPT website.

ADAPT at SIGGRAPH talk
WEDNESDAY, 13 AUGUST 3:30 PM – 5:30 PM
Vancouver Convention Centre
East Building, Room 2

There's also vfxunion reps at an IATSE Union Booth at SIGGRAPH #USA829.


Other  references:
Andy Grove, former chairman of Intel, discusses outsourcing issues.
http://www.technologyreview.com/qa/425125/andy-grove/
http://www.businessweek.com/magazine/content/10_28/b4186048358596.htm


China bridge building:
http://www.dailykos.com/story/2014/06/10/1305808/-California-discovers-hidden-price-tag-of-outsourcing-Bay-Bridge-to-China#
http://americanmanufacturing.org/blog/made-china-bay-bridge-continues-cost-california
http://www.sacbee.com/static/sinclair/sinclair.jquery/baybridge/

This echoes issues that Boeing had outsourcing as well:
http://seattletimes.com/html/businesstechnology/2020275838_boeingoutsourcingxml.html
http://www.forbes.com/sites/stevedenning/2013/01/21/what-went-wrong-at-boeing/

Film Subsidy Bubbles

Film Subsidy Bubbles
Dangers to those in the subsidized areas even if they may not be aware of it.

Someone on an email group questions why subsidies for visual effects were bad and why would we want to do away with "Our subsidies".

First off they're not our subsidies. The film studios are the ones who lobbied for them. They're the ones who profit from them. Not the vfx companies, not you, the vfx worker, and not the taxpayers.

All the vfx companies obtain by moving to subsidized areas is the 'opportunity' to bid on a project. Same competition. Same need to submit a bid the studios will accept.

Subsidies aren't what fund visual effects. World wide demand is what fuels visual effects. The studios make the films for a global market and most of their profits come from visual effects films. If they wish to make tent pole films they will continue to make films with visual effects. Reduction or elimination of subsidies would not cause visual effects work to disappear. What it would do is hopefully instill some basic management and planning of the visual effects to tell stories rather than abusive and excess amount of wasteful work.

What the studios gain from subsidies is someone (the taxpayers) who will cover a sizable cost of the film. This reduces their risk and allows them to make more profits, sooner. Thanks to the generosity of unsuspecting taxpayers.

Bubbles
It's useful to think of subsidies as what they are, economic bubbles. Those who cannot remember the past are condemned to repeat it.

Housing bubble - Banks were practically giving away home mortgages with no down payments. There was so much profit to be made some bank loan officers were forging documents. There was so much profit to be made people were rushing to become contractors and real estate agents. Many were investing their life savings on a sure thing so they bought houses to 'flip'.

Things were going great until they weren't. The housing bubble popped and was one of the main causes of the world wide recession in 2008 which we will continue to struggle with for years, perhaps decades. People were wiped out out. Even those not involved in the housing market saw their house values, retirement funds and their investments drop like a rock. Unemployment skyrocketed and hundreds of thousands of homes were foreclosed, many of them illegally.

But don't worry about the banks. They're doing just fine. They made huge profits on reselling the loans and on the foreclosures. They even got mountains of money from the government.

Tech bubble - A few years earlier there was the tech or internet bubble. People were betting their life savings on this new internet thing. Startups were happening in every other house. People were rushing to be web designers. The gold rush was on. Until it wasn't. When it all imploded many lost their life's savings.

But don't worry about the banks or rich, they got in on the IPOs of the best companies. They'd be laughing their way to the bank if they weren't already sitting there.

Silver mines - In the 1800's there were a few silver mines where silver was discovered. And almost overnight towns would spring up complete with saloons, stores and churches. People moved across the country to feed on the potential money. They either became miners or sold to the miners. And then the mine would run dry and it would all stop. Many of these towns turned into ghost towns as people fled to the next place. The entire economy for them was built around the silver mines. People lost their savings and moved on.

But don't worry about the banks or the owners of the mines, they did ok.

And if you had asked any of those people involved the day before those bubbles popped, the people would have told you everything was great. They all thought it would continue. Until it didn't.

Not creating an industry 
The film lobbyists and others who would make a profit from them, convinced the politicians of Michigan that it was in their best interest to build stages. Because they would be an ongoing profit center and employ over 6000 people. After all, they were creating an entire new industry there. And the politicians in their infinite wisdom backed the cost of building the stages (and the bonds required) by using the pension funds of the police, firefighters, teachers and others.

Then they learned the hard lesson that they weren't really creating an industry. They were simply leasing it at a high cost for a very short time. They were simply paying studios to come to their location on a film by film basis. And the studios would only bring films if they provided higher and higher amounts of cash every year. They had to compete with other countries and states and the ones to win film projects were the ones who outbid others and gave the studios more free money. Both the 'winners' and the losers were losers.

Many don't seem to see the downside of subsidies, especially if they're in a subsidized area. And just like the other bubbles, these people think everything will continue to be great.

Real World Example
Let's do a review of how this works and why it's not great for those working there. In this example I'll use Vancouver but it could be anywhere in the world.

Vancouver in the days before subsidies had their share of film production. Vancouver was a city and had a number of scenic locations for shooting (ocean, harbor, mountains, forests, city streets, snow, etc) There was some work from both Canada and the US. The lower exchange rate encouraged some projects to shoot there as well. If the subsidies never happened the  film production in that area would continue to grow at a rate that matched demand. The industry would be as stable as any production hub can be. Most of those who had film jobs would likely remain reasonably employed.

When the subsidies were created in that area they created a huge pull for all productions, especially those on the west coast. Many projects went to Vancouver along with a number of the below the line jobs. According to some of the SaveBCFilm people, over 20,000 now depend on the film industry. Many of these couldn't be filled because they had not evolved over time to the new size. This was simply a politician pulling switch. That required bringing in workers from all over the world. That required training many locals in film production.

Many jobs were lost in Los Angeles and surrounding areas, places that had evolved over the last 100 years and had maintained a certain balance. Because this was where the studios with the money were located. This is where most of the writers, directors and producers made their homes. So this eco system that had developed was being drained not due to lack of demand but simply by politics.

Dangers
And in the meantime Vancouver continued to balloon. VFX companies from the US and even the UK were forced to set up shops due to the demand for this free money from the studios. This in turn required many working in the US and other countries to now move to Vancouver to continue working. The original intent for many of these film subsidies is to create more jobs for locals but in many cases the jobs are filled by foreigners. The clamor for more people and the lure of money also tends to bring out the 'for profit' schools to start pumping out even more students. So these graduates join the work force of a local industry that is already expanded beyond what it can support naturally. This while other areas are experiencing high jobless rates simply because the jobs have moved. No new jobs were created. Simply the shifting of existing jobs in most cases.

And we see this same pattern repeat itself around the world in other countries, regions and states. And the same people pushing for these in one area are in fact the same source of the funding and lobbying to push all other areas, each competing against the other but all ultimately working for the same small set of clients.

The people working in film and visual effects in areas with subsidies have now become dependent on the subsidies. They have become dependent on government handouts or welfare in a sense. The government ends up covering a sizable amount of their labor costs. And these subsidies must increase on a yearly basis and must out spend other areas competing for the same exact work.

Now you have thousands of people who's private industry jobs are in the hands of local politicians. A very large portion of the film industry (individuals, vendors, stages, sub-contractors, etc) in those areas has now expanded beyond what it would support naturally if there were no subsidies. This puts those areas in a very dangerous and fragile position. The entire structure could collapse at any moment since the politicians could pull the support, the only thing holding all of it up.

Film production and visual effects has always had ebb and flow of work so that makes it difficult but places with subsidies have additional factors to consider. If a subsidized area reduces their subsidies due to change in politics, then it will all fall down. The taxpayers in these areas won't always be so ignorant of what it's actually costing them. One day they will realize they're seeing the Emperors New Clothes re-enacted with their money. And the other thing these subsidized areas have to worry about is another location out bidding them by providing even more free money. They're competing against other locations and if they lose, they may lose big time.

Vancouver, BC has seen this in action just in the last year. Ontario and Quebec started offering more incentives and the work to Vancouver slowed down and the work in these other areas increased. Those in Vancouver also fail to see the irony when they cry foul over the subsidies when a large percentage of the work they had was based on themselves outbidding in the subsidies war. And as in all wars, there are losers.

And Vancouver and their SaveBCFilm had no control of these other political groups in other locations since they were competing with them. They had no control over their own local industry since they had built it on fictional and temporary support. They had not built a self sustaining industry with it's own content creation but rather a simple service industry greatly dependent on the good graces of local politicians (receiving money from the studio lobbyists) rather than business and talent.

And we see this repeat itself all the time. Michigan loses to Louisiana. State or area X loses to area y because of a shift in subsidies. The amount of work remains the same, it's only question is where it will go and this is now controlled by government payouts than by any other selection criteria.

So now rather than having a few healthy and stable locations for film and visual effects production, we see the work spread out to many more locations which tends to make each location weaker. Rather than a large eco system that is self sustaining, these are smaller systems which are not self sustaining. With so many new areas developing there is more competition for the exact same amount of work. And there are new areas announcing film incentives almost on a weekly basis. These areas are all fighting for anything and everything. Those jobs that were 'created' in those locations may evaporate at any time since film production is starting anew with each film and not as a permanent industry. And one thing is for sure, the work is constantly in flux and shifting around the world. No place is safe or permanent. Those on top today will likely be on the bottom tomorrow.

Awareness
And because these areas have all been expanded beyond their self supporting means, they're all in danger of popping. And so eager are they to keep the work they are willing to keep outbidding others. Those who have moved there, those who trained there, those building their own businesses there and all of those working there are in a very precarious position and yet fail to notice their local industry is supported by the least reliable support. A politician. Like those in other bubbles, they fail to notice the dangers until it happens. It obvious to those on the outside but those riding the bubble fail to see it or simply prefer not to consider the reality.

And who is pushing for subsidies in all of these cases? The studios, the only ones who gain in the end from any of these and the ones who play each location off the other. But don't worry about the studios. They'll be just fine. They'll just move to the next place after your area pops.

What's happening in LA could easily happen to Vancouver, London or any other film location. And not only is it possible to happen, it will happen at some point. There's no magic that protects your area. Studios eager to make money in the short term have no allegiances since the subsidies have merely turned the discussion into a cost issue.

No problem
There are those who think that that's the way it is now and that we should get over it. They don't see any problem moving every 3-6 months like migrant workers. They see no issue with being treated as a commoditized migrant worker and they feel the best workers will win out. Sorry for being the bearer of bad news but that's not how it will play out. Just because you're willing to move doesn't mean that you can move. Many subsidies are dependent on locals (residents who have been in a location for over a year, file income taxes there, etc) and so when given a choice between you and someone who can fulfill their subsidizing criteria, your 'qualifications' may not be enough to counter the need for a subsidized worker. Some countries are difficult to get working visas and so even if work is available and you have great qualifications, you likely won't be hired. And don't forget that each area has been expanding and expanding already. There already is an excess of visual effects and film workers due to subsidies. As the work continues to shift based on subsidies you may find yourself shut out from working, regardless of your qualifications, experience, skill level or talent. Then you might consider why subsidies aren't the best for the industry and the people who work in it. Rather than being based on  quality, efficiency and cost criteria,  subsidies are only based on which politician will provide the most money.

Summary
Many of these locations that have subsidies would continue to do work after the subsidies go away. They have now built up infrastructures and experienced and talented people. It won't be as much work but it will be more stable and more long term.

Ultimately that's what we're striving for. A healthy and stable industry where quality, efficiencies and other factors are the deciding criteria on where a production does their work. These are all in the hands of the companies and the workers in those locations. Right now your local industry is in the hands of a 3rd party that you have no control over - the politicians. That may be good for the studios but that is no good for those of us working in the business.

Related Posts
Visual Effects Tax Incentives / Subsidies
Risk and subsidies
The Impact of Visual Effects Subsidies

The Impact of Visual Effects Subsidies

The Impact of Visual Effects Subsidies 

This was a post in regard to a conversation and postings on a mailing list.  I'm paraphrasing the original comments here so these are not the true quotes. I've also augmented it based on some of the discussions that followed.

Steady Employment

"While subsidies are a problem, they're not nearly as big of issue as people make them out to be.  What we really need is need is enough profits to provide steady employment and not lay people off. "

While it's a nice idea, even Hollywood hasn't employed people on staff since at least the 1940's.  The film factories used to have production people move from project to project but those days are long gone. Films, television and commercials are done on a project by project basis. Crews are hired, work the length of the project and then are laid off. The studios do not continue to pay the crews once the project is done.

No matter how much profit a vfx company may make, it will lay people off if they don't have work to do. Even places like ILM would routinely lay off half the people working there since they weren't on projects. Now if a vfx company has a contract for another project and think they can put workers to productive use in a relatively short time then they will be willing to hold on to them for that short duration. There is of course cost involved every time they have to hire someone, train them, get them up to speed, etc. But that cost is unlikely to be enough for them to hold onto the majority of people for months at a time with no specific projects or tasks.

That's how visual effects was done. With things like Harry Potter when there was a known amount of work coming in and where places in the UK were booked for 2 years in advance (in part thanks to subsidies), people got the idea that that would continue and that they were on staff. [Note that some people in subsidized areas take these things personally. I've been in the room with studio executives, vfx company managers and others. In many cases the studios don't even request a bid from a non-subsidized company. This is in no way reflects on the capabilities of people or companies in these areas, simply what has happened and continues to happen regarding the business aspects. That's the reality and that's what I'm reporting.] But since vfx is a service business and film are not scheduled based on the whims of the vfx companies, the work will continue as feast or famine. That's how projects work.

We don't make widgets at a set rate with a constant demand. We don't work in retail where there's a reasonably consistent amount of work all the time with thousands of customers. We're more like the workers at a summer park that have seasons where they hire people and seasons where they will let them go.

If management is on the ball and the stars align, then they can get in projects and try to adjust schedules to keep crews moving from one project to another but that's more of the exception than the rule.

The only places with some real control over their work flow are animation studios which control the creation of the work, the amount of work and the scheduling. And even that isn't a given if there are market issues (a film does poorly) or if an internal project gets canned, people are laid off.

The places that don't lay off people are even more likely to go under. The burn rate for hundreds of people is staggering and unless that's being compensated in some major way, it will bring a company to it's knees.

Subsidies Imapct
So while the subsidies weren't necessarily the main reason for DD and R&H problems they certainly played a role.

DD went under because the CEO saw how little margins they were making in vfx and his idea was to expand out into other related areas. Get local governments to fund much of it. Take a % of a feature film, invest in making your own animation content, start up a school, get into medical & military related media. In the end there wasn't enough real funding to cover all of that and it takes time.

R&H suffered from studios pulling work, among other things.

So why do vfx companies have terrible margins and weak contracts? Why do they have so little leverage?

vfx companies spend up to a million dollars setting up facilities in places like Vancouver, Montreal, etc.  Why do they do that, especially if money is tight? It would make sense if they were a retail chain and could get new customers. It would make sense to a mining or lumber companying wishing to access new resources. vfx have no new customers in subsidized areas. They have no more resources in subsidized areas. The only reason they setup shops there is because they are subsidized and the few clients they have demand it.

The subsidizes don't create more work, they merely spread the work around based on politics, not on efficiency. The subsidies encourage more training and local employment in the subsidized areas so you end up with more workers than the global vfx industry can support. And those workers will be fine until the subsidies in that area are reduced or another place offers greater subsidies. And that will happen just as Michigan saw with Louisiana and just as BC and UK are seeing with Toronto and Montreal. So now you see the erosion of worker wages. And those companies that expanded to the subsidized areas then have even more workers on their payroll, meaning trying to maintain staffing while low on projects becomes even more impossible.

How do California based companies such as DD and R&H compete for work? How do they lower their costs by the 60%* it may take just to match another governments subsidies? They lower their prices to the bone and then some. Add this type of competition along with the cost of opening branches all of the world and you can start to see why vfx companies are becoming weaker and weaker.

[* People ask where the 60% comes from and assume I'm making it up. It comes from the cumulative incentives offered in some of the Canadian provinces if you study their own government documents. Note this is for visual effects work done and includes things like DAVE in BC.

Disney covered some of this at the VES Production summit:
They focused on Canada where different region have different incentives. And many of the types of incentives add up. (i.e. they may have a labor incentive, a production incentive, etc so these can be  cumulative to a large amount)

"Using the example of a $1 million dollar project – in BC a production could get back $379,000. In Ontario credits can be combined to return $437,000 and in Quebec the return rises over 50% to $572,000." (from fxguide article and my notes)

So that's 57% from Disney estimates. It's also covered in the VES White paper on the state of the industry. While you can argue about the precise percentage and the requirements,  in any case it's a substantial amount, much more than simply a sales tax rebate. And still a major percentage to try to compete against.]

Subsidies encourage even more competition than would have resulted from technology and normal evolution. Free money being offered by governments has a way of distorting markets to no advantage except the final recipients. Companies in some area have grown much larger than they would have if left to their own. More people jump into the fray when they see free money. So now you have so many vfx companies that they will all underbid their actual costs in an attempt to stay in the game. And they are covering their crew costs, or at least attempting to do so, while being paid less than it actually costs them. How in the world are companies supposed to provide stable, continuous work to all their employees between projects when they can't even make profits while working on projects? And the sad part is most vfx companies are operating in the red, even those in subsidized areas.

There is a limited, finite amount of work so it's impossible to employ all the people currently in vfx all the time. The subsidies have encouraged more companies and workers than the industry can really support.

Is there little wonder why then vfx companies have so small of margins? Or that they have weak contracts and no leverage? The studios have plenty of other subsidies and companies to threaten any one vfx company with.

So no, subsidies didn't cause DD and R&H to go out of business but when you're in a weakened state of running in the red and trying to compete, the smallest bump may be your last. And this applies to vfx companies around the world. How long can any company operate in the red? Some in the UK have been doing it for at least the last couple of years. How stable do you think it is in subsidized areas where 75% work is there only be because of subsidies? Subsidies are no guarantee of stable work. The subsidies are controlled by the whim of politicians in all areas and as we know that can change quickly. And how stable do you think it is working for companies operating in the red year after year? At some point their owners or creditors will say enough is enough and close the company without warning or notice. The next DD or R&H can happen anytime, anywhere. The subsidies have created a very fragile industry and for those who think if only the companies made a little more profit and kept all their workers employed during the slow times I suggest you start looking at the actual situations, including cause and effect.

Film Production
So why have most Hollywood film crews (Directors, writers, camera, grip, sound, etc) been able to make being employed project to project work in the past? Even without the stability of permanent work at one studio? Because there was a concentration of studios in one area and each had a variety of projects in different phases at any one time. With a number of sources of employment it was likely a new opportunity would start up in a reasonable amount of time. Work on a feature and wrap that (be laid off). A couple of weeks later you may get 2 days of a commercial shoot.  Then maybe off a couple of months and then get work on a television project that may last 6 months. If you're lucky and the tv show gets picked up then you may be off for a few months and know that a project is waiting for you at the end of that time.


Some people have stated that I'm advocating for project based hires. I'm simply documenting that the work in reality is project based. We do service work for studios who do not maintain a consistent level of output of films, let alone visual effects shots. That's simply the nature of the business for better or worse. It's possible on television vfx to have a little sense of the amount of work required per week and maintain the staff accordingly. But once the show wraps for the season and has no work coming in until it ramps up again I suspect most are given unpaid 'time off', if not laid off. When there is too little work at a company they can either go into debt quickly or they can lay people off.

It was also mentioned that vfx is special, because we do R&D and pipelines and other things that we should be employed continuously and not be hired like interchangeable grips. Why vfx professionals choose to view all the crew as grips is beyond me. Maybe why they see us all as technicians. You'll notice the directors, writers, cinematographers, production designers and many others are guns for hire as it were. I don't consider any of them interchangeable.  Right how most vfx companies do hold on to key people in management, R&D and even some in production if they decide they can't risk losing them. But just because you may want to work on the pipeline does not mean you're able to continue to pay everyone from roto to animation to TDs.

And the other thing to note about R&D is it was originally all R&D. Figuring out skeletons, facial animation, skinning, texturing, painting, etc all required work. Most places had to write code to do just about everything from animating to rendering to compositing. By now you can purchase or rent software that handles the majority of those tasks to a large extent. There's even project management, databases and render queue software to handle at least a percentage of the work used to done by the pipeline people. Water, fire, hair, fur and other speciality software are all available to some extent for purchase and the number of projects requiring speciality and custom software is shrinking. For a typical show is a large shop with 30 people in R&D (full time) going to be as inexpensive or as necessary as a team which simply buys their software with minimal R&D support?

Unions

The freelance project to project work process is one of the reasons  why there are film unions. So you can go from project to project and know that there will be some minimum standard all the employers have to meet. You know they all have to follow labor laws and union regulations. You also get continuous health care, pension and other benefits even though you could be working for a different employer every week. And that's also why most people involved in film crews are paid above average working rates, because they are not guaranteed full time employment. They are taking on some of the risk themselves. Yet those in the vfx industry accept their rates as the norm and expect full time permanent employment.

Locations
The concentration of both studios and film crews in a few specific areas made all of this type of freelancing possible. It was good for the studios since they didn't have to employ entire crews permanently. When they needed a crew they simply put out the word. It was good for film workers since they could reasonably find more work at other places.  There are reasons why this types of clustering happens in certain industries. There is a reason why there are places like NY Broadway or the London West End. You have a concentration of theaters, actors, directors, musicians, etc. There are other examples of other industries clustered in specific areas. These are eco systems that have developed overtime and are somewhat self correcting as the work ebb and flows. Throw into that balance subsidies where the work is literally forced to go elsewhere and you'll soon destroy it.

If you were a dentist or retail clerk, you could probably work just about anywhere. But if your career is in a specialized field, such as vfx, then chances are you will have to go to a few specific areas. It's hard to be a professional snow skier and live in Florida. You may love to have the state fund a ski resort and fund man made snow for it so you can live in a place you like and still work in your profession but most other industries don't have the luxury of governments throwing money at things that no corporation or business person would support.

So what happens when that same amount of work is now spread worldwide due to subsidies? Now each area is setup with less than enough work and film and vfx crews can no longer easily move from project to project. Instead of having a few concentrated areas of healthy business you now have many more which are all operating in a less than healthy and stable situation. More people have been trained and employed in a specialized business than the business can truly support.

Outsourcing
"If subsidies went away then we may be stuck with Fresno, Waco, or places in China doing the work to keep the labor costs low and we wouldn't be able to do anything about it."

More FUD. Studios do the work where they can get the quality and type of work they need, with little risk, with cost as a factor. Otherwise they'd be in China and India 100% now. And as the new owners of DD have said, most of the vfx work coming out of China now is very poor. We in vfx seem to be more than happy to make up boogeymen even when they don't exist. True, places like China and India will be getting better, especially since companies are more than happy to setup there and train their own replacements.

Subsidies also don't guarantee that they will be nice areas. Another  myth is that the current places that are king of the subsidy hill at the moment will always be the king of the hill. They will not be. Economics and politics at some point will move and shift that work and you will have absolutely no control over it. If a place that was the armpit of the world offered better subsidies and the studios thought they could make it work, then your job in Vancouver could be gone in a weeks time.

In terms of companies and people moving to Fresno or Waco - Seriously? Any business can look at some of these lower cost areas and know what it will truly cost to setup there in terms of time and money and it would take a very long time to  offset any costs, if at all. And unless there are a number of companies in the area then you don't have an eco system. In those cases you have to cover full employment even during times with few projects. Even ILM had difficulty getting people to come up to the bay area because they were the only game in town for awhile. Even better if vfx companies operated as businesses and refused to setup shops in locations that make no economic sense. And if workers took the same business stance and said no to these types of proposals.

Workers continue to undermine just how much power they have in these situations. The work is 100% dependent on the workers and yet we act like we have no leverage or say in anything. If the majority of workers simply said no, just like if the majority companies had enough guts to say no, then the industry could get back on track. But as long as there are companies and individuals more than willing to undervalue themselves and the rest of the industry, things won't change.

And you're right, there are other problems for the industry and removing subsidies won't solve everything. But subsidies are the largest problem the vfx industry faces. Anybody can come up with a very long list of problems in the vfx industry but many items on that list will be directly or indirectly caused by or linked to subsidies.

And yes, vfx companies could work more with studios and directors to do the work more efficiently. To reduce wasted time and money but again take a look at that situation.
Can a vfx company guarantee to be 60% more efficient so they can do the work less than a subsidized area? When that exact proposal has been made to studio heads, they say fine, make it more efficient in the subsidized area. And the subsidized areas offer something else - money in the bank which is much more alluring than talk about trimming costs and doing things more efficiently. A studio can call their bankers and say we have $100 million movie but Canada (or whatever country/state) has agreed to pay 60% of the costs. You (the bank) can fund a $100 million movie for just $40 million. The bank will say "Where do I sign?"

Take a look from your own perspective. You wish to have a house built. It can be built in a town a little closer and more convenient to work. And the contractor there has said he will work closely with you and can keep the costs down provided decisions are made. You don't know exactly how much savings you can make and you'll have to assume you'll need to get a loan from the bank for the full amount and pay it off.

Or the other option is to build the house in the next town. It's little more of hassle and a little further away but the town has offered to pay up to 60% of the cost of the house if you use contractors there!  No strings attached. You can go to the bank and tell them you're buying a $500,000 house for just $200,000. The appraisal shows it as a $500,000 house. Yet you only have to pay off $200,000 The bank will sign you up instantly. You could turn around tomorrow and sell it for the full amount and keep all the profit since the town has offered the money not as an investment but as a totally free gift to you. Free money is fun.

Summary
While there are a lot of problems in the vfx industry, the subsidies are top of the list. And that's the one thing we can't address as companies or as workers. We can work on business models, efficiencies and other issues but we have no control over subsidies. And yet that tends to trump all. vfxsoldier is the only one to have come up with a proposal to try to nullify subsidies so that the industry can become healthier and so companies can make a difference in their own future.

In regard to the business model solution, which could be a big win, which company will be proposing a new model (cost-plus?) to their clients? Because right now vfx companies have refused to join or create a trade association which could potentially have the clout to change the approach. Will a company attempt it on their own and will they have enough leverage to make it happen?


If anyone has other solutions for any of vfx issues please post them. We already have plenty of lists of problems.


Related posts
Visual Effects Tax Incentives / Subsidies
Risk and subsidies
Oh, the mess we’re in!
The Miracle of Visual Effects, will it continue?

VFX World Wide Pi Talk

Last night was a great visual effects event.  Visual Effects World Wide Town Hall - Pi Day. A great many people worked incredibly hard to pull this off in the time available. (Big thank you to all of them)
We had abut 250 in Los Angeles where the event was held (Gnomon) and interconnected to New Zealand, the San Francisco Bay Area, Vancouver and Austin.

I touched on this yesterday and here's the website with more info of the things going on. See vfxsoldier and links on upper right for additional info.

Below is the script notes I started with for my talk. I wasn't able to cover everything in the time provided and since I was free speaking most of it, I probably lost a few things along the way.  

I've posted a link to the YouTube of the talks and discussions at the end.  (And thanks for all the great responses and feedback. Let's keep the discussions going and lets implement some solutions ).

Suggested music for reading
Eye of the Tiger    by Survivor
Waiting on the world to change     by Jon Mayer
Changes    by David Bowie
A change is going to come    by Sam Cooke

------
I’m Scott Squires, started on Close Encounters, started up and ran Dream Quest for a few years, was at ILM for 20 years and I run the Effects Corner blog.

I am a VES Board member but today I’m speaking as an individual,

This event is aimed at all VFX professional worldwide. Film, TV, Commercials, and similar art forms

Each year we as the vfx community pushes the boundaries of what we can do. We develop the art, skills and technology to do more and more. This last year we have seen incredible work. Our efforts have allowed filmmakers to tell any story. We have made the impossible, possible. We are involved in not only most Hollywood films but also almost every form of moving image content. All films that were up for best picture this year used visual effects. The studios are reaping large benefits from our talents. We should be celebrating instead we find ourselves scrambling for coins in the gutter.

We have allowed visual effects to NOT be considered for creativity, collaborative and quality. We have allowed the discussion to simply become a decision of costs.

Films do not hire the key creative’s based on how inexpensive they are.

With the bankruptcies of R&H and DD and closing of other companies I the last 6 months, it’s clear that our industry is out of balance.

Major Problems

Subsidies
These are basically government funded corporate subsidies for select industries in select areas. Politicians are controlling who wins and who loses. The evolution of companies is no longer based on creativity, collaboration, quality and efficiencies. No matter how great a company is they can’t compete with a 50% or more discount funded by the deep pockets of governments. Subsidies do not create jobs, they simply move them. VFX companies are forced to setup expensive branches in locations with subsidies. The vfx professional is now forced to move from place to place like a migrant worker. We still work in offices and the moves are only based on these politics.

The taxpayers in those areas are paying a high price. Louisiana recently discovered that they make less than 16 cents for every dollar spent, even factoring the intangibles and the multiplier effect. No unbiased report I’ve seen has shown any benefits to the taxpayers in those areas.

Building an industry based on subsidies means building it on a house of cards, ready to collapse when the subsides go away. And they will go away. The subsidies are one of the next bubbles to pop. They are temporarily. Film subsidies require constant feeding.

Another location will provide better subsidies or your subsidies will go away. The BC film industry is seeing that with work now going to Ontario and Quebec. UK companies are now setting up branches in Montreal.

If tomorrow Antarctica announced a 70% subsidy, the studios would be on the phone to all vfx companies and the vfx companies would be scrambling to setup in Antarctica and requiring many employees to pickup and move if they expect to keep working. 6 Months later a small island in the pacific will offer more and the cycle will repeat itself. This is ridiculous and as insane as it sounds. Yet this is what is happening. You can see a time lapse version playing out in the US. Michigan was top dog a short while ago. They are no longer top dog and now have shutters studios and businesses simply because they falsely believed they were building an industry.

Everyone in visual effects is affected by the subsidies.

Too much competition
The amount of visual effects in films and other entertainment has exploded in recent years. But there is still too much competition. The subsidies have caused a distortion in evolution. Companies are trying to get a small profit from the projects. The companies have no leverage due to this imbalance. Large companies, even in subsidize areas, are underbidding the actual cost of the projects. Anybody with common sense can see that doing projects in the red will end in the company going out of business.

Broken business model
The visual effects business model is a fixed bid. A fixed bid for a creative process that starts as simply vague writings and has a fixed deadline. We are the only industry in the world that operates this way for a process with so many unknowns and so many changes, large and small. Construction requires blueprints and selections. Any changes are billed and deadlines are extended. The fixed bid is an insane way to work and results in companies going out of business. And it should be pointed out that when these companies go out of business they leave a trail of unpaid workers. Because at the end of the day the workers bear the brunt of all of this. It’s not the studios or the companies.

Massive Overtime
Unions fought and won to help make a 40-hour week standard. Most countries have a maximum allowable number of hours a person can work. The Fair Trade Association that Apple, HP and other companies belong to that covers China and other countries has a cap of 60 hours. In visual effects many of us start at this number of hours and increase from there. As vfx professional we’ve already exceeded what both many countries and associations allow. In there UK they have a maximum hours of 48. But vfx workers are required to sign a waver when they start.  As overtime goes up, productivity goes down. There are now health studies clearly showing the impact to workers health when worked over 50 hours. Why on earth are we working the hours we’re working.

Unpaid overtime
Many putting in these hours are doing so unpaid. Many vfx companies are breaking labor laws by misclassifying people, making workers exempt from overtime and other questionable activities. In Vancouver they are classifying people as technicians to get around overtime laws. In the UK there are no requirements for overtime rates so many are simply given a standard day pay, if anything at all.

Health Care
This is the only US centric problem I will mention. Health care here is very expensive. Each new company you work for requires 3 months before coverage. If you work shorter than that then you will have to buy your own. That is one of the reasons why all other film crewmembers are union members, including writers and directors. Because they offer continuous benefits as crewmembers move between projects.

Problem Summary
There are plenty of other problems but we need to focus on these first.

The visual effects industry is like large ship that’s burning, sinking and headed towards a waterfall. It would make a great movie but we are all on it. All of us. There are some on the ship that see no problems, some that simply want to hold on and hope for the best or hope that someone else will come to the rescue, others argue about which to fix first and of course there are plenty that just complain without solutions.

Solutions
So lets talk about the possible solutions

Subsidies
Vxfsoldier has started a legal team looking at the issue of subsidies under the World Trade Organization, which technically lists these as illegal under their guidelines. But beyond this there is little we as individuals can do solve this problem due to the politics and the deep pockets of lobbyists.

Making our own content
Many have suggested that vfx companies make their own content. That this would provide an alternate revenue stream that would help cover costs. But being a content company is a different business than being a vfx service company.  Some vfx companies have attempted this with varied degrees of success. It is certainly worth exploring but bare in mind large amounts of money have to be obtained and invested. It would require companies to invest large sums themselves to create the concepts, hire writers and directors as necessary. And even once this has been done there is no guarantee of success. Even the large animation studios are not always successful at doing so. If your company was successful in create such content, would you even bother being a vfx service anymore? Especially if the vfx business was still broken.

Residuals and royalties
The other notion is that vfx company’s share back ends participation. Perhaps even the workers. If you think getting more credits is hard, try to get a valid back end. There are some vfx companies that have done so with varying success. But this usually requires the vfx company to bankroll a certain amount of their own production for which they require deep pockets. And what happens if these projects are unsuccessful or make no return on investment. How deep are the pockets of the companies, especially since they work on very low profits currently.

Keep in mind people such as writers get residuals based on their union coverage. Most film crews get residuals in the form of health and benefit fund payments. When you buy a DVD a certain % goes into that fund. So again, vfx workers are the odd man out with no participation in the profits of the projects.

Working for the studios
The studios could simply employ vfx workers directly, just like they do film crews. This is the way it used to be done. There would be a direct connection between decisions the director makes and the cost, just like there is for the rest of the movie. This isn’t as far-fetched or as impossible as it sounds. There would be some benefits to workers and could be an advantage to the studios and directors as well if it were done right. But the vfx companies today offer the studios the ability to take all risks over themselves and the vfx companies also offer doing the work below costs. Hard to convince a studio to do their own when others are more eager to fund their projects and take on the risks.

Post-production supervision
A director is given so many days to shoot live action. The producer, line producer and 1st AD all encourage and guide the director to shoot their moving in the allotted time. They have to shoot so many setups a day to meet their schedule. A director is less likely to do 100 takes or change their mind after shooting a setup or ask for a lot of reshoots because they have a limited time and they have others who keep them on track. Once into post-production there is no one working with the director to keep them on track. Because the vfx is done by an outside company that may not charge for all changes and overages, the changes continue. As these changes continue workers work more overtime and the company loses more money. If the studios had a strong post-production person and treated visual effects more like live action that would stop,

Global working conditions
Just like the Fair Trade Associations and other organizations mandate a specific code of conduct for companies; there could be a code of conduct for vfx companies to adhere to if they wished. Those who do so would be clearly listed and overtime and health benefits would be clearly defined. Should a company break any of these guidelines they would be off the list. All companies on the list would be required not to subcontract to others not on the list. And the studios could not plead ignorance.

Trade association
A trade association would be made up of vfx companies. By organizing they create a unified front, with numbers comes strength and leverage. Just like a union. Companies in the trade association couldn’t agree on pricing but they could establish standards and also define their business models. The goal of a trade association is to do what’s best for the companies involved. The film studios have their own trade association for negotiating with the unions as well as take care of issues affecting all of the studios.

The VES hosted a few meetings with some companies and Scott Ross has been trying for years to get companies on board. The larger companies and those in subsidies areas have been reluctant to even discuss the possibilities. But the vfx protest that many of you were involved in has seemed to make a bit of an impression. Scott Ross will be discussing the trade association tonight.

VFX Guild
A guild and union are one and the same. As mentioned almost all others involved in the film industry are covered under guilds. Writers, directors, production designers, cinematographers, actors, etc. Please don’t stereotype unions by what you have heard 2nd hand. And please don’t bother bringing up false notions of the auto industry. The German auto industry is doing just fine with a union work force.

The union provides protection for the worker. As an individual you have very little control at your workplace. The company could drop everyone’s pay without notice. They can do things to skirt around the labor laws. A company may not pay you for a few weeks and simply say that they will pay you soon. (Dave Rand can discuss this aspect) All of this is even more possible at a time of large unemployment. You have no say over your situation. You either keep working or you quit. Those are your two options.

The guilds goal is to do what is best for workers. Workers are involved in the management of the guild and are involved in determining what is critical. The guild sets up basic working conditions and they set minimums. Everyone is still allowed to do their own negotiating higher as they choose.

And guilds are not only here in the U.S. There are in a lot of countries including Canada, UK, New Zealand and even India. China is one of the few places where unions are not allowed by law.

Solutions summary
So those are many of the potential solutions. None of these will fix all of the problems. We have different members on the panel that can discuss different aspects of some of these possible solutions. And if other have better solutions please submit them.

Workers POV
Since this is a town hall event primarily for the workers let’s take a look at the solutions they can be involved with.

From my perspective a VFX trade association would be a very good thing and help build a more sustainable business model. I would suggest to all workers to ask management if they have an interest in a trade association and would be willing to meet about one. If not, why not?

We as workers don’t control the politicians, we don’t control the studios and we don’t control the companies so lets look at the options that are left.

1. Do nothing. Hold on and simply hope you don’t end up unemployed and/or half way around the working next year.

2. Quit the business. Some have already done so and more are more making plans.

3. Unionize. We now have a large group of motivated workers around the world.  We’ve changed our Facebook images but how do we put that into real results? For real change to take affect we will have to truly be organized in a contractual form.

I know some people say they want working conditions, they want to be paid the hours they work, they want collective bargaining to get continuous benefits but they don’t want a union. The problem is you’ve just described a union. Here in the US there are specific laws and regulations. To do those things you have to be a union otherwise you’re an organization that submits petitions in the hopes someone may read it.

Ideally a union would be global but given the range of laws in each country that’s not possible. The best option is a per country union that can be loosely connected.

Some say they wish to start a union from scratch. How much time will that take to get through all governmental approvals, to get acknowledgement from companies, studios and other unions? And in the end what do you have gained?

Now there will be those that say a union will be too expensive, that the companies can’t handle it. That all work tomorrow will go to China or the cheapest place this week.  It does the union no good to create a large added cost to the companies, which cause the companies to fail. The unions would negotiate with the companies to develop a reasonable solution for both sides.

And remember, I’m not just talking here in the US. If you wish some protection as a worker you should consider joining a union. Canada, UK, etc all have the option to unionize as well. I think that once one area unionizes the others would be more interested in following.

Nothing signals we’re tired of this and we’re not going to simply wait around for others who may not fix the problem than people joining a union. It sends a strong signal to the vfx companies that a trade association is a good idea. We as union members would be connected to all other film crewmembers.  With numbers comes the strength to do great things.


There are those who want to continue to talk about all of this for the next 2 years. I don’t know about you but I’m tired of talking. In 2 years time our ship will have burnt, sunk and gone over the waterfall.

We need to understand at the end of the day the entertainment companies need what we do. They are dependent on us.

What we need now is unity and courage by everyone. That is the only thing that is preventing us from making positive changes.



FXGuide hasVFX PI coverage.

Related Posts
Pass me a nail
Oh, what a mess we're in!
VFX Business Models

Global VFX Workers

VFX Tax Incentives / Subsidies
Risk and Subsidies

VFX Union, Take 2
VFX Trade Association
Using the nail

Other web related postings
John Parenteau's Thoughts on the VFX Industry
More than 400 VFX artists protest at the Oscars, to highlight the growing problems in the VFX industry after Oscar winning studio, Rhythm & Hues (Life of Pi) recently had to file for bankruptcy

Risk and subsidies

Risk and subsidies

This post is in response to a comment on the previous post Oh, the mess we’re in! . Blogger is unable to allow long comments so I've made a new post for the response.

Here's the comment:

" Mark said...

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."

'I think it's unlikely that's a new consideration.'

Actually  it is. Obviously studios wouldn't award projects in the past to companies that were just starting up or which there were indications they would fail from the get go.

Now there may have been a company or two that closed during a production in the pre-digital days but I can't think of any. But as you can see with R&H, DD, Meteor Studios, etc. that's a real risk now where it wasn't before. And this is as risky of the big companies as the small companies. The risk that a company may not be able to handle shots as desired or they may not be able to handle hundreds of new shots was always there but a company going out of business while working on a project? - That's a new one. Do the studios going to Weta or ILM think that tomorrow they may get a call saying they closed their doors while working on a project? No. And that was the case with almost all vfx companies pre-digital as well. Yet many projects are not done 100% at Weta or ILM. The work is split up among a few companies, not to reduce their risk of going out of business but in an attempt not to have all of their eggs in one basket. And by that I mean the studios don't want to hear about delays or problems or change orders. And they think it's cheaper.

A studio can check the quality of the work the company has done for other films, they can check their budgets, meet with the crew, they can talk to other studios, producers and directors - all of this to assess the risk and quality factor before they sign a contract. But the thing they can't do is check the books of the company and do a true assessment of their financial stability. In the past, they never had to.

Now a studio may pull work from a company and that's aways happened if the company wasn't delivering what was requested in the required time. There have been certainly 911 calls (emergency) when work needed to be shifted or shots were added. But that's a risk that is evaluated before the contract is signed and is monitored by the studio. This is not something they're blindsided with. A company calling them up and saying we're filing for bankruptcy tomorrow (or next week) is a much different thing and a much higher level of risk.

The studios have many risks when they make a film. They take on that risk with their crews and locations.  But vfx is a 3rd party since the studios don't want to take on running their own vfx company (too risky).  The real risk is laid at the doorstep of the vfx company. But the risk for the company is constantly changing by external forces which they have no control over. And in many cases their clients are the ones putting the companies at more risk either directly or indirectly.

'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.'

No offense but this sounds like a certain management software company or a studio talking and not someone working in visual effects or visual effects management. Would there be some risk without subsidies?  Yes but they'd likely to be much less.

As pointed out the studios and regions (countries, states) have created a situation where quality and efficiency are lower priority. If it were a true free market then those companies who were doing good work efficiently would be rewarded by more work. They'd be able to make a profit and be on much firmer ground financially.  The companies that did poor work or that were inefficient would see their profits go down and possibly have to close. Studios would be clearly able to see the different levels and know ahead of time what their general risks were. This is natural evolution. Just like in nature the weak ones would be dying off and the strong would survive.

But now you've added in subsidies into the mix. It's no longer evolution based on quality and efficiency. It's evolution based in large part on politics. And those politics change frequently. Companies that would be strong and survive in a free trade market now find that there is no way they can cut costs 50% or more. They find they have to invest $1 million dollar into a satellite branch they don't want and didn't plan for. And companies that wouldn't even exist without subsidies now exist only due to the subsidies. Companies that were small found themselves very big in a short time not because the companies were the best at what they did but because of subsidies.

 Imagine you've got 5 runners in the Olympics and you give some of them motorcycles. Is that fair? Is that a way to truly assess which runner is the best? Are people surprised when the actual runners don't win? Which one would you bet on?

Imagine a restaurant in a town and it's doing well. In fact it's very good and people are coming from other towns. And in another town right next to the first town the city government decides to pay for 50% of all orders at a similar restaurant.  Don't you think that would have an impact on the first restaurant? Almost all of the people from both towns would flock to the one that they could get food for 1/2 price.

 Is there a way for the first restaurant to compete with that? No. There are certain food, labor and building costs that they can't trim. They're not making over 100% markup so it's impossible to cut their prices 50% and still make any money.  What are their choices?
1. Close their doors
2. Try to offer food at the same price. And this will bring back some of the customers but since they're now losing money every month it's simply a matter of when they will close their doors.
3. They can open another restaurant in the town with the discounts. Now they have the extra burden of a duplicate restaurant. They have doubled their building and overhead costs. They've had to hire a manger, hostess and the entire group of chefs and wait staff just for this new place. Do they have enough money to do that? Will that added unexpected cost now make them more at risk of going out of business? Yes is the answer.

Now imagine that another town right next to these two starts offering a 70% discount. Now where does that put the owners of the restaurant? Do they now build a 3rd restaurant in this new town? Do they try to lower their price to match?  And with the more lucrative restaurant business in this new town, there will be more restaurants built by those who haven't done this before. The townspeople have paid their taxes and the town council has decided that offering food coupons is much more important than putting the money into their schools or their decaying bridges. There's no winners here except for the customer.

Are subsidies the only reason for troubles of the visual effects industry? No but it is a major reason. Natural evolution would tend to solve problems of poor management and other flaws by having them go out of business. Is there a risk? As in all of filmmaking, yes. Is the risk of a company running out of money on a project much greater now? Yes. See the restaurant example of options for a company.  None are good. And it's not a question on how good management is at that point, you can't do the work for 1/2 price. And that's whats created the largest risk - closing doors even while working on projects.

And lets not forget when studios do stop or pull projects that creates a huge loss for the companies that was unexpected. As I say, the companies take on a fair bit of risk outside their control. Now they're on even shakier ground. The studio that pulls 1/2 their work can't plead ignorance that they increased the financial burden of the company and increased the risk the company could go out of business. Between these types of actions and the subsidies it's no wonder some companies go out of business.

Related post:
Visual Effects Tax Incentives (aka subsidies)


Here's some more information on subsidies of other industries and the impact they have:

Choosing winners and losers: How government subsidies destroy the free market
Subsidy Insanity
WWF: subsidies destroying industry [PlanetArk]
Coalition of Gulf Shrimp Industries Files Petitions for Relief From Subsidized Shrimp Imports
New Study Reinforces USW Position that Improper Chinese Subsidies Destroy Jobs in American Paper Industry
USA Shrimp Industry Seeks Relief from Subsidized Imports
China subsidizing auto parts exporters: US industry
Solar energy firms 'bankrupted' after subsidies cut
Over Half of All U.S. Tax Subsidies Go to Four Industries. Guess Which Ones?
Germany Subsidizes China To Destroy The German Solar Industry
China Solar Subsidies Pose Dilemma For U.S. Trade
California Backfire: Energy Subsidies Destroy Economy
Put An End To Massive Logging Industry Subsidies in California

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.

Summary

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?