Special Effects Powerhouse Offers Insight into VFX Industry

Special Effects Powerhouse Offers Insight into VFX Industry

from: FilmWorksLA.com

In 1987, six talented California co-workers in the special effects industry decided to make a leap of faith and start their own computer animation and visual effects company.  They decided to name it Rhythm & Hues (“rhythm” for timing and “hues” for design).  During those early days in 1987, Rhythm & Hues operated with just a single computer in co-founder John Hughes’ living room.  By 1988, Rhythm & Hues had moved out of Hughes’ house and into a small office located in the basement of a Culver City dental office.  Now, let’s fast forward 25 years…

Rhythm & Hues occupied its new El Segundo offices in 2010.  The three building campus boasts 235,000 square feet of gleaming, dog-friendly offices for roughly 750 digital artists and staff, two state-of-the art screening rooms, a data center and other amenities.  The Rhythm & Hues campus is, to say the least, quite a step up from the basement.  Rhythm & Hues has a business footprint to match, as it is now a global company with offices in Mumbai, Hyderabad, Kuala Lumpur, Vancouver and another under construction in Taiwan.

  The explosive growth of Rhythm & Hues is almost as captivating as their award-winning special effects.   The company’s long body of workstems back to the famous CGI polar bears they created for Coca Cola commercials, to their Academy Award-winning CGI work on a lovable pig in 1995′s Babe, and recent blockbusters like Hunger Games, Snow White & the Huntsman and The Bourne Legacy.  Currently, hundreds of Rhythm & Hues digital artists are hard at work on roughly nine feature films to be released over the next year.

The amount of change Rhythm & Hues has gone through as a business is second only to the ever-evolving visual effects (VFX) industry that it helped pioneer.  According to Rhythm & Hues’ Film Division President Lee Berger, “the world has changed greatly in the last 15 years” for the VFX industry.  During that 15-year period, the VFX industry went from being based almost exclusively in California to a global industry with stiff international competition.  The trend toward globalization, according to Berger, started in the United Kingdom with a generous tax write off in the late 1990′s, which was later replaced in recent years with generous refundable tax credits.  “The tax credit trend in London changed the game and started the current [tax credit] trend,” said Berger.

The introduction of the UK financial incentives, which coincided with the filming of the Harry Potter film franchise, created “the perfect storm” according to Berger.  For the first Harry Potter film in 2001, over two-thirds of the VFX work was done in the United States; but for the last three Harry Potter films (made from 2009-2011), between 90-95% of the work was done in the UK.  During the same period, filmmaker Peter Jackson’s Weta Digital in New Zealand became a global powerhouse because of the groundbreaking effects work the director was using in the Lord of the Rings trilogy and films like King Kong.  Complicating the industry further, “the amount of money studios spend on VFX is shrinking,” said Berger.  A shrinking VFX pie, of course, raises the stakes in the competition for business even higher.

With the global proliferation of generous tax credits in places like Vancouver, British Columbia,  not only is there fierce competition between international  VFX companies (like Weta Digital or Rhythm & Hues) for lucrative special effects contracts, but also between state and national governments.  California is caught in the middle of the storm.

As a result of the competition among state and national governments to capture a share of the VFX industry, California’s share of the money spent on VFX has been plummeting in recent years.  Film Works was able to acquire the spending breakdowns for 12 big-budget films.  The name of each film and the studios attached have been withheld for confidentiality.   Seven are currently in production, three have (or will be) released this year and two were released from 2010-2011.  Click on the image below to for a full-size view:

The combined spending on VFX alone for these 12 films is $495 million, which represents 23% of the total $2.16 billion spent on production.  California’s share of the total VFX spend came in at about 34%.  As the chart reveals, the key reason most of the spending left California was because of rebates offered in other jurisdictions.   These rebates programs are generous, providing just over $64 million back to producers in cash.  Moreover, the programs that generate these rebates are very specific; the programs are often tailored specifically for VFX work.

According to Berger, 90 percent of the cost in the VFX industry is labor, which means there are few ways to reduce costs in other areas.    Recognizing that the only avenue for VFX houses to lower their costs was through wages, astute policymakers in Vancouver, British Columbia created a separate tax credit targeted at the VFX industry called the Digital Animation or Visual Effects (DAVE) production tax credit in 2003.  Under the DAVE credit, productions get a 17.5% credit on VFX labor costs incurred in British Columbia.  What really makes DAVE so attractive, however, is that it can be stacked on to both the standard film production incentive offered by the province and the labor incentive offered by Canada at the federal level.  The British Columbia Film & Media office offers an online tax calculator to show how much productions will receive once all of the incentive programs are stacked.  Using the VFX budget spent outside California for “Movie 9″ in the table above, we decided to see what the benefit would be if that $62.5 million had been spent in Vancouver.  The results were staggering:

By the calculator’s estimate, the $36.5 million in combined cash refunds amounts to just over 58% of the total VFX cost for the film.  Not surprisingly, the number of VFX companies that have relocated or opened branches in Vancouver has exploded, and most of the U.S. feature film projects that go to British Columbia do so exclusively for VFX work.  In 2006 & 2007, of the 54 U.S. feature film projects shot in British Columbia, just four were for VFX only (meaning principal photography was done elsewhere).  By 2011, of the 50 U.S. features that spent money in B.C., the number of VFX only projects ballooned to 35.

Surprisingly, Rhythm & Hues did not open a Vancouver office until 2011, making it of the most recent international satellite locations.  Berger explained the company’s other satellite locations offer much lower labor costs, allowing for savings that best or exceed Vancouver’s costs even with the tax credits.  More interesting yet, Berger said Rhythm & Hues could often match a bid from Vancouver for the same money even using his California artists.  “But what has happened in recent years with many studios,” Berger said, “it’s easier to understand the tax credits than it is to understand a discounted price.”

Veteran visual effects producer Allen Maris, whose credits include Robin Hood and this summer’s Prometheus, told Film Works that it is now common for studios to require much or all of the VFX budget be spent in locations that offer lucrative tax credits.  Maris, who calls California home, would love to see more of the money go to California VFX houses and, even better, that the work be performed in California by artists living here.  “It’s not uncommon for many small to medium-sized VFX houses to be little more than a storefront,” said Maris.  “Some of the VFX houses that used to employ dozens of artists now only staff a handful of people, and the only way they are able to keep their doors open is by outsourcing work to subcontractors in places like India who earn very low wages.”  Maris said no one likes the idea of sending work to another country, but it’s better than the alternative.  “Even a few jobs in California are better than none, because if California firms don’t compete–they close.”

Berger said Rhythm & Hues understands the concern among California VFX workers who feel that opening satellite offices in other nations comes at the cost of jobs in California.  In 2007, Sony Imageworks opened an office in New Mexico and announced plans to relocate 100 employees — roughly one-third of its workforce — from Culver City to Albuquerque.  Years later, Sony decided to close its New Mexico campus and relocate again — this time to Vancouver, British Columbia.  State and federal employment figures show there are fewer workers and business establishments  in the California post-production and VFX sector than there were ten years ago.

Berger is quick to point out Rhythm & Hues has actually been growing its California workforce even as it expanded abroad.  The number of jobs at Rhythm & Hues’ California headquarters increased from 300 in 1999 to more than 750 by 2011.  During a tour of Rhythm & Hues’ campus, Berger said the company was already outgrowing it after just two years. “Bottom line, expanding overseas has enabled us to expand here at home,” Berger said with pride.  Indeed, Rhythm & Hues currently has multiple job openings in Los Angeles.  Nevertheless, Rhythm & Hues may be the exception rather than the rule.

  Berger doesn’t deny one of the major reasons for opening facilities in emerging markets like India is the low-cost of labor, which keeps the company competitive and keeps the doors open in California.  “But low labor costs are far from being the only reason,” said Berger.  Having offices across the globe allows Rhythm & Hues to work on projects around the clock almost 24-hours a day.  When the employees in Los Angeles head home for the day, they pass the work to the team in Kuala Lumpur, who will do the same again with their colleagues in Mumbai and so on.  Finally, all of the locations where Rhythm & Hues operates have highly skilled and educated workforces.  “Why have just have the best from one country when you can have the best from all over the world?” Berger asks rhetorically.

During Film Works’ visit with Rhythm & Hues, it quickly became apparent they value nothing more greatly than their employees, whether they work in Los Angeles, India and anywhere in between.  Artists from all locations collaborate on a daily basis (sometimes hourly) through high-tech video conferencing.  Employees from other offices are frequently brought to Los Angeles to foster collaboration and teamwork. Rhythm & Hues Co-President Erika Burton said she and others are constantly traveling between all of the company’s locations.  “If we are not talking to the other offices on the phone or via Skype, we are on a plane traveling to one of them,” said Burton.

The incredibly talented digital artists at Rhythm & Hues earn high wages, work long hours and routinely get paid to work overtime.  Most digital artists in the VFX industry are freelance and get hired on a per-project basis.  Since Rhythm & Hues is often fortunate to land a steady stream of projects, many freelance artists are now referred to as “permalancers”.  Rhythm & Hues is constantly seeking to foster skill development by offering 3 to 4 week apprenticeship programs in areas like animation, digital lighting and 3D camera tracking (among others).  According to Burton, the programs are meant to complement formal education for students and provide them with “industry-ready skills and experience” when they apply for jobs.  The apprenticeship programs are highly selective.  All participants are paid for their work while in the program and housing is paid for by the company for apprentices who come from outside the Los Angeles area.

  For Rhythm & Hues President and CEO John Hughes (on of the studio’s three remaining co-founders), education and the arts are very important causes.  Within the company, Hughes encourages employees to express themselves by creating and sharing their own work.  As a result, the hallways of the Los Angeles office are lined with art (paintings, sculptures etc.) that Hughes has purchased from his employees.  Outside of the office, Hughes serves as Chairman of the Education Committee for the Digital Coast Roundtable and previously served as a member of the California Superintendent of Schools Task Force for the Visual and Performing Arts.  For more than 10 years, Rhythm & Hues has also been a major sponsor of the 66th Street Early Education Center in South Central Los Angeles.

There is no question the VFX industry in California–in the words of the Los Angeles Times– is  “under siege.”  More VFX houses in California have closed than opened in recent years and employment is stagnant at best.  Many workers  feel pressured to relocate in attempt to follow the work as studios chase film incentives from one place to the next.  Complaints regarding working conditions, long hours and the lack of benefits like health care at many smaller VFX houses has caused some to campaign for unionization.  Indeed, all of these issues are common topics of discussion at the industry watchdog site, VFX Soldier.

  Berger also told Film Works that Rhythm & Hues is supportive of any initiative by elected leaders in California to help keep more work in the state.  Berger pointed out he was particularly proud of the work the company had the opportunity to create for the films Moneyballand Hop, both of which received the California Film & Television Tax Credit.  “We are content creators… and we would love to create more of it in California with the help of programs like the film incentive,” said Berger.

When asked what the future holds for the VFX industry both in California and in general, Berger was quick to reply “I can’t predict what will happen in five minutes from now!  And while I am quick to reply with that answer, I always like to point out that Rhythm & Hues is a big, privately controlled company that is also capable of being quick to respond to whatever the future holds.”

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