The Peculiar VFX Business Model

A few posts about the VFX business model and it’s peculiar volatility.

VFX Supervisor Scott Squires ponders possible alternatives:

The trouble is there are no other business is quite like VFX in regard to being a 3rd party company getting paid a fixed fee for very custom work with a locked deadline but unlimited changes and approvals.

ILM GM and Digital Domain Founder Scott Ross talks about the struggling VFX model and subsidies :

He bemoans the tax breaks that the Queen (in reality the UK government) gives to home-grown effects facilities. “It became impossible to bid against the big Soho houses,” he says. (As a side-note, the 20% tax subsidy has an expiration date of March 31, 2012, so things may not be so rosy in London next year.)

TAG Organizer Steve Kaplan reacts:

We have argued that signing an IATSE contract could be a cost savings measure to a visual effects studio. Having recently been shown that studios will find necessary funds to complete visual effects when necessary, a union contract with contributions for portable health and pension benefits may now also be a line item cost that vfx studios can add to help shore up profits, thus addressing Mr. Ross’ viability concerns.

The problems the VFX industry suffers from are not unique to California. The VFX bidding process has created a march to the bottom and in my opinion, this has been compounded not by cheap labor, but government-backed subsidies where US studios are paid a rebate by doing post-production work in a designated region. All this does is artificialize the price of VFX.

Yes, they have taken their toll on US VFX facilities, but they’ve also taken a toll on the very regions that offer them.

Take Australia for instance. I wrote in a post a few months ago that even though a 15% subsidy was offered for US runaway production, the larger subsidies offered by other countries combined with a record rise in the Australian currency has led to a hollowing out of the Aussie film industry:

It’s not rocket science to realise our incentives of 15 per cent are behind everyone else’s…

The rising dollar has hurt the industry…

As in the case of The Hobbit fiasco where the NZ government was leveraged into giving more money to WB because of a record rise in the NZ dollar, I said other regions would probably be forced to do the same. So what do ya know:

Australia’s struggling post-production sector has received a boost from the Federal Government, which plans to double the level of the post, digital and visual effects (PDV) offset to 30 per cent.

“The high Australian dollar is dramatically impacting the competitiveness of Australian post-production companies for large scale work on offshore productions,”

Now eyes are on the UK to see if there will not only be an extension, but a competitive raise in the film subsidy for vfx work in that region next March. All this is happening while California, which offers no subsidy for big productions, witnesses WB pay 20% extra to complete the vfx for Green Lantern in Los Angeles.

One of the reasons I started this blog was to provide evidence against a fearful and cynical narrative that it’s so easy to send your job away to some cheap location. Anecdotally speaking, I can tell you I and many of my colleagues are offered a significantly larger raise to do VFX work in other countries.

The question that I still wonder is this: At some point a subsidized region isn’t going to be able to keep throwing money at the US studios. Then what? Many of these vfx markets were built on top of these film subsidies and yet they are only expected to get larger.

Only time will tell as it’s all a component that has played a role in the everlasting volatility in the peculiar VFX business model.

Soldier On.

15 Responses to The Peculiar VFX Business Model

  1. anon says:

    http://www.google.com/search?hl=en&q=Australia+Dutch+desease
    I’ve said it before, VFX is not the only industry to offer trade distorting subsidies and if you look at the entirety of the Australian economy it’s obvious that it’s suffering from Dutch disease. Why support the local film (manufacturing) industry when there’s billions to be made in the short term selling off domestic assets to china?
    Australian resources key to booming China
    http://news.bbc.co.uk/2/hi/programmes/hardtalk/9451824.stm
    In Australia, what little creativity that’s surviving globalization is subsidized by mining, but what happens after the unsustainable subsidy boom? The capitalists/studios/politicians don’t care, as long as they make their money in the short term. Is there a pattern developing?
    America’s Deepening Moral Crisis
    http://www.project-syndicate.org/commentary/sachs170/English
    America’s Ungovernable Budget
    http://www.project-syndicate.org/commentary/sachs174/English
    The G-20’s New Thinking For the Global Economy
    http://www.project-syndicate.org/commentary/sachs172/English
    The Global Economy’s Corporate Crime Wave
    http://www.project-syndicate.org/commentary/sachs177/English

  2. occlude says:

    It’s all true. We’re not getting paid less, we’re getting paid more. Especially here in LA. I had an offer to go work on Avatar @ Weta, while I was at Imageworks. It was a good offer for a lead position, but I couldn’t move across the world. I would’ve left my wife, my house, and my life here in LA. For what? Apparently to rake in the dough and work on an oscar winning movie that is now the highest grossing film of all time…some of my pals went, and they cleaned up nicely. Some of them took 6 month vacations to exotic destinations afterwards. But I heard stories from friends, such as this:

    “I missed the first two years of my son’s life…”

    and

    “I never saw my wife, my kids, or anyone…I was at Weta, all day, and sometimes all night”

    and

    “I made more money than I’ve ever made, and we were able to take time off and do that trip to Australia we wanted, but was it worth it?”

    So, I look back and think, you know what, glad I passed. Thanks, but no thanks. I’ll take my life here in LA, and I’m not willing to work 100 hours a week, anywhere. I do 40-50 hours, max, and if I have to go beyond that, I fucked up…

    Clock in, do your job, don’t waste time, do your job your best every day, clock out, go the fuck home.

    If this industry does go down the shitter, at least I won’t be the one missing out on life. I think we still have a chance though, I’m not giving up.

    Work smarter, not harder!

    • VFX Soldier says:

      I look at it like this: Put a price on missing 6-12 months of your life. Some say it’s worth it. I don’t. I like vfx but I’m not married to it.

      I want artists to reside and work where they want to be and these subsidies cause alot of problems as many artists are forced to become globetrotters.

      It’s nice to have the luxury to work where you want but for many there is no choice. The next job is in Vancouver or UK, or Singapore. Want to start a family? Want to own a home? No can do when the rug gets pulled from underneath you so often.

      I really disagree when people say this is a global industry. It’s actually not. The healthcare industry is global. You can work anywhere in the world in healthcare. Can that be said about vfx? No. Most of the work is done in locations because of some free money the government is handing out.

  3. JWite says:

    I’m confused . . .

    “bemoans the tax breaks that the Queen (in reality the UK government) gives to home-grown effects facilities”

    I’ve worked in the UK vfx industry for many years and never heard of any tax breaks that the UK government gives to home-grown effects facilities.

    There are certainly tax-breaks and financial incentives for features to shoot or spend money in the UK, but I’ve never heard of cheques from HRH being sent directly to the effects companies.

    There *is* a difference . . .

    • VFX Soldier says:

      Correct one thing that many forget is that it’s the rich US STUDIOS that get this money, not the vfx facilities. The facilities still have to tread the water of opening up a facility and maintaining it in a subsidized location.

      Many US vfx facilities are forced to go out of business because producers expect them to offer the same deal as the UK which is heavily subsidized.

      That’s simply not right and causes a ton of volatility. This is why I’m an advocate of the WTO looking into the issue. According to many trade law experts, these subsidies are a violation of international trade law.

  4. Yadda says:

    The uk tax break is based on a point system. You need 16 points to get the 20%. vfx is 3 points at the moment I think (could be 2 need to check the goverment site) So if your are doing just vfx in the uk, your wouldn’t get the tax break.
    It is a bit of a silly point system though, things like if it’s in the English language, director, producer, leading actor so on and son on are british, filmed in Britain, you get points. So it’s not hard for big American blockbusters to get the tax break. But it is designed for the whole film industry, not just vfx.

  5. Kevin Bjorke says:

    I have to admit I’m puzzled by most of the subsidies, since they don’t lead to long-term growth in the sector (which can’t compete without them) or the neighboring industries (likewise). They appear to just be cash sinks for the local governments (I’ve gone down this path a couple of times in Europe and the US). Hiring a bunch of guys to push Maya verts around will not re-create Silicon Valley on the Thames.

  6. Scott Ross says:

    TAG Organizer Steve Kaplan reacts:

    We have argued that signing an IATSE contract could be a cost savings measure to a visual effects studio. Having recently been shown that studios will find necessary funds to complete visual effects when necessary, a union contract with contributions for portable health and pension benefits may now also be a line item cost that vfx studios can add to help shore up profits, thus addressing Mr. Ross’ viability concerns.

    WHAT?
    This is an interesting concept. If a VFX studio has the possibility of doing 911 work, then at that time, since movie studios are prepared to pay anything, the VFX facility that is a union signatory can then add an additional line item ( because they are a Union shop and now have to pay more for health and welfare benefits) to their bid…..!!!! And then can shore up its profits! WHAT????

    I hope I have this line of thinking wrong. Please tell me I’ve missed your point Steve, please!!!

    • skaplan839 says:

      Indeed, you do have it wrong Mr. Ross. Indeed, you have missed my point.

      I’ve argued that studios offering health coverage to their artists currently, signing a union contract that includes health and pension coverage can be a cost savings. Contracted contributions for MPI benefits run around $5 an hour for an artist. This can be a significant savings compared to what a vfx facility can purchase for health coverage.

      That’s just with MPI. There has been discussion that points to the IATSE offering the National Benefits Plan to vfx artists. If that is offered in place of MPI, the cost savings can be even greater since there is more bargaining ability with the type of coverage that can be offered, depending on the health plan.

      There is your cost savings. This, as I pointed out, applies to facilities that are already offering health coverage. This would be the bigger mid-sized to larger facilities. The ones that get called on to do tent-pole feature work.

      Now, we’ve seen that studios are willing and able to find money when needed. You call it a “911 Work”. The point is, the money is there to get it done. I expounded on that fact and offered the same argument I’ve been making all along. Since the vfx studios are so desperate to find ways to increase their profits, use the union as a reason. Tack on costs to the bid and blame “the damned union”.

      Its a bold thought, and offered in contrast to the “We have to keep cutting our costs in order to survive” mentality. It flies in the face of the notion that without cost-benefit to the studios, all the work will go overseas. Because, as we’ve seen, the work goes overseas regardless and there’s still work here in LA. There will always be work here in LA, because the studios are here in LA.

      As a side note, I’d love to discuss your time as an IATSE Trustee and your experience with Local 16 and the IATSE contract with ILM. Please forward me your email address as I’ve tried desperately to contact the current leaders of Local 16 and have not been met with much of a response. I understand there was much misunderstanding and lack of representation on the part of Local 16 with that contract. I’m seeking a better understanding of what transpired.

      skaplan@animationguild.org

  7. Scott Ross says:

    glad I did…. or at least I thought I did…. but for the life of me, I’m still not sure I understand.

    I guess your basic premise is …. Unions, because they are larger bargaining units then say, DD or R&H, can negotiate better health plan pricing. In my experience, running both Union and non Union large shops, DD’s health plan ( though very expensive) was less expensive than the union benefits at ILM. Now, it was 20 years ago, so my memory is a bit, shall we say, cloudy! But as I recall the IATSE health plan was outrageously expensive as it was the most comprehensive health plan ever, additionally there was the ‘W’ part of the plan that DD could not offer because margins had eroded so much and pricing was significantly more competitive. So all told, running a Union shop was indeed more costly than running a non Union one. If that’s not the case today, let’s take a look at the actual cost difference between say a standard health benefit package and the IATSE H&W package per employee. BTW, again, I always tried to offer the best package/benefits/percs that the company could AFFORD, because after all, my product, what I was selling and how I got my paycheck was based upon the retention of digital artists. But when there are no margins, for a myriad of reasons, one can’t get blood from a stone!

    Your next thought seems to be that because there is work that does not go to lower priced (lower cost of living or state subsidized) facilities and that work still stays in LA, why not raise our prices in LA because the “damned union” is making us LA facilities charge higher H&W rates! Now, my head really starts to hurt!!!

    Competition, state subsidies, not charging fair pricing, VFX companies not being run as businesses, VFX not being valued for their box office magic, VFX facilities not having a trade association and allowing motion picture studios to dictate the over all business scenario…that is why the industry is in turmoil. So, given your position of “blaming it on the damn union”… if ALL facilities in LA were union signatories and the motion picture studios had no where else to go to do the work, then yes, I guess that for a short period, your concept would work. But if one extrapolates that almost impossible scenario out and we could get ALL LA facilities to join the union…. why not just all LA facilities raise their prices, without the need to “blame it on the union”!

    I have forwarded you my email addy, and look forward to open dialogue. Just for the record, I am not being paid by anyone to do this. So, please bear with my rather hectic schedule.

    And finally, your statement that “There will always be work here in LA, because the studios are here in LA”, reminds me of the line in SHINDLERS LIST when the elderly Jewish woman was watching the Nazi’s move her out of her neighborhood in Warsaw and into the pogrom…. she said ” Well, it can’t get any worse, it can’t get any worse”.

    • skaplan839 says:

      I’d go father than calling it a premise, but to continue, yes. That’s the crux of my argument. I’ve provided a cost example to boot. Keep in mind, that’s the cost for MPI. As I mentioned, I’ve heard of discussions of offering the IATSE National Benefits instead since MPI is LA/NY-centric and the whole point is to create a national VFX Local. The costs of that plan are literally “on the table” as this plan can be like MPI with fixed contributions towards Health and Pension or a la carte and customized to fit the studio’s operational limitations.

      Competition, state subsidies, not charging fair pricing, VFX companies not being run as businesses, VFX not being valued for their box office magic, VFX facilities not having a trade association and allowing motion picture studios to dictate the over all business scenario…that is why the industry is in turmoil

      I would never argue these points. There is a lot to address in the industry and those points highlight some of the biggest concerns. Its one reason I’m deeply thankful that you have decided to add your voice to the growing list of people actively seeking change and offering to be a part of that process. I don’t think there is another soul better equipped with the experience, tenacity and brass-pair to lead a VFX Studio Trade Organization. I wouldn’t just ask you, I’d beg and plead if I thought it would help.

      My idea of raising costs and blaming the union is a radical one. You are correct in pointing out that it is most effective if all LA based VFX studios do this simultaneously. However, as you mentioned, something has to stop the spiral downward. One thing I will not waver from is the notion that work here will not disappear and that raising the price of vfx work to the producers is the only solution to the industry bleeding itself dry trying to get in the good graces with a production studio. Working at or below cost is horrendous and completely an anathema to sustainable or even (God Forbid!!) a prosperous living. I’ll stop short of using WWII or Nazi references to illustrate my point. I may have distanced myself from the religion, but still can’t find it palatable to do so. However, I’ll never deny someone the chance to paint a mental picture to punctuate their point and find you excellent with that kind of brush. Please don’t take my pointing it out as an insult.

      I’ll finish with another affirmation of belief that VFX artists deserve the focused strength of their leverage that only collective bargaining can provide. As much as I believe the vfx studios need to be organized and acting together to secure their best interests, the artists need the same. With a collectively bargained contract stipulating and providing minimums and standards as well as portable benefits, artists can start to breathe the sweet air we’ve just wished for the vfx studios.

      I’ve received your email. Thank you very much. I look forward to further conversation with you.

  8. Scott Ross says:

    Thanks for the quick response. I can see your point that a new VFX local could negotiate its own health plan and therefor keep costs down, assuming it was not an outlandish plan. On the other hand would this new plan be able to be negotiated under an umbrella plan for the IATSE master health plan? I guess, what I’m saying is, we won’t really know what the cost impact will be to the VFX studio and therefor what its impact on price structure will be to the motion picture studio until a plan is negotiated and the cost structure weighed against the current cost of existing health plans of the major VFX houses….

    Of course, portable benefits are a must in this environment and so all avenues to provide portable benefits but without impacting cost structure should be seriously looked at.

    Also, thanks for the kind words regarding my background and skill sets regarding heading up a Trade Association… unfortunately most of the folks at the VES seem to feel differently. The realities of my not being involved in the industry should at some point be brought to light.

    When the VES first started I was asked to be on the board and to be one of its founding members. As I have stated before, I tried setting up a Trade Association several years before the VES was a glimmer in Tom Atkins eyes.

    AVEC, as it was called, had a few meetings, the last of which I could not attend. So I sent my then Head of Production, John Weaver, down to DreamQuest to represent me and ILM. John returned to San Rafael with more than just news of the meeting. He returned with a stolen list of all DQ’s employees! I called Hoyt immediately and told them what had happened, I trashed the list and then fired John. Given the paranoia of VFX facility heads back then ( and maybe today as well) AVEC fell apart.

    When VES started, I felt that we finally had an opportunity to create a similar organization to the AICP (which I had been involved with for years). Needless to say, it became very evident, very quickly, that the VES was to be an honorary society and it would not tackle the serious and critical business issues of the day. In fact, I was very outspoken as I saw the need for an industry organization that would protect the interests of the VFX industry. My position on such issues made me persona non grata, which was furthered by the fact that I was not only not interested in the VES anymore but as the Chairman of DD, would not spend the $10,000 a year to be a founding company. I love a good party and giving people awards, but I’d much rather give them stable jobs.

    Over the years the VES has precluded me from all of its doings. I have never been invited to be part of any of the Summits, nor any other activity where, given my unique background, could be of service to the industry.

    Finally, a decade or so later, VES is starting to look at the possibilities of creating an organization that addresses business issues. I hope they can address this dire situation…. and soon.

    As for your hopes about VFX never leaving LA… the aerospace industry felt the same way. There are a lot of very talented artists and some really big and well known VFX studios here in CA…. ILM, R&H, SPI, DD to name but a few. Many of these shops are chasing the tax rebate/subsidy train… opening offices in India, China, Vancouver, London, etc. If we are to think that the work will never go away… think again. Who would ever have thought that half of the VFX work done on major motion pictures would be done in London, or that since 2000, seven (7) of the eleven (11) Oscars for Visual Effects have been awarded to either British or New Zealand studios?! I heard recently, though this might be just rumour, that ScanLine is closing its LA facility and relocating to Vancouver.
    So…. who knows.

    I’d enjoy talking about this further. Best.

  9. skaplan839 says:

    Just to clarify, participation in MPI carries a fixed cost per artist. Participation in the IA NBF could be customized so as to find a portable health plan option that would fit a variety of operational financial scenarios. However, when speaking about the facilities that can handle feature tent-pole work, they are already offering health coverage at what I have to assume is a greater cost than what the MPI plan costs are .. strictly through the economy of scale. I’d love to see what the costs for health benefits are to DD, R&H or even Imageworks. I don’t think any request for that info would be met with a positive response.

    Utilizing the IA NBF, this plan offers customization to the extent that even mid-sized shops would be able to afford health plan contributions for their artists .. on a national scale. As an employee of 839, I am a non-affiliate member of MPI as well as an advocate of its participation since that’s what we offer in our contracts. However, the national VFX Local would be a natural advocate of the IA NBF since coverage for a studios that have facilities over many states can have equal coverage for all their employees. I see many IATSE contracts signed that have productions signatory to both plans since MPI is the plan of choice for CA/NY and the NBF for the rest of the USA.

    There are many options to these plans and I look forward to further exploration and discussions of their capabilities with you.

    Honestly Mr. Ross, not to sound like a fan-boy, but I don’t know anyone else with the passion, drive, expertise, ability and “cojones” to do the job effectively and correctly. A national VFX Studio Trade Organization has been a goal of yours in the past and I see it as something you’d easily be able to accomplish and make flourish, no matter the obstacles or challenges. In fact, the more of those, the more you’d enjoy it. I’d do whatever was in my power to give you the opportunity to start and run such an organization.

    As for my hopes, there are many. But I’m positive vfx will never leave Los Angeles for the reasons I stated. I would continue the argument that most (if not all) major metropolitan areas can have a vfx industry dedicated to supporting the entertainment that is born and grows in its borders. Episodic television, advertising, games .. vfx transcends many facets of our lives now. Feature length tent-pole vfx work? I’d still say will always be here but I would capitulate that the degree and amount is unpredictable.

    I’ll send you a message shortly. Thank you for responding and for your participation in this discussion.

  10. […] you know, I posted about problems in New Zealand and Austrailia: It’s not rocket science to realise our incentives of 15 per cent are behind everyone […]

  11. […] pointed this out before: I wrote in a post a few months ago that even though a 15% subsidy was offered for US runaway […]

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