Monday, May 09, 2011

VFX Business Models

VFX Business Models

The VFX business has always been difficult.  The amount of work has fluctuated causing feast or famine for those working in it. In the last decade or two the amount of work has increased but the amount of competition has expanded even more.  There are all types of incentives for work to be done in a specific state or country, which make the competition even more lopsided.

Getting work and getting continuous work to keep a large number of employees working is very difficult especially since the demand for highly complex VFX is being pushed at the same time most studios are compressing their post-production schedules.  3D stereo, 4k images and the potential for higher fps simply means pushing more work through an ever narrowing time frame.  This places an enormous amount of pressure on both the VFX companies and the artists. The last few years have seen more VFX companies going out of business.  As we look to the next few years is there an approach that will help smooth this whole process for all those involved?  One of the first tasks is to take a look at the VFX business model and see if it still makes sense or if there's a better approach.

Most VFX companies these days operate under a fixed bid business model. That means that an actual bid is submitted to the client for the work to be done. Remember this has to take into account new and never before techniques (R&D), guesstimates based on script only or at most storyboards and previs. Since this is a creative endeavor how many takes do you include in the bid? How many changes by the director or studio do you calculate in?  You can't bid too many because this is a competitive business. You can't bid 1 take because that's not the reality and certainly the studios will not honor a change order for take 2.  As a fixed bid the only time you can request (and get) extra money is from extra shots or something that is clearly a change from the bid parameters. These are change orders.

This places the VFX company in a major bind because changes are made until the last moment and it always turns into a bit of a back and forth with the studios.

The studios like it since it provides them a definitive number to put in their budget. The companies have to push to get paid for changes and then it becomes an issue of what constitutes a real change.  In many cases the VFX company is reluctant to make waves (there are a very limited number of potential clients) and so they tend to swallow the overages rather than appear 'problematic'.  In another business if a company is efficient it's possible they could do the work for less (with a fixed bid) and thereby make more profit.  In the case of VFX the push is always for more so even the expected profit is almost always less than expected.

I've written before that VFX business is not really a service as it's currently implemented.  Most services charge time and materials and adjust based on the changes of the work. Basic and repeatable tasks have a cost associated (oil change, teeth cleaning, etc) but with the understanding if it's something more then the bill will adjust accordingly.  The VFX business is also not a widget or commodity business since each shot is unique. A hundred 'simple' green screen shots can't simply be run through a computer script. Each shot will require individual adjustments based on an artist working on the shot and each of these shots will be reviewed, critiqued and possibly changed by the director or studio.

The trouble is there are no other business is quite like VFX in regard to being a 3rd party company getting paid a fixed fee for very custom work with a locked deadline but unlimited changes and approvals.

Some people think it's simply a matter of branding your company to get more work.  But what exactly makes your company special and who's buying?  If you're a large company such as ILM with full R&D and other resources then some tentpole work will go there because the studios know it will get done and are willing to pay the price.  Some VFX companies specialize in animated animals and other specialize in dynamic simulations.  But that's only a portion of the work. At the end of the day the studios make decisions based on a wide range of factors.  Not just cost but that is certainly a consideration and can be very high on the list depending on the project.

So let's look at a few other possible business approaches to VFX.
(There's been another take on the VFX business model in the last couple of weeks: VFX companies need an old business model.)

- Studio VFX
The studio could have a permanent VFX company of their own. This was standard in 1940-50's and continued into the 70's at some studios. Each studio had a VFX staff.  Universal had Albert Whitlock, Sid Dutton and Bill Taylor.  Disney had Art Cruickshank,  Ub Iwerks,   Peter Ellenshaw, Danny Lee, and others.  These were all phased out by the early eighties or earlier. Many had been dismantled in the 60's/70's. Some studios have tried to setup various forms of VFX departments but almost all have closed. Disney had the Secret Lab (which was based in part on Dream Quest which I had co-created with others) and recently they had Image Movers Digital.  Most studios find out how much it actually costs to do VFX and how much work is involved to keep it running. Add into that mix studio executives who are focused on the short-term gains and not long term gains.  That was one of the problems for Doug Trumbull when his Future General company was owned by Paramount.  All the R&D and interesting projects he was working on were beyond the mindset of the studio.  Sony does have Sony ImageWorks.

The advantage to the studios there is no markup. The downside is there's not a huge markup in VFX anyway and trying to keep it updated tends to require keeping it busy to pay for itself.

- Studio sets up a VFX to do a major VFX project.
This is how 2001, Close Encounters, Star Wars and Star Trek: The Motion Picture were all done.  The studio leased buildings, built, leased or purchased equipment and directly hired the necessary staff and crew.  Once the project was done the studios folded the VFX group.  In the case of Star Wars, George Lucas thought this VFX company might be handy to have around so he essentially kept his own company, ILM.

This approach is actually the same way a studio does a film.  They have basic offices on the lot but they create a unique production company for the film, which handles the pre-production and production. A crew of 200 or more people are hired, sets are constructed, props built, etc.  It's like a small army whose only task is this one film and it may have to travel or be setup around the world.

These days Roland Emmerich is one of the few people to do this.
The advantage to the studio is there's no markup. The producer and director have full focus on their project and they can do it more efficiently.  By making decisions quickly, by being actually in the same building as the VFX artists interacting with the them and by hiring the right people they can make large savings with a better result.
The downside is ramp up time required and inability to directly leverage longer term developments.

- Studio leases building designed for VFX.
It's now possible for a studio to lease a building, which is already setup with a screening room, workstations, render farm, etc.  Its probably possible to lease such a facility with a basic staff management.

- Studio leases a full VFX company and pays the going rate. The studio basically four walls an existing VFX company and people may be hired directly by the studio or through the effects company.

- Studio pays time and material for work done.
This is similar to how DI (Digital Intermediate) and sound mixing are approached. There's an estimate for the amount of time it will take (and thereby the cost) but ultimately it comes down to the amount of time the client uses up. This is the same way VFX are dealt with in some commercials when you're working in a Flame suite. There's a base hourly or daily rate and there's a rate card for all the other types of services and materials available.  It's then up to the client to be as efficient as possible or on the other extreme to be able to noodle with the task as much as they like. Ultimately the people in full control (the client) are the ones directly tied to the time and cost. The service company isn't on the hook for additions or changes.

This is how many of the independent VFX companies operated in the 60's and 70s. If you wanted a composite it was so much setup cost and then so much per foot. An animation stand was so much per hour and while an estimate was provided it ultimately came down to how long it actually took.

The problem became with the complexity of VFX.  Large VFX shops beyond basic optical companies didn't come around until ILM, Apogee, Dream Quest and Boss Films were available. When the client is in a room making decisions and the clock is ticking it's easy for them to see the time required and to see the impact when they make changes. The clients are open to this on something they could directly relate to. With today's VFX it is difficult for many clients to actually understand all the things going on.  Many in the film business think that all VFX are making a big markup. If they only knew the real truth.  A lot of highly skilled artist/technical people (film crew or VFX crew) working for long periods of time combined with lots of overtime makes for an expensive process.  And no, the computer doesn't do all the work.

So how would time and materials work on a large VFX project?
So many animators, lighters, etc along with equipment and basic supplies at $x a day, week? How much accounting would the studio require? How could they know if they were getting ripped off? The key here would be to come up with a viable way to make this or a hybrid business model work for both the studios and the VFX company. And that won't be easy, especially since the current model is working for the studios.

- Other options
Some VFX companies work in commercials or television and some work across the whole range of these areas in the hope of evening out the ebb and flow of work.

Some VFX companies offer not only VFX work for commercials but also operate as a commercial production company. Success of this has fluctuated across the years.

Some people point out a VFX company could be a collective of a number of individuals.  In some ways this is how many of the companies started and so that by itself isn't a solution.

At least one VFX company changed into a software company.  When I developed Commotion, ILM considered selling it themselves since George had suggested they look at other sources of income that weren't as cyclical. But ILM had no experience in selling software and it was beyond the experience of the games group so that fell by the wayside. Other areas some VFX companies are involved in include title design, logos, video games, multimedia, simulator rides and specialty projects.

One of the options people on the Internet talk about is having the VFX company (and even crew) receive residuals or a backend deal for the work in an effort to counter the costs of the effects and make it more reasonable for a VFX company. If you think getting extra slots in the credit list is difficult to get from a studio I can assure you getting a back end deal is even harder.  It has happened but it doesn't mean anything unless it's gross points. The VFX company would be making an indirect investment in the film by not charging profits or possibly working for less than the true cost of doing the VFX.  Does the company have deep enough pockets to make this happen and can it afford to take the risk if the film isn't a big success?

Another option I read about is for the VFX company to come up with their own IP (Intellectual Property).  After all if you develop a character, script, tv series, etc. you have the potential to keep making money off of them into the future, not just as a one shot deal as VFX work.  These same people point to Disney and Pixar as examples.

But neither of these companies were VFX companies. And while it sounds good, coming up with true great IP takes time, effort and a real knack. If it was easy everyone would be doing it. Does the VFX company have enough deep pockets to pay for development of ip? Can you do both efficiently? If you were making money off of ip would you even continue with the VFX side of the business?
Some companies become animation companies (which tends to be the most likely IP candidate for VFX companies).  Not too many can straddle being both a full VFX company and a full animation company.

Theres also the call for all VFX artists to make their own films. While I applaud having VFX artist explore filmmaking and other creative outlets do all VFX artists have the desire and skills to make a full film?  Is this to fulfill some creative wish or is this to make a living? If everyone was making their own films, who would be doing the VFX effects?

Are there other approaches or business models that would work better for the visual effects industry?

Update: 11/19/2011 Digital Domain (DD) is a large visual effects company based in the L.A. area and that is currently floating an IPO. Here's some public info that will reveal the real truth about what visual effects companies make. It's not pretty.
IPO Document
VFX Soldier article
VFX Foundation article

[[Update: 9/11/2012 Digital Domain has closed it's Florida facility and has spun off their visual effects group for a much smaller amount and filed for chapter 11 for the main holding company. This after going with a full IPO less than a year ago. No, visual effects is not a big profit center. This also points out the issue of developing your own IP. DD was trying to make their own projects but making projects on your own takes a large amount of money and time.]

[Update 3/19/2013  Alternate Visual Effects Business Model (Mix of a few with a twist)

[Here's a project management blog linking to this post.]

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