The VFX Subsidy War – Part II

In my last post, I wrote about government subsidies used to lure visual effects production to certain states. But what about subsidies offered overseas? How do they pose an even larger risk to the vfx industry?

When James Cameron set out to create his epic Avatar, for many in the industry it was no surprise that he went with the perennial visual effects powerhouse Weta Digital. The New Zealand company has had an incredible run winning Oscars in vfx for the Lord of the Rings trilogy and King Kong.

What came as a surprise was that while Weta’s work was superb, it was not the deciding factor in doing the film there. In fact, when Avatar producer Jon Landau was asked why they chose to make the film in New Zealand, he stated:

To be honest, we went for the tax credit.

Now can you blame him for being so honest after the fact that the New Zealand government paid $45 million in tax subsidies to Fox Studios to make Avatar there? Isn’t it ironic that Fox Studios owner Rupert Murdoch,  who also owns Fox News, a network that readily attacks any subsidies for healthcare and education, is the first to line up to the trough when government money is handed out?

In 2010 the NZ government handed out $200 million in goverment subsidies to Hollywood studios. How much of that money goes to Weta Digital? Zero. Weta Digital spokeswoman Judy Allen says it herself:

The only incentives offered to the industry were those provided to productions that come here from overseas and receive the well-understood package of grants that have been around since early 2000.

Maquila Visual Effects Houses

Overseas visual effects companies are at a huge risk because the work they get for maquila operations – productions that exist in a country for a subsidy. The problem with handing out subsidies for film studios is that they have made no commitment in doing future work in that country and the truth is the subsidies have always been intended to be temporary. Weta Digital is only as good as their latest competitive subsidy and in a market with 26 countries and 44 US states competing with each other to lure film industry work, each one is becoming more generous to Hollywood studios and more expensive for the hosting government. Essentially it becomes a race to the bottom and even Film New Zealand chief executive Sue Thompson reluctantly admits:

We have been doing extremely well, but when you look at Australia, it shows how vulnerable we are and how nimble we must be to grow our market share. We do not want the status quo. We want growth.

Now let’s look at Canada as an example. Canada introduced tax credits in 1997 and every time they’ve tried to lower them, the work went away. In order to get the work back, Canada had to offer something bigger:

Combining all levels of tax credits and the indirect subsidy of the lower Canadian dollar, a typical maquila production budgeted at U.S. $43 million could reduce costs by at least 57 per cent, or U.S. $24.5 million, by shooting in Canada.

Mind you the article quoted above was from 2008. Canada’s subsidy has grown since then and even American vfx facilities such as Imageworks, ILM, Digital Domain, and Pixar are opening or considering starting houses in Vancouver. So what happens when the subsidy goes away? Recently when the Royal Bank of Canada failed to deliver just loan guarantees to vfx giant CORE, they went belly up.

The Oncoming Tidal Wave

The global debt crisis is going to play a role in accelerating the problems subsidies have on the visual effects industry. Countries with large film subsidies such as the UK and Canada are severly in trouble with debt-to-gdp ratios of 72% and 69% respectively. As the debt tidal wave hits the shores of these countries they will either be forced to raise already high taxes on citizens, or send drastic cuts to subsidies that fund health care, education, and film production. What choice do you think they will make to cut? Spain recently was hit by the debt tidal wave and obviously one of the first things to get cut was the film subsidy.

The End Game

Lee Stranahan who is a strong advocate for film subsidies asked in my last post:

what’s your end game? How is anyone in the U.S. helped by killing state film subsidies?

I’m not for a particular market because of it’s location, what I’m for is a marketplace that exists in a location because that is where the talent wants to live and do business. If the subsidies are eliminated, the leverage would swing towards vfx artists and studios would be forced to do business where they want to live. Whether the talent wants to do the work and live in Canada, California, New Mexico, India, or New Zealand is not the issue. I want the work to go where they want to stay and raise families, not in constantly changing locations created by maquila production. The studios are currently driving where the work is because of the subsidy. The facilities are forced to chase after it, and so are vfx workers.

So we continue to march across the globe as members of the nomadic tribe of Veeffeksistan. One artist that I know globe trotted the world in less than 2 years as he went from Imageworks in Los Angeles, to MPC in the UK, to DreamWorks in Glendale, to ImageMovers’ temporary location in Los Angeles, to Weta in New Zealand, and then back to Disney in Burbank. Forget dragging a family through that. Hell, you can’t even own furniture for your apartment if you lived like that.

The reason a studio choses a location to do it’s visual effects is firstly whether or not a subsidy is involved, and secondly whether or not  the talent exists to do good work there. Let’s suppose government subsidies were to go away. What would happen? The artificial pricing mechanism that studios have taken advantage of would dissapear. Those studios would then go to unprofitable vfx facilities in the UK and Canada and audaciously tell them that their taxes have gone up 20-30% and that costs need to be slashed or they will be forced to go elsewhere. Unless the vfx facility can get cash infusions to make up for the lost subsidy, they will be unable to continue doing business. However, the capacity and the need to do visual effects for studios is still growing and the work needs to be done somewhere. Where will that work go? The place where the vfx artists live.