02/19/2013 07:02 pm ET Updated Apr 21, 2013

The Visual Effects (VFX) Paradox

How can it be that almost every movie (and every big-grossing movie!) out there is VFX-driven, and yet one of the top companies in the industry, Rhythm & Hues, has to file Chapter 11? The company is Oscar-nominated for its visual effects in the movie Life of Pi, and had a good year creatively with a number of projects, including Snow White & The Huntsman.  But VFX companies like R&H and Digital Domain (the company originally founded by Jim Cameron in the 1990s that was sold out of bankruptcy last fall) don't own any part of the movies they work on, so they don't share in the upside.  As work-for-hire shops, they are very vulnerable to a multiplicity of factors that are not in their control.

To the average movie-goer, this wouldn't seem to make sense.  If there are all these movies, isn't there plenty of work to go around? Sure. It's true that the number of VFX shots produced annually across the globe has skyrocketed over the last 20 years due to the incredible advancement in digital tools. And due to the specialized and complex nature of this work, both artistically and technically, producers need to source talent at multiple companies to create VFX for a single film.

The problem is cash flow management. At DreamWorks Animation, (a company that is expected to lay off staff imminently -- but for different reasons) we used to call this "the Gap." You've got dozens or hundreds of people on staff, and you bring them on staff to get them at the lowest rate because you're employing them for a long annual, or multi-annual term. And you bring them on because you project into the future and see that you've got four to five films booked, so you know you're going to be using the staff. Margins are thin because schedules change, the creative direction frequently changes, and you're competing with other houses to get the work. So you hope that it's going to take you less time and fewer man-hours than you've estimated to the client (Studio). If you're right, or you're lucky, you make money. If not, you don't. You can get away with a certain amount of loss, but when movies get cancelled or delayed, you're stuck. This is the Gap: you've got people on staff with nothing to do and no client to charge them to, and the clock is ticking.  If you can't get jobs in to pick up the slack, you're toast.

A small/medium sized company like R&H, with no other source of revenue, is succumbing to this "musical-chairs" scenario. Sony Imageworks is part of a conglomerate, obviously, Industrial Light & Magic, (ILM), the grand daddy of VFX, is part of Lucasfilm. There are other revenue sources that can cover these companies. Another formula is Weta Digital, which is kinda unique in that it is Peter Jackson's company and he's driving work into the shop. Pixar and DreamWorks Animation are obviously studios themselves. So the common thread for the healthier companies is... ownership. These companies (or their principles) own their movies, or significant chunks of their movies, or software that is making them money. R&H, Digital Domain, and others (like Framestore or Double Negative in London, or Animal Logic in Sydney) are pure "work for hire" companies, and have nothing to fall back on.  Yes, TV commercials can pay some bills, but that is an equally uneven and low-margin business.

Ironically, when R&H was formed, it was set up as a haven for VFX artists who had been poorly treated by companies who had collapsed and left their people hanging -- a fate that R&H is now sadly having to perpetrate on its own people. My Facebook wall is literally choked with messages today from friends and friends of friends in the field: CG artists, engineers, TD's.... It's very scary out there when this happens -- a very black day in Hollywood. The whole business takes a hit. It's bad for movies, bad for creativity, bad for the professional relationships that drive the business.

But everyone will survive, and most people will figure out ways back into other companies, or will form new companies. This is going on all the time in VFX. The work continues, the movies still need the shots. The silver lining may be that prices go up for everyone else, with one less big VFX house out there competing. Or maybe the downside is that more work goes to Vancouver or India (where, ironically, R&H has facilities). Keep watching...  

Correction: An earlier version of this post incorrectly identified the Massive crowd-creating software as owned by Weta Digital. While the software was developed initially for Weta, it is a standalone company with no ownership ties to Weta.