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.