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 an international-trade lawyer. You should get real legal advice from real lawyers. But I can do my best to explain it. 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 afore mentioned precedent to light. Also read: Oscars: Visual Effects Workers Rally Outside Academy Awards, Protesting Tax Subsidies, Job Losses What’s particularly of note is what the MPAA then did. They blinked. Then they turned their head to look in that direction. Then 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. What’s important, is that the MPAA showed their cards. They are clearly terrified. They don’t issue panicked and poorly constructed legal arguments in industry mags usually. Clearly, they are concerned. But what is a CVD? What happens if the case is won? In summary, the CVD is a reverse subsidy. It is a tax levied on subsidized goods that are imported into a country. It is a device meant to discipline countries that directly subsidize industries in a way that harms those industries in other countries. CVDs are not really meant to be paid. 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. 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. 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. Also read: ‘Noah’ VFX Firm Loses a Bundle on Biblical Epic (Exclusive)

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 a lot of people going to jail for trying to circumvent CVDs. Again, one should really seek the advice of international-trade lawyers to understand just how powerful a tool a CVD is. So why do you care about a CVD on visual-effects (VFX?) What’s it going to do to studio profits really? Studio Profits and VFX Subsidies Actual public numbers on this kind of thing really don’t seem to exist. They’re proprietary. They’re simply not available or reported. 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. They have been for years. 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. When they talk about their feature-film divisions and they report a slim profit, it’s because the subsidies are baked into the balance-sheet pushing them barely into the black. And likewise, when they report a slim loss, it’s only slim because those subsidies are part of the balance sheet, pushing back toward the black. If you took the subsidies out, you’d see those yearly reports all move in the direction of the red. Also read: Rhythm & Hues Attorney: ‘It Was Just the Perfect Storm’

How much red? Again, my estimate is that between 1/6th and 1/3rd of Hollywood’s production budget goes to VFX. So lets take a meager $120 million movie. Let’s pin the VFX budget at $30 million, in the middle of my range. Because it’s 2014 and this movie is on the cheaper side, 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, because they demand their subsidies. 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 percent on each dollar spent on qualifying labor. Most VFX bids and contracts consist of about 50 percent labor. These days, the studio forces the vendor to guarantee the credits. So, 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. Therefore, on our $30 million VFX budget, we get back 58.4 percent of half the budget. That’s $8.76 million. We don’t have nearly that amount of tax liability in British Columbia. We’ll take a little off the top of that theoretical number in the form of fees and such as we sell it through brokers. So let’s say it rounds out to $8.5 million by the time it hits the corporate balance sheet as real money and is put up against the original budget. You could argue we won’t get that good of a deal on the credits. But I assure you, the studios are not going to take a huge loss on them. That’s roughly 7.1 percent of the overall production budget coming back to us as a government subsidy. But 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. So 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 percent of overall expenditure on the movie and its advertising.

When the feature film division reports slim profits or losses of about 5-10 percent, 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 percent 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 percent 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, profits are slim or nonexistent of late. Paramount was busy beating its chest the end of last year over a 5.5 percent 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 percent 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 percent profit for Sony. And really, it’s probably not making that. The roughly 3.55 percent in profits from the subsidy on VFX is huge for them as well. As it is for all of them. So 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. But that’s just the subsidies on the VFX. What about the rest?

The CVD is a dangerous precedent for feature film profits It’s potentially worse than what I just described. 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 digital assets 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 5/6th to 2/3rds 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. These subsidies are the reason there are so many films and TV shows shooting in Vancouver and London these days. If the studios weren’t getting these subsidies, their reporting would look quite different. Their stock prices would likely be different as well. Obviously, the remaining physical film distribution market is easily assessed duties when the film goes through customs. It seems digital distribution isn’t 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.

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! If you go back, you’ll see that 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. But you went after them and hurt them, badly. 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. The VFX industry classically has operated in premium markets (locations) because it has been premium content. Just like actors flood to LA and NY to be in the premium acting market, VFX artists and technicians have flooded to LA and NY to be in the premium VFX market. Hollywood needed its VFX done in Hollywood. NY advertising needed its commercial VFX done in NY. However, 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. The location specific subsidies which are often focused on principal photography (the movie shoot), only effect core production people so much. They do complain about it though. J.J. Abrams famously did so with regard to the new Star Wars films, which are to be shot in London. Make no mistake about it. Yes, there is some historical precedent to shooting Star Wars in London. But it’s definitely there for the subsidies this time. 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.

When a production moves to a location, it’s temporary. It may be inconvenient for the director, producers and actors to be out of the country for some number of months, but they are coming back home when they are done. And the next movie they’re on won’t ship out for some time. Also, production usually covers the costs of housing when they travel. So they’re not paying double-rent when they travel with the production. A lot of above-the-line talent is well… rich. They can handle it. 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. New Yorkers used to whine (myself included) about getting too little feature film VFX work, but things were stable for a good VFX worker. They could work year round and make a good middle class life. They could possibly get married and have kids. And those kids could go to school and grow up. The hours were ridiculous and overtime often was rarely paid. But that’s a different gripe. 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. They paid my airfare and for a while they put me up in a local hotel. Things were different back then. It was still a premium market. I eventually decided to move to LA permanently and stick with that company for a bit. Essentially, I moved to Hollywood (LA) 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 in LA and NY. Every film student knew that 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. 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. Meritocracy. 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 though, 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. You’d think that’s why VFX in LA has died. But actually, it’s not. It’s clear that all things being equal, Hollywood would rather be in Hollywood. And further if the work is superior, they’re willing to go outside their comfort zone. But all things are not equal. They’re not making choices based on merit. Rather 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.

However, as an artist or technician, when subsidies force the work to Vancouver or London or Montreal, you are forced to move there immediately with little or no notice. Further, Vancouver requires you live there for a full year in order to qualify as labor for their tax-credit distribution. So really, you do have to move there. When the next movie decides to do its VFX work in Montreal or Toronto, the VFX vendor company (or another) will open up a shop there. Contracts will be awarded. The work will move. If you stick with it as a VFX worker, you and your family end up migrant. You end up following someone else’s tax credits around the world, full time. I have a lot of friends and colleagues who have been forced to do this. None of them wanted to do it. Kids are taken out of their schools. Homes are sold. I have one friend who finally got their US citizenship and was then forced to move to Canada within the year, with the whole family in tow. VFX workers are not rich people. They are below-the-line middle-class people. They can’t keep doing this. Since the British Columbia provincial government has become savvy and required residency of a year or more, they probably won’t even be given the option of moving in the future. Other subsidized areas will figure that part out and do the same. In that situation it makes more sense to hire existing residents. If the vendor moves their workers, they lose eligible workers in the first location and it could take a year for them to be eligible in the second. That’s why you see VFX vendor companies opening shops in Montreal these days and staffing up with residents. Depending on how things go, if they can’t move staff and get tax- credits, they’ll likely just fire in one location while hiring residents in the other. No waiting for residency. Quality and experience is secondary to subsidy money. The migrant VFX worker problem was bad enough. If it continues this way, every time a tax credit moves VFX work, it’s career ending for the workers.

In LA, this already happened. The tax subsidies in LA are too small to compete and Hollywood has all but abandoned the city as far as VFX is concerned. In NY, the tax subsides were significant enough to draw some work. But this year, they capped the VFX subsidy at $7 million. So I’d expect to see that temporary respite ended soon. You saw Marvel make a sweetheart deal for an individual production in NY recently. They needed a deal to make sure they got their subsidy money, and were not subject to losing out to the caps and other technicalities. It extends the respite a bit. But it also shows that without the individual project deal, those jobs wouldn’t be in NY. Many domestic VFX workers were forced into the worst job market in decades, with skills the rest of the world doesn’t understand and doesn’t think they need. A lot of people moved to follow the work. They’ll be forced to move again, and again if they are lucky. Those that are no longer in VFX didn’t lose their careers because they were bad at them. They didn’t lose their careers because others got better than them. They lost their careers because Hollywood studio executives needed to get subsidy dollars in order for the balance sheet to remain in the black. And the studios have been able to accomplish that by pitting foreign and state governments against one another. LA didn’t play ball. So they lost their careers. And if that were actually fair- play, perhaps that would be the end of it. 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. They’re exercising their rights. The studio executives are pushing the subsidies because they don’t know how to make profits any other way. They are MBAs. They have limited switches to throw and levers to pull. And to the extent that it’s working, they seem to feel they are doing their jobs well. If they end up losing the CVD case, they might be proven wrong about that feeling.

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. The studio executives work for you. 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? Why was no-one made aware of this? What has been going on? What are the true risks associated with the feature film industry as it currently exists? 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 that these ridiculous and thinly veiled risks be replaced by actual stable profits though good decision making and sustainable solutions. Lets assume for the moment, it’s possible to fix it. How? Eggs

VFX is the goose that laid the golden egg. Actually, 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, we can make any image we want now. We (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. 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. 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 wasn’t really available for a screwball comedy. There was not enough capacity. Now, they all have them. 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?

Ask yourself: Once “Jurrasic Park” happens, does Hollywood have the option of making money on movies without digital VFX? Can you go back to claymation? Can you go back to painting glass for matte- paintings? Can you avoid needing digital VFX? An argument could be made that Hollywood should have avoided the dependency. But they didn’t. And once the decision was made, the VFX industry delivered the second golden egg that was needed. They grew in scale and scope to be able to do what Hollywood demanded of them. You got your VFX renaissance 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 buisiness could have succumbed at that point. The egg you need Now obviously things are rough in Hollywood these days. You need something. Because right now, the only way Hollywood is just barely able to keep afloat, is by arm-twisting and beguiling politicos into giving them government subsidies. It’s unprecedented. Historically, it’s other foreign film-markets that have required the same government subsidies, in order to keep them from being crushed by Hollywood. In a sense, even NY’s independent film market needed subsidies to keep from becoming completely untenable. The knee-jerk reaction has been to eat the goose. 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.

However, I think I’ve argued quite clearly, these subsidies are illusory money. They’re risky. Hollywood’s profitability cannot be left to the whims of Vancouver’s voting body politic. When they wise-up, you are left to the whims of the UK’s voting body politic. If the UK wises-up, you are left with New Zealand. Except of course, NZ already bucked once. The next time they will be wiser. NY capped their VFX subsidy already. LA decided not to even play ball in the first place. It seems unlikely that the latest push to get something through the state legislature will succeed. Even if it does, you are then at their whims. And lastly, the CVD case seems serious enough that perhaps its not even up to the voters. The subsidies could be wiped out suddenly and all at once. 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. Yes, there’s a certain amount that could probably be trimmed already with some ham-handed cutting. But in truth, you need filmmaking and digital VFX to become one and the same thing. You need the smartest people in Hollywood, who have given you two golden eggs already, to figure out how to fix Hollywood. And you need to MAKE IT WORTH THEIR WHILE to do so. You need another golden egg. You need VFX to lay it for you because no one else seems ready or able to do so. But you cooked that goose! You can’t un-cook it, can you? Inverse culinary arts Last I checked, you can’t un-cook fowl. So ends the metaphore. Hollywood hurt the VFX industry. Hollywood laid them off and scattered them. It has pit worker against worker in international subsidy battles. But most importantly, 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.

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 5,000 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). 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 in case 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, 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.