Wednesday, July 31, 2013

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?


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.

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.

"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.

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?