Sie sind auf Seite 1von 40

Pierre Grage most certainly explains the issues that even an outsider can

begin to understand. Grage shines a light on just why and how the movie
business and the VFX business are so royally screwed up. This book, with its
statistical analysis and commonsense approach, fully encapsulates the problems.
It should be a primer for every student of VFX or animation, a must-read for
anyone who works in the industry and, in fact, should be mandatory for every
studio executive who might be looking to put (yet another) VFX studio out of
business.
SCOTT ROSS Co-Founder of Digital Domain and former CEO of
Industrial Light & Magic, Sr VP Lucasfilm Ltd.

"Inside VFX is a must read for anyone interested in the film and VFX business.
The amount of information Pierre Grage uncovers is groundbreaking. This is the
one and only book about the film and VFX industry you need to read.
MICHAEL PANGRAZIOCo-Founder of Matte World Digital & Art
Director for Weta Digital Ltd.

insidevfx
an insiders view
into the visual effects
and film industry

pierre grage

The views and opinions expressed in this book are solely those of the author and do not
represent and no way are aliated with, sponsored, approved, or reflect the views of
Lucasfilm, Industrial Light & Magic, Weta Digital, Animal Logic, Double Negative or any
other of the authors past, current employers, clients or any of their respective aliates or
licensees. This book expresses solely the authors views and opinions which are subject to
change without notice.
All data and information in this book are provided on an as-is basis and obtained from
sources believed to be reliable but accuracy, completeness, currentness, suitability, or
validity cannot be guaranteed. The information contained may become outdated and there
is no obligation to update any such information. Neither the author nor the publisher
shall be held liable or responsible to any person or entity with respect to any loss or
incidental or consequential damages caused, or alleged to have been caused, directly or
indirectly, by the information or data contained herein.
The information and data in this book are strictly for general information purposes only
and should not be construed as an oer of advisory services. Please seek the services of a
competent professional advisor on your specific situation before beginning any
improvement program.
The author has no responsibility for the persistence or accuracy of URLs for external or
third-party internet websites referred to in this book and does not guarantee that any
content on such websites is, or will remain, accurate or appropriate.
Copyright 2014 by Pierre Grage
All rights reserved. No part of this publication may be reproduced, distributed, or transmitted
without the express written consent of the author except for the use of brief quotations in a book
review.
Cover photo licensed by istockphoto.com-lisegagne. Cover design by carstenbiernat.com
First Publish: December 2014
www.InsideVFX.com

For Sabrina

Foreword by Scott Ross The Good Ol Days


Enter Pierre

PART ONE
INTRODUCTION TO THE BUSINESS OF FILM
AND VFX
SECTION 1
HOLLYWOODS FILM BUSINESS
Chapter 1: Box-Oce Deception
Chapter 2: Where Hollywood's Real Money Comes From
Chapter 3: Hollywood Demographics
Chapter 4: Behind the Mask of Hollywood
Chapter 5: Low-Risk Film Financing
Conclusion

SECTION 2
HOLLYWOODS PRODUCTION COSTS AND VISUAL
EFFECTS
Chapter 6: chapter 6 - Inflation 101
Currency Versus Money
The Slow Death of the US Dollar
Inflation Measurement
Chapter 7 Hollywood's Real Production Costs

Inside VFX

Cleopatra - History's Most Expensive Film Ever Made


Titanic - History's Second Most Expensive Film Ever Made
Steven Spielberg's Cleopatra
Conclusion

SECTION 3
THE DIGITAL REVOLUTION
1977 - Star Wars
1982 - Star Trek II: The Wrath of Khan
1982 - Tron
1984 - The Adventures of Andr and Wally B.
1984 - The Last Starfighter
1985 - Young Sherlock Holmes
1989 - The Abyss
1991 - Terminator 2
1992 - Lawnmower Man
1993 - Jurassic Park
1994 - Forrest Gump
1995 - Toy Story
1996 - Independence Day
1997 - Titanic
1998 - What Dreams May Come
1999 - The Matrix

Pierre Grage

2000 - Perfect Storm


2001 - The Lord of the Rings Trilogy
2002 - Spider-Man
2003 - Pirates of the Caribbean
2004 - The Day After Tomorrow
2005 - King Kong
2006 - 300
2007 - Transformers
2008 - The Curious Case of Benjamin Button
2009 - Avatar
2010 - Inception
2011 - Harry Potter Film Series
2012 - Life of Pi
2013 - Gravity
Summary

PART TWO
INSIDE THE VFX BUSINESS
Introduction

SECTION 4
THE PRICE COLLAPSE OF TECHNOLOGY
7

Inside VFX

Chapter 8: VFX Hardware


Chapter 9: VFX Software
Conclusion

SECTION 5
THE IMPORTANCE OF DIGITAL VISUAL EFFECTS TO THE
FILM INDUSTRY
Chapter 10: VFX Demand
Chapter 11:VFX Supply and Margins
Conclusion

SECTION 6
VFX EDUCATION ON THE RISE
Chapter 12: The awakening of the education industry to vfx
Chapter 13: Graphic Design Education Industry as Competitors
Conclusion

SECTION 7
VFX AND GLOBALIZATION
Chapter 14: chapter 14 - Globalization 101
Industrial Globalization
Service Globalization
Chapter 15: VFX Goes Global

Pierre Grage

Chapter 16: chapter 16 - Film Subsidies 101


How Europes Film Subsidies Are Supporting Hollywood
Chapter 17: How film subsidies influence the visual eects industry
Creative Destruction
War of the Film Subsidies
Chapter 18: chapter 18 - International Criticism Against Film Subsidies
Desperate Measures
Foreign Aid for Hollywood
Chapter 19: Why are governments subsidizing films?
Conclusion

SECTION 8
ASIA - THE RISE OF A GIANT
Chapter 20: chapter 20 - India
India's VFX Industry
India's VFX Scam
Chapter 21: chapter 21 - China
China's Film Industry
Hollywood's Flirt With China
China's Graphic-Design-and-Animation Education Industry
China's VFX Industry
Conclusion

Inside VFX

SECTION 9
THE VISUAL EFFECTS ROLLER COASTER
Chapter 22: chapter 22 - Top of the Eighties
Apogee
Chapter 23: Top of the Nineties
Boss Film Studios
Dream Quest Images
Chapter 24: chapter 24 - Top of the Two Thousands
Chapter 25: chapter 25 - Digital Domain
Textor Digital
Digital Remains
Chapter 26: chapter 26 - Rhythm & Hues
No Piece of the Pie
Cash Crunch
Chapter 27: chapter 27 - VFX Industry Fluctuations
Current Momentums
Conclusion

SECTION 10
BOOM, DOOM AND IMPLOSIONS
Chapter 28: chapter 28 - Business Cycles 101
Historys First Documented Business Cycle
The New Business Cycle

10

Pierre Grage

Reasons for the Business Cycle in Our Modern Economic World


Chapter 29: chapter 29 - Recessions and the Film Industry
The Cinemas Need for a New Positive Technological Shock
Chapter 30: Hype Cycle 101
Chapter 31: chapter 31 - Trouble in Blockbuster Town
The Digital-VFX Blockbuster Hype Cycle
Conclusion

SECTION 11
MONKEY BUSINESS
Chapter 32: chapter 32 - VFX Business Models
Profiting on Volume
Chapter 33: VFX Marketing
No Honor for VFX Artists
Chapter 34: chapter 34 - War of the Schedules
Digital Killed the Deadline
Chaos Coordinating
Real-Time VFX Postproduction
Chapter 35: chapter 35 - The Leading Kind of VFX People
Would The Real Business Managers Please Stand Up?
Chapter 36: chapter 36 - The Wrong Kind of VFX People
The Sociopaths Inner Urge to a Political Environment
Chapter 37: chapter 37 - The Dierent Kinds of VFX People

11

Inside VFX

The VFX Industry's Expectation to Work Like an Asperger


Conclusion

SECTION 12
UNDER PRESSURE
Chapter 38: Threat of New Entrants
Chapter 39: Threat of Substitute Products or Services
Chapter 40: Bargaining Power of Customers
Chapter 41: Bargaining Power of Suppliers
Chapter 42: Intensity of competitive rivalry
Conclusion

SECTION 13
BACK TO THE FUTURE
Chapter 43: The Future of the VFX Industry
Chapter 44: More Creative Destruction
Chapter 45: Endgame

Closing Thoughts
Acknowledgments

12

Foreword - The Good Ol Days

Recently I was at a VFX/animation conference, Trojan Horse Was a Unicorn


(THU), in Tria, Portugal. On the eve of the first day, the conversation among me
and twenty or so VFX artists turned to a discussion about the state of the
industry and how it is most definitely facing tumultuous times. The group was
made up of artists from various countries the United Kingdom, the United
States, New Zealand, France.
Earlier that day I had given the keynote address, and, as is my bent lately,
talked about the race to the bottom, the disastrous eects of subsidies as well
as the seeming commoditization of VFX. A rather depressing way to kick o what
turned out to be a great four days of fantastic tutorials and life lessons by some
of the greatest digital artists on the planet.
Interestingly enough I was the sole businessperson attending the conference.
In the 1980s I had headed Industrial Light & Magic, helping birth the era of
digital visual eects and, in the early 90s, had founded Digital Domain along
with Hollywood legends Stan Winston and James Cameron.
After several glasses of port, someone started to wax about the good old
days, when VFX used more models and miniatures, blue-screen photography
shot on VistaVision film with motion-control cameras, optical printers and when
VFX companies made money real money.
I scanned the group, and it seemed to me that I was the only member who
had actually worked in VFX during the so-called good old days as everyone else
was well under forty-five years of age. I took a long sip of my drink and said,
Hey, the good old days were actually the bad old days. Theyre just not as bad
as the present really bad current days.
Some members of the group protested. They said, Well, VFX artists didnt
have to constantly move to far-o places, leaving their families, to follow the
work. One said, Or not get paid overtime or, worse yet, be owed months of back
pay because the company that youre working for just went bankrupt. Another
jumped in to add, Or be significantly underpaid because some third-world
country can pay its workers so much less.
Everything they said was, indeed, true. However, the VFX companies that
produced the stunning images, which were paramount to box-oce success,

13

Inside VFX

invariably lost money. So, maybe, back then, it was better for the VFX artist (at
least in the short run), but it was really dicult for VFX companies to operate a
profitable business.
Todayeven though VFX is, by far, the most marketable part of any
blockbuster film (twenty out of twenty of the largest grossing films are VFXheavy or CG animated)the current climate is so dire that it is almost
impossible to run a profitable business.
The issues surrounding this seemingly strange business model are dicult to
understand. After all, shouldnt studios that make billions on VFX-laden films
want to ensure that VFX companies remained healthy and profitable? They
shouldnt want to kill the goose that lays golden eggs.
Pierre Grage most certainly explains the issues that even an outsider can
begin to understand. Grage shines a light on just why and how the movie
business and the VFX business are so royally screwed up. This book, with its
statistical analysis and commonsense approach, fully encapsulates the problems.
It should be a primer for every student of VFX or animation, a must-read for
anyone who works in the industry and, in fact, should be mandatory for every
studio executive who might be looking to put (yet another) VFX studio out of
business.
Scott Ross

14

Enter Pierre

When I was growing up in the 1990s in northern Germany, Hollywood seemed as


far away as a trip to Mars. Like any other child of the 90s, I enjoyed watching
films, such as those in the Indiana Jones series and the Star Wars saga, plus the
1978 Battlestar Galactica film, but my real passion was for my Commodore 64. I
would spend hours playing games, consumed in the worlds that programmers
had created for me. At that time there was nothing more exciting than those
blocky graphics and tinny sound tracks.
It didnt take long for me to develop the thought of creating my own games. I was
fascinated by the opportunity to create something others might enjoy. A few
friends from school joined me in my eorts. It didnt matter that none of us had
any idea how to code. We just hacked some game tests together in BASIC.1
Graphics were a problem of course, but then we found the extended ASCII
character set.2 Awesome! That will do. It was a very basic approach to game
design, but, in its own way, it worked.
In the end what my friends and I came up with were not one, but five, not-sodierent Tycoon games.3 One, if not all, of these masterstrokes had to be
published so o to a publisher with them. We attached to the floppy disks a nice,
professional-looking cover letter, which stated how much money we would like to
receive for the rights to publish each of our masterpieces. We celebrated our
victory with real Coke and full-fat, salty pretzels. However, the publisher was not
so amused. He had no idea that he was dealing with twelve-year-old kids and
returned our floppy disks with an angry letter. He noted that we were greedy but,
worst of all, that our games were bad, boring and technologically outdated. In
hindsight it seemed like the 1990s really werent the time for ASCII graphics
1

BASIC is an easy-to-learn programming language (according to Wikipedia, its an acronym for

Beginners All-Purpose Symbolic Instruction Code. Who knew that?). There are many dialects for it out
there. The Commodore 64 had one of them preinstalled and launched as its operating system. Great fun!
2 ASCII stands for American Standard Code for Information Interchange. Computers can only understand

numbers. An ASCII code is the numerical representation of every letter on a keyboard. The Extended
ASCII Codes were little lines and blocks that could be alienated for drawing very rough pictures. ASCII art
is still found today. Most of us continue to use it for displaying a smiley face, for example. ;-)
3 Economics-simulation games were very successful in Germany. Strangely no one else in the world

seemed to care much about them.

15

Inside VFX

anymore. Seriously our graphics sucked, even for the 90s. But there had to be a
way to make them suck less. I was spurred on.
This was the starting shot for my adventure into the world of computer graphics.
It became my obsession to try out every computer-graphic program I could get
my hands on. All this seemed much more exciting than my studies in economics
college. I only chose to graduate with a Bachelor of Science in Economics with a
specialization in Computer Science because of the computer-science part. Not the
economics part. Yet I was surprised to find out that I had actually enjoyed
learning about economics. I was fascinated how economics and business play an
important part in all our lives. I learned about what it means to manage a
company, its logistics, marketing, human resources and even accounting. The real
disappointment was the computer-science portion, which required us to write
boring code in HTML, Microsoft Excel and other database programs. But I was
fine with it, since I was learning with my friends how to code computer games
with good graphics.
My parents, on the other hand, were happy to see me studying something
normal, even though I did not know what on earth all this theoretical stu
about economics was good for. Back then I could not know how these studies
would provide me with a solid economics foundation. A foundation I can rely on
up to this day.
Still the career of a suburban bank clerk or small merchant didnt sound very
appealing to me. Reluctant to get a normal job, I decided to do a 3D artist
internship at Software 2000, a small respectable computer game company in
Eutin, northern Germany. This internship eventually grew into a real job, and
suddenly, out of nowhere, I got bitten by Hollywoods VFX1 bug.
When, in 2001, I received an oer to be part of Germanys first full-feature CGanimated film Back to Gaya at Ambient Entertainment in Hannover, it was
impossible for me to resist. At the time no one in Germany had tried full-CG
animation before, so we had to figure things out as we went. When we really
managed to finish the film after more than three years of production time, we all
earned ourselves our street education in state-of-the-art CG animation and
visual eects. This experience became my very foundation for an even deeper
VFX know-how. One that enabled me to live and work in five dierent countries

1 By now you probably know this but just to be sure: VFX stands for visual eects.

16

Pierre Grage

on four continentsbut ironically never in the United States, the motherland of


the visual eects industry. Yet I didnt have to. New Zealand, Australia and
Southeast Asia seemed far more exciting to me.
On the outside it might have appeared that I never looked back at my economics
education. From the inside, however, my interest in economics and finance was
fueled by the euro and its accelerating inflation.1 When the financial crisis of
2008 hit us, I intensified my economics studies and traveled the world. The
combination of studying economics and traveling made me really aware of how
the world is changing at a rapid paceand with it the whole visual eects
industry.
This book is the result of my observations and studies. I dont cover any hard-core
technological details about how to create visual eects or films. These kinds of
topics are countlessly covered in other publications. Instead this book is
exclusively about the business economics of creating visual eects and movies.
The digital VFX industry has undergone massive changes in the last thirty-five
years. All these changes eventually accumulated in the biggest transition period
the industry has ever experienced. This book documents these trends and oers a
holistic analysis. In addition the book aims to get a glimpse of a possible future
for the VFX industry.
You will certainly get the most out of this book if you read it, like most books,
from beginning to end. But you wont have to do this if you cant wait to dive in
to a specific subject. You are welcome to read the book in any order you prefer. To
justify the holistic approach, I included a few 101 crash courses on certain topics.
At first sight you might think that these 101 sections are not directly related to
the VFX industry. If you are only interested in the VFX and film business and
nothing else, please feel free to skip them. However, if you feel curious and
adventurous at the same time, these sections will oer you a deeper
understanding and analysis of certain industry trends.
I have tried to oer you a window into the inner works of a world that has been
hidden for far too long. And for those who are already working within the movie
and VFX industry, I am hoping to oer valuable insights that will assist you in
making decisions. This book oers all the information I wish I had at hand when I
1 After the introduction of the euro, many Germans (me included) felt just how their purchasing power got

cut in half.

17

Inside VFX

started my professional career in computer graphics fourteen years ago.


Unfortunately I had to find out many of these things the hard way. Now you
wont have to.
Pierre Grage

18

Pierre Grage

part one
introduction to the
business of film and vfx

19

section 1
hollywood's film business
Show Me the Money ROD TIDWELL in Jerry Maguire from 1996
Before we dive in to the world of visual eects, we first have to take a peek
at the film industry itself. This will help us to better understand the coherences
how diverse elements integrate and relateand some of the ongoing tensions
between those two businesses. It will be a brief chapter, so buckle up! By the end
of it we will have a good overview of how the modern film business really works.
Yes, it operates a whole lot dierently than most people believe.
In 1947 cinema attendance in the United States peaked at over 4.7 billion.
Cinema entertainment was a new, fascinating and cheap experience. People were
flocking to see movies. The studios, who owned most of the theater chains, had
total control over what people were able to see. In addition the studios owned
the stars, writers and directors, forcing them into long, exclusive contracts.
Without these contracts no star would even be allowed to rise to fame.
By the 1950s this Hollywood studio system had become so feared that
the United States Supreme Court ordered all major Hollywood studios to
liquidate their theater chains. But the challenges the studios faced did not
stopped there. The rise of TV and the increased star-bargaining power were
eating huge chunks into the studios profits. Harry Cohn, a then sixty-five-yearold Columbia Pictures executive, unburdened his heart in his companys annual
report from 1957:
We find ourselves in a highly competitive market for these talents [stars,
directors, producers, writers]. Under todays tax structures, [a] salary to those we are
dealing with is less inviting than the opportunity for capital gains. We find ourselves,
therefore, dealing with corporations rather than with individuals. We find ourselves,

20

Pierre Grage

too, forced to deal in terms of a percentage of the films profits, rather than in a
guaranteed salary [as] in the past. This is most notable among the top stars.1
To survive, the studios developed an impressive set of strategies and deceptions.
These developments changed the film industry in a way that made it nearly impossible
for an outsider to understand. It just doesnt make sense to read how big blockbuster
hits such as Harry Potter and the Order of the Phoenix or Star Wars: Episode VI Return of the Jedi are box-oce successes but still end up deeply in the red. Like
so often in show business, many things are just not the way they seem.

1 Source: Life Magazine, 10 June, 1957, p. 146

Link: http://books.google.com/books?
id=Nz8EAAAAMBAJ&lpg=PA146&pg=PA146&redir_esc=y#v=onepage&q&f=false

21

chapter 1
box-office deception
Media outlets of all kinds are eager to publish box-oce lists as a kind of
benchmark on how financially successful a film has performed. Web sites such as
boxocemojo.com or Wikipedia.com also publish production costs of a film.
However, these costs are, at best, close estimations since the true cost of a studio
movie is one of Hollywoods best kept secrets. Production-cost estimations
usually already include factors such as:

Development (story rights, screenplay, concept drawings, etc.)


Preproduction (producers, concept drawings, animation, location
scouts, traveling, etc.)
Production (principal photography1 with all the actors plus
technological- and production-sta costs)
Postproduction (This chunk of costs grew over the recent years
together with the demand.)

Even for small independent productions this is a huge chunk of money. For
a typical Hollywood production these costs are often in the multimillions. To find
out if a movie was profitable or not, people often simply compare budget
numbers with the total amount of income from the box oce. Very often this
picture looks quite rosy. Some people are then quick to conclude Wow! This
movie totally sucked, and it made that much money? Nice! I better sign up for a
film school, become a director and get rich quick.
Wait, hold your horses!
The box oce is just one side of the story. These numbers only reflect the
gross revenue. We have to take a couple deductions into account before we can
obtain a more realistic figure:

Cinema Theaters (their share of the total box oce)

1 This is the phase of a film where all the action happens and the movie is filmed. In this phase you can

see everything: actors, lights, people and cameras rolling. Very stressful, very expensive.

22

Pierre Grage

Distribution1 (by the film studios, expensed to the movie, with each
film as a separate company on paper)
Marketing (trailer, TV, Internet and print advertisements, publicity,
etc.)
Taxation (Taxation varies from country to country. Generally a studio
pays less domestically.)

The first in line are the theater chains. Normally they keep about 50
percent of the box oce, depending on the film.2 This is not a small cut but still
not enough for the cinema chain to make a profit from ticket sales alone. So the
theater chains had to change their business model from sales of admission tickets
over to concession stands. Thanks to sweet popcorn-profit margins of over 1000
percent3 and overpriced soda, cinema theaters are able to make about 85 percent
profits entirely on junk food.4
The second in line are the film studios in their role as distributors. In the
world of Hollywood accounting5 each film production is a separate corporation
a Spider-Man 2, Inc. or an Iron Man 3, Inc., if you like. This is a smart thing to do
since any movie production is a high-risk venture. Other benefits include
bookkeeping gains such as keeping a film in the red for as long as possible. Since
each film is a separate company, on paper, the film studios can charge for their
services such as financing and, of course, distribution.
To be sure, distribution costs are not cheap, and they are a necessity to get
a film into the cinemas. The film studios also have no choice but to outlay huge
amounts of money for film prints and marketing. While film prints are
increasingly being replaced by cheaper digital versions, on the flip side global
advertisement campaign costs have gone up. Ever since household entertainment
has been competing with the cinema, studios need to create audiences for their
1 Mostly a physical copy of a movie will be sent to movie theaters. One single copy on celluloid can cost a

four-figure sum, depending on the length of the film. On top comes logistical costs for getting the copies
from point A to point B. This is also why film studios are pushing for a digital-film distribution system.
2 source: http://www.businessinsider.com/theater-chains-not-selling-man-3-tickets-2013-4?IR=T
3 source: http://finance.yahoo.com/news/20-world-most-overpriced-products-095521796.html
4 source: http://business.time.com/2009/12/07/movie-theaters-make-85-profit-at-concession-stands/
5 Also known as creative accounting.

23

Inside VFX

movies. The only way to do this is to countlessly repeat ads on the most popular
TV networks. Movie posters in every major city of the world does additionally
help to make audiences aware of the trailers and ads.
For a huge blockbuster, a global marketing campaign can easily amount to
close to 50 percent of the original production budget. Disneys John Carter, for
example, was reported to have a $100 million advertisement budget1 which is 40
percent of its original $250 million production budget.2 After this flop, Disney
was reported to increase the marketing budget for The Lone Ranger even higher to
the $150$175 million range.3 This is a whopping 80 percent of the films original
$215 million production budget.4
Risk has its price. Which is why the distributors charge a hefty distribution
fee in the range of 33 percent based on the total theater receipts. A few very
strong leaders in this industry can become partners and negotiate this fee
down to around 12 percent and maybe even lower. In 2009 Spielbergs
DreamWorks Animation signed a seven-year distribution agreement with Disney
for a fee of 9 percent.5 But these kinds of deals are extremely rare. Even a film
which gains its financing independently outside the studio system still has to face
a going distribution fee of around 18 percent.
The bottom line is that any film will have a hard time being profitable from
only its box-oce revenues. The film studios will always collect their distribution
fee first before any other profit participant can get a payout. This fee structure,
plus interest charges for the film studios investments, help the studios make
some profits from the box oceassuming that the film is a hit. In the worstcase scenario, the film studios have at least a chance to earn back their initial
investment while the film corporation itself (The Wolf of Wall Street, Inc., for
example) is unlikely to make any money at this point. This means, for any other
investor and so-called net-point participants, they wont earn a cut of the movies
box-oce revenuesalmost no matter how successful the film has become in the
cinemas.

1 source: http://www.hollywoodreporter.com/news/john-carter-cost-disney-millions-301704
2 source: http://www.boxocemojo.com/movies/?id=johncarterofmars.htm
3 source: http://www.hollywoodreporter.com/news/disneys-lone-ranger-could-lead-581503
4 source: http://www.boxocemojo.com/movies/?id=loneranger.htm
5 source: http://www.theguardian.com/film/2009/feb/10/disney-to-distribute-dreamworks-movies

24

chapter 2
where hollywood's real money comes from
This presents a very important question. If a film is not making money from the
box oce, where does the real money come from?
To find an answer to that, we have to take a look at the film industrys
combined revenues. In 2012 they amounted to around eighty-six billion globally.
Below is a graphical representation of the film industrys global revenue.

According to these estimations, only 25 percent of the global film-industry


revenue really comes from the box oce after the standard theater-chain
deductions of 50 percent. Marketing and film-print outlays from the distributers
would reduce this percentage even furthernot to mention insurance, taxation,
translation and lawyer-fee deductions. Considering all this, the biggest driver for
the film industrys revenues is, in reality, the DVD/Blu-ray sales. This is despite

25

Inside VFX

recent reports about a decline in DVD sales.1 As of today Hollywood expects


higher future box-oce revenues from China. While this might be the case, we
can expect revenues from streaming services to have an even higher impact on
future global revenues.
Therefore, box-oce numbers and benchmark lists are irrelevant. Except
for one small thing: advertisement. If a film can claim that it was once a
number one box-oce hit, that recognition will act as a seal of quality and attract
more audiences. Hence the studio is able to charge higher network and streaming
licensing fees and can also hope for higher DVD/Blu-ray sales numbers.

1 source: http://www.theguardian.com/media/2010/nov/29/dvd-industry-sales-slump-blu-ray

26

chapter 3
hollywood demographics
After the rise of TVs popularity and the increased bargaining power of
superstars, Hollywood was forced to find new streams of revenues or face
extinction. Cinema attendances went into a free fall, revenues declined and bigname movie stars demanded profit participations. Movie demographics soon
revealed what was going on. Older audiences (especially those with kids)
preferred to stay home and indulged in their home entertainment. Young teens,
on the other hand, still enjoyed fleeing their parents homes to go to the airconditioning comfort of cinemas. This male and female audience, under the age
of twenty-five, also prefers to go to the movies more frequently. These days,
frequent moviegoers purchase a staggering 50 percent of all movie tickets.1
Therefore, it just made economic sense for the studios to shift their focus over to
young audiences.
Male and female audiences under the age of twenty-five tend to:

Purchase the latest music.


Play computer and casual games.
Consume similar content on TV and in books and magazines, which
makes them very eective (cheap) to promote too. A great example is
how Disney cross-promoted its number one box-oce hit The Avengers
with its new TV series called Marvels Agents of S.H.I.E.L.D.
Care more about action and visual eects extravaganza then big name
stars.

New franchise installments like 2 Fast 2 Furious, Transformers, Twilight and


Hunger Games, to name just a few, managed to establish themselves entirely
without a single big star in them. Unknown actors are always easier to handle in
contract negotiations than already-established brand names, such as Tom Cruise
or George Clooney, who negotiate like corporations. These kinds of stars know
that their names act as a guarantee to pull a certain minimum quota of attendees
into the cinemasand they charge a premium for that. But recent box-oce
1

source: http://www.mpaa.org/wp-content/uploads/2014/03/MPAA-Theatrical-Market-

Statistics-2013_032514-v2.pdf

27

Inside VFX

disappointments, like the star-driven Cowboys & Aliens (Harrison Ford and Daniel
Craig), R.I.P.D. (Je Bridges) and Lone Ranger (Johnny Depp) wont encourage
studios to change their blockbuster strategy all too much.
Why accumulate more economic risk by adding costly brand-name stars to
the costs of visual eects and explosions if the film can work entirely without any
expensive faces?

28

chapter 4
behind the mask of hollywood

With the studios focus on younger age groups, the real business has changed.
Great original content made room for movies oering manifold exploitable highconcept IPs1. The classic blockbuster-film recipe, visible in films like Jaws and the
Indiana Jones series, changed into so-called tent-pole movie events, such as the
Transformers, Iron Man and Avatar franchises.
Tent-pole films are, in principle, the same as blockbuster films, just without
any rough edges as seen in the films made for more mature audiences. These
kinds of tent-pole movie events are designed to appeal to all age groups under
twenty-five, which means they have to be as safe as possible. Scripts that feature
violence, nudity and swearing are huge red flags for the film studios tent-pole
strategy. The possibility to license film characters to toy factories and gaming
companies is often a key criteria to push scripts into production. But regardless
of whether the cinema film is a blockbuster, tent pole, comedy or drama, a
movies theatrical release today is nothing more than a huge advertisement
campaign for Hollywoods real moneymaking pillars:

Licensing to cable TV and streaming networks.


Character or story-setting licensing to toy, gaming, book, clothing and
theme-park companies.
DVD and Blu-ray sales.
DVD and Blu-ray rentals.
In-flight entertainment.
Foreign presale distribution rights.
Product placements.
Music records.

One often-underestimated stream of revenue is the character and


entertainment licensing. In 2012 this licensing segment scored, on its own, a
mind-blowing $49.3 billion in global revenues. Disney plays this licensing piano
1 Short for Intellectual Property. A perfect exploitable IP is something that can sell not only sequels but

also toys, games and pictures on household items.

29

Inside VFX

particularly well for its shareholders. The big mouse dominates the character and
entertainment segment with global annual revenues of $39.4 billion. Thats a
surreal dream market share of 80 percent. With its takeovers of Pixar, Marvel
and Lucasfilm, Disney took over a whole industry without anyone noticing.
The mouse turned Disney into the worlds largest licenser with brands like
Disney Princess and Star Wars. Just these two licenses flood Disneys money bin
with around $3 billion in yearly global revenuesfrom each.1 The studios other
top-selling billion-dollar character licenses include Cars, Mickey & Friends, Toy
Story, Disney Fairies and Spider-Man. In this industry Warner Brothers, with its
lucrative six billion in revenues, looks like a dwarf next to Disney. Even lagging
further behind are Nickelodeon ($5.5 billion), DreamWorks Animation ($3
billion), Cartoon Network ($2.8 billion), 20th Century Fox ($2.35 billion) and
Sony ($1.2 billion).2
Licensing became, for modern Hollywood, the most important business
since the rise of home entertainment. Once a blockbuster tent-pole IP is
successfully installed, the film studios make billions with licenses for clothing,
diapers, games and toys. Unlike the box-oce game, the licensing business is
near risk free and very rarely has to share profits with other partners. Yet
Hollywood tries to convince us with its biggest awards show that it is still in the
business of creating great and original contentand not IPs for its licensing
businesses.
Everyone knows that blockbusters have almost a zero chance of winning a
certain golden statue. Except maybe one for best visual eects and sound. Is that
because Hollywood really cares about the past best film winners, such as 12 Years
a Slave, Argo, The Artist and The Kings Speech?
Or is that because blockbusters dont really need another boost in cinema
attendances and DVD sales?
Judge for yourself: Of the nine nominated films for best picture in 2013,
every single one of them was released in the last three months of the year. This
pattern repeats itself in most of the preceding award years. No matter how far we

1 Sources: http://www.hollywoodreporter.com/news/george-lucas-star-wars-288513

http://www.forbes.com/sites/jennagoudreau/2012/09/17/disney-princess-tops-list-of-the-20-bestselling-entertainment-products/
2 source: http://variety.com/2013/biz/news/disney-star-wars-princesses-licensing-1200498040/

30

Pierre Grage

go back, a clear majority of best picture nominations are those films released
during the end of the year.
Does the awards committee really have such short-term memory, or is the
rest of the year traditionally such a lousy film year?
Whatever the case may be, the fact is, when the worlds biggest movie
awards show announces its nominees in January, chances are very high that most
of the nominated films will still be running in a theater somewhere in the world
or come out on DVD in a store close to you. This award-sale eect is especially
utilized to perfection if an actor or actress wins a golden statue and also happens
to star in a huge blockbuster tent-pole IP. This was the case with the doubtlessly
very gifted Jennifer Lawrence in 2013 (Hunger Games) and Natalie Portman in
2011 (Thor).
With millions of viewers in the double digits, Hollywoods biggest award
show is one of the worlds most successful image and advertisement campaign
ever launched. Its nothing but a huge promotional event for the American film
studios.1
Does this mean that non-tent-pole movies are only made to win awards?
Probably not. Dramas and independent films might not make any money
at the box ocebut on DVD, streaming and TV they do. For as long as people
are willing to pay for original content in one way or the other, someone will fulfill
this demand.

1 At least Hollywoods biggest awards show is quite open about how it only cares about American films.

Why else would they need a category for the best foreign film?

31

chapter 5
low-risk film financing
Acclaimed Hollywood screenwriter William Goldman famously summarized the
film industry in his book Adventures in the Screen Trade with the sentence
Nobody knows anything. He said so because there is no one who can explain
beforehand why a film will work and another one wont. So the best way studio
executives know how to play this uncertainty is to diversify the risk by producing
at least, lets say, ten films in a year. Then these mighty executives can only cross
their fingers and hope two of those films will allow the studio to break even for
the year. And hopefully a third or fourth film will be such big hits that the studio
will make money on its licenses and DVD releases. Only then are studio
executives able to keep their jobs for another round in the next year.
An improved version of this risk-diversification strategy is the release of a
safe backup movie shortly after or before the release of a risky, unproven IP. The
New York Times reported in 20091 that 20th Century Fox was ensuring its $500
million bet on Avatar with Alvin and the Chipmunks: The Squeakquel.22 The first
Chipmunk film cost only about $60 million to make and took in globally $361
million at the box oce. Indeed, the Squeakquel turned out to be a perfect
insurance. The second franchise installment took in a global box oce (not
counting DVD sales, rentals and licensing revenues) of $443 million on a $75
million budget.
Multiple film releases per year is definitely a smart way to diversify and
reduce the overall risk of a film studio. An even better way to reduce risk is to use
as little of the studios own money as possible. In business this magic formula is
called OPM, which simply stands for Other Peoples Money.
Over the years Hollywood could rely on funding by all or some of the
following ways:

s o u r c e : h t t p : / / w w w . n y t i m e s . c o m / 2 0 0 9 / 1 1 / 0 9 / b u s i n e s s / m e d i a / 0 9 a v a t a r. h t m l ?

_r=4&src=twr&pagewanted=all&
2 Estimated figure includes production and marketing budget.

32

Pierre Grage

Government Subsidies (more about subsidies in Chapter 7: VFX and


Globalization)
Tax Shelter Deals (a legal method to decrease taxable income and,
therefore, the liability of a production)
Product Placement (Its safe to assume that no brand featured in a
movie happens to be an accident.)
Presales of distribution rights (The studio keeps, for instance, the
American distribution rights but sells the European rights before the
film goes into production. Surly, these monetary gains limit the
studios upside. But since the studio pours such gains directly into the
production budget of the film again, they also limit their risk.)
Hedge Funds (Investors pool money to back one or multiple movie
productions for profit participation points.)

Even though a film studio could finance its own entire slate of movies, it
will only tap into its own pockets as a last resort because ultimately OPM also
translates into Other Peoples Risk. And as pointed out, movie productions are
always a high-risk crap-shooting venture. Why should a film studioeven
though it also gets consistent cash flow from DVDs and licensing revenues
finance its own movies if they can outsource their risk to taxpayers and outside
investors?
Thanks to the studios clever accounting techniques they are able to push
outside investors into a smaller share of total earnings. If the film studios had to
use their own money, they would never earn as much as they do with the
outsiders capital.
Lets look, as an example, at Paramounts financial masterstroke of the $95
million production Lara Craft: Tomb Raider from 2001. In a nutshell, here is how
the studio reduced its financial risk from 100 percent down to below 10 percent:1
Presales: Intermedia pays $65 million for distribution rights for Britain,
France, Germany, Italy, Spain and Japan.
Government Subsidies: A $12 million subsidy for shooting part of the
film in Britain.

1 source: http://www.edwardjayepstein.com/LaraCroft.htm

33

Inside VFX

Tax Shelter Deals: A German company buys the movie rights and leases
or sells it back to Paramount at a loss. The result is another cool $10.2 million.
Paramounts Remaining Budget: $8.7 million.
A more aggressive use of product placement would have reduced
Paramounts production budget even further. After the successful franchise
installment, Paramount made up for this lack in 2003 for the second Lara Craft
film, Lara Croft Tomb Raider: The Cradle of Life. In a very stylish and scenic African
setting, Lara parachutes into a Jeep Wrangler Rubicon from Chrysler. This scene
worked not only well in the movie but also in a separate commercial, which crosspromoted the movie on TV. Je Bell, vice president of the Chrysler Group, had
only this to say about this deal:
This is more than just a product placement. We have created a 360-degree
integrated marketing campaign around the movie and the debut of the Wrangler
Rubicon Tomb Raider model.1
Hollywood does not like to talk much about its product-placement deals, despite
the fact that those deals have become a very important part of its film-financing
practices.
It all started with the James Bond franchise signing a product-placement deal
for motor vehicles in 1974. All chase scenes, starting with The Man with the Golden
Gun, had to use cars made by American Motors. In return, the producers received
a check of over $5 million.2 In 1997 the James Bond series wrote productplacement history again with its $100 million deal for Tomorrow Never Dies. AMC
reported that brands like Avis, BMW, Ericsson mobile, Heineken, LOral, Omega,
Smirno and Visa all paid for the films entire production budget.3 Only this time
the brands were very obviously noticeable in long shots.4

1 source: http://www.ign.com/articles/2003/05/21/jeep-wrangler-rubicon-tomb-raider-edition
2 Doesnt sound like a lot, does it? Think again. Adjusted for inflation, this number amounts closer to $23

million by ocial inflation calculation. Thats some very serious money even by todays standards.
3 source: http://blogs.amctv.com/movie-blog/2010/05/product-placement-in-the-movies/
4 A shot in filmmaking means a series of frames that runs for an uninterrupted period of time. Transitions

and cuts are used to glue these shots together to create whole scenes and sequences.

34

Pierre Grage

Other filmssuch as Transformers, Battleship and The Lego Moviecarry


the product right in the title. Additionally a franchise like Transformers is also
perfect to advertise cars made by General Motors and the power of the US Army.
Some films even come directly across as two-hour-long commercials. Take The
Internship from 2013 as an example. This funny film deals with two uncommon
guys getting an internship at Google. By the end of the credits even I found
myself browsing the job pages of Google.

35

Inside VFX

conclusion
Since the early 1980s Hollywood has successfully managed to quietly shift their
business model from the box oce over to licensing models. George Lucas was
taking the lead with his legendary Star Wars IP. To this day all Hollywood studios
go to great lengths in making everyone believe that they still care about the box
oce as their only major form of income. In reality though they just see the box
oce as an advertisement for either a new IP or as maintenance to keep an
existing IP valuable. For Hollywood a good box-oce performance results into a
high-value IP for increasing TV licensing sales and hopefully very lucrative
character-licensing deals. A bad box oce, on the other hand, results into a closeto-worthless IP and low TV-licensing sales. Hollywood is no longer in the
business of making great original movies. Its in the business of selling their
brands and characters as toys, computer games and on diapers.
But Hollywoods new economics does not stop there. The film studios also
perfected their strategies to reduce the naturally high risk of producing movies
down to close to nothing. Thanks to the film businesss sex appeal, Hollywood has
no problem exporting risk to outside investors and governments. In return these
outsiders often gain little besides invitations to celebrity parties. There is
practically no chance in hell that Hollywood will ever allow any film talent or
outsider to tap into its real money: the licensing revenues.
Most peopleeven many industry professionals who have to find it out
the hard way1are largely unaware of Hollywoods economic realities. The film
studios are just too successful in creating economic box-oce distraction. Very
few books have been written on this subject, and, without The Hollywood
Economist by Edward Jay Epstein, the information about Hollywoods magical
world of economics would be even thinner.

1 Like myself for example. I became a financial coproducer for the first film I worked on as a CG artist. The

idea was that a small portion of my paycheck would be invested in the film for net points. Ten years later I
am still waiting to receive anything.

36

section 2
hollywood's production costs
and visual effects
This film cost $31 million. With that kind of money I could have invaded some country.
CLINT EASTWOOD on the budget of his film Gran Torino from 2008
The use of digital visual eects in all Hollywood films has risen markedly. It
is not uncommon for a blockbuster to feature 50 to 90 percent of its entire
running time with some form of digital VFX. Such a heavy VFX use will naturally
eat up an equal amount of the production budget, which will be spent on an army
of VFX artists. As if correlation always means coherence, it is often assumed that
VFX expenditures are driving what appears to be dramatically increasing budgets
for Hollywoods blockbuster films.
Film studios often argue that, with rising VFX budgets, their risks have
gone through the roof.1 The companies creating these elaborate VFX almost
always have a tough time justifying and defending their cost basis. The reasoning
that VFX studios not only do the impossible but also save a film production
company money often falls on deaf ears.2 Film production costs have gone from
tens of millions in the 1970s to hundreds of millions today. But can this increase
really be attributed to the rise of digital visual eects?
It seems that many professional filmmakers think so. Some even think that
VFX is still too expensive. Generally the views among professional filmmakers
have changed little since Director Ang Lee made this remark in July 2003:

1 Quite a cutting irony considering how much the new Hollywood managed to reduce their risk by getting

outside investors and governments on board.


2 Films which rely on postproduction usually require less shooting days.

37

Inside VFX

Summer blockbusters are very expensive to make. They have things that have to
be expensive, such as six hundred eects shots or CG characters who have to go a
certain way or a film design that is dierent but expensive.
Its tempting for filmmakers to remember the good old times when big
blockbusters did not cost more than $10 to $20 million to make. Compared to
the $200 million budgets, the risk to make a film these days seems to be, indeed,
unbearable. In June 2013 Steven Spielberg even went so far as to predict an
implosion over these expensive blockbusters:
Theres going to be an implosion where three or four or maybe even a half-dozen
megabudget movies are going to go crashing into the ground, and thats going to change
the paradigm again.1
If we compare a recent big film release with a blockbuster from the 1980s
or the 1930s, this logic definitely seems to make sense. Even adjusted for
inflation, this argument appears to be undisputed.

Neither blockbusters Star Wars nor Gone with the Wind come close to the
estimated production cost of Avatar. Even Star Wars inflation-adjusted $42
million budget looks like nothing compared to Avatars massive nonadjusted

1 Source: www.variety.com/2013/digital/news/lucas-spielberg-on-future-of-entertainment-1200496241/

In Chapter 10: Boom, Doom and Implosions, we will look deeper into this remark.

38

Pierre Grage

$250 million production budget. However, is this huge dierence really because
of the extensive use of CGI1 in Avatar? Is it really possible to produce a Star Wars
today, the way George Lucas did it in the 1970s? For only the inflation-adjusted
$42 million? Especially if we decide not to use CGI, just real celluloid with
optical2 and practical3 VFX? I highly doubt $42 million would still be a sucient
budget if we strictly limit ourselves to use technology from the 1970s.
But if the $42 million were not enough, it would imply that there is
something seriously wrong about the inflation numbers provided by the US
government. Could it really be that the United States is understating their
inflation rate? Why would they do that? I know that most of us have probably
heard about inflation. But if you are not quite sure what inflation means for our
standard of living, the first 101 section is for you. After reading this, you will
know far more about inflation than 90 percent of the average Joes out there.

1 Short for Computer Generated Images.


2 Optical eects are mostly understood as a chemical process, done in a laboratory to produce film

eects.
3 Practical eects are eects that are produced on a movie set by a skilled group of people. These eects

can be gunfire, splatter eects, bullet wounds, rain, wind, fire, explosions and even mechanical-driven
creatures like dinosaurs (animatronics).

39

chapter 6
inflation 101
In a nutshell we call the eect of a price increase for a commodity, such as an
apple, inflation. Price increases can happen every hour, day, month and year.
Despite the fact that there is nothing dierent about the apple itself. It still
tastes and looks the same.
So why does the apple become more expensive?
This is where people usually use the word inflation. Which is not quite
right. Rising prices are merely a symptom of inflation. What the word inflation
really describes is the declining value of the currency we hold in our hands.
Responsibility for the declining value aka inflation falls to the entity thats
issuing or controlling the currency. In most countries this is our government. The
problem with most governments is that they have huge spending deficits. To
grow or to keep their size, operations and spending intact, governments have
three major options:
1.

2.

3.

Issue bonds. In the United States they are called Treasury Bonds. For
the government they are nothing else but debt which has to be repaid
with interest in a time frame from one month to thirty years.
Print more currency into existence. Also known as expanding the
money supply. This happens mostly virtually these days. With the push
of a button.
Increase taxes. Usually a very unpopular decision. Since most
politicians like to stay in power, its traditionally the last resort. High
taxes also have very negative eects on the economy because it
punishes success. It just sucks to work hard, make more money and
then see most of it go to the government. So most people just stop
business activities or leave the country. Which in turn results in overall
lower tax revenues.

Governments all around the world really hate shrinking. Their instinct as
an organism is very similar to cancer. First rule is to survive. Second rule is to

40

Das könnte Ihnen auch gefallen