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

Globalization and VFX

Globalization and VFX


One of the issues facing VFX companies and artists is the issue of globalization. Given the tax incentives and cost of living variance around the world most film studios are looking beyond the borders to find a better price for doing film work, including visual effects.


This blog is read around the world. This article will have a California slant but I’m trying to as always document the current state of affairs in visual effects.


In the golden age of movie making most Hollywood films were shot in Los Angeles with some being done in New York. The studios were setup as film factories to be as efficient as possible. If you finished a film on Friday, you'd start another film on Monday. The stages, sets, back lots and rear projection allowed them to shoot a wide range of film settings within the confines of the studio lot. If you want New York in the 1890's you go to one block of the back lot. If you wanted a1940's Midwest town you'd make a left into that back lot street. Many 'locations' were within easy driving distance of the studios, which also had ranches and other outdoor areas where they could construct western towns or other special settings.


With films like Easy Rider studios started to reconsider what they needed. Many back lots were sold for short-term gains and more true location shooting was done. In some cases if a film could be shot at a lower price in a different location that made sense. In other cases it made sense to go to another location if that truly was the location in film.


When films like Star Wars and Close Encounters were filmed the majority of visual effects were done in Los Angeles. When ILM moved to northern California that spread the work a bit but still the majority of the big, Hollywood vfx work was done within California. VFX companies were on a relatively level playing field. The jobs were awarded based on ability, quality and costs.


As the digital age of visual effects got underway some countries and states started offering tax incentives that included vfx. The digital age enabled the use of computers and software to be setup anywhere. VFX artists can be brought in from anywhere else and setup with little effort. VFX artists can be trained in the basics locally. The internet allows images to be sent anywhere quickly for work to be done and reviewed anywhere else. The studios, always eager to save money on things that weren’t under their umbrella, were more than happy to start sending out work. In their view, vfx are a commodity that can be done anywhere.


At this point a number of countries offer tax incentives, rebates or even pre-investments in films in exchange for a certain amount of work to be done in that country. Various states also have tax incentives as well to try to get millions of dollars of production costs to come to their state. The details vary greatly and can be a smart or bad investment depending on the details.


From the various governments viewpoint (state and country) an incentive means that they can draw film production to their location. A film production can bring in millions of dollars to a given locale fairly quickly. A factory doesn’t have to be built over time before people can be employed and there usually aren’t a lot of ecology studies required. All the products, services and rentals that can be had are paid for by production (hotels, catering, car rentals, hardware stores, etc). The crew spends a fair bit of their money locally on things like restaurants, bars and leisure time activates. If a location is portrayed well it may mean extra tourists in the future. When long-term incentives are in place then an entire film studio infrastructure can be built in that location and crewmembers of all types can be developed, including visual effects artists. Many third party companies develop to service the motion picture industry at these locations.


Companies in Vancouver, London and similar locations are doing well since they don’t have to compete on a level playing field. With a 20% or more savings via the government it’s difficult for vfx companies in the U.S. to compete directly.


From the studio perspective their main aim is to do a film as cheaply as possible and still make it work. If the film is a major VFX tent pole movie with a lot of difficult or new vfx then they will pay top dollar to make it and to ensure it will be done on time and to the quality required. But this only applies to those shots and sequences they feel need to be done at expensive vfx companies. One step down from those types of shots (certainly simpler compositing and roto shots) or lower level vfx film and price becomes one of the highest priorities.


A Hollywood studios first choice is usually Vancouver simply because it’s in the same time zone, is just a 3 hour flight away and they all speak English there. Second choice would probably be London since it’s the next closest location, they speak English and studios executives and key personal enjoy the London life. Next would be Australia. (New Zealand with Weta is primarily on the big projects and not so much a cost saving measure). India, China and other locations are further down on the list if the studio executives and key personnel think they will have to go there. If they don’t have to personally travel there, then the studio is all for sending the work anywhere in the world.


Obviously some studios now have infrastructures setup in various locations and their choice will be dictated by their established suppliers. You’ll notice most editing and sound mixing still happens in the U.S. since the filmmakers and studios spend a fair bit of time involved directly in these activities. They’re also not at the same level of expense as vfx.


Some people think that the studios won’t go anywhere just based on price but it’s very dependent on the nature of the work. There was an article a few months ago where most of the studios were now sending out their subtitling work (as done on the DVD’s). The cost savings to the studio? $600. A $100 million dollar movie and they send out the subtitling to a different country to save $600. I’m not a studio accountant but I suspect there might be a few other budget items that would yield larger savings but since subtitling (and vfx) are done by third parties it’s an easy win for any studio person to make that decision.


Unfortunately the location that has the most to lose (and gain) from subsidies is California. They have done too little, too late. A large revenue stream for California (especially southern California) comes from movies. There are a lot of people employed in this business and they in turn spend their money locally on services and products.
Runaway product continues to suck out revenues from California and unfortunately most of the California legislation can’t get a simple grasp of the obvious. Motion pictures are one of the U.S.’s largest exports.


People (and politicians) assume since movies bring in huge revenue that everyone who works in movies are ‘gazillionairs’ to quote another internet forum. What they forget is the vast majority of people involved in movie making are making working wages. The median income for writers in the Writers Guild is $44,000 a year. Most VFX people make more than this but if it’s averaged over all vfx artists and dry spells it may not be as much as you think.


Some US companies are opening satellite companies in other countries that are able to offer a better price break. There are multiple arrangements. In some cases they simply outsource the work they feel can be outsourced such as Roto. In other cases they have a full working relationship where the foreign company does a fair bit of real work on the actual product. Some companies operate independent shops in different countries that can be leveraged, as the work requires it.


Part of the issue is what is to be gained for everyone involved. If the focus of the studios is purely on the cost factor, having a US based VFX company doesn't necessarily gain them much. They're willing to pay top dollar today for certain projects with a lot of R&D but what happens in a few years when those techniques and software are more readily available in off the shelf products? If your California vfx company has some specialty (water, fire, etc) what happens when that’s all in the next major update of a software package? Will you continue to get work? What happens when vfx production management elsewhere is brought up to the same level? Will the studios continue to be willing pay more to a U.S. company to act as an intermediate?


Will most of the work being done in the US move out of the country and the only thing remaining be the vfx company executives and accountants?


If you live in a country that is currently doing well (healthy vfx production) because of the incentives or reduced expenses what happens when that changes? At some point your government may reduce or eliminate the incentive. Another country may offer a higher incentive. The world and local economy may increase the cost of doing business such that the incentives aren’t enough or another location may end up being even a lower expense because of changing cost of living factors. The studios will quickly move to the lowest priced area that can provide them what they need. Can you and the company you work for compete on a level playing field if it had to? Is your company truly efficient? Does it have the talented artists and R&D people required?


If you live in California (or starting here) what can you do?


1. You can work at some of the larger companies such as ILM, DD, etc. These still get large projects but they still lay off massive amounts of people and still go through cycles of feast or famine work so there’s no guarantee of long-term employment even if you’re considered on staff.


2. Consider working at a small to mid-size shop that continues to maintain a reasonable balance of work. Many of these do all television work (which is usually done here or in Vancouver) or that at least do some television work to help balance the work.


3. Consider moving out of country to where the actual work is being done. This sounds like a simple fix to anyone who doesn’t consider the implications.


a. There are already people working there. Are there enough job openings to make it worth moving there?


b. How long is the project? Is this a permanent move or will you have to shuffle off again in few months to somewhere else?


c. Can you qualify to work elsewhere? Many countries require work visas and other paperwork. Some incentives require crewmembers to be living in the country for a given length of time. Just because there is technical and creative work elsewhere doesn’t mean you can just move there and start working.


d. Can you work at reduced wages if that’s the reason the work is located in that country? If you’re at a location that is getting work based mainly on the cost of living can you work there yourself at the reduced rate and feel comfortable? Does the local taxes and other issues reduced the income even further?


e. What happens if you have loved ones, family, house or other connections here? If you’re young and single it may be fun and exciting to move to another location. For those of us with families do we sell the house and uproot all family members (taking children out of school and away from their friends) to go work in another country? Do we leave the family for long periods of time? (6 months to a year or longer) Do we try to rent out the house and hope to return someday?


It’s a sad state of affairs when experienced vfx artists, with all of their creative and technical skills, are likened to migrant farm workers moving to where the work is. At least there’s a real reason farm workers move is because of locations of the crops and growing seasons. In the case of the vfx artist a cubicle is a cubicle, no matter where in the world it’s located. The only reason for moving is purely at the whim of the counties incentives and the studios.


Unfortunately I can’t offer any real solutions. The unions can’t prevent work from moving out of the country. The politicians seem to be the few who have much control over this so they’re the ones to contact. I know that there are some organizations trying to make this better. If you’re in a location doing well then enjoy it while you can. If you’re in California it’s likely you’ll have to do what you have to do. There are now some vfx supes that spend months shooting in one country and then do the post in another country and spend most of the year away from their families.


Will there be enough of a demand and balance that all the vfx companies and artists throughout the world can keep reasonably busy and can enjoy the fruits of their labor?


(Links added 7/12/10 based on VFX Soldier comment posting. See comments for my basic response at this time.  The links all make interesting reading and really get to the heart of the matter.)


VFX Soldier  VFX Subsidy War Grows Into Global Trade War

How to Make an American Job Before It's Too Late

The Vanishing American Consumer and the Coming Trade War

(If you're viewing this on a page with other posts then please click on the Comments link below to see the comments and responses)

Update 8-9-2010
Every week there seem to be new updates on state or country incentive programs.
Clint Eastwood makes UKFC plea - Entertainment News, Top News, Media - Variety


Here's a snippet:

Scottish-born producer Iain Smith, whose credits include "The A-Team," "Children of Men" and "Local Hero," expressed the need for the government to quickly form a plan or risk producers looking elsewhere to shoot films.

"While we have a fantastic infrastructure, we have to protect that as much as we can and in order to do that we have to compete against industries in other countries," said Smith. "There's no doubt we need to tighten purse strings but we need to be careful we don't asphyxiate the film industry in general."

But in an article written for Blighty's Observer newspaper on Sunday, culture secretary Jeremy Hunt hit back at critics.

"If we are going to face budget cuts I have a duty to ensure that taxpayers' money is spent where it gets the most bang for its buck," he said. "It is simply not acceptable in these times to fund an organization like the U.K. Film council where no fewer than eight of the top executives are paid more than £100,000 ($160,000)."

Hunt added: "Stopping money being spent on a film quango is not the same as stopping money being spent on film."

NY RENEWS TAX CREDIT, ADDS POST INCENTIVE Snippet:

"This new credit will give New York post production services a much needed competitive edge," explains Rich Friedlander, co-founder of Brainstorm Digital. "We increasingly saw visual effects post work going to Canada thanks to their their Digital Animation or Visual Effects tax credit (DAVE). This new program will allow work that was filmed in New York to stay through its entire production cycle. It's a major move that will attract and keep top talent here in state."