IBM Corp. is taking a high-risk stake in Hollywood, backing a new special effects and digital production company headed by Jim Cameron.

The new venture, Digital Domain, includes Oscar-winning character creator Stan Winston and Scott Ross, former head of LucasArts’ Industrial Light & Magic special-effects unit. All three will be on the board of directors, with Cameron as chairman. Ross will serve as president and chief operating officer. Cameron remains chairman of his own production company, Lightstorm Entertainment Inc., and Winston as head of Stan Winston Prods.

As previously reported, while Digital Domain’s initial focus will be special effects, it will develop new filmmaking tools and properties for other mediums, ranging from interactive entertainment to videogames (Daily Variety, Feb. 23). The idea is to let directors easily design effects into their productions. The company may open its doors as early as this summer.

“We can start with a special-effects digital production studio and make money on characters and software,” said Lucie Fjeldstad, IBM VP and general manager of multimedia. “That allows us to build the tools for the digital domain in the future. We’re going to lead the next generation of computer platforms and applications.”

The deal gives IBM a 50% equity stake in Digital Domain, the remainder evenly split among Cameron, Ross and Winston. The ownership of new products would be decided case by case, with IBM getting first look. IBM will also use the company as an R&D lab to develop software applications for other industries, ranging from medicine to construction, and even produce material for its long-rumored digital network. There’s no commitment to use IBM hardware.

Though Big Blue doesn’t expect the new company to be profitable in the first year, a “very good” rate of return is expected within three years. The start-up cost could be as high as $ 20 million, reportedly the budget for IBM’s own digital studio, a project Fjeldstad’s team has worked on since early 1991.

Cameron and Ross plan to seize a sizable share of the effects market and promoting its growth.

The initial reaction from rival effects firms was wary but positive.

“I think they’ll come on the scene as an almost-immediate player with that kind of talent at the top,” said John Hughes, president of Rhythm & Hues Studios. “This another major competitor.”

Moreover, Digital Domain confirms a growing industry trend. “Digital effects are now part of the grammar of filmmaking,” said Richard Edlund, head of Boss Films Studio, a current Oscar nominee for “Alien3.”

Despite a wealth of competitors, there could be plenty of business. Cameron envisions filmmaking that increasingly embraces the computer.

“It will all be done at a workstation,” said the director. “Your film will now be in the digital domain.”

It doesn’t mean non-digital tools, from miniature models to duct tape, won’t be used when appropriate. However, Cameron said, “the term ‘optical’ will be obsolete.”

Once digital, films can be turned into a pay-per-view movie, vidgame or interactive story. And, “we intend on entering the interactive visual markets,” Cameron said.

The creative partners with that in mind are Cameron and Winston. Both worked on “Aliens” and “Terminator 2: Judgment Day.” The pair insist their own firms are separate from Digital Domain, and will use the new company as a service operation and still be on call to give advice to clients.

Indeed, new projects will be developed for the partnership.

“A studio will come to us to create a character, or we can do it ourselves. We can do that during our down time,” said Cameron, who hinted that several ideas were already in the works. Or, he added, “I can license a character to Lightstorm.”

Clearly, Winston and Cameron want more control of their creations. Winston, for example, designed the animatronic penguins for “Batman Returns,” but handed over the computer-generated animals to Boss Films. And a pair of software packages, Adobe’s Photoshop and Virtus’ Walk-through, both had kernels of development on Cameron’s “The Abyss.”

While at ILM, Ross saw the morphing technique that transforms one character into another go from an in-house tool to become a popular $ 95 product for another firm.

Cameron and Ross had been in discussions for a jointly owned effects studio since last summer, with Winston joining soon after. The trio decided to join forces with IBM this fall and the project’s development accellerated. In the interim, said Cameron, two Hollywood studios expressed interest in investing, but the trio decided to keep their independence.

Initially, Digital Domain will be a special effects company for feature films , TV, commercials and theme-park rides. Ross plans on attacking two problems endemic to the effects business: high costs and timeliness. During his nearly five years at ILM, Ross tripled the staff to 300 and garnered three Oscars for the group.

Despite all the talent, the new company, according to observers and the participants, faces several pitfalls.

Digital Domain must start running quickly. For one, the competition is stiff and the studios are setting up their own digital operations. Also, there’s concern about Cameron and Winston’s availability for counsel once their own projects begin.

Whatever the outcome, Fjeldstad pointed out that the venture was more of a journey into a new digital medium.

“This is a revolution,” she mused. “Who knows what’s next.”

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