The Prisoner’s Dilemma

Could failures of state film subsidy programs spread to other locations that vfx clients depend on?

Michigan Governor Rick Snyder recently waved the white flag of surrender in the subsidy war and asks Canada to disarm:

“The use of tax incentives by government, in my view, is a terrible thing,” Snyder told a conference on U.S.-Canada relations in Ottawa. “I essentially view it as the equivalent of a heroin drip for government.”

“Do the governments really win by everyone continuing to ratchet up incentives?” Snyder said in an interview with Bloomberg News, saying he wants the Canadian and Ontario governments to follow his state’s lead.

Michigan once had a very large film subsidy program until they realized how expensive it was and how small the returns were. Now that the program is capped, US studios are interested in other locations such as Canada.

The regional subsidy wars lead the players into the prisoner’s dilemma where each government is in an arms race to attract US studio film work. They have 2 options, keep increasing the amount they give to the studios or get the other players to stop.

However when you are putting your own skin into the game, the other side increases the stakes by throwing in other vital organs. It all becomes a race to the bottom. Here’s a good example:

USA’s Race To The Bottom

Last week I posted some news about Canada’s Race To The Bottom. This week Producer Jerry Bruckheimer explained why he wants New Mexico to throw more subsidy money at him:

“We found that Louisiana gave us a better tax incentive than New Mexico — that was another $8 million,” Bruckheimer was quoted as saying, referring to how he trimmed the Lone Ranger budget from around $250 million to $215 million to get a Disney green light on the project.

“We’re still shooting in New Mexico, and we might [also] go to Louisiana. We’re asking New Mexico to come closer to the Louisiana incentive,” Bruckheimer told theHollywood Reporter.

According to Forbes, Bruckheimer is worth $850 million and earned more than $100 million in the last year. Meanwhile, operating profit at Disney’s movie studio was $49 million on $1.6 billion in revenue, according to an August 2011 story in the Orlando Sentinel.

Imageworks opened a facility in New Mexico a few years ago so clients could take advantage of NM’s subsidies. Today you’ll find that the Albuquerque facility is winding down with US studios focused on Vancouver which is offering a 35% in subsidies. Even with NM offering a lucrative subsidy, it still is not enough for US Studios who have no intention on commiting to a region.

This is sort of why I’m very reluctant for California to offer these kinds of subsidies for VFX, they will just keep asking for more and it will hurt the industry of the long run. This is why Michigan’s Governor compared subsidies to a heroin drip: A good short term high with terrible long term effects.

Soldier On.

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14 Responses to The Prisoner’s Dilemma

  1. meh says:

    Aardman threatens overseas move
    Wallace and Gromit maker Aardman’s head of TV has said the company may have to halt UK production of its famed stop-frame animations because it has become too expensive.
    Miles Bullough told Radio 4’s World This Weekend there was a “crisis” in the UK’s TV animation industry and that homegrown shows were being lost to cheaper foreign competitors.
    http://www.bbc.co.uk/news/entertainment-arts-15611244

  2. lester says:

    http://www.bbc.co.uk/news/entertainment-arts-15673867

    “A report commissioned by the UK Film Council in 2009 warned that Britain’s film industry could collapse if the benefits were removed.

    [...]

    “The huge success of British films at the Oscars, the Golden Globes and the Baftas this year is clear recognition of our world class talent and creativity,” said culture minister Ed Vaizey in a statement.””

    Two very different statements in the same paragraph…

  3. bob says:

    The subsidies are a temporary problem. The trade agreements are the real issue. Truth is without a major fundamental change in trade agreements the work is headed to China. No Western country will ever be able to compete with a country who’s slave labor work force is 1.7billion strong. It is only a matter of time. Need an example just look at the device you are using to read this. Made by slave labor.

  4. Hey There,

    Great Blog. Love the dialog..

    Bob…you nailed it!

    VFX’s race to the bottom due to subsidies is not special to this industry, nor subsidies the devil. I just posted on oDesk the need for a Python or MEL script. Within an hour I had 2 offers for under $20/h. On the flip side, in 5 mins I have a meeting with my 2 developers who together command easily $15,000-$20,000 per month. No subsidies here…just the cost of living in the different countries. (skill level assumed equal)

    Let’s pretend we are in a world where Gov’t is dead set against subsidies – as they may only believe in bailouts :) – and start from there. Here is how it would pan out:

    1. Offending countries like Canada, Australia etc, lose all work due to the higher cost of living in their countries.
    2. US takes some of that work away due to the lower cost of living – except in most major urban areas like San Fran, NYC, LA. So, San Fan does not get it, nor does any of the places that are considered the hub of any part of the entertainment industry. Cities like Tulsa, Omaha with their lower cost of living are the ones who benefit. For now..
    3. Now we have everything in Tulsa, Omaha and Houston. But wait…countries in South America or China step up and offer services, plus the Philippines and we get what we had in the 80’s. NOTHING DONE IN NORTH AMERICA.

    Without subsidies everything would be done in lower cost of living countries. As Bob mentioned, Apple, HTC, Samsung…why do you think they are in China overworking the people there? Lower standard and cost of living. Less worker rights. This is the TRUE RACE TO THE BOTTOM.

    Remove subsidies from Canada, Australia etc. will not eliminate the drive for lower costs. Instead of the Governor of Michigan complaining about Canada, he will be complaining about Brazil, or the Philippines. Then what? Eventually there will be a Foxconn of VFX somewhere in Asia or South America…

    As for a worldwide union or trade association; that will be extremely difficult. Let’s take my programming example. The programmers who offered their services to me for under $20/hr; where do we find the appropriate amount they should charge compared to someone in Canada, US, Ireland or Australia? Does this offend my programming buddies that a guy from Morocco can code (or do VFX) for a fraction of the price due to where he lives? Likely…as it offends many that jobs are in Canada and Australia due to subsidies…but guess what? That is the reality. Instead of moving from the US to Vancouver or Sydney, you are now in Manila or Singapore.

    The US has subsidies on agriculture, transportation, a “Buy American” policy..Which is against any trade pacts signed at least that I know of with Canada. Not to mention the “Twinkies subsidies” American’s pay.
    http://www.calpirg.org/home/reports/report-archives/health-care/health-care/apples-to-twinkies2

    Maybe subsidies are not the issue. Maybe where Government spends the American tax dollar is the issue.
    Removing subsidies from the countries who want to give their people work is not the problem. Sony would still be in NM if the subsidies continued. Gone too is all the money that the facility brings to the State. The homes the artists buy; the money that goes back into the community…all gone. Gone back to LA or up to Vancouver.
    Once Canada and Australia and the rest remove their subsidies, you are now just in a true cost of living battle…then what? What is the argument when Manila gets the work Canada or Australia use to get? What is the solution then? You can no longer blame countries with subsidies.

    If you were in the industry in the 80’s…you know where this is going…

    Thanks for the great blog. Great reading here and I look forward to any comments.

    M

    • k says:

      I’m not really even sure what argument you’re making, but your understanding of the logistics and economics of the VFX and animation industries are fatally flawed. If it was all subsidies, then EVERYTHING would have left California years ago. If it was all cost of living, it would have left decades ago. Somehow the California industry has survived, and generally been the go-to place, for decades, despite the lack of subsidies and the high cost of living.

      Subsidies distort the market in the short run, but have never lead to these industries putting down real roots. Turn off the subsidies (and eventually they all get turned off), the industries leave and head back where the talent is. Chasing lower cost of living hasn’t worked either. Lots of people have tried to establish studios in Omahas or the Philippines. Hell, more VFX studios have been formed and failed in India than in the US over the last decade. This isn’t sewing shirts. And it’s not programming, either.

  5. Fair enough. Many places have failed in India over the years. But Prime Focus and Technicolor seem to be doing just fine. Manila is flying…lots of work in the Philippines. China will only get more and more visible in this space. China will be the biggest issue. The sewing comparison is irrelevant. Unless you are comparing the skill-set of programmers to sewing shirts.

    The programmer/VFX artists/Animator/illusionist/digital painter comparison works. Here is why:
    All have specialized skill-sets. The success of each depends on the skill..suck and you don’t make funds! Each use a computer and specialize in a piece of software (or platform or framework) and all are creative.
    In the 90’s even with dial-up internet, to contract a programmer from anywhere in the world changed budgets dramatically. And still applies to this day. This is just the facts…the workforce shifted from local to global for this industry. And with this a drop of 50% enrollment in Comp Sci since 2000. http://iisit.org/Vol7/IISITv7p209-224Ali825.pdf (Toilet reading)
    The 12Kb/sec internet linked industry to cheap labour. No subsidies for programmers and now on most US universities 1% of the student body are in Comp Sci. and they are struggling to figure out how to get the numbers back up.

    Ignoring this fact is like the movie industry ignoring Napster.

    Now that we have broadband at almost 100% in all urban areas in the world running at 25-50Mb for residential, you can replace programmer with digital artists. This can mean illusionist, animator and VFX artists. whatever…producers have flexibility that never existed before. Even without subsidies. Throw your infrastructure up to SwitchNAP in Vegas, and serve that up to anyone in the world. That is where we are now. Never before in the entertainment industry has this option been available to a producer.

    Animation has dwindled in California. And that is not all due to Can and Aus. Wildbrain is using foreign service studios. Rough Draft sends most of its animation over to Korea…no subsidies there…Simpsons, Family Guy, Drawn Together…animated overseas…Add the ability to communicate in real-time with overseas, broadband and an infrastructure available all over the world, and it really makes a strong case for a producer to do as much digital work away from N.A. as possible…on paper anyways! :)

    Personally all I see is a blanket “subsidies bad” comment here. I believe there is a place for them..Capped of course…and the company cannot be losing millions or forfeit their credits.

    But we should learn from what transpired in the programming industry. If work does go to Asia as many think, what is the solution for you in LA? Let the market play out? A few of my programming buddies may have landscaping work for you.

    FYI..LA is not even in the top 50 of high cost of living cities..not even top 10 in the US.

    http://www.numbeo.com/cost-of-living/rankings_current.jsp

  6. Mark says:

    Full time? Are the studios taking advantage of overseas(or subsidies) for parts of the project to afford local talent? much more involved then just a stat.

    But, at least being unionized you get overtime! :-)

    • VFX Soldier says:

      Yes Mark, full time. I appreciate the opinion but the fact that TAG’s membership is at an all time high is a testament that unions and businesses can coexist and be successful. Animated films are being made right here in California and television animation is going through a nice bump. Most of them are TAG members. That’s not to say that you might find instances where work is being done in China and India, but that seems to be the exception, not the rule. Quality matters.

  7. I know I left this for a bit, but take a look at Sony Imageworks…you mention China and India, but Sony is leaving NM and downsizing Cali to not move to India or China, but to Vancouver.
    And in regards to everything coming back to TAG. Just because you have members is not what I would use as a measuring stick.

    Quality does matter – but I would argue that there is equal talent in Canada or Australia. Both subsidized…So I hear ya, and congrats on the memberships, but the main discussion is subsidies and the race to the bottom..I do not believe Sony is increasing its Vancouver presence to diminish the quality of what they put out. I’d hate to see where this post goes if you think that..They are moving here to take advantage of the talent here in Vancouver and the subsidies that comes with it. and one of the biggest things guys from Cali tell me who are now working up here is how much more the cost of living is here. AND IT IS THIS SPECIFICALLY WHY subsidies are needed. Shit, we pay $1.20 more per gal of gas..the field needs to be evened out – and subsidies do that.

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