On March 12, 2014, The Wrap published an op/ed I penned.  I am grateful that they provided me the opportunity reach a wide audience for a piece that’s meant for such a wide audience.

Unfortunately, they published an older version of the piece than I had intended.  They published a version I had sent them of Feb 27th, rather than the newer versions I had sent on March 3rd and March 7th respectively.

To be clear:  I do not retract anything in the piece that was published on March 12th.  However, the piece’s relevance is expected to be more long-term.  As the issues and market forces laid out in the piece continue to exert themselves, the analysis and opinions in the piece continue to be relevant.  Therefore, now that the piece at The Wrap has run its course, I think it’s important that the tighter and more refined version be published as well (especially since it’s the version I expected to be published).

This is an open letter.  I give permission to reproduce it in part and in full, as long as it is properly attributed to me, and it is not taken grossly out of context.

Dear Hollywood, you can’t fix the biz in post.

If you really don’t want to think about the business and money side of things, this piece isn’t for you.  But I’d caution you:  You probably have money in the movie industry.  If you’ve got an IRA or a 401k or a pension, some of your money is probably in Hollywood.  Maybe you should take this seriously.

Personally, I’d like to be writing pieces about the craft and promise of digital motion pictures.  I went to NYU Film School.  I worked directly with Terrence Malick for two years on “The Tree of Life.”  I worked on “Iron Man” too.  Believe me, I’d love to be waxing poetic and philosophical about all of it.  But that would be a luxury at this point.

We need to be adults.  We need to talk about what is actually going on and what it means.  So if you want to go read a bunch of sophomoric fluff about how to best collaborate with directors and execute their intent through VFX, there are other pieces to read.

Blunt Instruments

What’s different today, versus yesterday, is that the domestic VFX industry has been forced to wield a very blunt instrument.  It’s called a countervailing duty (CVD).  I am not a lawyer.  Much less am I an international-trade lawyer.  You should get real legal advice from real lawyers.  But I can do my best to explain as I understand it.

This isn’t about middle-class-jobs as has been put-on of late.  You don’t create jobs by taking jobs from other states and countries and paying to move them to yours.   No one has suggested these subsidies increase the amount of filmmaking that’s going on.  They’re just moving it around.  It’s a trade-war stoked by the very industry selling the weapons to all sides.  And the domestic VFX industry has been ripped apart by it.  The workers have been the hardest hit.

Recently it has come to light that not only is a CVD case coming, but that the MPAA themselves may have already set the most important legal precedent for the case’s success.  They seem to have made it clear that digital assets, like VFX shots, can be subject to a CVD.

Further, a new 501(c)(6) organization, ADAPT, has sprung up to officially bring the case.  They’ve hired a law firm and it is their research that brought the MPAA’s precedent to light.

What’s particularly of note is how the MPAA immediately responded.  They blinked.  They tried to litigate the matter in the press with a poor argument that would seem to already be refuted by the research done by ADAPT’s lawyers earlier last year.  The lawyers can do the real arguing in court (if the MPAA can even manage to have standing to argue).  But most analysis I’ve seen is unimpressed with the MPAA’s argument.

What’s important, is that the MPAA showed their cards.   They are scared.  Usually, the MPAA doesn’t issue panicked and poorly constructed legal arguments in industry mags.  Clearly, they are concerned.  That, in turn, should concern Hollywood and its investors.

At the Oscars this year, ADAPT held a rally that brought together over 500 supporters.  That number may not seem huge.  But again, look at it from the perspective of the CVD case.  500 people came to protest at the Oscars over this, during a rather rainy day.  What do you think that means when it comes time to do an official head-count of domestic workers supporting the CVD case?  They only need 25%.  There aren’t that many left in LA.

Let’s take a step back though.  What is a CVD?  What happens if the case is won?  What are the risks of letting it happen?

In summary, the CVD is a reverse subsidy.  It is a tax levied on subsidized goods that are imported into a country.  They are meant to forcibly re-level a playing field so everyone can actually compete in an open market, without governments trying to tilt the field.  They’re not meant to be paid.  They’re meant to be avoided, by not taking subsidies in the first place, even if they’re offered.

The Democrat likes a CVD because it raises the floor when it comes to doing business, which can raise salaries and quality of life.  The Republican likes it because it disciplines a market that’s being distorted by government handouts.

The Democrat can be made wary of a CVD because people in subsidized areas get hurt when the subsidies are disciplined and things shift around quickly.  The Republican can be made wary of a CVD because a duty is a tax, and a tax can never be a solution in libertarian (neo-fiscal-conservative) doctrine.

The jaded semi-intellectual will tell you that multi-national corporations will find ways around a CVD like they do everything else.  But in truth, a CVD is a very blunt and broad instrument. There are people going to jail for trying to circumvent CVDs.

It is my understanding that duties would be levied retroactive to the date the case is filed.  There is some percent chance that the CVD case will be won.  Every dollar in VFX subsidies that go to the studios from that date forward is at risk.  Every movie that takes more of those subsidy dollars just doubles-down, triples-down etc, on that risk and that ruling.

Studio Profits and VFX Subsidies

So how much of the studios profits are VFX subsidies?  Actual public numbers on this kind of thing really don’t seem to exist.  They’re proprietary.  However, with my simple (but somewhat privileged) knowledge of the industry, I can estimate some rather important figures.

By my estimate, somewhere between 1/6th and 1/3rd of Hollywood’s yearly production budget is spent on VFX.  Right now, Hollywood is getting a huge amount of international and state government subsidy dollars from that work.  It’s one of the few ways they’ve been able to keep the feature film industry from completely tanking.

As an investor, you see those subsidies every year when the big multi-nationals report, and talk about their feature-film divisions.  If you took the subsidies out, you’d see those yearly profits all move in the direction of the red.

How much red?  Lets take a meager $120,000,000 movie.  Let’s pin the VFX budget at $30,000,000, in the middle of my range.

That VFX budget is being spent entirely in Vancouver.  The studio simply will not sign a VFX contract with a VFX vendor company in any other location for this film.  You’ll see why when we finish the math.  The subsidy comes in the form of tax-credits, which can be sold in a thriving tax-credit market in British Columbia.

They are awarded at a rate of 58.4% on each dollar spent on qualifying labor.  Most VFX bids and contracts consist of about 50% labor (others estimate it higher around 65%.  I’m being generous to you here).  These days, the studio forces the vendor to guarantee the credits. If for some reason a government audit results in less qualifying labor expenditure than originally in the contract, the vendor must pay the difference to the studio out of their pockets.

On our $30,000,000 VFX budget, we get back 58.4% of half the budget.  That’s $8,760,000.  We don’t have nearly that amount of tax liability in British Columbia.  We’ll take a little off the top of that number in the form of fees and such as we sell it through brokers.  So let’s say it rounds out to $8.5mil by the time it hits the corporate balance sheet as real $$.  You could argue we won’t get that good of a deal on the credits, but they won’t suffer huge-enough losses that change the final outcome dramatically.  That’s roughly 7.1% of the overall production budget coming back to us as a gov’t subsidy.

Of course the second huge part of the feature-film business is marketing.  A gross simplification is that the marketing budget of a film is about equal to its production budget.  Overall, once the film is produced and marketed, the subsidy that comes back onto the balance sheet from the VFX budget comes to about 3.55% of overall expenditure on the movie and its advertising.

When the feature film division reports slim profits or losses of about 5-10%, you can see how big a deal those subsidies actually are to the profitability of feature film divisions.  It would appear a feature film division reporting about 3.55% profit would be breaking even without the VFX subsidies pumping them up.  And a feature film division that reports it’s breaking even would be taking about a 3.55% loss without the VFX subsidies helping them out.  There is some overhead associated with a feature film division.  But you can be assured that they try to structure those divisions such that it’s almost all project costs and very little overhead.

If you follow feature film profits year to year, you know that despite huge box-office, actual profits are slim or nonexistent of late.  Further, you know that this isn’t caused by the recession.  Remember: Hollywood is recession-proof.  Hollywood’s profit issues reflect other issues that have been at play long before the recession and are too numerous and complex to discuss in full here.

Paramount was busy beating its chest the end of last year over a 5.5% profit margin or more over the past three years at the end of 2013.  Sony doesn’t seem to report its film separate from its television but “Pictures” seems to have made about 6.5% in 2013.  It’s well understood that TV is making more money than film these days.  So it’s probably safe to say that film is at best making 6.5% profit for Sony.  And really, it’s probably not making that.  The roughly 3.55% in profits from the subsidy on VFX is huge for them as well.  As it is for all of them.

If the CVD is levied, and those subsidies go away, you’re going to see it on the balance sheets.  It could be the difference between being in the black or the red year to year. And in turn, it can be a big deal with regard to the stock price.  It’s just math.  And I think you can see how fiddling with the numbers isn’t going to change it all that much.  It’s big because it is big.  And perhaps that’s why the MPAA so uncharacteristically flinched when presented with the possibility of the subsidies going away all at once.

But that’s just the subsidies on the VFX.  What about the rest?

The CVD is a dangerous precedent for feature film profits

I just estimated and isolated the profits from the subsidies on the VFX work.  But in truth, you have a bigger problem.  VFX are not the only goods that could have CVDs levied against them.  The precedent opens up the film industry to quite a few other CVD cases by nearly ever local union for every craft in every location.

The remaining 5/6 to 2/3 of the production budget is usually subsidized under the same laws and programs.  It’s just at different rates of return.  But they’re calculated against most of the budget rather than just the VFX budget.  In some parts of Canada, they’re calculated against all expenditures, not just labor.  So the contribution to the balance sheet is huge.  The remaining subsides are not something I think I can calculate effectively.  But they’re already baked in to the balance sheet.  They’re part of the yearly financial reports already.  They have been for years.

Obviously, the remaining physical film distribution market is easily assessed duties when the film goes through customs.  It seems digital distribution isn’t going to be a way to get around a CVD for broader film production work.  Digital cinema masters (DCMs) and digital projection packages (DCPs) are digital assets as well.  If the rest of the industry sees VFX succeed in getting a CVD levied, there’s very little keeping them from attempting the same thing against the whole film, market by market.

Again, I’d suggest you get the advice of a real international-trade lawyer as to if the VFX CVD case has merit, and if the precedent could result in further CVD cases.

Why is VFX doing this to us?  That’s my retirement money!

I said the domestic VFX industry was “forced” to wield the CVD.  They’re not doing it to hurt the country or the film business that they love working in.  They have rights.  They are defending themselves.  You did it to yourself.

Are you angry with me because I said it’s your fault?  Let me explain:

VFX has a completely different kind of schedule and working situation compared to traditional production.  Production usually has long pre-production and prep cycles, and long post-production cycles.

Core production people do complain about having to chase subsidies though.  JJ Abrams famously did so with regard to the new Star Wars films, which are to be shot in London.  It’d probably be shot in New Zealand or Vancouver were it not for the newly upped UK subsides.  Just take a look at the public arm-twisting that surrounded “The Hobbit” films, or the new “Avatar” films, to see that kind of thing going on in New Zealand.

In VFX, unless you are one of the lucky few to be working directly for the production company and moving with the production, you are working for a VFX vendor company.  You only work on a movie during post-production.  And when you are done, you either move directly onto another movie that’s entering post-production, or you are let go (and need to get on another one ASAP).

When this was all done in LA and NY, it wasn’t a big deal.  You had already decided to move to the Mecca of filmmaking.  Things were stable for a good VFX worker.  One could work year round and make a good middle class life.

I myself was expecting to enter the NY commercial VFX market upon finishing my master’s degree (MS).  Instead, I was “noticed” and brought to LA to do feature film work.  I decided to move to LA permanently and stick with that company for a bit, because I was good enough to make real movies and they’d have me there.  But it was my choice.  I always knew from day one that TV and movies were primarily made in LA and NY.  Every film student knew that before going into film-school.

Some exceptional VFX vendor companies managed to establish themselves in Hollywood feature films outside of the LA and NY markets.  Usually they clawed their way up and out of the pack in their own domestic commercial and TV markets.  But they were usually in premium locations for their own domestic markets, like London.  The deal there was the same as it was in LA and NY for the most part.  Premium content in premium markets resulted in a reasonable life for people who were good enough to make it in those markets.

Though I’d point out, there were no shortage of gripes from Hollywood producers and directors about Industrial Light and Magic (ILM) being located in Marin County, far away from LA.  ILM lost some work along the way to their “remote” location.  But it’s ILM.  And they probably don’t care.  Other companies in more remote locations probably cared a bit more about their disadvantage.

These days the technology and methodology has evolved to the point that you can do VFX work anywhere you want, as long as the price is right.  The disadvantage to being outside of LA has disappeared.  It’s clear that all things being equal, Hollywood would rather be in Hollywood.  But if the work is superior, they’re willing to go outside their comfort zone.

All things are not equal though.  They’re not making choices based on merit.  The ability to do VFX for a film anywhere simply makes it easy for subsidies to be used to move VFX jobs to any country or state that’s willing to pay.  The subsidies are the most powerful force in the market.  They override everything else.  It can be done at the drop of a hat.  The current strategy to winning contracts, is to be able to pop-up or subcontract a VFX shop wherever you need to, to get the studios their subsidies.  The vendor companies aren’t thrilled with this.  But they have adapted to do it at the company level.

A lot of VFX workers in subsidized areas don’t understand this, or don’t want to understand it.  But if you’ve been involved or privy to the right feature film VFX negotiations over the past 5-10 years or so, you do understand it.  Most VFX workers are not part of those negotiations.  Ultimately, if the CVD case gets through to the investigative phase, the opacity surrounding this point will be removed.  The relationship between the subsidies and profits already show you why the studios are doing it.  But the investigation will show you the evidence that it’s actually what happened and continues to happen.  Not by inference or coincidence.  It was actually what was discussed.  It’s the force that was brazenly applied.  Arguments to the contrary are ignorant.

I had a long section in here that explained what this did to workers and will do to them going forward.  But you don’t care.  Take it for granted, they’ve been injured by what is obviously a trade-war being stoked by the MPAA and their members, to bolster their profits.  That trade-war continues.  There will be more casualties.  If that were actually fair-play, perhaps it would be over.  But it’s not fair-play.  International trade law allows a CVD case to be brought by the domestic industry because it’s not fair-play.  The domestic VFX industry is smart enough to see that.  They’re altruistic enough to want to fix the whole problem for everyone, rather than just cheerlead for more local subsidies.  They’re exercising their rights.

This trade-war isn’t stable profit.  It’s risky money.  It’s dangerous to the studios in the end.  It’s most dangerous, when investors mistake it for stable profits.  The biggest question here is: do the current stock prices accurately reflect the reality that significant amounts of feature film profit are trade-war subsidy dollars?  Do they properly reflect the risk associated with those dollars?  I doubt it.

Look, Oklahoma just voted theirs down.  Poof!  Even without the CVD, they can just disappear.  New Zealand almost voted theirs down last year.  Most of these subsidies need to be renewed or re-upped regularly.  It’s just not politically sustainable in the long run.

That gets us back to you.  I said it was your fault.  You’re probably saying right now:  But it’s the studio executives fault.  It’s multi-national corporations.  Not me!

Studio executives do what it takes to maximize stock prices and dividends for their investors.  That’s you.  That’s your neighbor.  That’s your uncle.  They do it so your 401k, IRA or pension can grow each year.  That’s their job.  If you keep quiet and don’t pay attention to what they’re doing, it’s still your fault.  You enabled them.  As an investor you have rights and in-fact you have obligations.  You could vote them out.  You didn’t.  In the best case scenario for you, you have not held institutional investors responsible for their decisions on your behalf in these matters.  It’s still your fault.

Rather than ask why the domestic VFX industry wants to do this to you, you should probably be asking what has happened to the film industry such that it’s now completely dependent on international subsidies to be profitable?  Who messed up?  When did it happen?

Perhaps the most important question should be:  Can this be fixed?  After all, it’s your retirement money.  You own the studio.  You can demand it be fixed.  You can demand profits based on good decision making and sustainable solutions rather than a risky trade-war.

Lets assume it’s possible to fix it.  How?

Eggs

VFX is so large a part of the equation, that the subsidy dollars that can be extracted from a trade-war over it are big enough to make an impact on profits.  That means there’s huge potential for VFX to be a stable solution.  After all, VFX has quietly done that twice already.

VFX is the goose that laid the golden egg.  It laid two golden eggs.  What you are looking for here, is a third golden egg.  And if you cook the goose, that isn’t going to happen for you.

Egg #1

Since the beginning of cinema, there has been a component to the film market knowns as “the cinema of attractions.”

The earliest example would be cinema itself.  At first, walking into a tent and watching a moving-picture was novel.  It was an attraction.  There was no narrative.  There were no movie stars.  There were images of far off places and things, brought to your locale and shown to you as a motion-picture, or movie.  It was amazing.  It was worth the price of admission.

It’s easy to think of the barker with his megaphone yelling, “come one, come all, and see the amazing moving-picture machine!  It will transport you to wonders far off.  Paris!  Egypt!  All inside this tent!”

Perhaps you believe that was temporary and quaint?  That the “cinema of attractions” is long dead?

Does this ring a bell?

“You’ll believe a man can fly?”  That would be the tagline to “Superman” in 1978.

How about this?

“An adventure 65 million years in the making.”  That would be the tagline to “Jurassic Park” in 1993.

Even that little movie I worked on, “Iron Man” had huge bright, shiny attraction in it.  It was red and gold (and I can claim I helped design it early on).  Don’t think for an instant that Jon Favreau didn’t understand he was hocking the thing.  Why do you think there was so little of it in the movies until the end?  He’s been teasing you with it.

Those tag lines could flow just as easily from the barker’s megaphone as a call to view the bearded lady.  The cinema of attractions never died.  And in 1993 going forward in particular, the digital VFX industry turned it into a cash-cow for the film industry.

Even today, “Gravity” features huge, long-take, 3D, digitally animated sequences the likes of which have not been seen before.  They are more refined and integrated than the bearded lady.  But the fact of the matter is, people pay to see the grandstanding digital effects.  Without them, “Gravity” isn’t even possible.

Technically, Hollywood can make any image it wants now.  The audience should have matured past the effectiveness of this golden egg.  But it still has some life in it.  It’s still reaping rewards.  Your movie industry might have been a wreck long ago without this egg VFX laid for you.  I’d argue it would have.

Egg #2

The second egg VFX laid for you is something you probably take for granted.  “Jurassic Park” seems have had about 50 or so CGI dinosaur shots in it.  Really, the VFX industry was only so big at that point.  And the tools that were in use could only handle so much complexity.  By today’s standards, that work is simplistic.  But it required some of the most intelligent and talented people in the world to accomplish it at the time.  It could not be mass-produced.

The second golden egg is the egg of scale and scope.  Over the years, the VFX industry has expanded its size and its technical abilities to handle anything.  Really, anything.  Any image you can come up with can be done, and done repeatedly.  It may just require more money than you have available.

Does your movie require over 1,400 digital VFX shots?  No problem.  Does your movie require every background to be replaced?  No problem.  Does your movie require most of the main cast to be digitally altered or digitally generated?  No problem.  Need to get rid of your director?  Talk to the DGA.  That’s not our thing.  But we work for you.  So if you want us to change the ending, we might be able to do it.  Just keep the director off our back if you override him/her.  Hey DGA, if you don’t like that, consider that we’d be great allies to you.  But we can’t do that unless we have a guild.

In the past, producers, writers and directors had to be very careful about what they tried to produce and how they went about it.  Writers needed to re-write scripts to make them able to be shot on budget.  Producers needed to talk directors out of certain creative choices that created logistical problems that were impossible to solve.  Certain books and screenplays were simply labeled, “un-shootable.”  When CGI wasn’t really capable of everything, one had to be a judge of what should be done CGI and what should not.  For a while, digital VFX weren’t really available for a screwball comedy.  There was not enough capacity.  Now, they all have VFX.  I spent weeks programming tools to work with LIDAR data for a comedy.  I never saw the movie.  I don’t know if it was funny.  But the VFX got done, LIDAR and all.

The second golden egg VFX laid for you is the scale and scope of work that it has grown to be able to accomplish.  Say what you want about the artistic value of the “Transformers” franchise.  But it makes a ton of money.  If VFX hadn’t grown to be able to handle it for you, how would it ever have been made?  Would it ever have made the kind of money it did?

An argument could be made that Hollywood should have avoided the dependency.  But they didn’t.  You got your VFX renascence where your most profitable movies simply could not have been made without huge amounts of digital VFX.  You made a lot of money on it.  And had VFX not been able to do this for you, the movie business could have wrecked at that point.  I’d argue, it probably would have.

The egg you need

Hollywood has spent the better part of the last 7-10 years cooking and eating the VFX goose.  Not just with the subsidies, but by insisting on a fixed-cost contract model.  Then by insisting on outsourcing work to low-cost labor markets.  Now, by forcing vendors into any subsidized market Hollywood can negotiate/lobby into existence.  These were all ham-handed mistakes.

What you really need, is for the VFX industry to focus on doing everything that they’ve already done, but do it cheaper, better and faster.  You need filmmaking and digital VFX to become one and the same thing and to benefit from one another.  And you need to make it worth their while to do so.

And here’s the biggest secret of all.  It’s not the VFX supervisors or the VFX producers or the managers at VFX vendors that did this all for you in the past.  It was the workers.  The ideas, the tools, the talent and the experience was always the workers.  The only reason the death of so many VFX vendor companies could be sustained over the years, was because the workers kept moving around to compensate.

You need another golden egg.  You need VFX workers to lay it for you because no one else seems ready or able to do so.  Unfortunately for you you’ve been busy ending their careers of late.

Inverse culinary arts

The goose was already cooked.  Last I checked, you can’t un-cook fowl.  So ends the metaphore.

As things are currently arranged, there is absolutely no incentive for VFX workers to fix things for you.  And that is what you need to change.  In simplistic terms, actors and directors get residuals.  Other unions like IATSE get their portable benefits partially paid for by box-office revenue.  This binds them to the studios interests to a degree.  But in many ways, that doesn’t work well enough.  It doesn’t get anyone interested in controlling costs and production budgets, because their money comes from box-office, not profits.  Of course everyone knows that net-points are a joke due to ‘hollywood-accounting.’

I have put a lot of thought into the kind of structure and deals that would need to be in place to properly align the VFX industry with Hollywood’s needs.  And that could probably be another 5000 or so word piece.

For now, I’ll simply leave you with the call to action that starts the boulder rolling down the hill.

You need to buy them in.  To do that, the AMPTP needs to pull out a chair at the bargaining table and ask the VFX industry to sit down and negotiate.  Just like you negotiate with the Screen Actors Guild (SAG), the Writers Guild and the Directors Guild (DGA).  That’s how Hollywood has kept stable for so long.  They negotiate and they come to agreements and they sign them.

Last I checked, the CVD case is being brought by a 501(c)(6) organization, which is the same kind of organization as the NFL.  You can negotiate with them.

Just incase all this is lost on you

Hollywood,

Yes the CVD is leverage against you.  If you want to be angry at being forced into negotiations, be angry.  But take a good long hard look at where you actually stand right now and ask yourself:  Shouldn’t we have pulled out that chair a long time ago, before it got to this point?

If your investors take a good look at what has been going on, and you don’t un-cook the goose that laid your golden eggs, there’s going to be hell to pay.

If for some reason you don’t take this advice, and you continue along your current vector, consider this:  Do you really want the former-US-domestic-VFX-industry to be out of work and trying to figure out how to beat you in the open market?  They are smarter than you are.  You’re giving them quite a few axes to grind.

I for one, don’t work for you anymore.  I’m just one.  I’m probably not the smartest of them or the most business savvy.  If I have put all this together in this piece to suggest you act in your own self interests, you don’t want to see what I would put together to compete with you in an open market.

If it’s not me, it’s just one of the others you cast off.  I have a friend who does VFX because he found theoretical mathematics at an ivy league school uninteresting.  You’ve got… Brett Ratner?  Let’s place bets on who’s going to figure out the future of top-tier digital entertainment in this century.  You are completely restrained by decades of AMPTP guild contracts.  We have no such restraints.  Unless you’d be willing to put such restraints on us?  Hmm.

About the author

Bradley Friedman is the founder of FIE LLC, a tiny little tech and consulting company of one.  Formerly, he was the Director of Software and Pipeline for Method Studios.  He was the Digital Effects Supervisor for Terrence Malick’s “The Tree of Life.”  He was the Staff Technical Director for Pixel Liberation Front.