Rhythm & Hues: Special Effects Powerhouse Offers Insight into VFX Industry
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7, six talented California co-workers in the special effects industry decided to make a leap of faith and start their own computer animation and visual effects company. They decided to name it Rhythm & Hues (“rhythm” for timing and “hues” for design). During those early days in 1987, Rhythm & Hues operated with just a single computer in co-founder John Hughes’ living room. By 1988, Rhythm & Hues had moved out of Hughes’ house and into a small office located in the basement of a Culver City dental office. Now, let’s fast forward 25 years…
Rhythm & Hues occupied its new El Segundo offices in 2010. The three building campus boasts 235,000 square feet of gleaming, dog-friendly offices for roughly 750 digital artists and staff, two state-of-the art screening rooms, a data center and other amenities. The Rhythm & Hues campus is, to say the least, quite a step up from the basement. Rhythm & Hues has a business footprint to match, as it is now a global company with offices in Mumbai, Hyderabad, Kuala Lumpur, Vancouver and another under construction in Taiwan.
The explosive growth of Rhythm & Hues is almost as captivating as their award-winning special effects. The company’s long body of work stems back to the famous CGI polar bears they created for Coca Cola commercials, to their Academy Award-winning CGI work on a lovable pig in 1995′s Babe, and recent blockbusters like Hunger Games, Snow White & the Huntsman and The Bourne Legacy. Currently, hundreds of Rhythm & Hues digital artists are hard at work on roughly nine feature films to be released over the next year.
The amount of change Rhythm & Hues has gone through as a business is second only to the ever-evolving visual effects (VFX) industry that it helped pioneer. According to Rhythm & Hues’ Film Division President Lee Berger, “the world has changed greatly in the last 15 years” for the VFX industry. During that 15-year period, the VFX industry went from being based almost exclusively in California to a global industry with stiff international competition. The trend toward globalization, according to Berger, started in the United Kingdom with a generous tax write off in the late 1990′s, which was later replaced in recent years with generous refundable tax credits. “The tax credit trend in London changed the game and started the current [tax credit] trend,” said Berger.
The introduction of the UK financial incentives, which coincided with the filming of the Harry Potter film franchise, created “the perfect storm” according to Berger. For the first Harry Potter film in 2001, over two-thirds of the VFX work was done in the United States; but for the last three Harry Potter films (made from 2009-2011), between 90-95% of the work was done in the UK. During the same period, filmmaker Peter Jackson’s Weta Digital in New Zealand became a global powerhouse because of the groundbreaking effects work the director was using in the Lord of the Rings trilogy and films like King Kong. Complicating the industry further, “the amount of money studios spend on VFX is shrinking,” said Berger. A shrinking VFX pie, of course, raises the stakes in the competition for business even higher.
With the global proliferation of generous tax credits in places like Vancouver, British Columbia, not only is there fierce competition between international VFX companies (like Weta Digital or Rhythm & Hues) for lucrative special effects contracts, but also between state and national governments. California is caught in the middle of the storm.
As a result of the competition among state and national governments to capture a share of the VFX industry, California’s share of the money spent on VFX has been plummeting in recent years. Film Works was able to acquire the spending breakdowns for 12 big-budget films. The name of each film and the studios attached have been withheld for confidentiality. Seven are currently in production, three have (or will be) released this year and two were released from 2010-2011. Click on the image below to for a full-size view:
The combined spending on VFX alone for these 12 films is $495 million, which represents 23% of the total $2.16 billion spent on production. California’s share of the total VFX spend came in at about 34%. As the chart reveals, the key reason most of the spending left California was because of rebates offered in other jurisdictions. These rebates programs are generous, providing just over $64 million back to producers in cash. Moreover, the programs that generate these rebates are very specific; the programs are often tailored specifically for VFX work.
According to Berger, 90 percent of the cost in the VFX industry is labor, which means there are few ways to reduce costs in other areas. Recognizing that the only avenue for VFX houses to lower their costs was through wages, astute policymakers in Vancouver, British Columbia created a separate tax credit targeted at the VFX industry called the Digital Animation or Visual Effects (DAVE) production tax credit in 2003. Under the DAVE credit, productions get a 17.5% credit on VFX labor costs incurred in British Columbia. What really makes DAVE so attractive, however, is that it can be stacked on to both the standard film production incentive offered by the province and the labor incentive offered by Canada at the federal level. The British Columbia Film & Media office offers an online tax calculator to show how much productions will receive once all of the incentive programs are stacked. Using the VFX budget spent outside California for “Movie 9″ in the table above, we decided to see what the benefit would be if that $62.5 million had been spent in Vancouver. The results were staggering:
By the calculator’s estimate, the $36.5 million in combined cash refunds amounts to just over 58% of the total VFX cost for the film. Not surprisingly, the number of VFX companies that have relocated or opened branches in Vancouver has exploded, and most of the U.S. feature film projects that go to British Columbia do so exclusively for VFX work. In 2006 & 2007, of the 54 U.S. feature film projects shot in British Columbia, just four were for VFX only (meaning principal photography was done elsewhere). By 2011, of the 50 U.S. features that spent money in B.C., the number of VFX only projects ballooned to 35.
Surprisingly, Rhythm & Hues did not open a Vancouver office until 2011, making it of the most recent international satellite locations. Berger explained the company’s other satellite locations offer much lower labor costs, allowing for savings that best or exceed Vancouver’s costs even with the tax credits. More interesting yet, Berger said Rhythm & Hues could often match a bid from Vancouver for the same money even using his California artists. “But what has happened in recent years with many studios,” Berger said, “it’s easier to understand the tax credits than it is to understand a discounted price.”
Veteran visual effects producer Allen Maris, whose credits include Robin Hood and this summer’s Prometheus, told Film Works that it is now common for studios to require much or all of the VFX budget be spent in locations that offer lucrative tax credits. Maris, who calls California home, would love to see more of the money go to California VFX houses and, even better, that the work be performed in California by artists living here. “It’s not uncommon for many small to medium-sized VFX houses to be little more than a storefront,” said Maris. “Some of the VFX houses that used to employ dozens of artists now only staff a handful of people, and the only way they are able to keep their doors open is by outsourcing work to subcontractors in places like India who earn very low wages.” Maris said no one likes the idea of sending work to another country, but it’s better than the alternative. “Even a few jobs in California are better than none, because if [California firms] don’t compete–they close.”
Berger said Rhythm & Hues understands the concern among California VFX workers who feel that opening satellite offices in other nations comes at the cost of jobs in California. In 2007, Sony Imageworks opened an office in New Mexico and announced plans to relocate 100 employees — roughly one-third of its workforce — from Culver City to Albuquerque. Years later, Sony decided to close its New Mexico campus and relocate again — this time to Vancouver, British Columbia. State and federal employment figures show there are fewer workers and business establishments in the California post-production and VFX sector than there were ten years ago.
Berger is quick to point out Rhythm & Hues has actually been growing its California workforce even as it expanded abroad. The number of jobs at Rhythm & Hues’ California headquarters increased from 300 in 1999 to more than 750 by 2011. During a tour of Rhythm & Hues’ campus, Berger said the company was already outgrowing it after just two years. “Bottom line, expanding overseas has enabled us to expand here at home,” Berger said with pride. Indeed, Rhythm & Hues currently has multiple job openings in Los Angeles. Nevertheless, Rhythm & Hues may be the exception rather than the rule.
Berger doesn’t deny one of the major reasons for opening facilities in emerging markets like India is the low-cost of labor, which keeps the company competitive and keeps the doors open in California. “But low labor costs are far from being the only reason,” said Berger. Having offices across the globe allows Rhythm & Hues to work on projects around the clock almost 24-hours a day. When the employees in Los Angeles head home for the day, they pass the work to the team in Kuala Lumpur, who will do the same again with their colleagues in Mumbai and so on. Finally, all of the locations where Rhythm & Hues operates have highly skilled and educated workforces. “Why have just have the best from one country when you can have the best from all over the world?” Berger asks rhetorically.
During Film Works’ visit with Rhythm & Hues, it quickly became apparent they value nothing more greatly than their employees, whether they work in Los Angeles, India and anywhere in between. Artists from all locations collaborate on a daily basis (sometimes hourly) through high-tech video conferencing. Employees from other offices are frequently brought to Los Angeles to foster collaboration and teamwork. Rhythm & Hues Co-President Erika Burton said she and others are constantly traveling between all of the company’s locations. “If we are not talking to the other offices on the phone or via Skype, we are on a plane traveling to one of them,” said Burton.
The incredibly talented digital artists at Rhythm & Hues earn high wages, work long hours and routinely get paid to work overtime. Most digital artists in the VFX industry are freelance and get hired on a per-project basis. Since Rhythm & Hues is often fortunate to land a steady stream of projects, many freelance artists are now referred to as “permalancers”. Rhythm & Hues is constantly seeking to foster skill development by offering 3 to 4 week apprenticeship programs in areas like animation, digital lighting and 3D camera tracking (among others). According to Burton, the programs are meant to complement formal education for students and provide them with “industry-ready skills and experience” when they apply for jobs. The apprenticeship programs are highly selective. All participants are paid for their work while in the program and housing is paid for by the company for apprentices who come from outside the Los Angeles area.
For Rhythm & Hues President and CEO John Hughes (one of the studio’s three remaining co-founders), education and the arts are very important causes. Within the company, Hughes encourages employees to express themselves by creating and sharing their own work. As a result, the hallways of the Los Angeles office are lined with art (paintings, sculptures etc.) that Hughes has purchased from his employees. Outside of the office, Hughes serves as Chairman of the Education Committee for the Digital Coast Roundtable and previously served as a member of the California Superintendent of Schools Task Force for the Visual and Performing Arts. For more than 10 years, Rhythm & Hues has also been a major sponsor of the 66th Street Early Education Center in South Central Los Angeles.
There is no question the VFX industry in California–in the words of the Los Angeles Times– is “under siege.” More VFX houses in California have closed than opened in recent years and employment is stagnant at best. Many workers feel pressured to relocate in attempt to follow the work as studios chase film incentives from one place to the next. Complaints regarding working conditions, long hours and the lack of benefits like health care at many smaller VFX houses has caused some to campaign for unionization. Indeed, all of these issues are common topics of discussion at the industry watchdog site, VFX Soldier.
Berger also told Film Works that Rhythm & Hues is supportive of any initiative by elected leaders in California to help keep more work in the state. Berger pointed out he was particularly proud of the work the company had the opportunity to create for the films Moneyball and Hop, both of which received the California Film & Television Tax Credit. “We are content creators… and we would love to create more of it in California with the help of programs like the film incentive,” said Berger.
When asked what the future holds for the VFX industry both in California and in general, Berger was quick to reply “I can’t predict what will happen in five minutes from now! And while I am quick to reply with that answer, I always like to point out that Rhythm & Hues is a big, privately controlled company that is also capable of being quick to respond to whatever the future holds.”
I’m not sure it’s obvious that “Even a few jobs in California are better than none, because if [California firms] don’t compete–they close.”
The choice may not be between “a few jobs” and “no jobs”. If the place closed because they couldn’t compete in this particular line of business, those senior creative and technical employees, the management, and the capital (no longer tied up in a business that is just a shell for outsourcing) would not disappear from the world or necessarily sit idle — they would probably be used to start entirely new businesses, possibly including ones that could employ many more people in California.
If the only Californians involved are the owners, managers, and a handful of senior artists, with the bulk of the real work outsourced to poorly paid workers in the 3rd world, it merely increases income disparity in California (highly paid managers, NO mid-level workers), and ties up those senior level people in a way that prevents them from participating in more useful work that could employ more people in California.
I think the point was the companies don’t staff as many as they used to, but they still staff some. For a struggling freelance artist in California, its better than nothing. And for the VFX houses that do go out of business, starting a new venture that will employ even more Californians assumes they have the capital to do that. That’s a pretty ridiculous assumption. Not only did they lose whatever they invested into the failed VFX House, finding investors coming off such a failure would be a challenge even in a good economy. The economy, as we know, is anything but good.
” … and routinely get paid to work overtime.”
- Just to clarify, this in only for Rhythm & Hues L.A. and Vancouver.
You reference a separate Canadian tax credit for the VFX work on a given production that can piggy-back the other film production credit/incentive. Does the CA film incentive that was just recently extended for two more years offer sugar such as this too? Do other US states have a similar rebate? You offer the example of Film 9 and the $58+ million that was or could be funded by this credit which is alarming. To what extent does this DAVE rebate program impact a competing locale that does NOT have such a credit? Not sure how well this can be quantified but when previous articles published here discuss runaway production, is this additional incentive included in the calculations?
Hi Amanda, thank you for your comment. No, California does not have a separate credit for VFX work, but it is covered as an eligible expense under the general film tax credit program. The problem is the current program only allows films or shows with budgets of $75 million or less. Since much of the VFX work is done on big-budget projects, California’s existing film incentive does not not offer that much benefit to the California VFX industry. Only New York has a separate set of funds for post production work in the US, but VFX is included under most state film incentive programs. That said, most of the US VFX industry is clustered in California, so the competition is more from other nations rather than other states. At least for now.
“According to Berger, 90 percent of the cost in the VFX industry is labor, which means there are few ways to reduce costs in other areas.”
That’s an awfully big statement to just throw out there. Some pretty bad rhetorical misdirection.
Labor X Time does not equal productivity in this business. We don’t make iPods, we satisfy clients with subjective and evolving goals. A VFX shot isn’t “done” when enough time is spent on it, it’s done when the client says it’s done. Client expectations will never magically decrease if you throw more labor at a task.
Secondly, labor is not a fixed unit of measurement – productivity is. Just because you can get labor more cheaply – whether by 3rd world wages or tax incentives – doesn’t mean you’re actually getting more DONE. There are countless reputable studies that back up this idea.
I certainly don’t expect film producers to turn down free money, but I might hope that at some point in the near future someone might actually crunch the numbers and realize that you wouldn’t NEED to spend $60 million on VFX if it was done by a workforce that maximizes the value of their labor for clients that understand the strengths and weaknesses of the medium.
There are TONS of ways to reduce other costs. Spend some time in the trenches with working artists and you’ll figure that out on day 1.
I just don’t understand this kind of thinking: “Our company is losing money, and we need to evolve or go extinct. Let’s not change ANYTHING about the business – not the management strategy, not the client relationships, not the software or hardware. Let’s move heaven and earth to pay as little as possible for the ONLY source of revenue we have – the highly specialized, creative output of our workers.”
I didn’t get the impression Berger was trying to misdirect. He was simply pointing out that 90% of the overhead is from the hourly pay to workers who are meeting client expectations. If it takes longer for the client to say its done because they want changes etc, then the artists will get paid for the extra hours they spend on it.
And he also made it quite clear that he could keep work in California and beat bids from Vancouver. But the studios are the clients and clearly the policy dictate coming from the studios is to only spend money where the government will cut them a check. It would be nice if they understood “the strengths and weaknessess of the medium”, but that level of sophistication is totally nonexsitant at the six majors–case in point: “Jack and Jill”, “Battleship” and the host of other vapid bombs they decide to greenlight. They still haven’t figured out paying $20 million to a star does not somehow make the movie a moneymaker, so expecting them to grasp the artistic nuances of VFX work is pretty ridiculous. Not saying that’s good; it’s just reality.
And if the dictate is to only spend money in places that have cash rebates, then no–your company literally can’t do anything to change how they operate, because if you are not operating where there is a tax credit, the studios won’t be using you.
At least this company is still adding and growing in California.
There has been a big lack of innovation in VFX in recently years and the only solution has been to throw unskilled labor at the problem. Its similar to making Walmart products and shipping unskilled factory jobs oversees. The solution lies in new tools that require fewer people, shifting the labor force back to artistically skilled/creative, reducing the need for technical support roles (ie: 20 people to fix broken renders and paint bad frames, or $2m in salary for Windows IT department when a small infrastructure can be built from a $1k unix-based Mac Mini with the right creative coding), and managing projects at the studio level better. Generally, bringing back innovation in tools and vfx visual language and shifting from unskilled to skilled workforce. Until then, VFX remains a mcdonalds/walmart industry and the business model will be similar : high volume, low margin, and the ills that historically accompany those industries such as reliance on ponzi-scheme investment monies (Digital Domain), quality of life issues (unions), and the credit card known as tax incentives (UK/Vancouver co’s).
@anonymous: I so didn’t interpret the Berger quote in the context you appear to have. My take on his point, not the author’s, was that because the bulk of a given film’s VFX price tag is dependent on the time it takes for the talent to craft and perfect it to its standards and its client’s expectations, there aren’t any other significant ways to reduce this aspect in a VFX budget. Implied in that, given the tone of this text and the obvious respect this CEO has for his peeps, is that he, Berger, won’t compromise their talents and reputations to save a buck. I think you might be a bit off the mark…
R&H was one of the first and most enthusiastic companies outsourcing to low-labor-cost countries, even during years when the industry was relatively healthy (such as it is.) I hesitate very strongly to take his comments at face value – he’s a businessman and his job is to keep his company healthy first and foremost. No doubt he values his artists and cares strongly about the work but I only question the fixation on labor costs.
For example, I’ve heard (never worked there, no first hand experience) that R&H uses cryptic proprietary software and pipelines. Surely there’s been some exploration on how to make that more efficient, but has anyone ever REALLY explored how much time is wasted on stuff like that? There are a lot of VERY smart people in this industry who could really make big changes if given the opportunity.
I’ve worked for a decade at all different jobs in big studios like R&H and the amount of wasted time and effort is staggering. Sure, redesigning critical systems takes time and effort and money at a time when these businesses are struggling to survive but at some they must realize that they’re limping along by cannibalizing their workforce. It’s unsustainable and things need to change.
Bottom line: the studios are doing business, getting the cheapest price they can. Fine, I won’t argue with that. I will argue with the single-minded focus that VFX companies have on driving down the price of labor. It’s ultimately self-defeating and short sighted.
The way we understood it, labor is 90% of the cost wherever the work is done, regardless of how much is paid. Hence, just in one location in India, 90% of the cost is for their labor. They may get paid less relative to US workers, but paying them is still 90% of the cost for that location. Likewise, the wages paid to LA workers is 90% of the costs for them in LA and so on. But the point made by some of the others in the comments seems true. Let’s assume the company did all of the things you mentioned–streamlining workflow, improving pipelines and using better software etc. Let’s also assume the very smart people you mention are given the opportunity and they do make big changes. Even if all of that is done, it’s still negated if the facility is not located in a jurisdiction offering a government subsidy, because the studios are requiring that is where the money be spent.
There has been a big lack of innovation in VFX in recently years and the only solution has been to throw unskilled labor at the problem. Its similar to making Walmart products and shipping unskilled factory jobs oversees.
The solution lies in new tools that require fewer people, shifting the labor force back to artistically skilled/creative, reducing the need for technical support roles (ie: 20 people to fix broken renders and paint bad frames, or $2m in salary for Windows IT department when a small infrastructure can be built from a $1k unix-based Mac Mini with the right creative coding), and managing projects at the studio level better. Generally, bringing back innovation in tools and vfx visual language and shifting from unskilled to skilled workforce.
Until then, VFX remains a mcdonalds/walmart industry and the business model will be similar : high volume, low margin, and the ills that historically accompany those industries such as reliance on ponzi-scheme investment monies (Digital Domain), quality of life issues (unions), and the credit card known as tax incentives (UK/Vancouver co’s).
The solution is to iether stop Canada from using tax credits, or match them in CA. Im wondering how Canada can afford to keep pumping so much money into the vfx industy? And why? So they can work on movies too? big deal… and how is this even profitable for them? Its like Vancouver is Hollywood s ugly cousin and is jealous because no one notices her. Why dont they target another industy that will actually stay once the tax shelter runs out? I know people who contract to Canada, and move back right away, and try to find work in La. All they are doing is screwing up the industy for us vfx pleople, we dont love them for it, we wish they would push off.