High-profile bankruptcies reveal blockbusters' fragile underpinnings

The visual effects sector is in crisis.

When I started covering the visual effects realm there was a “big four” of vfx companies: Industrial Light & Magic, Digital Domain, Rhythm & Hues Studios and Sony Pictures Imageworks. Two of those, DD and R&H, have gone bankrupt in the last six months and the other two are studio-owned, which doesn’t assure their future but assures they won’t miss payroll.

You could see DD and R&H as sort of a canary in the coal mine for the state of the vfx business. But I think the vfx business is the canary in the coal mine for the studios’ movie business — especially the tentpole business.

The big four have been joined by three to six rivals at the high end. That’s led to an oversupply of high-end vfx capacity, which has depressed the cost of vfx and pitted all of those companies against each other. It’s a buyer’s market, but the bankruptcies of Digital Domain and Rhythm & Hues are likely a sign of a painful contraction in capacity.

Financial stress is widespread and growing among vfx companies. A studio vfx exec recently told me of another vfx studio, not in the U.S., that had to be bailed out last summer. Days later a vfx exec at a California vfx shop told me of having to bail out a smaller subcontractor facility that ran out of cash before it could deliver.

We’ve learned over the years that people often try to plant rumors in Variety with malicious intent, so I won’t detail all the rumors I hear. However I’m pretty sure some of those rumors are smoke from smoldering fires.

As a community, artists are suffering. Digital Domain’s bankruptcy threw hundreds of animators at its Florida studio out of work. DreamWorks Animation is laying off. London-based Framestore, which is now one of the “big” vfx shops, recently told employees it would reduce staff and didn’t expect work to pick up until autumn. (Not coincidentally, it announced a Montreal branch to qualify for tax incentives.) The prevailing mood among artists is a seething cocktail of rage and fear. (A sampling of that rage can be found below.)

A former topper of another “big” vfx studio, who is now out of the vfx business, called me to point the finger at the studios.

“They know what our margins are and they won’t let us make any money,” he said.

He cited one vfx-Oscar-nommed tentpole his company worked on with another “big” shop, saying the director made probably $50 million but neither vfx company made a penny of profit. Such imbalances seem common.

Bob Iger has said that tentpoles and franchises are Disney’s future. Other studios seem to be following the same strategy.

I see a tentpole business that’s come to rely on two things: government subsidies and a vast visual effects pipeline where profits are slim to nil and artists are not compensated on par with actors, grips and other unionized pros (i.e., toiling with no health or retirement benefits, under poor working conditions, sometimes with no overtime).

On the tax side, subsidies are distorting the market, encouraging oversupply of both tentpoles and vfx.

It’s a truism of tax policy that if you want less of something, tax it, and if you want more of something, subsidize it. But there is already more vfx capacity than work. Moreover, as I’ve argued before in this column, the market is oversaturated with tentpoles, and more and more of them are underperforming at the box office. On the vfx pipeline side, it’s a buyer’s market. Vfx companies lack leverage and artists lack protections. London artists don’t get overtime. I hear more and more reports of sweatshop conditions in Asian vfx facilities. The vfx biz lacks a union or guild and probably will never have one, now that digital production has become globalized. The former vfx studio topper who called me complained he lost roto work to a shop in Nepal. If you need a union, and that union needs to organize workers in Louisiana, India, Malaysia, China and Nepal, you’re in trouble.

A harsh question has to be addressed: Would the studio tentpole business be viable if it couldn’t get vfx companies, states, nations and, yes, even artists, to subsidize the pictures either through tax policy, working for below cost or accepting poor compensation? In short, would tentpole production make financial sense if the studios couldn’t play all these people for saps? I’m not convinced it would.

The studios, I’ve recently been reminded, are under their own pressures from games, television, YouTube, streaming and declining audience interest in movies, and marketing costs so huge that only the returns off a tentpole make sense to them. That’s why they’re so committed to the tentpole strategy. But those macro trends aren’t going away.

I guess there are still hundreds of city, state and national governments that can be seduced into propping up Hollywood, and there may be an inexhaustible supply of young digital artists willing to work for peanuts until they burn out or get fed up. But some governments are questioning their subisidies and the R&H bankruptcy seems to have shocked the vfx industry into action.

If your business model relies on the quiescence of governments and artists, the canary gasping for breath may be your own.

Here are some samples from my inbox of the rage among vfx artists:

From a visual effects artist in Paris, after Buf’s announcement that it will open a Montreal branch to qualify for tax incentives: “Buf, the old French company, is forced to send artists to Canada to win projects. That is really sad. I am young … so it’s not a problem for me, but for the oldest guys, the ones who built Buf and made its reputation, it’s not so good.”

From an artist in London, where Warner’s search for tax incentives for the Harry Potter pics turned the city into the world’s vfx capital: “VFX is the most abused sector of the industry. … People are unhappy. And we have no unions in the U.K. and if we did, the companies would just hire non-union staff! There are no companies that pay overtime in the U.K. and people regularly work past midnight, especially for deadlines and crunch time. You get a day rate and that’s all.”

From one of the 200-odd artists just laid off by Rhythm & Hues as it entered bankruptcy: “This shithole of a company that just screwed me out of three weeks of wages with lots of overtime, I have $75 to my name to feed my (family). … they just assured me that the paychecks were going to be delayed not denied. … They used 200 of us to play a shell game to try and put on a facade to potential investors only to screw all of us out of hard-earned money and put many of us with families in a horrible position with no recompense or alternatives.”

Bits & Bytes

Framestore is branching out into a new area: books. The London-based vfx studio will collaborate with Razorbill to publish “The Creature Department,” from author Robert Paul Weston. Razorbill is an imprint of Penguin Young Readers Group. Weston and Framestore are collaborating on visual assets to be used across multiple platforms.

The ITU has given first-stage approval to the new High Efficiency Video Codec (HEVC), a.k.a. H.265, which allows four times as much data to be sent over existing broadast or cable channels, and would permit 4K television channels without adding more bandwidth. … Elemental Technologies, which supplies multiscreen content delivery solutions, will demonstrate concurrent H.264, MPEG-2, and H.265 encoding on a single Elemental Live system at April’s NAB Show in Las Vegas. Elemental will also present a webinar on HEVC for multiscreen video on Feb. 7.

Bling Digital is presenting the “Post on Demand” panel at next week’s Hollywood Post Alliance Tech Retreat. Bling’s chief technology officer Chris Parker hosts. Panelists include Bling Digital VP of creative services Chris Jacobson; “Pacific Rim” executive producer Callum Greene; Universal Media Studios VP of post production Richard Winnie; and Suits and Covert Affairs co-producer Gavin Barclay.

The NOVAC Training Center in New Orleans will offer an Intro to Cinematography class Feb. 23 at 10 a.m.

3D TV network 3Net is reporting it is in 40 million households and continuing to add original programming. … RealD has expanded in Russia with an agreement to outfit up to 200 Karo Film cinemas with RealD 3D.

The Cinema Audio Society will honor Stefan Kudelski, 84, inventor of the first portable professional recorder, with a tribute, which will include interview footage and personal recollections, at the 49th Annual CAS Awards Dinner on Saturday. Kudelski died Jan. 26 in Switzerland.

Blue Room Post has provided post services on “The Letters,” a biopic of Mother Teresa. … Global marketplace Shutterstock has announced a content partnership with motion designer and art director Orrin Zucker of Ozone Prods. Zucker’s Liquid FX collection will now be available for license within the Shutterstock library.

Shotgun Software has integrated three separate applications, Shotgun, Revolver, and Tank, into a single package under the Shotgun monicker, available for $49 per seat. … E-on software has announced the availability of its Carbon Scatter 2 trial version for Autodesk 3ds Max and Maya, as well as Maxon Cinema4D. Carbon Scatter 2 is derived from e-on’s EcoSystem tech and provides quick nature and plant renderings.

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