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UPDATED: It’s coming down to the wire for bankrupt VFX house Rhythm & Hues. Today at 5 PM is the deadline Federal Court Judge Neil Bason set for interested buyers to submit qualified bids for the company ahead of a March 27 auction. I’m told at least four bidders will be entering the fray, including Prime Focus, Prana Animation, Psyop, and Rocket Science 3D, and possibly others. Korean company JS Communication this week dropped out as the court-approved stalking horse bidder, which would have guaranteed Rhythm & Hues a minimum bid at auction. That surprise hiccup sprang from recent failed talks between JS and studios Fox and Universal, which last month teamed to bail out Rhythm & Hues with a $17 million DIP loan. JS rep David Shim told Deadline the two studios were uncooperative when he asked for a non-binding handshake agreement to $60 million worth of work per year for three years to ensure Rhythm & Hues had financial lifeblood through a post-sale rebuilding phase. He also says he agreed to pay an additional $3M to cover operational costs for the company. But a source with knowledge of the talks claims Shim was asking for a binding guarantee as well as additional financial commitments, a tall order in an industry where production and release schedules for studio films are always potentially in flux.
Few can blame Shim for wanting to guarantee work from two of Rhythm & Hues’ biggest studio clients after spending more than $17 million plus additional costs to save it out of bankruptcy, and I hear other potential bidders are just as uneasy about the studios’ lack of guaranteed business. But how could Fox and Universal commit to funneling that much VFX work in advance for multiple years? Would any studio make that deal? “I realized why the VFX industry is in such dire trouble”, Shim told Deadline. “Their work arrangement [with studios] and fee schedule system is very bizarre and highly unfavorable”.
JS Communications may still enter a bid by today.
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It is absolutely outrageous JS would insist on a guarantee of future work from Fox and Universal. No studio will ever agree to such terms. The only interest the studios should have is the delivery and completion of existing projects. Why is it the responsibility of clients to guarantee a vendors ability to stay in business? I am a consultant and I would like a guarantee that my former clients will feed my employer a steady stream of work too, but we have always accepted we have to bust our humps to get every project we work on. We lose many opportunities to local and foreign competitors because we cant compete on cost or deliver the technical skills required for a specific opportunity. That’s what happens in a competitive marketplace.
This is globalization and free market economics at work. I understand emotions are running high among the VFX artists who are seeing years of expensive training go to waste for failure to find available work at a living US wage. The same thing is happening with certain engineering degrees and and other technical advanced fields with the emergence of highly skilled competitors in India and China.
It is time for the VFX artists and firms to quit whining that the industry and world is treating them unfairly and start looking introspectively and ponder what is their place in the new global marketplace.
Great comment – dead on.
“This is globalization and free market economics at work.”
Sorry, nope. Subsidies does not make this a free market. Subsidies cause major harm to ‘free market economics” as it’s not free nor does it allow companies to build on their own strengths.
“Why is it the responsibility of clients to guarantee a vendors ability to stay in business?”
Let’s suppose you’re Apple and you have a small selection of places that actually can build and supply iPhone to the quality and volume you need. And let’s further suppose you as Apple push all of those vendors into closing by pushing on them so much it’s better for them to close. Where would Apple be at that point? No iPhones to sell. Even if they parcel the work out to 2 dozen other companies can they meet the demand or get the quality and quantity they need?
So when there are are only so many ‘vendors’ that you rely on and actually require to run your own business profitably, it’s best not to kill those vendors with your own tactics. It would behoove you to actually make sure they are healthy companies that can continue to supply you what you need.
To your points…
Subdidies- As a whole, the industry benefits from this. There are many movies that wouldn’t get made if it wasn’t for the subsidies offered in places like the UK or New Mexico. Unless the WTO wants to step in, the practice won’t stop. The real problem is the large FX houses in CA are immobile, held back by bloated infrastructure with crippling overhead and a business model that has failed. If there is demand for the services, supply will emerge to fill the vacuum after all of the big houses have failed. Those new suppliers will be healthier having evolved to account for the new global dynamic.
Apple- Your analogy is false in this example because that is not reflective of the situation in the VFX industry. If R&H goes down, Universal or Fox will not be forced to cease operations. R&H does not control technology or skills that can not be found elsewhere. There are other suppliers the Studios can turn to. Until 7 years ago or so this was not the case when the FX houses had software, hardware and skills that could not be found anywhere else. The hardware is now commoditized, the software is mostly off the shelf and the skills are available in lower cost regions. Put another way – the VFX industry in California has lost it’s competitive differentiators and it is neither the CA stae, or federal government, nor the stidios’ responsibility to protect the industry from domestic and global competition.
I truly feel bad for the artists. Many of them are personal friends of mine and I see them hurting every day. What is needed is a neutral dispassionate third party to come in and fully study the economic consequences of globalization, subsidies and the health of the industry ecosystem. This surely is a role the Economics departments at UCLA, USC, Stanford or Berkeley could take on. I am surprised no one has stepped forward to ask one of theuniversities to volunteer their expertise in helping tackle an issue that has serious economic consequences for the state.
As a consultant, do you sign a 2-3 year agreement for your services, expecting to get paid at the end of the contract? Suppose during those 2-3 years, the client asks for more than originally agreed upon. And the deadline (payment) was shelved for a year. Would objecting to this arrangement be “whining?” The solution will not be found solely by “looking introspectively and ponder what is their place in the new global marketplace.”
I agree with you that the governments shouldn’t bailout the industry. You say, “..it is neither the CA stae, or federal government, nor the stidios’ responsibility to protect the industry.” However you seem to think other governments should be able to create an industry in their country using tax payers money.
“What is needed is a neutral dispassionate third party to come in and fully study the economic consequences of globalization, subsidies and the health of the industry ecosystem.” While JS communications aren’t exactly neutral, they are a successful company spanning several industries. They found the work arrangement with studios and fee schedule system “very bizarre and highly unfavorable”.
Unless VFX business practices change, “these new suppliers” could only be healthy by exploiting their artists. (whether the artists live in the US, Canada, China or India.
Are “subsidies” causing work to migrate to India and China (who are now Digital Domain’s owners BTW)? Isn’t the differential in the cost/standard of living more the reason in this case (specifically India and China and maybe the former Soviet bloc countries).
As to places like New Zealand, the UK and Canada (aka ‘first world nations with similar standard/cost of living and higher end VFX capabilities), maybe subsidies draw work there but…so what? Every industry that plays at the global level does this…auto industry, manufacturing industry, even natural resources. Tax subsidies are a legal and long used tools to attract work to a nation/state or city. Heck, even other US states are using tax subsidies to pull work (both production and VFX) out of California.
I hear so much about how California “created” the digital VFX industry through it’s unique innovations (arguable, since Maya, the de facto backbone of the industry on the CG side, is a product from a Canadian company). If you don’t want to play the “tax subsidy game” (aka California can’t afford to play), then innovation is the only way to combat offshore outsourcing (this is true in ANY industry). Samsung knocks off the Iphone for a cheaper (inferior) version…then Apple needs to step up with the “next innovation”. 20 years ago only about 3 high end VFX companies independantly created “the morph”…3 years later, every facility could do it and 2 years after that anyone with a PC could do it.
Complaining that all tax subsidies should “go away” is ridiculous, not just for the VFX industry but EVERY industry that operates at the global level (and the $$ figures collectively from those HUGE industries DWARFS the VFX biz or even the entire film industry). Why would politicians step in to stop what is a legal device to attract business to “save” your (relatively, in pure $ value) small industry when there was no appetite to save the auto industry or the manufacturing industry? This isn’t dueling lemonade stands on a summer afternoon, it’s global economics and it’s a complex (profit$) game and, like it or not, tax subsidies is one of the tools in the arsenal.
So the same guys that likely voted for Obama are now crying that they’re losing business to company’s overseas that can do it cheaper due to — amongst MANY things — fewer/cheaper tax restrictions?
Too funny…
Kinda like my sister (a teacher) who voted for Obama then saw her paycheck reduced this year due to increased taxes.
Guess it pays to read the fine print, eh?
Really? Right-wing rhetoric? And such a moronic, uniformed argument to boot? Devils-Advocate, you should go play, little laddie, and let the grownups handlel the heavy-lifting. We’re obviously discussing matters clearly above your pay-grade.
Yes, I put my name on what I write.
Curious you seem to be the Canadian that continues to say similar things on vfxsoldier.
” Tax subsidies are a legal” Not according to the WTO agreements. And yes, there are plenty of subsidies and yes, they should all go away but we’ll focus for the moment on the vfx subsidies.
“Are “subsidies” causing work to migrate to India and China (who are now Digital Domain’s owners BTW)? ” Once agin, you are confused. I never suggested subsidies cause work to go to India and China. India and China are getting better but if you think they can do all the world’s tentpoles tomorrow you are sadly mistaken. Why do you think they have purchased DD and why they are bidding on R&H. Because they do not have the ability to do it.
The point was the studios are going to shoot themselves in the foot if they are not careful. If all the US VFX companies closed tomorrow they’d be in big trouble. Who do you think owns many of places in Vancouver along with some in CHina and India?
And maybe, just maybe, those in vancouver and the UK start to understand the subsidies are in fact causing them problems as well. Both are already seeing work go to Montreal and elsewhere and are setting up locations there themselves. The studios will keep them busy spending money setting up shots until the make their final end run and take it to China and India when they are ready. Those in vancouver and UK will find that they have built a large base built almost completely on subsidies. A large collapse is coming and it’s the doing of the studios and the companies for not working together.
Mr.Curious your fisrt two paragraphs are valid. Subsidies are not causing work to migrate to India/China.
There should not be problem with work migrating anywhere as long as it abides free market and globaliozation regulations/ethics.
There are two major biforcations happening here. A) there is this work going to the countries/states aiming subsidies, where subsidies are not serving their very propose, instead they are doing exactly opposite (I can explain that late upon request). This should stop as soon as possible, its an epidemic which will ventually kill the industry where the subsidies are offening now or in future, if they continue to keep going with any justification and regulations.
B) there is this other form of work low-end roto/mm/paint work for which the current destinations are attractive becasue of the exploitation of artists as well as the business and financial systems.
As long as there is a fair play, subsidies / globalization/ migration of work based on the currency value and taxing policies should not be a problem.
Which means as long as the subsidies are actually and truly serving thier purpose & the artists in third world countries are not cheated and exploited, California based vfx artist will and should not have any issues.
ALONG with major upgrade / positive change to current business model.
We are just asking production studios/competitors/government to be fair and vfx houses to be smart. thats it!! is it oo much?
“Kinda like my sister (a teacher) who voted for Obama then saw her paycheck reduced this year due to increased taxes.”
Little off topic but…
No your sister’s paycheck went back to what it was before the temporary SS payroll “tax holiday” that Congress enacted the previous year to help stimulate the economy. So don’t complain when for the past year everybody has been getting extra money in their pocket due to the change then when it goes back to what it was previously blame Obama for a tax hike.
If I take my car to the dealership for repair, and the estimate is 1000 dollars, I either agree for the work to start or not. Then the mechanic discovers other problems and increases the estimate. I would get a call from the mechanic with the revised estimate and either agree to pay for the additional work or not. If I agree to the new higher estimate, I pay the difference. Why is R n H getting a 17 million dollar LOAN to finish work that increased because of the client’s lack of planning? Shouldn’t that 17 million dollar loan actually be a payment to R n H? And isn’t that what’s partially wrong? R n H not charging for all of the change orders of clients not knowing what they want?
Now now, the VFX houses have a big part in this too.
Every thing I’ve been a part of VFX companies low ball their initial bids, and then attempt to basically weasel more money by claiming things are taking more hours than they originally bid. My favorite is that despite sitting for hours with these guys being very specific, they do something completely different than asked, then have the balls to turn around and try to charge an overage.
It’s a game they all play, and I think productions have inally gotten a bit wiser to it.
It’s funny to see comments from those on the outside or those who are on the fringe. I’m a VFX veteran of over 20 years now, and seen it all from the studio and facility side.
While VFX facilities do sometimes make poor decisions, it is naive to think that they’re the blame in all this, as some suggest. Since the late 80′s (my entry into VFX), one thing holds true more today than ever before — Nobody ever says “No” to a Director. The next Producer or Studio Exec who controls a Director will be the 1st. Perhaps an embellishment, but not by much. R&H is in trouble partially because of mismanagement, partially because future projects went away, and mostly from being awarded a show (Life of Pi), and the Director continuing to add to their workload…without the studio rightfully paying for it. Hundreds of versions of a shot (how do you ever bid for that); Changes made mid stream…the list goes on and on. The constant threat of “If you want to work with us again…” or “we’ll make it up on the next one” requires the VFX facility to bite the bullet and hope another show comes in to make up for it. It’s naive to think its so easy for VFX studios to draw a line in the sand.
Also — VFX houses rarely “lowball” initial bids. They also don’t attempt to “weasel more money” out of clients. Initial bids come in, and 90% of the time, the client says it needs to be done for much less. When VFX houses are able to accommodate, its based on certain assumptions… ALWAYS! Then, the Director changes his mind, long after the work has begun (quite often), and the client is given a change order. There lies the problem – the client never wants to pay. By this time, you are knee deep in the work, threatened with no future work by the studio.
VFX facilities definitely share responsibility in this, but to point the finger directly in their way,as some do, is ridiculous. It’s obvious that some people’s experience in this is purely from reading this website or other articles posted elsewhere.
So that seems to be the problem as this is ART, unable to quantify number of man hours required to produce the result to meet the director’s vision which is hard to predict.
Even you think one million man hours will be enough and it is not.
What about modifying the current fee standards and schedules for VFX? But then it requires all VFX studios, at least in the US to be on board to enforce the new fee standards and schedules.
Without changing the fee standards and schedules, VFX will not win in the market.
Sad: who would of thought you’d see that day that a big company such as Rhythm and Hues would only attract four buyers?