The VFX Subsidy War – Part I

In my first post I documented the range of adverse issues facing the visual effects industry. One of the remedies I suggested to these conditions was engaging in an open dialogue amongst each other. Unlike cgtalk which engages in censorship by inappropriately editing and pulling issue-oriented posts, this blog and other sites such as Lee Stranahan’s VFX Filmmaker hope to engage in a civil and serious discussion. While there will always be differences between artists and technicians who work in our community it is important to realize that what brings us together is far greater than what sets us apart. Lee commented on my initial post with the following:

Speaking personally, I’m not opposed to subsidies. I moved to New Mexico a year ago because their long term commitment to to film subsidies has created a nice community and a better, more affordable lifestyle than the sinking ship that is the state of California, where the state’s budget problems are basically unsolvable due to the fractured state legislature.

What Are Film Subsidies?

Film subsidization, not outsourcing, is probably the most divisive issue in our industry. The Animation Guild Blog coincidentally wrote a post about it earlier today. They are tax grants, tax breaks, loans, guarantees, and incentives funded by governments to lure film production to their states and countries. The hope is that the resulting economic actvity contributes to higher tax revenues and standards of living for residents. However, depending where you are, you may stand to benefit or suffer greatly upon how robust the incentive is to conduct work in your location. The result of these subsidies have had a rippling effect on the vfx industry, artists, and the governments involved.

Sony Pictures Imageworks Enters The Subsidy Game

A good case in point is Sony Pictures Imageworks. A few years ago, they announced the groundbreaking of what would be a new satellite facility in Albuquerque, New Mexico. With it’s robust tax subsidies and low costs of living, the hope was that New Mexico would be a good long term commitment for production studios, vfx facilities, and artists.  At the time, a number of Imageworkers were receptive to the idea. In LA, traffic was bad, homes prices were at record highs even for handsomely paid vfx artists, and aging workers were looking to settle down and have a family. There was even a nifty short film of Imageworkers enjoying the quality of life in New Mexico.

The Decision

However, many workers were a bit skeptical for the reasoning behind New Mexico. In fact, the idea originally came from outside the company. According to an executive, Imageworks, after one of their busiest years in history, was blind sided by the loss of work for sequels to UK film subsidies. The owners of The Culver Studios, which housed soundstages across the street of Imageworks, approached them to generate interest in a set of new facilities they were building in New Mexico. While the owners had bit of a colored past, Imageworks hoped to compete with vfx facilites in the UK with lucrative New Mexican tax subsidies of their own. The goal was to create a 100,000 square foot facility that housed an initial number of 300 workers. Eventually, the hope was to house everyone in NM minus a small crew of producers, supervisors, and executives that would stay Culver City. (note to states, one way to test if a Hollywood company is really interested in staying in your area is to ask if the CEO is willing to move there!)

The Logistics

Before building of the facility was set to start there were challenges. There was a national real estate crash where most workers found themselves owing more on their mortgage than what their house was worth and unable to sell. For those who were able to sell, there was reluctance to move to Albuquerque during an oncoming recession which no long term job commitment could be made. For others, the leverage and the incentives simply were not there. Even if an Imageworker was laid off or had a contract that was up, there was a chance the artist could leverage another local facility into a deal. Sony was the only game in town and the market didn’t exist in New Mexico yet. One could also speculate that New Mexico could have cost Imageworks extra money. It’s important to note that only the production studio financing the film receives the tax subsidy, not the vfx facility. The facility had to invest in overhead and infrastructure costs but the studios were still expecting bids with little if any margin. With no offers of raises, the only incentive for workers who were receptive to moving was the New Mexican lower cost of living.

The Results

In the end, the result was a far cry from what was planned. Sony decided to locate their facility in a rented out office space of downtown Albuquerque. The housing of an initial crew of 300 dwindled to 40 and has reached 50 so far. Sony corporate was dealing with a tough recession and cutting back. This lead to the restructuring of Imageworks with most management being replaced and many artists losing their jobs. The new management has decided to open a facility in Vancouver to chase down a subsidy that is even more lucrative than New Mexico’s.

The Costs

And speaking of New Mexico, what were the results of their investment so far? In August of 2008, the government of New Mexico’s Legislative Finance Committee and the New Mexico State University-affiliated Arrowhead Center released a study to look at the return on 31 film projects that cost $152 million for filmmakers and $38 million for the state:

During fiscal year 2008 the NM government granted $38.195 million in rebates. The resulting increase in economic activity generated $5.518 million in revenues. The implied return is 14.44 cents on the dollar. This means that for every one dollar in rebate, the state only received 14.44 cents in return.

The March To The Bottom

How would you feel if I had a film project that cost $100 to make and if you paid me $25 bucks, I’ll shoot it in your backyard. The film goes on to make me handsome profits but only generates $3.50 for you? What makes matters worse for New Mexico is that 44 other states are offering competing subsidies. Why should I shoot my $100 film in your backyard when Michigan will pay me $42? Congratulations state governments, the Hollywood studios have essentially forced you to adopt the visual effects business model! Now you too and compete with others as we march to the bottom. The last state standing will be the biggest loser. With the economic downturn and states going into deeper debt, many of them don’t have the stomach to continue funding these subsidies. Many of them are reconsidering whether to continue paying the film industry to produce films. Who can blame them? With such dubious returns, governments would have had a better chance if they gambled their money in Las Vegas casinos. How much of the $38 million in New Mexican film subsidies could have been spent on education, healthcare, and other more appropriate programs?

The Loss

I am not angry at many of my colleagues who were just looking to make a descent living for their families in New Mexico. I’m not angry at companies like Imageworks or the people of the State of New Mexico for genuinely wanting to generate work and a return on their investment in the film industry. What I’m angry about is that the Hollywood corporations, with little or no effort, could lobby politicians to hand them free money with no commitment what so ever. The New Mexican studio facilities that once housed 30 productions now operate with half as many and even almost went into bankruptcy and foreclosure. Many are now being lured to Canada which recently passed even more robust tax subsidies. As subsidies get larger, film productions that take advantage of them can feed the money they make into the big 6 studios’ profit margins. The irony in all of this is that the government that stands to benefit the most from the tax revenue generated on those profits is the state the big 6 studios exist in – California. Isn’t it ironic that California was one of the most reluctant states to offer film subsidies until recently?

Now some readers overseas might react with glee over the troubles here in the states. However, in my next post, I’ll talk about the global subsidy war and how that may be even more challenging for facilities overseas.

25 Responses to The VFX Subsidy War – Part I

  1. Paul Mica says:

    VFX Soldier,

    Thank you so much for posting this. It can’t get any clearer! After reading it I can’t see a happy ending to my VFX career? 😦

    I’m so glad you’re doing this! It might wake some people up, or not? Well at least the people that care about their VFX futures.

    VFX Soldier Paul

    ps. Please join my Facebook group “Pixel Gypsies”. I’d love to share your posts there.

  2. You’re really getting it wrong here…very,very wrong.

    First off – explain why somehow it’s better for VFX workers to live in California. The state of California is a total mess for reasons that have zero to do with effects or filmmakers.

    I’ll state it plainly – my life and the life of my family is better here in New Mexico. California is overcrowded and expensive. Social services are getting cut. I pay less money here in New Mexico for a 4 bedroom house then I did in L.A. for a 2 bedroom apartment.

    Do you want a better life for VFX workers? Let them more out of California.

    The fact is state and federal governments give subsidies and make deals with all sorts of businesses from WalMart to the auto industry. Something like the incentives absolutely are working in places like New Mexico by bringing growth businesses like media production to the state.

    The study you cite was controversial. For one thing, it doesn’t take into account the ‘economic activity’ of the people who have moved here. States like New Mexico do the incentives because they work, period. There’s a budget crunch – they have to do things that work.

    If you care about workers and the industry, support smart state incentives.

  3. Since you failed to mention it, here’s the Ernst & Young study showing $1.50 in revenue for every $1 spent on the New Mexico Film incentives.

    Click to access earnst.pdf

    Again – I live here. Everyone here knows the film incentives in New Mexico work.

    If you want to help the VFX industry, fight for smart incentives and hope the industry follows suit. California is hopeless.

  4. vfxsoldier says:

    I never said it was better to live in California. I even pointed out the problems of living in California and that VFX workers were receptive to New Mexico.

    California is the most expensive place to do vfx yet the market stays here. Why? I think we need to consider the huge problem with the VFX Industry: You work project to project.

    Should a VFX family move to family friendly New Mexico where Sony, with no commitment or extra money, would be the only game in town?

    Or would you rather stay in a less family friendly area like LA where if you’re laid off or didn’t like your contract you could go to another local facility?

    I think the judgment has been decided: only 40-50 Imageworkers were willing to make the move. Their inital number was supposed to be 300 and more. Imageworks new management is now looking at Vancouver because of the bigger incentives.

    Did a lot of Imageworkers get laid off? Yes and it was painful for alot but most of them ended up at Digital Domain, DreamWorks, and Blizzard.

    I’m for subsidies that are sustainable, the ones that provide a return on investment and encourage a commitment by corporations to stay in the area. Is that what NM is getting right now? Have any of the Big 6 studios promised to stay after the subsidy is gone? Vancouver has had subsidies for more than a decade and every time they try to change that the studios leave.

    Finally, during my research I saw the study you posted above and disregarded it because it was funded by the NM Film Office.

    The very site you pulled that study from calls it out and uses the study I support as the basis for introducing legislation for pulling the subsidy:

  5. So – you’re arguing for keeping the industry on the Titanic of California or watching it move overseas…because that’s the end result of what you’re arguing for.

    But let’s get the facts correct.

    The incentives in New Mexico are working, period. They are sustainable – the only people who want them stopped are the people lobbying for farmers. When they had public hearings, people came out largely in favor of the subsidies. You dismissed a report from Ernst & Young, a well known and reputable source…and you’re ignoring the reality that I’m telling you about.

    The VFX community is slowly growing in New Mexico. Ron Thornton recently opened a studio here. People like Brad Carvey have been doing work here for years. There’s freelance work. There’s even local work for places like Sandia Lab, the numerous casinos and so on. Bottom line – the streets aren’t filled with unemployed VFX artists. And I’d MUCH rather be unemployed here than in California, because of the cost of living for one thing. Also, I could do work here remotely…and my employer would get 25% back since I’m a New Mexico resident.

    You’re also completely ignoring the fact that one of the best options for VFX artists is to get into the content creation business and New Mexico’s incentives make that much easier, too.

    But – what’s your end game? Who would benefit from state subsidies ending? Certainly not U.S. workers…

    Here’s the ugly truth of what you’re promoting — it would benefit Canada, England and every other country that has subsidies. And those countries have subsidies for the reason New Mexico does – they WORK. That’s why the work is going to Canada, England, New Zealand and so on.

    So please – stop pretending subsidies don’t work. They do or states and countries wouldn’t use them. Your argument certainly isn’t fooling anyone who actually lives and works in New Mexico.

    Again – the best thing for workers and facilities would be if if DD or R&H or even a mid size company like Computer Cafe sent most of their operations to New Mexico. I hope more of them do.

    A poll in today’s LA Times says only 7% think California is moving in the right direction. The sooner more and more FX artists can escape California’s sinking ship, the better off they will be.

    • vfxsoldier says:

      “So – you’re arguing for keeping the industry on the Titanic of California or watching it move overseas…because that’s the end result of what you’re arguing for.”

      No. You’re trying to make it an either or argument. What I am arguing is that subsidies are the lifeline for a vfx facilities in every other place except California. You act as if California is the only one in trouble. What about Europe? Spain is about to get hit by the debt tidal wave and guess what was one of the first programs they cut? The film subsidy.

      Pretend you are MPC, or Double Negative in the UK. You get work by studios who come for the tax subsidy. When the debt tidal wave hits the UK what do you think people are going to want cut? Healthcare or the film subsidy? It’s a no brainer. When the film subsidy gets cut what do you think the studios are going to say to the vfx facilities there?

      “Hey your govt just raised my taxes 25% to do business here, you vfx houses need to cut your costs now or we are gone.” But those facilities were already making little if any margin. They are either going to let the studio cut their head off or just starve to death of hunger.

      Now consider California: The debt tidal hits as it already has been and programs get cut. There was not film subsidy here in the first place! No artificial pricing on vfx here. They continue to tread water, but for the vfx facilities overseas that used the subsidy as a lifeline, they are dead!

      “The incentives in New Mexico are working, period.”

      So the subsidies are working because they are working? What evidence do you have besides the anecdotal ones? Yes, the Ernst and Young report you site is from a reputable accounting agency. But they were hired by the NM Film Office to achieve a certain set of results given some dubious parameters. For example, they added the income of movie stars and directors to pad the salaries of film crew!

      • You’re quoting a report that’s politically motivated, too…and it’s your only piece of evidence that the subsidies aren’t working. If they weren’t working, they wouldn’t exist…

        And if a country like England drops the subsidies, than that’s better for states with subsidies like New Mexico, right? The state it’s NOT good for is California.

        The state subsidies help U.S. workers. It helps create a more level playing field with the rest of the world. It’s a LOT easier for someone to move to New Mexico or Louisiana than to leave for England, New Zealand or Canada. State subsidies give facilities another reason to keep operations in the states.

        Most of the talent in California moved there from somewhere. There’s no reason on earth that the talent there needs to chained…

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

  6. One more thing – it’s pretty huge…

    You said…

    “California is the most expensive place to do vfx yet the market stays here. Why?”

    This TOTALLY misses the point…

    In fact, the VFX market is NOT staying there. That’s part of the problem, right? The work is going other places, especially overseas…

    So you’re wrong on the whole crux of the issue. The work IS leaving and it’s leaving VFX workers stuck with higher living expenses.

    • vfxsoldier says:

      Yes, vfx work is going overseas not because it is cheaper but because of the subsidies! Studios want to get free money first then pay the real costs. It has always been cheaper to take your work overseas, but then why doesn’t it all go away? Why does Imageworks, ILM, Digital Domain, and others keep one foot here? The talent is here. The posts for vfx jobs in Vancouver are posted in LA sites. They need to lure the talent there and most of us aren’t falling for it.

      But honestly, I commend you and your colleagues who are moving to New Mexico to legitimately make movies there and stay there. You deserve the subsidy money because you are investing and making the commitment to NM.

      My problem is the big Hollywood studios that take those subsidies and run.

  7. PixelNate says:

    I would like to add that the subsidies only work as long as they exist. The moment the subsidies that San Antonio gave to AT&T ran out, they were in Dallas.

    • True – which is why smart states view this stuff as a long term investment. New Mexico sure seems serious about the film industry in the long term — there’s even a high school that teaches a pro film curriculum

  8. […] VFX Subsidy War – Part II In my last post, I wrote about government subsidies used to lure visual effects production to certain states. But […]

  9. VFX Sniper says:

    How do I email you? I have first hand experience with Sony Albuquerque and have a lot to share.

  10. […] To Stranahan On Subsidies While the subsidy issue is quite divisive for vfx workers, the reason I chose to talk about it was that I hope a […]

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