UPDATE: 3/29/13. I'm told that I stirred up some rumors about which studio I was referring to when I mentioned that I knew of a VFX house that’s about to incur a loss on a project. I got the information from a well-connected and highly respected industry source who is a 20-year friend. He declined to reveal the name of the house, and I didn’t ask him to. I have no direct knowledge of the situation and should have made that clear. Anyway, the spread of unfounded rumors is counter-productive, and I thank everyone who contacted me directly about this. Let’s continue on with the fascinating conversation below.

I got sick to my stomach when I heard that the venerable Rhythm & Hues was going bankrupt. Sure, there's been a lot of speculation about what went on to bring R&H to its knees. I've said elsewhere that it collapsed from within due to heavy overhead. Well, I was only a tiny bit right about that. Finding out what really happened has been difficult. I've managed to have conversations with a number of people in positions to know who wish to remain unnamed. I've gotten diametrically opposite opinions at times and had to seek third- or fourth-party input. In the end, what I have makes sense, and I've shown it to knowledgeable people and asked if I was being reasonably correct and fair. After a number of revisions and re-writes, I'm quite certain this is what happened. Be aware that I have long been a fan of R&H, but I have done my best to remain objective here.

First, for decades R&H has treated its core people extremely well. To my knowledge, John Hughes has a great respect for artists and to my observation, he can even go overboard trying to treat and pay them fairly. R&H has managed to be a globally expanding enterprise for about three decades. Many thousands of VFX artists have been trained there, spent their careers there and changed their lives for the better because of R&H around the world.

Once you've proven yourself — I mean talent, work ethic and loyalty — you become a core employee. Like any VFX house, R&H also hires project people – freelancers. These are the nomads of our industry who go from house to house as the work is available. They represent the majority of VFX artists. Over the years, R&H has accumulated a fair number of core employees. They are loyal to the company and the company is loyal to them. That, dear readers, can lead to a lot of overhead expenditure during the slow times.

A Going Concern for Decades
Still, R&H has managed to remain a going concern. Add to that a great health plan. Vacations that start at three weeks and go to six weeks. As I recall, in the old days people could accumulate vacation at R&H without limit. And at one time their medical covered such things as alternative medicine and cosmetic surgery. Add to that, they still have four-week sabbaticals every five years, in the belief that artists need a creative break. Some of it had to change, of course, and R&H revamped its benefits a few years ago to keep things under control. So R&H has been feeding back a lot of their income to support their artists. You do not hear of this kind of thing very often. I'm more likely to hear about sweatshop conditions at other studios. After much research, I can honestly say that I don't believe it was the benefits package that caused the problems. Also, the vast majority of their artists are freelance and are laid off when there is no work for them. So that wasn't the problem either.

R&H has been a profitable business with a five-year average EBITDA nearly twice what I've been told is the average for the industry. That's pretty damn good, considering they had about 1400 employees worldwide before the bankruptcy that they had to keep paying.

Clearly they don't work cheap, but they can deliver what few other houses can. They maintain their own flexible, adaptable in-house pipeline development team and proprietary software. Their virtual animal work has always been groundbreaking, and Life of Pi's tiger is proof positive of that. They have been pioneers at taking advantage of various government tax incentives and training their own staffs, creating jobs in India and Malaysia and Taiwan. I personally know they do not exploit their people there. In fact, they help people build wonderful new lives. I will say that they did not have incentives in India, but took advantage of the economy to create local high-paying jobs that produced reasonably priced VFX.

I have a number of dear friends working at R&H abroad. So in my opinion this house has been doing many of the things I've been preaching for a long time — all the key elements for survival in this industry. So I had to dig deeper to find out what in hell was going on.

Digging Deeper
I did find a number of management inefficiencies and policies that might be improved, but in general it looks like R&H was able to function well as a business. The company's longevity would reinforce that impression.

But then I discovered that there was a major difference in what went on at R&H during 2012 and early 2013. Remember that R&H has many parallel shows running in production at any one time. Sometimes there are delays caused by factors beyond their control, usually studios. Studio delays are a vice squeezing the life out of any VFX house. Why? Because you have to maintain the crew.

In this business, if you let part of a well-honed crew go, you're not going to get them back. Also, the kind of shows R&H was fielding required top talent. Core people. People who know their pipeline. They were big shows, primarily run on Houdini pipelines that were customized and fine-tuned to each show. That meant R&H maintained a sizable Houdini team with development and support programmers. Plus they had to maintain their own proprietary tools teams, as well. These are full-time key individuals that had to be dedicated to these specific shows.

You would think the studios would have to pay for their delays. After all, it causes the VFX house to incur significant additional costs. But lots of luck with that.

From March of 2012 until April of 2013, R&H experienced devastating six-month delays on two major in-house shows. Add to that four-month delays on two other very large shows. From what I've been able to piece together, each of those four shows had between 150 and 200 people dedicated. I suspect they could have let some of those people go, but R&H rarely does ordinary VFX. They do the hard stuff, and you can't just hire anybody to come in and do it. They needed their special people.

Lets talk about what that costs. Consider those 150 and 200 artists on each of these shows. Total cost per artist, including overhead, is about $2000.00 per week. That is between $1.2 and $1.6 million per month that R&H had to eat. And so it was that R&H developed a cash-flow problem. They were out of pocket between $25 and $30 million dollars to pay for studio delays. Ouch. How much sense does that make? I don't know of any house that could sustain those kinds of losses and survive.

R&H may have made some mistakes here and there, but none of them would have jeopardized the company. But the fact that studios can cause massive delays on critical projects with no penalties is insane. That has to change if this industry is to survive.

Studios watch the bottom line very closely on their own premises. When costs start soaring due to delays on a studio shoot, the execs put a stop to it quickly. So when a director wants the same VFX shot done dozens of times over, he should have to pay for that. Worse, when a director comes in after four to six months of hard work has already taken place on a series of shots and changes the entire design, all that work is shot. Now, the house had to bid on that shot at a fixed price. That means they have to eat that loss, not the director and not the studio. R&H has experienced these kinds of situations lately also. All of it makes it difficult for any VFX house to stay afloat, no less make a profit.

Client-Side VFX Supervision
This part isn't specifically about R&H. I've seen it too many times and feel I need to comment. Sometimes there is one person behind the many delays and do-overs and all the stress. This one person can cause millions in losses for a VFX house with no consequences at all. It is the dreaded toxic client-side VFX supervisor. There are only a few of them, but they wreak havoc on the houses and make people's lives miserable — and I am betting they contributed to the downfall of R&H.

I don't mean to imply for one second that client-side supes are generally bad people. On the contrary, some are amazingly good and are helpful to the houses. In truth they run the gamut from fabulous to toxic. I know at least four fabulous ones and two who are poisonous. The bad ones are, in my opinion, seriously compromised individuals who should not be in such a high stress job. They definitely should not be in a position to cause VFX houses losses. These people are the arm of the director that can make a show go smoothly, or they can precipitate devastating losses for the VFX house by insisting on doing shots over and over and over, sometimes more than 100 times, for no good reason. I've looked at rejected shots that were perfect. There appears to be no penalty for this destructive behavior. They are often not nice people — nasty, often pulling power trips at work, while seeming normal in private.

I will say the best ones make the job run smoothly. They work well with the VFX houses, and it's not an easy job. They keep the budget in mind and only ask for the changes that are needed. They may even get the studio to agree to a change of scope where needed. So much of the problem boils down to a few individuals causing major problems. For some reason, they keep getting jobs. (I'm actually thinking of publishing a list with my awards for best and worst client-side VFX supervisors. My ass will be in trouble because I have friends on both sides, and my kids will be all over me about it.)

Here's a heinous related detail that is killing VFX houses. I know of a studio that will be delivering shortly, two months late because of delays. This house will be losing right around a million bucks because of it. Here's the thing — studios will often get magnanimous and pay for an extension of the production management for the show. Big deal. They won't pay for the artists, who are the bulk of the cost.

Although many vectors enter into a bankruptcy, and R&H could have done a few things differently, it is this systematic lack of accountability on the part of studios that appears to be the single crippling factor killing the VFX industry. That's what forced R&H into bankruptcy.

What We Need to Do
Okay, we need a plan. The way things are done now inflates costs for everyone concerned, including studios. Everybody has to add padding to cover their asses, and the directors, client-side VFX supervisors, and studios have no incentives to try to be efficient with outside vendors. Why? Because they usually have no penalties for changing scope or irrationally rejecting good product. I know of no other business that runs like this, including the movie business. Not anyplace but in VFX.

We need a set of best-practice operational conventions that will stabilize the system from studio to director (really, all the creatives on the client side) to VFX house to studio.

  • Studios and houses need to agree on a residuals plan so there is a flow of money to houses for work already done that is currently reaping box-office rewards.
  • A two-way penalty system should be instituted between the studio and the VFX house, where the studio has to pay for causing delays and the houses get docked for delays that are not the fault of the studio.
  • Studios should be required to pay for all changes of scope, and get refunds for reduction in scope, so long as those reductions are done prior to the work being started, except in cases were assets had to be irretrievably committed.
  • A confidential channel should be created through which houses can report toxic VFX supervisors to studios and request a replacement.

There are other things. But if we got these, I'm willing to bet that 90% of VFX house failures would be eliminated, with just the really badly run ones collapsing. Wait — they already have!

How We Do It
We build a strong state and possibly national lobby. We may need a trade organization, but one that is focused on getting the studios to work with the houses in a fair and equitable manner. Forget lobbying against subsidies. That's a different matter for another day. It should focus on the development of best business practices.

These are well-known in the business world. You don't, for example, sign a fixed-price contract on a virtually undefined task. But I digress.

I think we need to have the lobby work towards legislation favorable to keeping VFX houses in California and especially in Los Angeles. That legislation should in some way regulate fair business practice in contracting between studios and houses, breaking the high-handed, monopolistic approach currently in practice. As soon as we get sane contracts in force, both sides are protected and life can resume normality.

Of course, the studios can always opt to move or send all their work overseas. It is a free country, sort of. But I don't think they will.

Now I know some of you are going to disagree with me. I admit I could be wrong on some things, but I won't know unless you convince me. Please post your comments, pro or con, below, and take the time to explain what you mean. Also, please don't do it anonymously if you can help it. I want a real dialog here and if you spout anonymously, how much credibility can we give you?