a strategy for the ontario digital animation and visual effects industry

Strategic Consultants

A Strategy for the Ontario Digital

Animation and Visual Effects Industry

Prepared For

June 17, 2010 Final Report

A Strategy for the Ontario Digital Animation and Visual Effects Industry

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Tom Wesson Consulting

Tom Wesson Consulting was retained by the Computer

Animation Studios of Ontario to develop a strategy for the digital

animation and special effects industry. The principals who

worked on this project are as follows:

Tom Wesson PhD, Schulich School of Business, York University

Dave Barrows MA, Schulich School of Business, York University

Glen Randall PhD, DeGroote School of Business, McMaster University

Computer Animation Studios of Ontario (CASO)

CASO (Computer Animation Studios of Ontario) is a

non‐profit association representing Computer Animation and

Digital Visual Effects companies in Ontario. “CASO’s mandate

is to promote the interests of its members and to enlist the

support of government and private sector partners with an

interest in the growth of the computer animation and visual

effects industry in Ontario.”1 CASO’s initiatives fall under the following general categories:

international promotion and marketing; industry statistics and competitive advantage; promotion

and publicity; education and organizational relations; government relationships; and membership.

Ontario Media Development Corporation

Funding for this study was provided by Ontario Media

Development Corporation. The author of this report is Tom

Wesson Consulting Corporation. Any opinions, findings,

conclusions or recommendations expressed in this material are

those of the author and do not necessarily reflect the views of

Ontario Media Development Corporation or the Government of

Ontario. The Government of Ontario and its agencies are in no

way bound by the recommendations contained in this document.

1 CASO website. http://www.casont.ca/mission.php


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Table of Contents EXECUTIVE SUMMARY .................................................................................. VI

1 INTRODUCTION......................................................................................... 1

1.1 BACKGROUND & PROJECT SCOPE ................................................................................... 1

1.2 APPROACH & METHODOLOGY ....................................................................................... 2

1.3 OUTLINE OF REPORT ................................................................................................... 3

2 THE ONTARIO ANIMATION AND VFX INDUSTRY ........................................ 4

2.1 INDUSTRY CLUSTERS .................................................................................................... 4

2.2 THE ONTARIO COMPUTER ANIMATION AND VFX CLUSTER ................................................... 4

2.3 COMPONENTS OF THE INDUSTRY CLUSTER ........................................................................ 5

2.3.1 Digital VFX ............................................................................................................. 5

2.3.2 Digital Animation .................................................................................................. 6

2.3.3 Digital Animation Technology ............................................................................... 7

2.4 RELATED INDUSTRIES AND ACTIVITIES .............................................................................. 9

2.4.1 Gaming and Interactive Digital Media ............................................................... 10

2.4.2 Alternative Platforms ......................................................................................... 10

2.4.3 Software firms and products .............................................................................. 11

2.5 OTHER INDUSTRY TRENDS .......................................................................................... 11

2.5.1 Co‐productions ................................................................................................... 11

2.5.2 Outsourcing to Low‐Cost Nations ...................................................................... 12

2.6 EDUCATION ............................................................................................................. 13

2.6.1 Community Colleges ........................................................................................... 13

2.6.2 Universities ......................................................................................................... 13

2.6.3 Private Schools ................................................................................................... 14

2.7 INDUSTRY FACTS AND FIGURES .................................................................................... 14

2.8 VALUE CHAINS ......................................................................................................... 15

2.8.1 Inbound Logistics................................................................................................ 17

2.8.2 Operations .......................................................................................................... 17

2.8.3 Outbound Logistics ............................................................................................. 18

2.8.4 Marketing and Sales .......................................................................................... 18

2.8.5 Services ............................................................................................................... 18

2.8.6 Support Activities ............................................................................................... 19

2.9 KEY MESSAGES IDENTIFIED IN THIS SECTION .................................................................... 20


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3 THE FILM AND TELEVISION PRODUCTION CUSTOMER BASE .................... 21

3.1 INTRODUCTION ........................................................................................................ 21

3.2 THE FILM AND TELEVISION INDUSTRY SIZE AND SCOPE ....................................................... 21

3.3 CANADIAN PRODUCTION – ANIMATION AND CHILDREN’S AND YOUTH PROGRAMS ................... 27

3.4 CO‐PRODUCTIONS .................................................................................................... 33


4 GOVERNMENT ROLE IN THE CREATIVE INDUSTRIES ................................ 36

4.1 RATIONALE FOR GOVERNMENT INVOLVEMENT ................................................................. 36

4.2 GOVERNMENT TAX CREDIT PROGRAMS ......................................................................... 36

4.2.1 Canada – Federal ............................................................................................... 37

4.2.2 Ontario ............................................................................................................... 38

4.2.3 Other Provinces .................................................................................................. 40

4.2.4 Jurisdictions Outside of Canada ......................................................................... 43

4.3 OTHER ONTARIO GOVERNMENT INITIATIVES ................................................................... 48

4.4 GOVERNMENT SUPPORT ISSUES FOR ONTARIO IDENTIFIED BY INDUSTRY MEMBERS ................. 51

4.4.1 Tax Credits .......................................................................................................... 51

4.4.2 Other Government Initiatives ............................................................................ 53


5 DATA COLLECTION .................................................................................. 55

5.1 DOCUMENTS ........................................................................................................... 55

5.2 INTERVIEWS ............................................................................................................ 56

5.3 FOCUS GROUP ......................................................................................................... 58

5.4 SURVEY .................................................................................................................. 59

5.4.1 Current and Future State of the Industry ........................................................... 60

5.4.2 Government Support and Tax Credits ................................................................ 65

5.4.3 Employment and Staffing Issues ........................................................................ 67

5.4.4 Key Survey Results .............................................................................................. 67


6 ANALYSIS ................................................................................................ 70

6.1 THE DIAMOND MODEL .............................................................................................. 70

6.1.1 Factor Conditions ............................................................................................... 72

6.1.2 Demand conditions ............................................................................................ 73

6.1.3 Firm Strategy, Structure and Rivalry .................................................................. 75

6.1.4 Related and Supporting Industries ..................................................................... 76


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6.1.5 Summary of Cluster Analysis .............................................................................. 77

6.2 SWOT ANALYSIS ..................................................................................................... 77


7 RECOMMENDATIONS .............................................................................. 82

8 CONCLUSION: A NEW BUSINESS PARADIGM .......................................... 89


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Executive Summary The Computer Animation Studios of Ontario Association (CASO) was created in 2005 in order to

represent and promote the interests of organizations that do work in the area of computer

animation and visual effects (VFX) in Ontario. In November of 2009, the CASO Executive, with

financial support from the Ontario Media Development Corporation (OMDC), retained the services of

Tom Wesson Consulting Corporation to prepare a report that would assist the industry in setting a

new strategic direction intended to facilitate growth and long‐term stability within the industry.

The Wesson team was responsible for collecting and reviewing existing data on the industry,

collecting new data through consultation with experts and industry leaders, and analysing this data in

order to arrive at recommendations for helping the industry to meet future challenges. Data were

collected through a combination of a literature review, individual interviews, a focus group and a

survey. The Institute for Social Research at York University was retained to administer the survey. In

the course of this project, hundreds of documents and reports were reviewed and more than 50 key

industry stakeholders participated in individual interviews, a focus group session, and/or completion

of an industry survey. The information obtained was then used to conduct an analysis of the industry

and to formulate a number of specific recommendations for supporting the industry’s future growth.

It quickly became apparent that the current business model of the Ontario digital animation and VFX

industry is under stress. Instability within the industry was attributed in part to fluctuation in

demand for services due to changing consumer preferences, swings in the value of the Canadian

dollar, and growing domestic and international competition. Competition has been especially fierce

since many jurisdictions around the world offer attractive tax incentives and studios have

demonstrated a willingness to relocate productions in response to these tax credits. As soon as one

jurisdiction improves its tax credit offering, other jurisdictions must quickly follow suit. For many

years, Ontario was a leader in the digital imaging industry, but increasingly the industry in Ontario is

being challenged by other jurisdictions that have built stronger reputations for quality, consistency

and reliability in some cases and low‐cost in others. As a result of this increased competition from

two sides, Ontario is “stuck in the middle,” ‐ not clearly differentiated from other higher‐cost

competitors and unable to profitably match the prices charged by lower‐cost competitors.

Moreover, many firms in the Ontario industry lacked the power to retain a fair share of the value

they created. Ontario computer animation and VFX studios are an intermediate supplier to

producers of television programming and films. The industry can be considered an important value‐


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added supplier in the supply chain for major film studio and television producers, and its activity

provides significant economic contribution to the Ontario economy. However, most Ontario

computer animation and VFX studios have little, if any, power in relation to their customers. The

result is that Ontario studios are forced to compete with each other, and competitors from other

jurisdictions, primarily on the basis of price, allowing the producers of the projects on which they

work to capture most of the value the Ontario studios create. For service work there are only a few

Ontario studios whose reputation for quality production differentiates them enough from their

competitors to allow them to charge a premium price and capture a more substantial share of the

value they create. Ontario animation studios that produce internally developed television series

must licence their productions to broadcasters, who can sell commercial time or collect subscription

fees to in order to capture value from viewers. Unfortunately, in the relationship between the

animation producers and the broadcasters, the broadcasters also hold the balance of power and,

therefore, are able to capture the balance of the value created. In this report we have identified this

problem as the inability to capture intellectual property rights.

The current business model used by most organizations within the Ontario digital animation and

special effects industry is not able to support a strong and expanding industry. In the absence of

change, the industry in Ontario will continue to be vulnerable to external forces and be required to

react to each new stressor rather than collectively set the future direction for the industry. The

industry’s options for change are limited.

Individually each government/OMDC initiative appears to be important and useful in supporting the

industry. However, while they are necessary, they are not sufficient to achieve the kind of structural

changes that will be required for the industry to be internationally competitive. The new world of

alternative distribution channels represents both an exciting opportunity and a considerable threat

to CASO members and their existing business model. Government’s role in this industry will

therefore remain critical regardless of the direction in which the industry proceeds.

The following recommendations have been developed with the recognition that the digital animation

and visual effects industry in Ontario is multifaceted with no “one size fits all” solutions. While some

Ontario studios have successfully carved out a niche within the industry, many others find

themselves in the unenviable position of being providers of a narrow range of services that need to

compete on price during low‐demand periods in order to cover overhead costs. Building a stable and

thriving industry over the long term requires the current business model to be re‐invented. While

some industry players may wish to continue with business‐as‐usual, most within the industry will

have to reconsider how they do business. In the short to medium future, this will mean maximizing

adaptability and improving the predictability of cash flows. This may be achieved by expanding

services into less familiar territory, working with former competitors to be able to attract larger

projects, identifying opportunities and approaches to developing and maintaining some control over

intellectual property, and enhancing supports to the industry. In the long term, this will mean

coming together as an industry to promote Ontario having a quality advantage rather than cost


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advantage so that premium pricing may be commanded on a more consistent basis.

A key lesson from this study and countless other studies of industries facing global competition is

that strong firms and strong industries do not exist in isolation. Strengthening Ontario's digital

animation and visual effects industry will strengthen the entire ecosystem in which the industry

exists. The following recommendations identify a course of action in which these benefits can be

realized with little or no incremental spending by the government of Ontario.

1: Promote the Industry on the Basis of Quality (It is recommended that CASO, the members of the

industry and the OMDC work to shift the focus of the industry’s marketing strategy to promoting

the quality of Ontario service providers).

2: Seek New Opportunities to Apply the Industry's Skill Set (CASO should work with industry members

to identify and exploit additional markets in which the skills, resources and intellectual property of

the industry could be applied).

3: Develop World Class Communications Infrastructure to Support the Industry (It is recommended

that CASO investigate the feasibility of establishing a high‐speed data network (something similar

to SohoNet in the UK) along with options for attracting investment for such a project).

4: Ontario Studios Should Work Together on Projects (It is recommended that the industry enhance

flexibility and adaptability by creating a virtual cooperative in which studios can seamlessly work

together on projects).

5: Work to make the OCASE Tax Credit Payable to Producers (CASO and members of the industry

should work with the Ontario Government revise the current tax credit system in order to flow

both benefits and risks directly to the producers).

6: Provide Transition Funding Until Changes to OCASE are fully Implemented (CASO, other members

of the industry and other stakeholders should work with the Ontario government to implement a

transitional loan guarantee program for qualifying Ontario studios).

7: Modify the Residency Requirement for OCASE Tax Credits (It is recommended that the provisions

of the OCASE tax credit be modified with respect to the residency requirement for an employee’s

salary to qualify for the credit. We recommend that the residency requirements be changed so

that an employee need only be a resident of Ontario for tax purposes at the time his or her work

on a project is performed to meet the residency requirement).

8: Enhance Mid‐Career Retraining Opportunities (It is recommended that CASO and the provincial

government work with the educational institutions in Ontario to ensure that there is adequate

availability of part‐time and short‐term re‐training programs for mid‐career individuals wishing to

upgrade or alter their career paths).


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9: Moderate the Power of the Buyers of Animation by Exploring the Possibility of Harmonizing Tax

Credit Requirements (CASO and the Ontario industry should explore the possibility of working

with other interested groups (for example Film Ontario and the CFTPA), and the OMDC to make

the requirements of the Ontario Film and Television Tax Credit consistent with those of the OCASE

tax credit in terms of proving the commercial viability of the project.

10: Moderate the Power of the Buyers of Animation by Expanding Animation Producers' Potential

Distribution Channels (It is recommended that virtual cooperative (recommendation #4) and

CASO should facilitate the development and retention of intellectual property for industry

members, especially by Ontario animation studios).

The recommendations made in this study can help move the Ontario industry into a position where

Ontario digital animation and VFX firms differentiate themselves from their competitors and will be

able to earn sustainable margins. The benefits of the recommendations made in this report will

extend beyond the Ontario digital animation and VFX industry. By strengthening the industry, these

recommendations will also strengthen the entire Ontario digital media cluster.


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1 Introduction

1.1 Background & Project Scope

The Computer Animation Studios of Ontario Association (CASO) was created in 2005 in order to represent and promote the interests of organizations that do work in the area of digital animation and visual effects (VFX) in Ontario. While the initial focus of CASO was on computer animation and VFX for film and television, the association acknowledged the need to broaden its scope to include a more diverse group of organizations engaged in related digital technologies production including:

Music Video or Commercial Companies engaged in computer animation;

Computer Animation for Gaming;

Classical Animation;

Stop Motion Animation ;

Motion Capture Studios;

Special FX and FX Make Up Providers; and

Animatronics Companies.

One issue that CASO focused on in its early days with great success was advocating for changes to the provincial government’s approach to tax credits for this specialty segment of the film and television industry. As a result, the Ontario Computer Animation and Special Effects (OCASE) tax credit can be credited with promoting growth and greater stability within the industry. In recent years, CASO has been proactively marketing and advertising the industry in foreign markets and has begun investigating opportunities for supporting expansion of the industry over the mid and long‐term. To this end, the CASO Executive, with financial support from the Ontario Media Development Corporation (OMDC), sought to develop a strategy for moving the industry forward with the assistance of external experts.

In the summer of 2009, CASO began a search for a consulting firm that would be able to provide assistance in setting a new direction for the Ontario computer animation and digital VFX industry. This new direction was intended to facilitate growth and long‐term stability within the industry. In particular, CASO wanted to ensure that the industry was appropriately positioned as the global economy improved in order to:

enable studios to market and promote their services and products effectively;

guide development of training and educational programs;

ensure that public policy is targeted and appropriate to the changing needs of the market and the industry;

provide a more precise direction for the success of studios; and

enable studios to build successful businesses, attract capital and continue to thrive.


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Tom Wesson Consulting Corporation was retained by CASO and began working on this project in

November of 2009. The Wesson team was responsible for collecting and reviewing existing data on

the industry, collecting new data through consultation with experts and industry leaders, and

analysing this data in order to arrive at recommendations for helping the industry to meet future

challenges. While the project was to have an Ontario focus it is inevitable that consideration would

be given to the global industry insofar as it will have an impact on what happens within Ontario.

1.2 Approach & Methodology

In attempting to assess possible future directions for the computer animation and VFX industry in

Ontario, we faced several challenges. One challenge was the overwhelming amount of information

available. A great deal has been written about Canada’s creative sector with hundreds of studies,

reports and government documents shedding light on government policy, consumer behaviour and

economic impact. While many of these documents are extremely broad, others are more focused

covering the range of digital media activities from animation to gaming. This plethora of information

required us to sift carefully through this vast array of documents to identify those that may provide

evidence and insights into developing the most appropriate strategies for the computer animation

and VFX industry.

Another key challenge was to obtain current and detailed information about the state of the

computer animation and VFX industry. Things move quickly in the digital age. For instance, even

during the course of this study, several governments announced modifications to their tax credit

programs and, as we were in the final stages of writing this report, one of the largest digital

animation and VFX studios in Ontario, CORE Digital Pictures declared bankruptcy and shut its doors.

In addition, in a competitive industry such as this one, individuals may not feel completely

comfortable sharing detailed or proprietary information about their company. Yet the success of this

study depended on obtaining a clear and accurate picture of how the industry functions as well as

the opinions and perception of the key players within the industry. In order to overcome this

problem, data were collected through a combination of individual interviews, a focus group and a

survey. This process allowed the researchers to compare the information obtained to ensure its

validity.

Interviews of key individuals from within the industry as well as representatives from government,

educational institutions and supporting organizations were conducted. Respondents were selected

based on their knowledge and potential insight into the workings of the computer animation and

visual effects industry. These interviews were semi‐structured to allow respondents some flexibility

to expand on their answers.


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A focus group was also conducted. The group included individuals representing a wide range of

services provided within the industry, ranging from financing and production to animation for

television and VFX for feature films. The focus group format was used in addition to the interviews in

order to promote in‐depth discussion and debate about topics affecting the industry. This format

allowed participants to build on thoughts of others and to challenge each other’s perceptions of the

state of the industry.

An emailed survey of Ontario industry members was also conducted. The survey format was used to

provide respondents with greater anonymity, which is important given that some financial data were

being requested, as well as additional time to reflect on answers to questions about the future of the

industry. Questions on the survey sought to obtain information about perceptions of quality, value

and reputation of the Ontario industry and to better understand the challenges and opportunities

that face the industry. The Institute for Social Research at York University was retained to administer

the survey.

1.3 Outline of Report

This report begins with an Executive Summary that describes briefly the purpose of the study, how

the study was conducted, and the major findings and recommendations. The main body of the

report begins by providing background and introductory information. Sections 2 and 3 of the report

provide an overview of the status of the film and television industry as well as more detailed

information about the computer animation and visual effects industry within Ontario. Section 4

discusses the role of government in supporting the industry with specific discussion of tax credits,

providing some comparative information, and possible options for changes. Section 5 provides an

overview of how data were collected and a summary of findings from the interviews, focus group,

and survey. Section 6 reports on the analysis of the industry using secondary research and the

primary data collected for the study. It includes a SWOT analysis, a discussion of the industry value

chain, and key issues within the industry. The report concludes with a direction for moving the

industry forward along with specific recommendations that would assist the industry in moving

towards this new direction.


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2 The Ontario Animation and VFX Industry

The purpose of this section is to provide an overview of the state of the industry in Ontario. The data

come from a variety of sources which we have compiled and integrated.

2.1 Industry Clusters

Clusters have been defined as “geographic concentrations of interconnected companies, specialized

suppliers, service suppliers, firms in related industries, and associated institutions (for example,

universities, standards agencies, and trade associations) in particular fields that compete but also

cooperate” (Porter, 1998, p. 78). In a similar vein, Cooke defines economic clusters as

“geographically proximate firms in vertical and horizontal relationships, involving a localized

enterprise support infrastructure with a shared developmental vision for business growth, based on

competition and co‐operation in a specific market field” (Cooke, 1999, p. 292). The following are

some of the potential benefits associated with such an industry cluster:

improved access to skilled labour and suppliers, government funding , and specialized

knowledge/expertise (including from high quality educational institutions);

increased productivity related to proximity that promotes small firms cooperating, sharing

knowledge, and building a trust relationship;

the creation of an environment that encourages growth of new companies; and

the fact that well entrenched clusters are more resistant to change and are better able to

resist external shocks such as a downturn in the economy (Smith et. al., 2004).

2.2 The Ontario Computer Animation and VFX Cluster

In Ontario, a cluster of firms with computer animation and digital VFX expertise has emerged through

a combination of the innovation and creativity of entrepreneurs within the industry, government

supports to the industry and high quality specialty education.

The Ontario computer animation and special effects cluster includes not only all of the studios that

provide animation or visual effects services for the television or film markets but also firms in related

industries and those organizations that provide supporting services. Organizations providing


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supporting services include government, financial services, and software developers. The firms in

related industries may include those providing specialty computer animation or visual effects

services for specialty markets or platforms including:

firms producing commercials or related advertising;

firms in the gaming sector producing games for telephones and iPods, video, Internet

(including interactive);

firms producing educational materials (including animation and/or visual effects for medical

or military training); and

firms that provide content for new digital media platforms (including hand held devices such

as telephones and iPods, podcasts, and interactive media).

2.3 Components of the Industry Cluster

2.3.1 Digital VFX

Digital VFX artists use computer technology to modify or enhance live‐action cinematography. The

industry does not include non‐digital “in‐camera” effects using manipulation of such things as

physical elements in the shot, lighting, makeup, prosthetics or costumes. In many circumstances, the

use of special effects is clear to all audience members. When we see giant monsters picking up cars,

spaceships traveling at the speed of light or massive explosions destroying entire city blocks, we

know what we are watching is not real. However, today almost every studio produced feature film

uses some VFX to create exactly the look and feel that the director is looking for in a particular scene,

or in some cases, simply to save on production costs. Besides the obvious spaceships and explosions,

other common uses of VFX include:

creating digital set extensions – extending a scene beyond what exists or is affordable to

create;

• crowd replication – creating small crowds or massive armies without having to hire or direct

large numbers of extras; and

• altering environmental conditions – changing such things as the time of day or the weather

or altering the physical environment to set a scene among mountains, by the oceanside, on a

lonely country road or wherever else the artistic vision of the filmmakers may require .

When VFX are used effectively, very often audience members have no idea that they are watching

digitally altered images on the screen.


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There are many steps involved in the process of creating digital VFX. Although these steps will vary

somewhat depending on the demands of a particular scene, they generally include:

1. consulting with the filmmakers to create a basic design for the effect;

2. preparing a budget and creating a schedule;

3. supervising on set filming of the scene to ensure that the needs of the VFX artists are taken

into consideration to allow the VFX to be added as easily as possible;

4. creating the individual digital elements that will be used to create the effect (e.g. characters,

props, backgrounds);

5. integrating the basic effect into the live‐action sequence;

6. manipulating the background of the scene using such techniques as set extensions, crowd

replication and matte painting;

7. adding additional environmental elements such as fire, water, dust and smoke to a scene;

8. removal of digital elements that do not belong in the final scene; and

9. creating and outputting the final film or digital image.

2.3.2 Digital Animation

Canada has a long history of groundbreaking work in the computer animation industry.2 The focus of

this work has always been on the development of systems for artists in the arts and entertainment

sectors. As early as the 1960s, Canadian computer researchers were working with creative users to

develop systems to aid the creative process.

Like the creation of digital VFX, the creation of digital animation is a complex multistep process.

However, it can be broken down into four broad stages.

Development

In the development stage, basic ideas and design concepts are developed. The main plot elements,

characters and setting are established. This is also the stage where funding is secured and control of

intellectual property rights is established.

Preproduction

In preproduction, the basic ideas from the development stage of the production process are

advanced to the point that they are ready to be developed for the final product. This is where the

final script is written, storyboards are drawn, characters and backgrounds are designed, and the basic

look and feel of the production is established.

2 Innovation in Creative Industries: The Case of Computer Animation in Canada,

http://www.nextcentury.ca/Papers/CanAmbrief.html


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Production

The production stage of 3‐D3 computer animation involves three basic steps:

1. 3‐D Modeling, which involves forming the shape of an object or character. In character

animation, the character is first “rigged”, meaning that its underlying skeletal structure is

created. This structure can then be used by an animator to create the character’s

movements without requiring the animator to know all of the details of the character’s set‐

up.

2. Layout and animation: In this step objects are placed in the scene and their movements are

created. Important aspects of this process are ensuring that objects are correctly sized

relative to each other in the three dimensional space of the scene, and that objects’ shapes

change realistically as they move relative to the point of view of the viewer and also as they

interact with other objects. Also included in this stage is lighting the scene, ensuring that

each shot is lit realistically and consistently throughout the scene and the entire production.

Lighting is one of the most difficult steps in the 3‐D animation production process.

3. 3‐D Rendering: In this final stage, all of the components of the scene are combined to create

the final image that will appear on screen. Many features of the scene (lighting, shadows,

reflections, depth of field, textures, motion blur, etc.) are manipulated to create the look

desired by the animator. This stage is very computer intensive. It can take many hours of

computing time to render each frame of a high quality production. Feature films have a

frame rate of 24 frames per second, so a 90 minute animated feature would require about

130,000 frames.

Post Production

The postproduction stage of a project involves taking all of the individual elements created so far ‐‐

digital animation, film footage, special effects, sound effects and so on ‐‐ and combining them into

the finished product. Steps in this stage include editing, adding music, checking quality and creating

the final film or digital output.

2.3.3 Digital Animation Technology

Many steps in the digital animation and VFX processes are completed through a combination of

manually manipulating objects on the computer screen and manipulating objects automatically with

software scripts (a script is a series of commands that can run repeatedly to automate a repetitive

task). Important skills required for creating digital animation efficiently include knowing when it is

3 Throughout this report we will use the term 3‐D to connote computer‐generated two‐dimensional images that simulate a three‐dimensional view. We will use the term stereoscopic or stereoscopic 3‐D to connote images that create a simulated three‐dimensional appearance by displaying an image with a different point of view to each of the viewer's eyes.


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best to create a script to automate a process and what the best way to formulate such a script is.

Over time, the developers of animation software have added more and more features to their

products so that many things that were once done manually or with scripts are now included as

features of many popular programs (e.g. animating fur or water). In many cases, software providers

notice that their products are being used for certain tasks and build tools for completing those tasks

into new releases of the program – sometimes even incorporating scripts they have received from

users into the tool within the program. In other cases, an animator or IT specialist will market a

script he or she has created to perform a particular task as an add‐in for a computer animation

software program. In either case, it generally happens that a particular skill that might differentiate

an animation studio or individual animator at a particular point in time will become commonplace in

the near future. It is essential, therefore, for studios and individuals who wish to remain at the top of

the industry to continually add new skills and push new limits in their work.

Another key consideration in managing the animation process (or the animation pipeline as it is

referred to in the industry) is assessing how handling a particular task at one stage of the process will

affect later stages of the process. For example, an animator might create a scene in a way that

seems very efficient to him but makes the scene very difficult to light later on in the production

pipeline.

Another way of automating the digital animation or VFX production process is to use software and

hardware capable of capturing real‐world conditions and building that information into digital

images. For example, it is now possible to use instruments to do a 360° survey of on‐set lighting

conditions and fit that data into software used for the lighting stage of digital VFX production, instead

of having an artist light the effect manually. This method of digital VFX lighting is faster, more

efficient, and is scalable. Some major digital VFX studios now use this lighting process exclusively for

their visual effects.

One factor that discourages the use of automation and reduces efficiency in the industry is the desire

of clients to have a “fresh look” for each project. This desire for novelty means that digital animation

and VFX artists, like their clients, are constantly reinventing things and finding ways of doing things

differently than they had been done in the past. Even for sequels, producers and directors usually

want a fresh look. This trend is exacerbated by the continuous improvement in technology that

makes more and more realistic animation and effects possible. A startling statistic that shows the

extent of this continuous push for realism in digital animation is that when Toy Story was produced

by Pixar in 1995 it took about 2 hours of computer time to render each frame of the film. When Pixar

produced Cars 10 years later, it took an average of 15 hours of computing time to render each frame

using computers that were about 300 times more powerful than those used on Toy Story. 4

4 http://www.cgenie.com/component/content/article/47‐articles/94‐realism‐is‐dead‐long‐live‐simplicity.html?directory=257, accessed December 9, 2009.


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A major technological change that is currently taking place in the feature film and television industry

is the huge push to implement stereoscopic 3‐D technology. Millions of dollars are currently being

spent worldwide to replace traditional film projectors with stereoscopic 3‐D capable digital

projectors in movie theatres. Many major consumer electronics manufacturers have announced the

introduction of stereoscopic 3‐D televisions. Stereoscopic 3‐D technology is being marketed to

consumers as a way of achieving a more realistic viewing experience. The technology is billed as

much more than a way to create the thrill effects of traditional stereoscopic 3‐D movies – monsters

reaching out of the screen and so on. Stereoscopic 3‐D technology is also being touted as a way to

create greater intimacy, making viewers feel like they are part of an onscreen dinner party, that one

character is really running toward another to celebrate their reunion in a point‐of‐view shot, or that

they are sitting on the sidelines as they watch their favourite sporting team compete.

Another important reason for the push towards stereoscopic 3‐D, especially for feature films, is a

desire on the part of the studios to curb piracy by making it difficult to record images off the screen

in theatres. A move to stereoscopic 3‐D technology might seem likely to have a large impact on

digital VFX and animation studios, but its effect will actually be quite minimal. Because the

animation and VFX studios all use similar technologies, the change will impact them all equally and,

because they are all extremely comfortable working with digital technologies, the move to

stereoscopic 3‐D is not a major paradigm shift. The major change comes in the rendering stage of

the animation process, where for stereoscopic 3‐D productions a scene will need to be rendered

from two different perspectives. However, despite the relatively minor impact of stereoscopic 3‐D

technology on digital animation and VFX production, Ontario studios still report that their clients are

reluctant to compensate them proportionally for this added work.

2.4 Related Industries and Activities

As mentioned earlier, Canadian artists began working with information technology as early as the

1960s. In contrast, developments in computer animation in the US were driven by the military and

industries such as aviation and telecommunications. The connection that existed between the

developers of computer animation and creative users in Canada continued through the 1970s and

led directly to the vibrant Canadian computer animation industry that emerged in the 1980s.

However, this historical connection also means that the Canadian computer animation and VFX

industry is somewhat more narrow than that of the US. This difference is potentially important

because there are a variety of industries closely related to digital animation and VFX. As we will

discuss further below, success in these related industries can help support a region's computer

animation and VFX industry. Some of these related sectors are discussed here.


10

2.4.1 Gaming and Interactive Digital Media

“The term interactive digital media includes several types of content available through a variety of

digital platforms. Interactive digital media includes content such as games, news, stories, comedy,

videos and audio. This content can be delivered via a variety of devices including computers, game

consoles and mobile devices.”5 The international gaming sector generates revenues of more than

$42 billion annually. The Ontario sector consists of dozens of gaming companies that employ more

than 2,000 people and generate more than $1 billion in revenues each year. Annual growth has

been at the staggering rate of 20% a year during each of the past five years. While the

Ontario/Toronto gaming sector is smaller than that of Vancouver or Montreal, it benefits from its

historical association with hardware and software manufacturing and the educational sector, which

operates more than 100 specialized digital gaming programs. Ubisoft’s recent Toronto expansion is

indicative of the expected growth in this sector. Ubisoft’s plans call for the development of a studio

with 800 employees. Ubisoft plans to invest more than $500 million in the project while the

government of Ontario has pledged $263 million in support over 10 years6.

While the gaming sector requires employees with a similar skill set as in the film and television sector

of the computer animation and VFX industry, there are some important differences. For instance,

gaming requires a much larger proportion of technical programmers versus artists, the interactive

components are greater, and the gaming sector uses different distribution channels. Our interviews

also indicate that the aspects of the gaming industry that are furthest from the digital animation

industry – designing and programming the software “engines” that drive video game play – are the

most attractive segments to compete in. The major game developers are increasingly focusing on

this aspect of the industry, subcontracting the game animation to specialists. These game animation

specialists face many of the same disadvantages in their relationship with the game developers that

CASO members do in their relationships with major movie studios – intense price competition and

difficulty developing and controlling intellectual property, etc.

2.4.2 Alternative Platforms

Advances in digital technology have supported the growth in new platforms such as telephones,

iPods, and webisodes. These platforms represent a growth opportunity within the industry. In

addition, information and communications technology (ICT) networks now permit members of the

public to become participants in the consumption of digital media. Content can be easily stored,

viewed online, modified, and shared or exchanged through peer‐to‐peer file sharing.

5 OMDC Interactive Digital Media Industry Profile, http://www.omdc.on.ca/AssetFactory.aspx?did=6564 6 Develop‐online.net, November 2009 issue, http://issuu.com/develop/docs/dev100_web, assessed January 15, 2010.


11

2.4.3 Software firms and products

There are two major software programs used in the digital animation and VFX industries, Houdini,

produced by Side‐Effects Software and Maya, produced by Autodesk. Both programs were originally

created by Toronto‐based companies. However, since 2006 when Autodesk acquired Alias Software

(the creator of Maya), Maya has been part of Autodesk’s Media and Entertainment Division, which is

based in Montreal. Houdini and Maya both began in the mid‐1990s. Houdini was first released in

1996, and Version 10 was released in April of 2009. Maya was created when Silicon Graphics

Incorporated (SGI) purchased and combined two prominent 3‐D graphics firms, Alias Software of

Toronto and Wavefront of Los Angeles. The combined company, Alias|Wavefront was

headquartered in Toronto. In 1998, it introduced Maya, which combined source code from both

Alias’s and Wavefront’s pre‐merger products into a single product. Maya quickly became an industry

leader. In 2003 the Ontario Teacher’s Pension Plan bought Alias (as it was once again known) from

SGI. In late 2005, the Teachers sold Alias to Autodesk, with the sale closing in January 2006.

Autodesk moved the company’s operations to Montreal. The latest version of Maya, known as

Autodesk Maya 2010, is the 11th version of the software. Both Side‐Effects and Alias have won

Science and Technical Oscars for their products.

One of the key features of both Houdini and Maya is that they employ open code architecture so that

users can both customize their appearance and write scripts to perform specialized functions not

included in the programs themselves. It is also possible for 3rd parties to produce add‐ins for the

programs.

2.5 Other Industry Trends

2.5.1 Coproductions

Although co‐productions are not new to the film industry, there has been a steady rise in their

numbers in the international film industry over the past decade. Co‐productions are essentially

collaborations between film producers from two or more countries on a single project. The benefits

of a co‐production include the ability to share resources, spread risk, and in many cases benefit from

tax incentives from multiple countries. In an environment where the ultimate demand for the

product is uncertain, these advantages can be important drivers. Formal co‐productions require the

existence of a co‐production treaty between the home nations of the firms involved. It is the terms

of these co‐production agreements that allow producers to access very generous incentive packages.


12

2.5.2 Outsourcing to LowCost Nations

Trends towards globalization in combination with technological advances have made outsourcing of

many products and services commonplace. While shifting of services to low cost countries has its

appeal in terms of cost savings, it also creates additional complications. In the case of computer

animation and visual effects, the downside primarily relates to quality control and difficulties

maintaining the feel of North American cultural norms when some elements of productions take

place in developing economies. Despite this issue, some estimates suggest that as much as 90% of

American television animation is produced at least in part in Asia (Lent, 2000).

Levels of outsourcing fluctuate with the introduction of new technologies. For instance, only a few

years ago it was impractical to attempt to separate the creative elements from the technical tasks in

digital animation, but now outsourcing has become common place. In fact, Tschang and Goldstein

(2004) have concluded that “it now appears that when labour‐intensive production processes

mature, along with substantial mechanisms for coordination and specifications, production can be

located almost anywhere” 7. The main difficulty remains finding individuals with a mix of artistic

talent and computer programming skills8. As we move to 3‐D technologies, “the creative pre‐

production tasks are rarely outsourced, since they demand frequent interaction between artists,

software experts, and others in the studio”9 .

In Ontario, the industry’s experiences with outsourcing have not been uniform. Some firms report

having relied on outsourcing extensively while others have never attempted to outsource. Some

firms reported that attempts to outsource created headaches in terms of a greater need to supervise

work quality. A typical problem is that once overseas firms gain sufficient expertise to produce a

high quality product, they can, in fact, end up competing with their former mentors for projects.

Some individuals within the industry were not concerned about competition from developing

economies while others suggested that it is only a matter of time before quality improves to such an

extent that the overseas firms become viable alternatives to production in Western centres.

7 Tschang, T. and Goldstein, A. (2004). Production and political economy in the animation industry: Why

insourcing and outsourcing occur, in Proceedings of DRUID Summer Conference, June 14‐16, 2004, Elsinore,

Denmark, p.19.

8 Jones, A. and Oliff, J. (2006). Bridging the 2D and CG gap. Computer Graphics World, 29(11), 8‐10.

9 Yoon, H. and Malecki, E.J. (2009). Cartoon planet: worlds of production and global production networks in the

animation industry. Industrial and Corporate Change, pp. 1‐33. doi: 10.1093/icc/dtp040.


13

2.6 Education

A key resource requirement for the digital animation and VFX industry is a steady supply of skilled

artists to work in the industry. Almost all of these artists learn the basic skills required by the

industry in postsecondary educational institutions. Therefore, having these educational institutions

nearby is of great benefit to firms in the industry. Fortunately, Ontario has world‐class educational

institutions in the field. Community colleges, universities and non‐degree granting private schools

are all involved in training digital animation and VFX artists in Ontario.

2.6.1 Community Colleges

Several Ontario community colleges have programs in computer animation and VFX and they are

generally regarded as among the best programs in the world. These include Sheridan College,

Algonquin College, Seneca College and St. Clair College, among others. Of these, Sheridan College

has the highest profile international reputation, and it is considered to be among the top schools in

North America for animation training. Graduates from this program have been hired by companies

including Disney/Pixar and DreamWorks. Most faculty members at Sheridan have extensive

experience in the industry. Programs at Sheridan include:

A four year Bachelor of Applied Arts in Animation (BAAA), which was recently expanded from

a three year diploma program; and

Graduate Certificate Programs (eight months each) in:

o Computer Animation;

o Computer Animation ‐ Digital Character Animation; and

o Digital Visual Effects.

The undergraduate degree program focuses on classical animation training. More advanced training,

such as 3‐D technology is largely reserved for specialty training in one of the graduate programs. The

graduate programs target classical animators, illustrators, filmmakers, graphic designers, and

industrial designers. Sheridan admits around 140 students into year 1 of the 4 year applied BA

program, 30 into post graduate computer animation program, 30 into the digital character animation

program, and 15 into post graduate digital visual effects program. Programs at Ontario’s other

Community Colleges offer a similar slate of core and specialty programs.

2.6.2 Universities

Ontario is respected for the quality of its graduates in the areas of both computer programming and

media arts. A large number of Ontario’s universities offer degree programs that provide broad based

training in the use of digital media. While these programs often allow students to specialize in areas


14

such as animation or gaming, they tend to take a more generalist approach than is seen in the

Community Colleges. In addition, most Ontario Universities offer programs in computer

programming, but the University of Waterloo stands out as the preeminent institution. Graduates

are highly sought after by organizations including Microsoft, Research in Motion, and Google. One

factor that has helped to set Waterloo apart from other universities is its long history of working

closely with industry. Recently, the University of Waterloo announced its participation in an

incubator project in which it works with and supports innovation in promising new companies. One

such company is AXS Biomedical Animations Studio, a company that creates 3‐D medical animation

for biomedical research and other applications.10

2.6.3 Private Schools

There are several private career colleges grouped in the Toronto area that offer programs in film

production, animation, computer programming, and game design. These schools tend to focus on

practical skills development and are generally shorter than the Community College programs, often

ranging from weeks to less than a year. While there may be variability in the quality of instruction

across the programs, the main differentiating factor is the shorter period of training time. Despite

this difference, there is acknowledgement from the mainstream educational institutions that

talented students will do well regardless of the program they complete.

2.7 Industry Facts and Figures

It is difficult to determine accurately the precise size of the digital animation and VFX industry in

Ontario since it is dominated by privately held small and medium sized enterprises. In 2008, CASO

commissioned a survey of the Ontario digital animation and VFX industry in order to determine as

accurately as possible the size and scope of the industry. This survey was completed by the Nordicity

Group and will be referred to as the Nordicity survey throughout this report. Its principal findings are

as follows:

In 2007, the Ontario industry's revenue was in the range of 170 to 200 million dollars;

More than 40% of the respondents to the survey had revenues of less than $2 million a year

while a nearly equal number had revenues of between $2 million and $5 million per year;

A few large firms had revenues of more than $15 million;

10 Personal communication, Kevin Tuer, VP, Digital Media, Communitech and Managing Director, Canadian Digital Media Network. January 6, 2010.


15

70% of respondents were privately held corporations while only 3% were public

corporations. These public corporations were all foreign controlled. The remainder of firms

in the industry were sole proprietorships or partnerships;

Overall, the survey paints a picture of an industry dominated by small, privately held firms.

Of note, 28% of respondents indicated that they had outsourced work to other Ontario firms

in the past;

Because of the industry's structure, the firms’ largest source of start‐up capital was their

founders’ personal funds (54% of start‐up funds), and their largest source of ongoing funding

was retained earnings (59% of ongoing funding). Firms in this industry typically have limited,

if any, access to outside capital;

10% of the respondents to the survey had been in business for more than 20 years. The

biggest cohorts of firms, however, were those between seven and eleven years old (38% of

respondents) and between two and six years old (34% of respondents). Only 3% of the

respondents were two years old or less;

According to the survey, by far the largest operating expense for the Ontario industry was

wages and other employee compensation, which totalled 64% of all operating expenses. The

next largest category of expenses was software and equipment at 17.9% of all expenses.

The OMDC is also a good source of data on the industry because it administers the tax credit

programs that support the industry. The main tax credit that supports the industry is the Ontario

Computer Animation and Special Effects (OCASE) tax credit. For the 2007‐2008 fiscal year, the

OMDC estimates that it paid about $11.4 million in OCASE tax credits on 254 computer animation

and VFX projects valued at $225.6 million. About 48% of the OCASE credits paid were paid on

Canadian projects and 52% were paid on foreign projects. This foreign share was lower than both

the preceding and following fiscal years, where foreign projects received 60% and 58%, respectively,

of the OCASE credits paid. In 2006‐2007, the value of OCASE credits paid was only marginally lower

at $11.1 million than in 2007‐2008, but those credits were paid on far fewer projects (130) with much

lower value ($154 million) than in 2007‐2008.

2.8 Value Chains

A value chain provides a representation of how various activities within an organization (or industry)

contribute to adding value to a product or service (Porter, 1985). An organization’s (or industry’s)

profit is ultimately dependent on the extent to which these activities lead to a product that

consumers perceive as being of a greater value than the cost of the inputs required to produce it.

Through analyzing its value chain an organization may be able to gain a competitive advantage by

identifying gaps in best practices and altering the structure of the value chain as needed. Such


16

alterations are primarily intended either to enhance efficiency or to provide greater differentiation

and value to consumers. Alterations to the value chain may include:

Eliminating low value‐added activities to focus resources on higher value‐added activities (to the extent possible; this might include options such as outsourcing);

Enhancing integration (forward or backwards) for greater control of inputs, production, and/or distribution channels;

Improving horizontal integration (including sharing of information and resources across industry stakeholders);

Utilizing technological innovations; or

Devising unique adaptation to the value chain that has not been used by competitors.

Value chains not only map the flow of products in an industry but also provide insights into how

various industry stakeholders interrelate. These insights are essential since cooperative links

(including the sharing of risks, rewards and resources) through the value chain can facilitate

efficiency and ultimately provide a competitive advantage (Soosay et al., 2008).

A value chain analysis divides value‐adding activities into two broad categories. The "primary

activities" include: inbound logistics, operations (production), outbound logistics, marketing and

sales, and services (maintenance). The "support activities" include: administrative infrastructure,

management, human resource management, technology (R&D), and procurement.

Our analysis with respect to the value chain for CASO is below. We have utilized a generic value

chain in recognition of the complexity of the actual value chain and the variations in value chains

from the perspective of individual organizations. This value chain is intended to identify key

components of the value creation process, communication linkages across the value chain, and key

issues arising from the structure of the value chain. The value chain components are derived from

quantitative and qualitative assessments. Quantitative assessments are the synthesis of our

extensive consultations with multiple industry stakeholders.


17

Figure 1: The Value Chain

2.8.1 Inbound Logistics

The major competitive issue concerning inbound logistics which CASO members face is how to share

data quickly and efficiently with their clients. It is discussed below under outbound logistics, where

its impact is more severe. The survey, focus groups and in‐depth discussions did not identify any

other major issues with respect to inbound logistics.

2.8.2 Operations

Given the nature of the production process and lack of economies of scale in the digital animation

and VFX industry, there are very few opportunities available for firms to reduce production costs

without also reducing quality. Some repetitive tasks can be automated with scripts, and animators

become more efficient with experience, but in general cost savings are difficult to achieve. This is

why there is much interest in the global industry for the possibility of outsourcing work to developing

countries where wage rates are much lower. An operational issue that emerged in our analysis of

the Ontario industry is that because of the lack of large firms in Ontario, it is very difficult to have

extremely large projects come to the province.

The Ontario computer animation and VFX industry has been in existence for many years. As a result,

the industry is well known in the television and film production sectors. However, industry members

complain that they are still required to undertake demonstrations for the major studios. This

practice would suggest that, notwithstanding the financial support from various levels of

government, the industry continues to have a quality perception issue.


18

2.8.3 Outbound Logistics

CASO members deliver their output to their clients in an electronic format. Because the files

involved in digital animation and VFX projects are so massive, hard drives of material have generally

been shipped by courier. This approach is obviously not optimal. It entails delays and risks. Some of

CASO's competitors, most notably those in London, have access to direct high speed connections to

Los Angeles area clients. For London‐based studios, SohoNet provides studios with a fast and secure

data connection to their LA clients.

2.8.4 Marketing and Sales

The Ontario industry would like to market its products on the basis of world class quality of service.

However, recently the studios’ marketing focus has primarily been on price as opposed to quality

differentiation. Competing on price requires continued support and assistance from various levels of

government. However, it is not possible to create a unique advantage with respect to government

financing because other jurisdictions continue to offer equivalent or greater compensation packages

for international producers. No jurisdiction is able to gain sustainable advantage. Adding to the

difficulty of competing on price is the fact that competition from developing nations is making it

increasingly difficult for digital animation and VFX studios from developed nations to be the low cost

provider regardless of how generously they are supported by their government.

2.8.5 Services

In our discussions with industry members with respect to the value chain, we identified few strategic

issues with respect to the provision of services that augment the core products of the industry.

However, some members did point out that consultation between the producer and the digital VFX

studio prior to and during principal photography is valuable and can significantly reduce the cost of

adding digital VFX in the postproduction stage.

One additional point that became clear in our interviews is that in the commercial market it is

necessary for studios to offer a broader spectrum of services to their clients (e.g., catered meals,

arranging hotels and drivers, etc.). This practice makes it difficult for studios to serve the commercial

market as well as the general market.


19

2.8.6 Support Activities

Support activities are those elements of a firm’s value chain that cut across the primary activities to

help the firm create value for its customers. Support activities include such things as research and

development, human resource management and financial management.

Because each project in the computer animation and VFX industry is essentially a “one‐off” custom

project, it is very difficult to undertake significant research and development activities. The existence

of the Ontario‐based software company Side Effects appears to have had little if any impact on the

research and development activities of the Ontario‐based computer animation and VFX industry.

Our research did identify two human resource management challenges faced by the Ontario

computer animation and VFX industry. First, because of the large project nature of work in the

industry and the international mobility of its skilled labour, it is often necessary for firms to hire

skilled labour from outside of Ontario to complete projects in the time required. Hiring workers from

outside Ontario can affect the studio’s eligibility for some Ontario tax credits and can be complicated

by immigration issues. Secondly, our research identified a training related issue within the industry.

While Ontario community colleges do an outstanding job of supplying the industry with skilled new

hires, there is a group of industry professionals who have extremely valuable experience in

animation, but lack the latest technological skills. Because of the itinerant nature of the workforce in

the industry, firms are reluctant to incur the significant retraining expenses required to give these

workers the technological skills to adequately complement their industry experience.

Another supporting activity in which there are clearly significant issues within the Ontario computer

animation and VFX industry is in the area of financial management. While the OCASE and Ontario

production services tax credits provide generous support without which industry members would

find it next to impossible to secure work, there are still significant problems faced by industry

members trying to raise capital. Unfortunately, as currently structured, the OCASE tax credit actually

exacerbates this problem. The severity of this funding crunch faced by many firms is exemplified in

the recent collapse of CORE Digital Pictures, despite the firm's significant list of current projects.


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2.9 Key Messages Identified in this Section

Research indicates that cluster development is vital for the long‐term viability

of the industry. There is no clear definition as to what constitutes the industry. A narrow

definition focuses exclusively on digital animation and visual effects. A broader

description would include such activities as commercials, gaming, and medical,

military, and educational animation/simulations. The industry is dominated by small and medium size enterprises that lack

access to external sources of equity financing. The organizations providing support to the industry are generally of high

quality.


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3 The Film and Television Production Customer Base

3.1 Introduction

The purpose of this section is to understand the broader market for CASO members to sell their

services. The market for digital animation and VFX and is driven by conditions in the film and

television production industry. Therefore, one needs to analyze conditions in the film and television

industry to understand the visual special effects and computer animation industry.

Although there is significant variation from sector to sector, the film and television production

process can be broken down broadly into five steps.

Early Stage Development ‐ story development, book optioning, draft script development, etc.

Development

− hiring talent ‐ director, actors, etc.

− securing financing – including finding co‐production partners if applicable

− selecting filming locations ‐ often influenced by financial considerations

Production ‐ principal photography, second unit photography, etc. Post‐Production ‐ editing, addition of special effects, etc. Distribution ‐ marketing and promotion, participation in festivals, etc.

When a digital animation studio is producing a project from an idea that was developed in‐house, it

can guide the project through each step of this process. Often, however, a larger film or television

production company will hire an Ontario digital animation studio to complete all or part of the

production stage of a project that is developed from an idea developed by the larger studio. Digital

VFX studios often become involved in a project only in the postproduction stage although it is

generally preferable to involve the digital VFX studio in the development and production stages.

Earlier involvement in the project helps to ensure that the addition of special effects to the project in

the postproduction stage can be carried out as efficiently as possible.

3.2 The Film and Television Industry Size and Scope

As can be seen in Table 1 (below), the film and television production industry has been a significant

contributor to the Ontario economy in recent years. However, there has also been significant year‐

to‐year variation in the value of film and television production in the province. The value of


22

production in 2009 was more than 40% higher than in 2008. However, this is essentially unchanged

since 2004. This pattern is indicative of an industry that is not experiencing trend growth and

experiences significant volatility. While changes in the levels of domestic production contribute

significantly to this variation, we can also see from Table 1 that the value of foreign productions in

Ontario has shown even greater variability in both relative and absolute terms.

Table 1: Ontario Film Production Spending11

$ Millions

2009 2008 2007 2006 2005 2004

Domestic12 Feature Film 99.2 26.6 75.7 118.4 113 39.8

Domestic TV Series 488.3 453.5 326.0 332.7 279.5 358.2

Domestic TV Other 86.8 64.5 96.9 98.3 82.6 50.2

Foreign Feature Film 161.8 79.0 224.9 218.2 317.4 331.3

Foreign TV Series 58.0 16.0 16.1 75.2 60.9 53.2

Foreign TV Other 52.3 31.6 51.5 45.4 80.4 101.8

Total Domestic 674.3 544.6 498.6 549.4 475.1 448.2

Total Foreign 272.1 126.6 292.4 338.7 458.8 486.3

TOTAL 946.4 671.2 791.0 888.1 933.8 934.5

Table 2 (below) compares Ontario feature film production to Ontario television production. It shows

that over the last six years television production has consistently been a larger contributor to the

Ontario economy than feature film production. In 2008 and 2009, in particular, television

production was much higher than feature film production in Ontario. Table 2 also shows that the key

driver of this reliance on television was high levels of Canadian television productions. Over the six

11 Source: OMDC, Ontario Film and Television Production 2007 – 2009, accessed at http://www.omdc.on.ca/AssetFactory.aspx?did=6767, February 20, 2010 and Ontario Film and Television Production 2004 – 2006 accessed at http://www.omdc.on.ca/AssetFactory.aspx?did=5600, November 18, 2009. The dollar figures in table 1 represent production dollars left in Ontario from all productions using OMDC administered incentives and services. There may be productions that shot in Ontario that are not included in these totals due to the timing of project applications. 12 Throughout this document we will use the terms “Canadian” and “domestic” to indicate a film or television production that meets the requirements to be funded as domestic content under the federal government’s funding rules. These are explained more fully below.


23

year period shown in Table 2, Canadian television production was on average more than 50% of all

film and television production in Ontario.

Table 2: Ontario Film Production Spending – Feature Film vs. Television13

2009 2008 2007 2006 2005 2004

Feature Film Total

261.0

105.6

300.6

336.6

430.4

371.1

Television Total 685.4 565.6 490.5 551.6 503.4 563.4

946.4 671.2 791.1 888.2 933.8 934.5

Feature Film Share 27.6% 15.7% 38.0% 37.9% 46.1% 39.7%

Television Share 72.4% 84.3% 62.0% 62.1% 53.9% 60.3%

Canadian TV Share 60.8% 77.2% 53.5% 48.5% 38.8% 43.7%

While Tables 1 and 2 show that the volume of Canadian television produced in Ontario is increasing,

the data in Table 3 suggest that this increase is likely not uniformly distributed across all genres.

Table 3 shows total Canadian production spending for various genres of domestic television. These

data show that production spending on fiction programs has been essentially stagnant, and

production spending on children's and youth programs has dropped slightly over the period covered

by the table, while the highest areas of growth have been the “documentary” and “other” categories.

However, year over year change is extremely volatile, and there appears to be no sustained growth

with the exception of the “other” category, which accounts for no more than 6% of all production

spending in any one year.

In addition to the changes that are taking place in terms of the genres of television programming

created by Canadian producers, another shift is taking place in terms of the type of broadcaster who

is funding the productions. Figure 2 shows that in recent years there has been relatively low growth

in production spending by conventional broadcasters while spending by specialty broadcasters has

grown rapidly.

13 Source: OMDC, Ontario Film and Television Production 2007 – 2009, accessed at http://www.omdc.on.ca/AssetFactory.aspx?did=6767, February 20, 2010 and Ontario Film and Television Production 2004 – 2006 accessed at http://www.omdc.on.ca/AssetFactory.aspx?did=5600, November 18, 2009. The dollar figures in table 2 represent production dollars left in Ontario from all productions using OMDC administered incentives and services. There may be productions that shot in Ontario that are not included in these totals due to the timing of project applications.


24

Table 3: Canadian Television Production by Genre14

$ Millions

CAGR15 2001‐02 to

2007‐08 2007‐2008

2006‐2007

2005‐2006

2004‐2005

2003‐2004

2002‐2003

2001‐2002

Fiction 1.1% 933 954 806 832 749 860 876

Children’s & Youth ‐5.8% 250 379 276 280 290 300 358

Documentary 6.7% 424 481 395 387 374 313 287

Magazine 3.4% 156 130 144 143 133 145 128

Variety & Arts 5.0% 149 143 120 125 159 127 111

Other 29.0% 120 90 53 47 24 56 26

Total 2.2% 2,032 2,177 1,794 1,814 1,730 1,802 1,785

Figure 2: Expenditure on Independent Canadian Productions by Canadian Private

Broadcasters16

14 Source: Canadian Film and Television Production Association (CFTPA), Profile 2009, accessed at

http://www.cftpa.ca/newsroom/pdf/profile/profile2009‐en.pdf, November 18, 2009. Page 38. 15 Compound annual growth rate

16 Source: CFTPA, Profile 2009, p. 50.

87 97 100 101 109 122 126 138 145 14312 15 26 23 30

34 38 4058 64

116

171198

233

291

331354 324

410 425

0

100

200

300

400

500

600

700

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Specialty Television

Pay Television

Private Conventional Television


25

Table 4: Film and Television Production Spending by Home Province of Producer17

Table 4a: Spending, $ millions, 2007‐2008

ForeignService

Production

Canadian

Total Value Television Film

British Columbia 1,518 1,174 318 26

Ontario 1,228 350 776 102

Quebec 965 120 726 119

Rest of Canada 359 121 212 26

Total 4,070 1,765 2,032 272

Table 4b: Share of Spending, 2007‐2008

Service Production

Canadian

Total Value Television Film

British Columbia 37.3% 66.5% 15.6% 9.5%

Ontario 30.2% 19.8% 38.2% 37.4%

Quebec 23.7% 6.8% 35.7% 43.6%

Rest of Canada 8.8% 6.9% 10.4% 9.5%

Total 100.0% 100.0% 100.0% 100.0%

Table 4 illustrates further the reliance of Ontario's film and television industry on Canadian television

productions. Compared, in particular, to its chief Canadian rival in the market for English‐language

productions, British Columbia, Ontario is very reliant on Canadian television production. Table also

shows that British Columbia dominates Ontario in terms of foreign service production. Québec's

performance is explained in large part by its high share of French language production. About 25% of

Canadian television production spending and 30% of Canadian feature film production spending

occurs on French language productions. The majority of these projects are produced by Québec‐

based producers.

17 Source: CFTPA Profile 2009 pages 29 and 80. Provincial data from the CFTPA is not strictly comparable to the OMDC data presented elsewhere in this report. The OMDC measures production activity that takes place within the province of Ontario, regardless of the home of the production company involved. The CFTPA measures production based on the home province of the producer, regardless of where production activity takes place.


26

British Columbia dominates in terms of service production. This appears to be related to a number of

factors including geographic proximity to California, government support, production quality, and

diversity in filming locations. As Figure 3 shows, the vast majority of service productions in Canada

are completed for US‐based clients. Since California is the center of the US film and television

industry, British Columbia's geographic advantages are significant.

Figure 3: Share of Foreign Service and Location Productions in Canada by Country of

Copyright18

Table 5 shows the average production spending per project for foreign and domestic television and

feature film productions in Ontario. As the table shows, there is significant variation from year to

year in all categories. However, foreign feature film productions consistently have much higher

production spending than any other category of production. Similarly, foreign television productions

have much higher spending than domestic television productions.

In 2009, foreign productions in Ontario averaged almost three times the spending per project of

Canadian productions, while foreign feature film projects in Ontario averaged more than five times

the spending per project of domestic feature films. Thus, Ontario's film and television industry's

18 Source: CFTPA, Profile 2009, page 83. The CFTPA notes that “Canadian projects in the foreign location and service sector include projects made by Canadian producers primarily for foreign audiences, or as part of international co‐ventures. International co‐venture production includes films and television programs made as international co‐production, but outside of the auspices of a bilateral co‐production treaty.”

79%

13%

2%3% 1%

3%

United States

Canada

Germany

France

United Kingdom

Other


27

strength lies in industry sectors that have relatively low levels of production spending and high levels

of volatility in their budgets.

Table 5: Average budget per Project – Ontario Film and Television Production19

($ millions)

2009 2008 2007 2006 2005 2004

Domestic

Feature Film 3.54 1.77 3.03 3.48 5.14 3.06

Television Series 4.61 3.57 4.13 3.43 3.83 4.78

Television Movies, Mini‐series, Specials, Pilots 1.38 1.11 1.62 1.31 1.50 1.29

Total Domestic 3.42 2.72 3.04 2.67 3.17 3.53

Foreign

Feature Film 17.98 8.78 16.06 15.59 14.43 25.48

Television Series 9.67 3.20 2.68 9.40 12.18 13.30

Television Movies, Mini‐series, Specials, Pilots 4.02 3.51 3.43 4.54 5.74 4.85

Total Foreign 9.72 5.50 8.35 10.58 11.19 12.80

TOTAL 4.21 3.01 3.97 3.73 4.89 5.66

3.3 Canadian Production – Animation and Children’s and Youth Programs

An important segment of the Canadian television production industry is animation for youth and

children’s programming. As Figure 4 shows, while there is significant year‐to‐year variation in the

level of animation production in Canada, there does seem to be a downward trend in production

19 Source: OMDC, Ontario Film and Television Production 2007 – 2009, accessed at

http://www.omdc.on.ca/AssetFactory.aspx?did=6767, February 20, 2010 and Ontario Film and Television Production 2004 – 2006 accessed at http://www.omdc.on.ca/AssetFactory.aspx?did=5600, November 18, 2009. The dollar figures in table 5 represent production dollars left in Ontario from all productions using OMDC administered incentives and services. There may be productions that shot in Ontario that are not included in these totals due to the timing of project applications. The number of television series does not include cycles [seasons] which began production in the previous year.


28

levels over the past 10 years. The vast majority of Canadian animation is produced for the children's

and youth market (85% in 2007‐8 and 90% in 2006‐7).20

Figure 4: Total Volume of Canadian Animation Production (All Genres)21

There are many factors leading to the decline in the production of children's and youth films and

television programs in Canada. Several of these factors relate to project funding. Table 6 shows the

sources of funding for children's and youth television production in Canada for the years 1999‐00

through 2007‐08. One of the first things one notices is the funding from the company producing the

program dropped from $59 million or 15% of the funding in 1999‐00 to $10 million or 4% of the

funding in 2007‐08. This is perhaps not surprising given the data in Figure 5, which show that the

average profitability of Canadian film and television producers has been declining since the mid‐

1990s and was actually negative in 2007.

20 CFTPA, Profile 2009, page 22 21 Source: CFTPA Profile 2009, page 27

0

50

100

150

200

250

300

350

$ M

illions


29

Table 6: Sources of Financing for Canadian Children’s and Youth Production ($ Millions)22

1999‐ 2000

2000‐ 2001

2001‐ 2002

2002‐ 2003

2003‐ 2004

2004‐ 2005

2005‐ 2006

2006‐ 2007

2007‐ 2008

Private Brdcstr. L. Fees* 41 40 45 41 44 53 48 82 51

Public Brdcstr. L. Fees** 11 13 15 24 17 19 26 21 24

Federal Tax Credit 37 35 31 25 27 31 29 41 25

Provincial Tax Credit 41 33 40 36 37 44 49 66 40

Canadian Distributor 37 38 22 24 21 12 12 28 21

Foreign 117 74 52 23 41 22 21 19 16

Production Company 59 88 78 40 34 27 19 37 10

Cdn. Television Fund 28 31 49 58 41 45 46 45 49

Independent Prdn. Funds 6 7 7 8 8 10 13 13 14

Other Public 4 3 3 7 2 4 2 7 0

Other Private 7 8 16 14 18 14 11 19 0

Total 388 370 358 300 290 281 276 378 250

* Private broadcast licence fees

** Public broadcast licence fees

Another factor contributing to this decline in animation production is the significant decline in

revenue from foreign presales realized by Canadian animation producers. As shown in Table 6, in

2007‐2008, Canadian animation producers received $16 million in foreign presale revenue. In 1999‐

2000, foreign presale revenue had been $117 million.23 A related trend is the drop in fees from

Canadian distributors. These fees are usually paid by distributors in anticipation of foreign sales.

These fees dropped from a high of $38 million in 2000‐01 to $21 million in 2007‐08, although they

were as low as $12 million in 2004‐05 and 2005‐06. In all, financing from foreign sales dropped from

$154 million (or 40% of all sources of financing) in 1999‐00 to $37 million (or 15% of all sources of

financing) in 2007‐08.

22 Source: CFTPA, The Case for Kids Programming: Children's and Youth Screen Based Production in Canada, 2009 Edition, accessed at http://www.cftpa.ca/newsroom/pdf/CFTPA_2009_Kids_Study.pdf, November 27, 2009. Page 7. 23 Source: CFTPA, The Case for Kids Programming: Children's and Youth Screen Based Production in Canada, 2009 Edition, accessed at http://www.cftpa.ca/newsroom/pdf/CFTPA_2009_Kids_Study.pdf, November 27, 2009. Page 6.


30

Figure 5: The Operating Profit Margin of Canadian Film and Television Producers24

There are several possible reasons for this decline in foreign revenue for Canadian children's and

youth television programs. First, global market conditions have changed. In many countries there is

an increased focus on broadcasting locally produced television programming, especially for children.

This change has coincided with increased consolidation of the EU into a single Continental market,

making any EU‐based producer a domestic producer in all of the EU nations. Another factor reducing

foreign demand for Canadian children’s programming is the creation of large, global, vertically‐

integrated broadcasters/producers of children's programming, such as Disney and

Nickelodeon/Viacom. Finally, the producers' foreign revenue is reduced because Canadian

broadcasters are beginning to demand international and other rights as part of their broadcast

license agreements with producers, even when the broadcasters have no immediate plans to exploit

these rights.

Since the completion of a licensing agreement with a Canadian broadcaster is a requirement for

television programs applying for many tax credit programs, including the Canadian Film or Video

Production Tax Credit and the Ontario Film and Television Tax Credit,25 Canadian broadcasters have

huge bargaining power in their negotiations with Canadian animation producers. The changes that

24 Source: Statistics Canada, CANSIM variable v21570251 from table 5010008 (1995‐2004, released August 2006) and variable v43975080 from table 3610016 (2006‐2007, released May 2009). 25 These are the main federal and provincial (respectively) tax credits for which Ontario based productions are eligible. They are described more fully below.

‐2

‐1

0

1

2

3

4

5

6

7

8

Operating Profit Margin %

Operating Profit Margin %

5 per. Mov. Avg. (Operating Profit Margin %)


31

have taken place in the animation market in the last few years have hit Ontario particularly hard,

since 61% of children’s and youth programming in Canada was produced in Ontario (data from 2005‐

6 and 2007‐8). 26

Figure 6: Financial Leverage of Public Investments in Canadian Television: Dollars of Private

Funds Invested per Dollar of Public Funds Invested (2007‐2008)27

Despite these current problems, historically children’s and youth programming has been one of the

strongest sectors of the Canadian film and television production industry. As shown in Figure 6,

children's and youth programming generates relatively high levels of private investment for each

public dollar invested in the sector. Part of the reason for this private investment is that children's

and youth programming is the genre of programming in which Canadian produced programs has the

highest share of Canadian television viewership (see Figure 7). Children's and youth programming is

also important to broadcasters because it attracts audiences at times that otherwise would be very

slow periods in the broadcast day. Additionally, children's and youth programs are also less prone to

seasonal variation in audience levels.

26 Source: CFTPA, The Case for Kids Programming: Children's and Youth Screen Based Production in Canada, 2009 Edition, accessed at http://www.cftpa.ca/newsroom/pdf/CFTPA_2009_Kids_Study.pdf, November 27, 2009. Page 26. 27 Source: CFTPA, The Case for Kids Programming: Children's and Youth Screen Based Production in Canada, 2009 Edition, accessed at http://www.cftpa.ca/newsroom/pdf/CFTPA_2009_Kids_Study.pdf, November 27, 2009. Page 35.

1.1

1.14

1.25

1 1.05 1.1 1.15 1.2 1.25 1.3

All Genres

Fiction

Children's and Youth


32

Figure 7: Viewing of Canadian Programs As a Share of Total Viewing (6 AM to 2 AM Time Slots,

2007‐2008)28

Children’s and youth production is also a strong generator of export revenue, accounting for 18% of

the total amount of foreign financing of Canadian television production in 2007/08, despite

representing only 12% of total Canadian television production volume.29

Finally, children's and youth programming has also been an important training ground for industry

members. Many members of the Canadian film and television industry ‐ both those appearing on

camera and those working behind the scenes ‐ got their start in children's television. Sarah Polley,

Ellen Page, Elisha Cuthbert, Jay Baruchel and Clement Virgo are among the prominent Canadian

talents who found important early career success in children's programs.

An ironic element of the children's and youth television sector in Canada is that children and youth

oriented broadcasters are generally performing very well financially while the producers of the

programs they broadcast are not. According to the CFTPA, Canada's specialty and pay broadcasters

of children's and youth programming had an average profit before income taxes of 40.6% of sales.30

Specialty and pay broadcasters specializing in fiction programs for general audiences had average

profit before taxes of only 27.9%.

28 Source: CFTPA, The Case for Kids Programming: Children's and Youth Screen Based Production in Canada, 2009 Edition, accessed at http://www.cftpa.ca/newsroom/pdf/CFTPA_2009_Kids_Study.pdf, November 27, 2009. Page 23. 29 Source: CFTPA, The Case for Kids Programming: Children's and Youth Screen Based Production in Canada, 2009 Edition, accessed at http://www.cftpa.ca/newsroom/pdf/CFTPA_2009_Kids_Study.pdf, November 27, 2009. Page 28. 30 Source: CFTPA, The Case for Kids Programming: Children's and Youth Screen Based Production in Canada, 2009 Edition, accessed at http://www.cftpa.ca/newsroom/pdf/CFTPA_2009_Kids_Study.pdf, November 27, 2009. Page 33.

0 10 20 30 40 50 60 70 80 90

Variety & Performing Arts

Documentaries

Drama and Comedy

Children's and Youth

English Market

French Market


33

In sum, although animated children's and youth television programming is still an area of relative

strength for the Ontario digital animation industry, is not as strong a segment of the market for

Ontario as it once was.

3.4 Coproductions

As mentioned above, co‐productions can be very attractive mechanisms for television and feature

film producers. Canada currently has co‐production treaties with 53 nations. In 2008, Canadian

producers were involved in 58 co‐productions with partners from 14 of these 53 nations.31 Of these

77 co‐productions, 50 were in English and 27 were in French. However, as Table 7 shows, 2008 was

marked by a drastic decline in co‐production activity involving Canadian producers. Table 7 shows

this decline largely came from a precipitous drop in feature film co‐productions. Not surprisingly,

most of this decline was attributable to a decline in activity with Canada's two major co‐production

partners, France and the United Kingdom. According to CFTPA, co‐production activity with the

United Kingdom declined because of a series of changes in the tax laws in the UK since 2004 that

have made it less favourable for UK producers to pursue co‐productions. Feature film co‐productions

involving UK producers have dropped from 106 in 2003 to 22 in each of 2008 and 2009.32 Also

contributing to the decline in Canada‐UK co‐productions was a general tendency within the EU to

partner with other EU producers. This trend also explains the reduction in Canada‐France co‐

productions.

Nonetheless, Table 7 shows the importance of co‐productions to the Canadian film and television

production industry. Over the past decade, co‐productions have accounted for as much as 40% of all

spending on Canadian feature films. While that share has declined to an average of about 15% over

the last few years, it is still significant. In terms of all spending on feature film and television

production in Canada, over the last 10 years co‐productions have consistently accounted for 5 to 7%

of all spending. We should also note from Table 10 that co‐produced feature films have significantly

larger budgets than Canadian productions. These larger budgets should allow producers to improve

the quality of their product. It is also an important point for CASO members to make note of,

because those larger overall budgets should allow producers to significantly increase their VFX

budgets.

31 Source: CFTPA Profile 2009, pages 31‐33. 32 http://www.ukfilmcouncil.org.uk/media/pdf/j/i/2009_Full_Year_Production_Report_Final_Version.pdf


34

Table 7: Canadian Coproduction Activity ($ Millions)33

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

TV

Foreign budgets 161 183 277 274 183 131 126 121 145 136 128

Canadian budgets 218 211 387 313 185 122 99 97 108 110 112

Total volume 379 394 664 587 368 253 225 218 253 246 240

Number of projects 60 53 76 82 78 54 54 51 43 47 44

Avg. project budget 6.3 7.4 8.7 7.2 4.7 4.7 4.2 4.3 5.9 5.2 5.5

Feature Film

Foreign budgets 94 110 126 94 81 171 115 70 126 199 27


Total volume 186 214 228 189 177 368 221 149 203 322 57


Avg. project budget 11.6 10.2 10.9 9.5 8.4 11.9 13 9.3 10.1 11.9 4.1

Total

Foreign budgets 255 293 403 368 264 302 241 191 271 335 155


Total volume 565 608 892 776 545 621 446 367 456 568 297


Avg. project budget 7.4 8.2 9.2 7.6 5.5 7.3 6.3 5.5 7.2 7.7 5.1

33 Source: CFTPA Profile 2009, pages 32, 55 and 71.


35


There has not been any substantial, long‐term sustainable growth in the film

and television marketplace. The Ontario digital animation and visual effects industry receives a higher

proportion of revenues from the less lucrative Canadian film and television

industry; whereas, British Columbia receives a much higher proportion of

revenues from the foreign film and television marketplace. The industry (in Ontario, Canada and internationally) has been exceedingly

volatile, making it difficult to manage cash flows. One of the strongest sectors in the Canadian film and television production

industry has been the children’s and youth sector in Ontario; however, this

industry has experienced significant declines in recent years.


36

4 Government Role in the Creative Industries

The following discussion looks at the tax credit system in Ontario and several of its key rivals in the

digital animation and special effects industry. In many cases, including Ontario, there are special

incentives for studios to perform digital animation and special effects production within the

jurisdiction.

4.1 Rationale for Government Involvement

Governments around the world invest in their local film and television production industries.

Governments invest in the industry in part because of the social and cultural benefits it brings. The

industry provides a pathway for cultural expression and offers members of a society the opportunity

to see and hear their own stories told from their own point of view. The cultural media industries

also provide an opportunity for a society to communicate stories and ideas beyond its borders to the

world as a whole. However, a major reason for government involvement in this industry is the

significant economic impact the industry can have. According to the OMDC, Ontario's cultural media

industries contribute $6.7 billion to the province's economy annually and create more than 36,000

jobs.34 Moreover, governments are particularly active in the cultural media industries because many

of the jobs created are high‐paying jobs requiring high levels of specialized skills.

Many jurisdictions throughout North America and around the world offer the attractive tax

incentives to entice motion picture producers to complete some or all of the motion picture

production process within the jurisdiction. Motion picture producers, especially the major

Hollywood studios, are very sensitive to these incentives and will often locate production activities

where tax incentives provide them with the lowest overall production cost. Because of the

willingness of the studios to relocate productions in response to tax credits, there is fierce

competition among jurisdictions wishing to maintain a competitive tax credit regime. As soon as one

jurisdiction improves its tax credit offering, other jurisdictions quickly follow suit.

4.2 Government Tax Credit Programs

What follows is a description of the tax credit programs offered by the Canadian federal government,

Ontario, its main competitors for computer animation and VFX work as identified by industry experts

34 Ontario Media Development Corporation, Annual Report 2006‐2007. Page 3.


37

(BC, Quebec, the United Kingdom and California), and two US states whose experience is informative

to our later discussions (New Mexico and Iowa).

4.2.1 Canada – Federal

The Film or Video Production Services Tax Credit (PSTC)

The federal government's PSTC program is designed to entice foreign film and television producers to

choose Canada as their production location and to employ Canadian industry members. The PSTC is

a 16% tax credit on all qualified Canadian labour expenditures. The PSTC is jointly administered by

Revenue Canada and the Canadian Audio‐Visual Certification Office (CAVCO). Both Canadian and

foreign‐owned firms may apply for the PSTC. The credit can be applied for either by a project’s

producer or by a firm providing production services to the producer. CAVCO operates on a cost

recovery system, with most projects paying a $5,000 administration fee with every tax credit

application. The fee is lower for small projects (if the total tax credit is less than $25,000).

The PSTC is payable on all wages and salaries paid to persons who were resident in Canada at the

time the payments were made, provided the services for which they were paid were performed in

Canada. The tax credit is paid on labour expenditures net of any other assistance, however. This

means that the PSTC on digital animation or VFX work performed in Ontario is reduced by as much as

45% because of the tax credits paid towards the project by the government of Ontario.35 Industry

participants refer to this effect, where one tax credit reduces the value of other tax credits, as “the

grind”. They would describe the federal tax credit as having been "ground down" by the provincial

credit.

The Canadian Film or Video Production Tax Credit (CPTC)

The CPTC is the federal government's program to support films and television programs with

significant Canadian content. In order to be eligible for the credit, a production must meet specific

criteria regarding key creative personnel and production costs. If a production meets the criteria,

CAVCO issues a ruling certifying that the production meets the Canadian content requirements

necessary to be eligible for the CPTC. The CPTC pays a credit of 25% of all eligible salaries and wages,

35 More typically, "the grind" would be 25% of the labour, since this is the amount of the Ontario Production Services Tax Credit, which is the main tax credit payable to foreign firms producing in Ontario. If however, the producer of a project is directly involved in creating digital animation or VFX in Ontario as part of the project, and is therefore eligible for The Ontario Computer Animation and Special Effects tax credit, then the grind would be 45% of the labour.


38

which may not exceed 60% of the total cost of the production, net of other assistance.36 CAVCO

charges fees of 0.15% to 0.3% of eligible production costs to process CPTC applications.

Scientific Research and Experimental Development Tax Credit (SRED)

The SRED tax credit is a general federal tax credit available to all industries, not just entertainment

industries. Because the government applies a fairly stringent definition of “scientific research and

experimental development,” it is often quite difficult for firms in the film and television industries to

be eligible for the grant. The difficulty is often in separating eligible from ineligible costs. For

example, if an employee was working on a project for a client, and as part of that work developed a

computer script to automate a particular task, the time spent developing the script might be eligible

for the tax credit but documenting the eligible expenditures would likely prove difficult. Several

industry members we talked to suggested that applying for the SRED tax credit was often not worth

the effort involved.

4.2.2 Ontario

Ontario has three major tax credit programs that support its digital animation and VFX industry.

They are:

1. The Ontario Film and Television Tax Credit (OFTTC) ‐ this credit is for Canadian producers

with a permanent establishment in Ontario. The amount of the credit is 35% of all eligible

labour expenditures within Ontario. To be eligible, a production must have at least six

Canadian content points (as calculated by CAVCO, with 10 being the maximum score), be

predominantly shot and posted in Ontario, spend at least 75% of its total budget on Ontario

costs, and have an agreement with an Ontario‐based distributor or a Canadian broadcaster

to have the production shown in Ontario within two years of completion. First time

producers receive a 5% bonus, lifting the total rate for the tax credit to 40% on the first

$240,000 of eligible labour. Productions that are shot entirely outside of the Greater

Toronto Area or which have at least five location days (or one location day per episode for

television series) in Ontario of which 85% or more are outside of the Greater Toronto Area

are eligible for a 10% bonus on their Ontario labour expenditures, bringing the total tax

credit to 45%. The OFTTC is jointly administered by the OMDC and The Canada Revenue

Agency (CRA). The application fee for the Ontario film and television tax credit is 0.06% of

the production budget, with a minimum fee of $100 and a maximum fee of $5,000 per

production.

36 That is, the CPTC is also subject to the "the grind".


39

2. The Ontario Production Services Tax Credit (OPSTC) ‐ this is a tax credit of 25% of all

qualified production costs incurred in Ontario. It is payable to any Canadian or foreign‐

owned corporation that undertakes film or video production or provides production services

at a permanent establishment in Ontario, files an Ontario corporate tax return, and owns the

copyright to the eligible production or contracts directly with the copyright owner to provide

production services to an eligible production. The OPSTC requirements are largely the same

as the federal PSTC administered by CAVCO and Canada Revenue Agency (CRA). The OPSTC

is jointly administered by the OMDC and CRA. There is no limit on the amount of eligible

labour or other production expenditures on which a production may earn the credit. In

addition, this credit can be combined with the federal Film or Video Production Services Tax

Credit (subject to “the grind”). The production cost must be at least $1 million, except in the

case of a series consisting of two or more episodes or a pilot for such a series. In the case of

a series or pilot, the cost for each episode that has a running time of thirty minutes or less

must be at least $100,000 and the cost for episodes with a longer running time must be at

least $200,000. Productions that have received the Ontario Film and Television Tax Credit

are not eligible for the Ontario Production Services Tax Credit. There is a flat fee of $5,000

per application for the OPSTC. A rebate is offered if the tax credit is less than $25,000.

3. The Ontario Computer Animation and Special Effects (OCASE) Tax Credit ‐ this is a credit of

20% of the eligible Ontario labour expenditures incurred by any Canadian or foreign‐owned

corporation with a permanent establishment in Ontario and that files an Ontario corporate

tax return. The OCASE Tax Credit may be claimed in addition to the Ontario Film and

Television Tax Credit or the Ontario Production Services Tax Credit. The OCASE credit is

payable on animation or VFX created with digital technologies. It is payable on salaries and

wages directly attributable to eligible activities that are paid to individuals resident in Ontario

since at least the end of the previous calendar year. Since March 26, 2009, 100% of

remuneration paid to freelancers who are individuals, partnerships, or arm’s‐length

incorporated individuals, also qualifies for the credit. Previously only 50% of remuneration

paid to freelancer individuals or to partnerships was eligible for the OCASE credit, and

remuneration paid to incorporated individuals was completely ineligible. Activities that are

eligible for the SRED tax credit are not eligible for the OCASE tax credit. The OCASE credit is

paid on labour expenditures net of other assistance; however, The Ontario Film and

Television Tax Credit and the Ontario Production Services Tax Credit are not taken into

account when calculating the net labour spending. Therefore, for example, digital effects

and animation performed on a foreign service production basis are eligible for a total Ontario

tax credit on labour expenditures of 45%, assuming that the company is the eligible applicant

for both the OCASE tax credit and the OPSTC. The OCASE application fee is 0.06% of eligible

labour expenditures with a minimum fee of $100 and maximum fee of $5,000. Like the

OFTTC and the OPSTC, the OCASE credit is jointly administered by the OMDC and CRA.


40

4.2.3 Other Provinces

British Columbia

“The British Columbia Production Services Tax Credit (PSTC) encourages film, television and

animation production in BC and is available to either international or Canadian productions produced

in British Columbia.”37

There are four components:

1. The basic PSTC tax credit is 33% of qualified BC labour expenditures (25% before February 28,

2010);

2. The Regional tax credit is an additional 6% of qualified BC labour expenditures for days of

shooting outside of the designated Vancouver area;

3. The Distant Location tax credit is a further 6% and is added to the regional tax credit for days

of shooting outside of the Lower Mainland Region, north of Whistler and east of Hope,

excluding the Capital Regional District; and

4. Digital Animation or Visual Effects (DAVE) tax credit is 17.5% of BC labour expenditures

directly attributable to digital animation or VFX activities (15% before February 28, 2010).

The Regional and Distant Location tax credits are calculated by pro‐rating the PSTC eligible

expenditures by the ratio of the number of days of principal photography in the eligible region by the

total days of principal photography in BC.

The BC government announced increases to the basic PSTC and DAVE rates in February 2010 in

response to pressure to change the PSTC to at an all spend credit in response to similar changes

made by Ontario and Québec.38

In 2008, BC eased its residency requirements for its film and television tax credits. Now, for a

production to be eligible for tax credits on an employee’s wages, the employee only has to be a BC

resident during the time of the production in question, not at the end of the preceding year. This

means that, unlike Ontario studios, BC studios can hire workers from outside of the province and

immediately begin accruing tax credits on those workers’ wages. This change was made specifically

with the digital VFX industry in mind. At the time the changes were made, Andrée Laplante of British

Columbia Film explained, “We have more and more visual effects being done in British Columbia.

That requires more and more people that would be able to do this type of work.” 39

37 http://www.bcfilmcommission.com/production/tax_incentives.htm 38 http://www.vancouversun.com/business/Ontario+lures+film+productions+with+sweetened+credits/1795766/story.html and http://www.bclocalnews.com/tri_city_maple_ridge/mapleridgenews/news/81729997.html 39 Craig Takeuchi, “More changes to film and TV tax credits,” accessed at http://www.straight.com/article‐133901/news‐from‐hollywood‐north, January 24, 2010.


41

The application processing fees charged in British Columbia are somewhat higher than those charged

in Ontario. However, because the production services tax credit and the DAVE tax credit are jointly

administered in British Columbia, there is only a single application fee when applying for both credits.

Therefore, for projects with total budgets of more than about $4.5 million, total fees in British

Columbia are lower. Administration fees in British Columbia are likely to be lower than those in

Ontario especially for projects with digital animation or VFX spending in the province.

One measure of the strength of the British Colombia digital animation and visual effects industry is

the fact that three major Hollywood studios have opened or announced plans to open facilities in the

Vancouver area in the last year or so. In May of 2009, Pixar announced plans to open a Vancouver

studio employing 75 to 100 artists to produce theatrical shorts. In October of last year, Digital

Domain, a major special effects studio whose credits include Titanic and The Curious Case of

Benjamin Button, announced plans to open a Vancouver studio with an initial employment of 50 to

60, but expected to eventually employ about 100. Although no formal announcement has been

made, it is well understood in Vancouver that Sony Pictures Imageworks will be opening a Vancouver

studio later this year. Finally, recently the Vancouver industry has been rife with rumours that

George Lucas’ Industrial Light and Magic will soon be announcing plans for a Vancouver studio.

Such large studios are desirable for a production location because they provide ongoing employment

to a large number of artists, and they attract new graduates to the area because of the good

employment prospects the large studios create. They also create a pool of experienced artists some

of whom are likely to decide to leave the larger firm and strike out on their own. In a recent Globe

and Mail article40 about the boom in animation in Vancouver, Gloria Borders, Digital Domain’s

president of feature film operations, spoke of the benefits of having Pixar also locating in Vancouver.

She is quoted as saying, with “Pixar opening up shop, there is going to be a huge plus. It’s just raising

the bar [in terms of the] artists that are going to be knocking on Vancouver’s door.”

Ms. Borders also talked about the ability of the Vancouver studios to work together. She told the

Globe and Mail, "What I love so much about Vancouver [is] everybody wants to help one another. So

if there's a project that might be ending and there are a group of artists that are working in your

company and they need a place to go, the heads of studios pick up the phone and say, 'Hey, help me

out here; I want to keep my people employed.'" This willingness on the part of industry members to

cooperate on human resource issues is very significant. As pointed out earlier, the "lumpy" nature of

work in this industry and the specialized skills and international mobility of its workers make

managing the workforce particularly challenging. A tendency to poach workers from one another

has at times been a significant source of conflict among members of the Ontario industry.

The same Globe and Mail article gives three reasons for the popularity of Vancouver as a location for

digital animation and VFX firms: the talent available in Vancouver, the fact that Vancouver is

40 “Pixar studio opens in Vancouver,” accessed at http://www.theglobeandmail.com/news/arts/pixar‐studio‐opens‐in‐vancouver/article1540515/, April 22, 2010.


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relatively close to and in the same time zone as Los Angeles and the tax credits available in British

Columbia. The general manager of Pixar’s Vancouver studio, Amir Nasrabadi is quoted as saying,

“We felt that Canada and Vancouver specifically offered the right blend of advantages that we were

looking for. We felt that we could not get all three of those things anywhere else.”

Film Incentive BC (FIBC) is British Columbia's tax credit program for domestic productions. FIBC has

the following eligibility requirements:41

1. The production corporation claiming the tax credit must be Canadian owned and controlled.

2. The “producer” of the production must be a BC‐based individual who is a Canadian.

3. The production must be Canadian content. 4. The production corporation must own more than 50% of the copyright in the

production. 5. At least 75% of the principal photography days of the production must be

done in British Columbia. 6. At least 75% of the cost of the production must be paid to BC‐based

individuals or corporations. 7. At least 75% of the cost of post‐production work for the production must be

carried out in British Columbia.

The basic credit for the IBC tax credit is 35% of qualified BC labour expenditures. An additional 12.5% is paid on a prorated basis for days of principal photography in British Columbia but outside of the designated Vancouver area. As with the BC, PSTC an additional tax credit of 6% of eligible labour expenditures is paid for days shooting in distant locations within the province.

Since in order to be eligible for the FIBC a project must have a producer who is a BC‐based individual, this credit would only impact Ontario production activity in two cases. First, the FIBC could reduce Ontario production activity if, without the FIBC, a British Colombia‐based producer would have produced a project in Ontario. Secondly, if a broadcaster were looking for a producer to complete a project and were willing to give the producer majority control over the copyright on the project, the FIBC might cause the broadcaster to hire a BC‐based producer over an Ontario‐based one.

Quebec42

Québec's basic production services tax credit, like Ontario's, is 25% of all production expenditures

within the province, with no prescribed limit. Québec has no minimum spending level required to be

eligible for the credit. For digital animation and special effects (including CGI and green screen shots)

41 The British Columbia film commission, Tax Credits Available to Domestic Film and Television Productions, accessed at http://www.bcfilmcommission.com/database/rte/files/Domestic%20Tax%20‐%20March%202010.pdf, June 1, 2010. 42 Source: http://www.qftc.ca/tax‐credits.php


43

a bonus tax credit of 20% of “extended eligible labour” is added. The producer is not required to

release the film in Québec to collect the tax credit. Québec's residency requirements for workers’

wages and salary to be eligible for the tax credit are significantly less stringent than Ontario’s. To be

eligible, many workers need only to have performed the work in question in Québec. Certain senior

members of the cast and crew must have been residents of Québec for tax purposes at the time the

work was performed in order for their wages and salaries to be eligible for the tax credit. However,

even in these cases, there is no prior year residency requirement like in Ontario. It is also simpler to

apply for the Québec credit, since separate applications are not required for the general tax credit

and the animation and visual effects tax credit. However, in general, the application fees are higher

in Québec and can be as much as $25,000 for a very large project.

For Quebec film or television productions (productions meeting criteria to be deemed a Quebec

production), the basic tax credit offered is 29.1667% of eligible labour expenditures incurred.43 This

is subject to a maximum labour share of 50% of production costs (so the maximum credit is

14.58335% of total spending) and an overall maximum of $2,187,500 per film. To qualify both 75%

of the overall budget and 75% of the post‐production budget must be spent in Quebec. However,

the rules also state that “additional assistance may be allowed regarding labour expenditures relating

to the production of certain French‐language short, medium‐length and feature‐length fiction films,

certain documentaries, certain French‐language youth productions and giant‐screen films, with the

result that the tax assistance may reach 19.6875% of the film's production costs,” and “films

including scenes shot in front of a chromatic screen, computer animation or special effects, excluding

French‐language feature films, certain documentaries, French‐language youth productions and giant‐

screen films, may obtain additional tax assistance.” Finally, when the film or a portion of the film is

produced outside the Montréal region tax assistance may reach 24.2813% of the film's production

costs.

4.2.4 Jurisdictions Outside of Canada

US States

According to a recent study in the Journal of State Taxation,44 44 of the 50 US states offer some kind

of incentive to attract film production to the state. These range from token incentives (Kansas waves

the occupancy tax on hotel stays in excess of 28 days) to huge incentives by states that are

aggressively seeking to attract productions (Michigan’s base tax credit is 40% of all spending in state

with certain locations eligible for a further 2% tax credit, and infrastructure expenditures are eligible

for an additional 25% investment tax credit).

43 Source: http://www.sodec.gouv.qc.ca/documents/ddp/Lignesdirectrices_cinema2008_ang.pdf 44 Steve Wells and Clyde Posey, “Big Sky on the Big Screen Act—State Tax Incentives for the Film Industry,” The State Tax Journal, May June 2009 pages 29‐34.


44

If anything, the competition among states to attract film investment expenditure is becoming more

intense. For the first time, California began offering incentives in July 2009. The Hollywood studios

can now earn a 20‐25% tax credit on qualifying expenditures just by staying home. However, the

California incentive regime is not as generous as it might seem. The five‐year program is limited to

an annual budget of $100 million. This is not nearly enough funds to pay all of the incentives that

productions are eligible for. Therefore, incentives are granted on the combination of a first‐come

first‐served basis and lotteries among qualified applicants. Industry observers have criticized the

California plan and others like it because it creates uncertainty in the planning and budgeting process

for producers. In addition, to be eligible for the California tax credits at least 75% of the project

spending must be made in the state and 75% of principal photography filming days must take place

in California.45

One reason for the intensifying rivalry among states in trying to attract film and television

productions has been attempts by states that previously had little or no film industry to create one.

As a result, state film commissions with little or no experience in such matters have been given

control over huge budgets, and have been expected to spend all of the funds allocated to them. The

problems that such situations create came to a head in Iowa in September of 2009 when the state

film commission experienced a spending scandal and the governor temporarily suspended all

payments to producers.46 The effect of the scandal in Iowa was to make producers generally more

cautious about the promises made to them by bureaucrats and politicians. This caution has worked

in favour of jurisdictions like Ontario that have a long track record of providing reliable support to the

film and television industries.

Another state worthy of specific mention is New Mexico. New Mexico has realized that in order to

build a strong industry it must not only attract individual productions to the state but create an

infrastructure within the state to support the film and television production industry. 47 Most notable

among New Mexico's achievements is its ability to attract Sony Imageworks, the digital effects and

animation subsidiary of Sony Pictures, a major Hollywood studio. Sony Imageworks is relocating an

initial group of 100 employees from its Los Angeles area operations to a 100,000 square foot facility

located at Albuquerque Studios, a newly built production centre that is to be the hub of New

Mexico's growing industry.48

45 California Film Commission, California Film & Television Tax Credit Program Guidelines, June 2010. Accessed at http://www.film.ca.gov/res/docs/pdf/Tax‐Credit‐Guidelines.pdf. 46 Randy Boswell, “Canadian filmmaker side‐swiped by Iowa funding debacle,” Canwest News Service November 10, 2009. Accessed at http://www.vancouversun.com/story_print.html?id=2208024&sponsor=, November 30th, 2009. 47 Press release by Albuquerque Studios,” Albuquerque Studios Sees Special Effects of SONY Deal,” May 18, 2007. Accessed at http://www.abqstudios.com/news.aspx?ID=146, November 30th, 2009. 48 Haley Wachdorf, “Sony Imageworks deal could animate NM's media story,” New Mexico Business Weekly, March 19, 2007. Accessed at http://albuquerque.bizjournals.com/albuquerque/stories/2007/03/19/story3.html?t=printable, November 30th, 2009.


45

The basic tax credit in New Mexico is a 25% all spend credit. There is no application fee or prior year

residency requirement on labour. Even wages and salaries paid to out of state actors, and stunt

people are eligible up to a level of $20 million in spending per project. The state will also provide

interest‐free loans of up to $15 million per film or television project.

As part of its efforts to develop infrastructure to support the film and television industry, New

Mexico created the New Mexico Computing Applications Center.49 This is a non‐profit organization

closely associated with Los Alamos National Laboratory and Sandia National Laboratories. As part of

this project, a high‐speed data link was established between the center and Hollywood. The link was

established as part of a deal with DreamWorks which will see DreamWorks render its 3‐D animation

in New Mexico.

United Kingdom

To be eligible for most tax relief in the United Kingdom, a film must either pass a British culture test

or be an official co‐production. For films meeting either of these requirements and costing up to £20

million to produce, the basic credit is 25% of UK qualifying film production expenditure. For films

costing over £20 million, the basic credit is 20% of UK qualifying film production expenditure. To be

eligible for the credits, at least 25% of all of a film’s production spending must take place in the

United Kingdom. Spending that takes place in the UK is eligible regardless of the nationality of the

persons carrying out the activity. The credit is payable to any of the companies responsible for the

principal photography on the film, the post production of the film, or the completion of the finished

film.

The UK government also provides direct funding for films through its Premiere Fund. This fund

provides equity funding for select films. Total funding is set at £8 million per year and is typically

spread over 8 or 9 films. Films are judged on creative merit and evidence of financial viability.

Both the tax credit and the Premiere Fund require films to pass a "cultural test," scoring at least 16

out of 31 possible points. Passing the cultural test requires significant UK content. While the UK has

no provisions specifically aimed at the digital animation and VFX industry, if a film is not shot 50% in

the UK, completing 50% of visual special effects in the UK can earn 2 points on the cultural test. This

means that there is often a strong incentive for a production hire a UK based VFX studio. Passing the

cultural test is not needed for treaty co‐productions. Projects which do not pass the cultural test or

which are not treaty co‐productions receive no assistance from the UK government. However, a

recent article in Variety points out that the United Kingdom Film Commission has discretion “to

49 Megan Kamerick, “New Mexico's computer center inks DreamWorks Animation deal,” Los Angeles Business, ‐ February 18, 2009. Accessed at http://losangeles.bizjournals.com/losangeles/stories/2009/02/16/daily17.html?t=printable, November 28th, 2009.


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award marks for projects perceived as making a “cultural contribution”” to the UK.50 The article then

goes on to assert that “In truth if you shoot in the UK it’s a hard test to fail – though in the case of big

international productions such as Prince of Persia, some manoeuvring on the amount of post‐

production done in London was necessary.”

The UK digital animation and VFX industry was a frequent topic of discussion in our interviews with

industry members. There was a strong perception among those we talked to that the UK industry

has managed to thrive in recent years despite relatively weak tax credits and other government

incentives available to producers who work there. Although there is no publicly available data on

the UK digital animation and VFX industry, publicly available data on the UK film industry does cast

some doubt on this perception. As shown in Table 8, film production in the UK, like film production

in Canada, has varied greatly from year to year and has certainly not exhibited any sort of upward

trend. These conclusions are particularly true when UK production spending is converted into

Canadian dollars. In 2008, film production spending in Canada was actually greater than film

production spending in the UK.

Table 8: A Comparison of UK and Canadian Feature Film Production Spending51

Year

Total Film Production

Spending In UK (£)

Average Annual Exchange Rate

($C/£)

Total Film Production

Spending In UK ($C)

Total Film Production Spending In Canada ($C)

Canadian Spending / UK

Spending(%)

2004 811 2.38 1,934 1,497 77.4%

2005 581 2.21 1,283 968 75.4%

2006 825 2.09 1,724 1,372 79.6%

2007 753 2.15 1,619 1,035 63.9%

2008 578 1.96 1,134 1,364 120.3%

One interesting aspect of the UK/London digital animation and VFX industry is the existence of an

organization called SohoNet. SohoNet is a privately owned corporation that began as an Internet

provider in the Soho district of London in 1995. Today SohoNet offers a network of high‐speed data

connections linking London to New York and Los Angeles as well as production centers in Australia.

This is a private network that is not part of the public Internet and therefore can offer guaranteed

50 Adam Dawerty, “Tax credits are UK’s secret weapon,” Variety October 16th, 2008. Accessed at http://www.variety.com/article/VR1117994180.html?categoryid=3281&cs=1&query=secret+weapon, October 31st, 2009. 51 Source: Canadian Film and Television Production Association (CFTPA), Profile 2009, p. 38. Source: Canadian Film and Television Production Association (CFTPA), Profile 2009, pages 81 and 61 and UK Film Council Statistical Yearbook 2009, page 138, accessed at http://www.ukfilmcouncil.org.uk/media/pdf/2/p/2009.pdf


47

transfer speeds to its clients. SohoNet has announced plans to expand its network significantly.

Among cities to be included are Toronto and Vancouver in Canada; Singapore, Seoul, Tokyo and

Mumbai in Asia; Auckland, New Zealand; and Frankfurt and Paris in Europe. It is unclear when these

network expansions will take place.

New Zealand

Another jurisdiction that was cited several times in our discussions with industry members as being a

strong competitor for the Ontario digital animation and VFX industry was New Zealand. New Zealand

offers a 15% grant on "qualifying New Zealand production expenditures" incurred on large foreign

productions. This grant is called the Large Budget Screen Production (LBSP) Grant. To qualify for the

LBSP, a production must spend the equivalent of nearly $C 11 million in New Zealand. Payments to

non‐New Zealand ‐based cast and crew are not included in this minimum. If a production qualifies

for this grant, the 15% grant is paid on digital animation and VFX spending. Because of the large

minimum expenditure required to qualify for the LBSP program, New Zealand also has a grant

program specifically designed for post‐production and digital VFX expenditures. This grant is similar

in structure to the LBSP, but has a minimum expenditure of about $C 2.1 million. This is still a very

high minimum expenditure requirement for a digital VFX incentive. The average budget of projects

in which the OCASE tax credit was paid in the 2006‐07 fiscal year was only $1.2 million. In addition to

its high minimum expenditure requirement, the New Zealand grant is also not very attractive

because of its low rate. It is a 15% all spend grant, while in Ontario digital animation and VFX

expenditures qualify for a 25% all spend tax credit and an additional 20% tax credit on labour

spending. The New Zealand grant does have the advantage of being simple to apply for. It is also

paid relatively quickly, because it is a grant and not a tax credit; therefore, it is not tied to the

applicant’s tax return.

Given the relative weakness of its incentive schemes, it is logical to ask why New Zealand was seen as

a threat to the Ontario digital animation and VFX industry. One interesting thing to note about the

New Zealand industry is that its reputation is based largely on a small number of very big budget

projects. The industry really came to prominence with the production of The Lord of the Rings

Trilogy. Director Peter Jackson shot these films in New Zealand largely because he is a New

Zealander himself. More recently, New Zealand has been in the spotlight because James Cameron

shot Avatar in New Zealand. These marquee productions have served as invaluable marketing tools

for the New Zealand industry.

Another unique aspect of the New Zealand film industry is the way in which it markets itself. The

New Zealand industry, through its trade Association, Film New Zealand, markets the New Zealand

industry as a whole, in some ways acting as if the industry were a single entity. For example, in its


48

publication Post, Digital and Visual Effects in New Zealand52 Film New Zealand lists skills and

resources of the industry as a whole, as if it would be the whole industry that a foreign studio would

be hiring. Only later in the publication is a list of individual firms in the industry provided. It is also

interesting to note that this industry directory contains only 17 firms in the digital animation and VFX

areas. Of the 17 firms, 12 are listed under both digital animation and VFX, four are listed under VFX

only, and only one is listed under digital animation only. There is one other very interesting aspect of

film New Zealand's publication Post, Digital and Visual Effects in New Zealand. Not once in the entire

publication is mention made of New Zealand's grant programs for producers or is any reference

made to price or cost competitiveness. The entire marketing pitch is built around the two themes of

the ease of working in New Zealand and the quality of the work done there. Film New Zealand's

tagline is "You're welcome." Clearly, the New Zealand digital animation and VFX industry has been

able to steer clear of the cost‐based competition which has hampered the Ontario industry. Lastly,

the New Zealand industry does have access to a high speed data network with 100‐megabit

connections to the US (via Medianet) and the UK (via SohoNet).

4.3 Other Ontario Government Initiatives

In addition to its tax credit programs, the government of Ontario has numerous other initiatives that

support the digital animation and VFX industry.

In its publication Towards a Strategic Plan: Helping Ontario Firms Compete in the Global Creative

Media Market53, the OMDC identified five themes that came up in its investigation of the sector’s

future. The five themes identified are:

1. DIGITAL EVOLUTION

2. CONTENT DEVELOPMENT AND MARKET ACCESS

3. NEED FOR MARKET INTELLIGENCE

4. ACCESS TO CAPITAL

5. CROSS SECTOR COLLABORATION AND COMMUNICATION

Our interpretation of each of these themes and their implications for CASO are as follows:

1. “DIGITAL EVOLUTION”: the emergence of digital technology has been a disruptive force but

also a unique opportunity for most firms in the creative sector. However, we found that

CASO members are among the least affected by this trend, since their industry has always

been digital.

52Accessed April 15th 2010 at www.filmnz.com/filedownload.html?...Post,%20Digital%20and%20Visual%20Effects%20in%20New%20Zealand 53 http://www.omdc.on.ca/AssetFactory.aspx?did=6346


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2. “CONTENT DEVELOPMENT AND MARKET ACCESS”: With the globalization of the creative

industries and consolidation in media industries, firms in Ontario’s creative cluster are facing

more intense competition than ever before. These firms require support to market their

products and services globally and to create quality content.

3. “NEED FOR MARKET INTELLIGENCE”: Ontario media companies, especially smaller ones,

often have a difficult time collecting the data they need to make good strategic decisions.

According to CASO, one of the reasons the organization was formed was to fulfill this role for

its members.

4. “ACCESS TO CAPITAL”: Most firms in the cultural media industries in Ontario lack the scale

and capital needed to compete effectively with large multi‐national competitors. Traditional

sources of capital are often not open to them. A key to enhancing the competitive position

of Ontario’s companies will be to address this problem. Industry members told us that

originally the OCASE tax credit helped generate working capital for them. However, as will

be discussed below, we feel that it no longer adequately fulfills this role.

5. “CROSS SECTOR COLLABORATION AND COMMUNICATION”: Stimulating collaboration

among firms across the various industries in the creative media sector is a way to encourage

innovation and stimulate new business development in Ontario. This will help Ontario firms

to compete in the global market place.

Several programs have been introduced that speak to these themes:

OMDC Film Fund

The OMDC film fund is designed to provide project‐based funding and encourage the development of

film and television productions by Ontario producers. The OMDC describes the fund's goals as

“Supporting Ontario producers to tell their stories at home, hire locally, retain copyright and

strengthen their companies.”54 Money from the fund is distributed through a jury adjudicated

process. So far, the fund has invested more than $17 million in 134 feature film projects. The OMDC

calculates that the firms receiving funding were able to leverage every dollar invested by the fund

into an average of $18 in total investment. This investment has created over 27,665 weeks of work

in the Ontario industry. Among the films funded are Away from Her, written and directed by Sarah

Polley; Adoration, written and directed by Atom Egoyan; and Cairo Time, written and directed by

Ruba Nadda.55 The OMDC film fund is not likely to be a significant source of funds for either an

animated feature or the film that uses special effects intensively. These films are very expensive to

54 http://www.omdc.on.ca/AssetFactory.aspx?did=5896 55 http://www.omdc.on.ca/AssetFactory.aspx?did=7014


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produce and the funding levels provided by the fund are inadequate to provide significant support

for them.

OMDC Intellectual Property Development Fund

The IP Development Fund is a pilot program covering the year ending March 31, 2010. The fund

provides a refund to Ontario corporations of 30% of prior costs incurred for the early stage

development activities aimed at bringing screen‐based content to the production stage. Eligible

corporations apply for the refund on early stage development expenditures that were aimed at

moving forward a slate of early stage development projects and that were incurred over the course

of a particular taxation year. The maximum refund any firm can receive is $150,000 plus a possible

additional 10% of eligible early stage development activities up to $20,000 per corporate group

(subject to available funds). To be eligible for the program a firm must have spent at least $30,000

during the taxation year in question on the development of screen‐based content.

To be eligible to participate in the program, a corporation must: be incorporated in Ontario and

Canadian controlled; generate the majority of its revenues through the creation, development and

production of screen‐based content; and have been in business for at least one year (or for emerging

companies less than a year old the controlling individuals must have at least two years’ experience

producing screen‐based content that has been released to the market).

Eligible activities under the program include those required to bring film or television productions

closer to pre‐production or production (principal photography) or those required to bring interactive

digital media products closer to completion of a functional prototype. Eligible activities might

include acquiring story rights; story and character creation; research for script or story development;

script writing; creating proposals for financing; creating business and marketing plans; or creating

pitch packages for television series.

This fund, and any fund focusing on having Ontario firms maintain control of copyright for the

projects they work on, does little for digital VFX firms. Because of the nature of the VFX business, it is

extremely difficult for VFX firms to end up owning the intellectual property on which they work.

Entertainment and Creative Cluster Partnerships Fund

The Entertainment and Creative Cluster Partnerships Fund is designed to encourage cross sector

collaboration within the creative cluster. It is jointly administered by the OMDC and the Ministry of

Tourism and Culture. The fund was initially valued at $7.5 million over the three years 2006‐2008. In

2009, it was renewed with $12 million funding over four years. It is designed to develop new forms

of entertainment content and new delivery platforms by supporting risk‐taking and innovation.

The Next Generation Jobs Fund


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The Next Generation Jobs Fund was not an OMDC program (it was administered by the Ministry of

Economic Development and Trade). It was a non‐industry‐specific fund designed to stimulate new

investment and job creation by larger firms. The fund provided significant amounts of funding to two

firms in the digital media cluster. Starz Animation received a grant of $23 million to support the

expansion of its Toronto studio, which will eventually employ 250. The French computer game

producer Ubisoft will receive a grant of $263 million over 10 years to create a Toronto studio that will

employ 800.

4.4 Government Support Issues for Ontario Identified By Industry Members

4.4.1 Tax Credits

Ontario is unique in that the digital animation / special effects tax credit is paid to the animation /

special effects studio, not the overall producer of the project. The system was originally intended to

provide the Ontario digital animation and VFX studios with additional working capital and to improve

their profitability by having the tax credits paid to them instead of their customers. The system

worked as planned initially, but now almost all Ontario digital animation and effects studios end up

discounting their contracts by the amount of the OCASE tax credits they anticipate receiving. They

are forced to pass tax credits on to their customers because of the fierce competition in the industry,

both within Ontario and from other jurisdictions.

The practice of discounting contracts by the amount of their anticipated tax credits creates two

problems for Ontario animation and digital effects studios. First, although the discount is given off

the amount paid on the contract during the period in which the work is completed, the Ontario

studio often does not collect the tax credits until long after a project is completed. Thus, in fact, the

tax credit actually ends up reducing the studios’ working capital. Second, it can often be the case

that the actual tax credit collected by the studio is less than anticipated. One reason for this is the

strict residency requirement applied to the OCASE tax credit. In order for a studio to collect the tax

credit on its payments to any employee, the employee has to have been an Ontario resident at the

end of the preceding tax year. Because there is mobility of people between firms in the industry,

studios are often unaware of their employees’ previous years’ residency and, therefore, may only

find that they cannot collect OCASE tax credit for one or more of their employees long after a project

is completed. This is a major problem if they have already discounted their fees for the project by

the amount of the anticipated tax credit. As noted above, British Columbia recently changed its

residency requirements to eliminate similar complaints about its tax credit programs.


52

Since, for the majority of projects, the OCASE tax credit no longer provides sufficient margin

improvement or working capital to the Ontario animation and VFX studios, it may no longer make

sense to treat it separately from the other Ontario tax credits, especially the production services tax

credit. For this reason, the OCASE credit could be bundled with the general tax credits and applied

for by a film or television program’s producer. Besides eliminating the problems that occur for the

animation and VFX studios because of the way the OCASE credit is currently structured, this change

would simplify the application and approval process and generally speed up the payment of the

OCASE credit. In most instances, the producer of a project is a special‐purpose corporation whose

year‐end coincides with the completion of the project. Therefore, these corporations can begin the

tax credit application process immediately after the completion of the project. Digital animation and

effects studios, however, are ongoing businesses with regular annual year ends. They cannot begin

the OCASE application process until their regular year end, which would on average be six months

after the completion of any particular project.

An alternative approach would be to give the Ontario digital animation and VFX studios the option of

either applying for the OCASE credit themselves (i.e. the status quo), or assign the right to apply for

the credit to a project’s producer. This added flexibility would provide benefit in those cases where

an Ontario studio has been able to retain some of the value of the OCASE tax credit in its

negotiations with its customers, but this would make the overall program more complicated than it is

now.

Bundling the OCASE credit with the producer tax credits would eliminate the negative effects that

the OCASE credit currently has on Ontario's digital animation and VFX studios. However, it would not

provide any direct benefit to the Ontario Studios. Only a tax credit that is not tied to specific projects

would provide any lasting or significant benefit to the Ontario studios. There are several alternative

means of providing such a credit. For example, the studios could receive a tax credit based on their

overall labour spending, including management and overhead labour, based on their annual tax

return and not tied to any specific project. Similarly, they could receive a tax credit based on their

capital expenditures. Alternatively, they could receive a tax credit similar to the Scientific Research

and Experimental Development Tax Credit, but fine tuned to meet the specific needs of the

animation and VFX industry. As discussed earlier, as it is currently structured, the SRED is not

effective for the industry. Industry members told us that applying for the scientific research and

development tax credit is too complex and time‐consuming and that the credit received is often too

small to justify the administrative effort required to collect it.

Another issue with the OCASE tax credit as it is currently structured is that for producers of television

animation, the OCASE regulations place them in a very weak bargaining position vis‐à‐vis Canadian

broadcasters. In order to be eligible for OFTTC a producer must have entered into a broadcast

license agreement that will result in the program being broadcast in Ontario within two years. In

addition, all programs except children's programs must air in prime time. It was also apparent from

our interviews that some industry members are under the misconception that a broadcast license is


53

also required for a program to be eligible for the OCASE tax credit. To be eligible for OCASE a

program must have been “produced for commercial exploitation.” The OCASE guidelines published

by the OMDC state, “A production which has a broadcast or distribution agreement will generally be

considered to satisfy the requirement that an eligible production be “produced for commercial

exploitation”. Where no such agreement exists, the OMDC will look at the facts of the situation to

determine whether the production was produced for commercial exploitation.”56 Thus, from the

producer's perspective is not unreasonable to think that the best way to fulfill this OCASE eligibility

requirement would be to secure a broadcast license, which is required in any case for the OFTTC.

While having a broadcast license agreement in place is an important step in qualifying for these two

grant programs, it is not always an easy thing to achieve. Since there are very few potential

broadcasters for children's programming in Canada, especially animated programming, the effect of

this requirement is to give the broadcasters disproportionate power in their negotiations with

Ontario animation studios. The studios feel that they are in a position where they must reach an

agreement with one of the broadcasters at almost any cost, since the OCASE tax credit is such a

significant source of funding for any Ontario animation project.

Finally, as noted above, the residency requirements for the OCASE tax credit make it difficult for

studios to be sure that they will get the tax credit they expect. This is a particularly vexing problem

for the OCASE tax credit because the workforce in the digital animation and VFX industry is extremely

mobile. This provision means that Ontario residents who leave the province and then move back are

not eligible for the tax credit in their first year back in Ontario. This is true even if they remained in

Canada throughout the period in question. The Ontario residency requirements are more stringent

than either the federal government's requirements or those of the other provinces with which

Ontario competes in the industry. The standard requirement in the industry is only that employees

be residents at the time the work is completed. Conforming to this industry standard for the OCASE

tax credit would be particularly valuable for Ontario given the possibility of projects in the industry

being of relatively short duration and the aforementioned mobility of the workforce. The uncertainty

created by the current rules is a huge issue for Ontario studios that rely on the OCASE tax credit to

earn acceptable margins on their work. These rules also hinder the ability of Ontario studios to bid

on large projects that would require them to hire significant numbers of employees from outside of

the province.

4.4.2 Other Government Initiatives

The OMDC has recognized that for firms in the creative media industries in Ontario a significant issue

is the ownership of intellectual property. It is rare for an Ontario producer to retain control over a

56 OMDC, Ontario Computer Animation and Special Effects Tax Credit (OCASE) Information/Application Package, page 8.


54

production and its intellectual property upon completion of the project. Based on our interviews,

some Ontario producers are acting as service producers for foreign production companies that are

developing their own intellectual property. In these cases, there is really no chance for the Ontario

producer to control any intellectual property. This is the situation in which VFX studios typically find

themselves. However, even when an Ontario production company develops its own idea, by the

time the project is completed the creator has almost always given up control over its intellectual

property. This is because in order to raise funds for the project, the production company must

generally give intellectual property rights to those providing it with funds. In many cases, a key

funder is a Canadian broadcaster that pre‐pays for the Canadian broadcast license but also demands

other rights, often including international rights, in exchange for providing funding. The participation

of a Canadian broadcaster is essential since without having sold the Canadian broadcast license, a

production is not eligible for the OFTTC.

Realizing that it is exceedingly difficult for Ontario producers to maintain intellectual property rights

over their productions, the OMDC has recently created the IP Development Fund, as discussed

above. While this is a pilot program and it is too early to measure its results, there is serious cause

for concern over its potential effectiveness. The levels of funding available are quite low and not

likely to make a significant difference to the overall cost of producing the film or television program.

The maximum amount payable for any project is $150,000.


There is intense competition domestically and internationally to attract new

firms and service work.

It is never possible to have a sustained competitive advantage based on

government incentives.

OCASE as currently constructed does not currently work to the benefit of the

industry.

The Next Generation of Jobs Funding did not meet the needs of the small and

medium sized firms in Ontario.


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5 Data Collection

Data for this study comes from a combination of documents, interviews, a focus group and a survey

of industry firms in Ontario. Together these data sources provide the information used for our

analysis and are the foundation for our recommendations.

5.1 Documents

Documents collected for this study are from a wide variety of sources. These include related reports,

government documents, academic research and newspaper articles. The most relevant of these

documents are identified in the reference list. We found that there has been significant interest in

the digital and creative industries in general. Studies and reports have primarily been commissioned

by governments, governmental agencies and associations. Studies and reports that deal directly with

computer animation and visual effects have been sparse, particularly those which address issues

within the Ontario industry. We identified numerous policy documents that addressed the

government’s role in supporting the industry, primarily through financial incentives such as tax

credits. The following is an example of some of the themes identified in the documents we

reviewed:

There had been steady growth in the animation market due to increased consumer demand

and the advent of VCRs and DVDs which allow many animations to go straight to video rather

than through theatres (Larson, 2003). However, this growth has slowed in recent years

because of a movement toward live action.

Revenues for large studios have shifted dramatically. In 1981, theatres accounted for 58% of

revenues and that has declined to 14% in 2006 (Adams, 2006).

Revenues for studios from television (including broadcast channels, cable and satellite) have

grown from 24% in 1981 to 34% in 2006 (Adams, 2006).

Video on demand through both streaming and downloading accounted for only 2% of the

market in 2006 but is expected to climb exponentially (Screen Digest et al., 2006).

A major trend is towards interactive content and convergence toward platforms including

video, mobile phones and iPods, and the Internet (multiplayer online games) (Cardillo et al.,

2006).

Creating a proprietary animation property is a blend of artistic talent and business acumen

(Neuwirth, 2003). However, a growing proportion of revenue is coming from alternative

distribution channels and the sale of consumer products. Yoon and Malecki (2009) report

that “up to 90% of a film’s profits may come from sources other than theatre audiences” (p.


56

16). This has made it increasingly common for characters to be modified, not based on their

artistic merit, but rather to improve their suitability for toy production (Patrick, 2006).

Projections from PriceWaterhouseCoopers suggest that mobile TV will reach 600,000

Canadian subscribers by 2013 with subscription fees exceeding $40 million US

(PriceWaterhouseCoopers).

5.2 Interviews

Interviews of key individuals who possess knowledge of various aspects of the computer animation

and VFX industry were conducted between November of 2009 and March of 2010. In total, more

than 25 individuals agreed to be interviewed for this study on the understanding that their

comments would not be attributed directly to them. These individuals included representatives from

the following categories:

Educational institutions;

Government;

Animation and/or VFX industry studios;

Supporting organizations (including those involved in financing and software); and

Related industry representatives (including those involved with gaming and interactive

applications).

Some of the key issues and themes that emerged out of these interviews are as follows:

There was a lack of clarity/consistency in how respondents defined the industry. For some it

was fairly narrowly defined with a focus on CASO members (and supporting organizations)

who are involved with feature film and television. For others the industry was much broader

and encompassed gaming, interactive video etc.

One of the main strengths of the Ontario industry lies in the education system and the talent

of our artists.

o The premier educational programs use state of the art technology and have a very

high employment rate on graduation.

o Some concerns were noted that the field may be getting saturated with graduates

(including from the many private schools).

o Many talented graduates find employment in other jurisdictions (both other

provinces and countries).

Some interview respondents felt that the core artistic and computer skills are identical for all

segments for the industry (film, commercials, television, gaming, educational animation etc.)

while others felt that it was difficult to move between segments of the industry due to the

highly specialized nature of each position and production pipeline.


57

A common theme was that despite any overlap in core education, success in the industry

requires mastering a very narrow area of expertise. This makes it difficult for firms to

diversify into multiple areas. One respondent noted that “You can’t make money unless you

really know the business and it is not easy to operate two different businesses”.

There were mixed views about the extent to which cheaper labour in developing countries

was either a significant threat or opportunity for the industry.

o Some respondents felt that quality was too low for developing countries to pose any

real threat while others highlighted the rapid movement towards comparable quality

in many countries.

o A few respondents noted that they had been experimenting with contracting out

portions of projects to developing countries to keep costs down but also

acknowledged that there are additional supervision costs and some concern that

they were training their future competitors.

Several respondents were concerned that Ontario has got itself enmeshed in a “race‐to‐the‐

bottom” in which the Ontario industry is competing on the basis of government incentives

and is too focused on competing on price rather than selling quality.

o A related concern was that the creative side of the industry was being overshadowed

by the bottom‐line.

o Some respondents felt that the lack of a focus on selling Ontario’s quality was

exacerbated by what they perceive as the OMDC’s approach to marketing the

industry to foreign producers that emphasizes tax credits.

There was general agreement that government support in terms of tax credits is currently

essential to the survival of the industry.

o Most viewed government support as adequate (similar in size to competing

jurisdictions) but too complicated.

o Some felt that major revisions to the tax credit system were required since the

administrative costs and risks associated with the system are being borne by the

digital animation and VFX studios while the production companies expect to reap all

of the benefits.

o A few respondents noted that they were able to negotiate deals to retain some of

the tax credit benefit.

Respondents provided mixed reviews as to the future prospects for the Ontario industry.

o A few felt that greater stability and growth is dependent on the industry’s ability to

sell quality rather than price.

o A few felt that gaining more power in negotiations was critical and various

respondents felt this could be achieved by:

Changes to the tax credit system;

Retaining / generating more intellectual property to stabilize future income

streams; or


58

Studios working in a more cooperative fashion to help attract large projects

to the province.

Several respondents indicated that they would be resistant to changes to their existing

business model. In particular, they were not interested in vertical/horizontal integration

(including expanding into alternative media platforms and pursuing intellectual property

control or joint ventures with other studios). A few others have already indicated that they

are embracing such change as we see a move towards multi‐media convergence.

5.3 Focus Group

A focus group consisting of eight CASO members took place on February 5th, 2010. The participants

represent a wide range of service providers within the industry ranging from financing and

production to animation for television and VFX for feature films. A focus group format was used in

order to promote in‐depth discussion and debate about topics affecting the industry. This format

allowed participants to build on thoughts of others and to challenge each other’s perceptions of the

state of the industry.

While a wide range of topics were covered during the discussion, the major themes that emerged out

of the focus group were as follows:

There was no clear consensus as to how to define the scope or limits of the “industry”. Some

viewed the industry as those studios that provide services aimed at television and film while

others took a broader interpretation to include related activities such as gaming. This finding

was supported by the interviews.

There was general agreement that the industry’s customers were primarily made up of a

handful of American firms.

The majority of participants saw little future in attempting to gain greater control over

intellectual property as a mechanism to capture value. Some saw it as unrealistic given the

power differential between them and their customers. One participant simply argued that

creating intellectual property is not the business they are (or want to be) in. A few

participants acknowledged that maintaining intellectual property rights was central to their

business model.

Discussion of the need/potential for expanding distribution channels followed a similar

theme as the intellectual property discussion. Some saw it as irrelevant to their core

business while others saw the growth in platforms and distribution channels as central to the

industry’s success.

The issue of outsourcing seemed to be a low priority for the group. A few saw the trend as

inevitable while others saw it as irrelevant since they felt it was unlikely that the quality in

most of the developing countries would be sufficient for them to be real competition. Some


59

participants were clearly surprised to learn that others were either currently (or had in the

past) been engaged in outsourcing to developing countries.

There was initially little concern regarding the role of educational institutions in the industry.

Once discussion progressed it seemed that there is a gap in the educational process in terms

of part‐time or short‐term upgrading for senior or mid‐career industry personnel.

Discussion on the use and value of tax credits resulted in the greatest amount of feedback.

o There was general agreement that the ultimate value of any tax benefits would need

to be similar to other jurisdictions in order to compete with them.

o For many participants, the OCASE tax credit had become complicated, difficult to

explain, and administratively onerous. For most, the benefits accrued with their

customers and they retained little value. In fact, some pointed out that the current

structure was a financial drain on them as they have to carry the cost of the tax

credit until payment is received well after a production is complete.

o There was support for a simplified tax credit model, perhaps something similar to

British Columbia’s model.

o A few participants thought that it was important to create some form of incentive

that was tied to the studio rather than a single project.

In terms of moving the industry forward, participants raised several suggestions.

o There was a feeling that the overall industry needed to stop competing on lowest

cost and instead stress the quality of work in Ontario.

o There was a general sense of concern that the OMDC needed to be less focused on

tax credits and more focused on quality when promoting Ontario’s industry.

o There was some discussion of the need for the Ontario industry to build on their

willingness to collaborate by demonstrating that Ontario studios can jointly take on

even the largest of projects.

o A few participants suggested that the industry in the UK (centered in London)

seemed to already exhibit all of these characteristics (focus on quality not price, a

cooperative industry environment, and simplified tax structures) and that the

Ontario industry should attempt to emulate the UK.

In terms of the future role for CASO, participants felt that it should continue to build its

profile and facilitate cooperative ventures within the industry. Participants also saw a role

for CASO in working with the OMDC to shift how the industry is promoted.

5.4 Survey

A survey of Ontario industry members was conducted in order to gain greater insight into how

industry insiders viewed the future prospects for the industry. The survey was intended to

complement the Nordicity study that was conducted in 2008 rather than repeat it (Nordicity, 2008).


60

Questions on the survey were designed to help us understand the challenges and opportunities that

face the industry and the extent to which Ontario firms are positioned to excel in the coming years.

In addition to asking basic demographic questions such as firm location and size, questions also

sought to obtain perceptions of quality, value and reputation of the Ontario industry.

The survey participant list was compiled from the CASO membership list and the list of firms in the

OMDC industry directory.57 We set out to obtain the views of organizations rather than individuals

so only one survey was to be completed for each organization in order to ensure that multiple

responses from larger organizations did not skew the survey findings. As a result, duplicate firm

listings on our initial participant list were removed. In the end, surveys were sent by email to 77

Ontario digital animation and special effects studios.

The Institute for Social Research at York University was retained to administer the survey. The survey

was initially distributed by email on March 1st. In order to maximize the responses rate, the

Executive of CASO distributed a letter to their members in advance in order to encourage

participation. In addition, the Institute followed up with four email reminders.

The survey response rate was 30% (23 out of a possible 77 firms). Of these, 61% were CASO

members and 39% were direct service providers. The sample size is insufficient to conduct formal

statistical analysis. Nonetheless, in conjunction with the focus group analysis and the in depth

interviews with industry participants, the survey data help to provide a comprehensive qualitative

assessment with respect to this industry.

5.4.1 Current and Future State of the Industry

When asked about challenges facing the industry over the next five years, the top issues (combined

moderate and very significant challenge responses) were: increased government incentives in other

jurisdictions (87%); fluctuations in the Canadian dollar (78%); and competition from developing

countries (78%). Concerns about changes in technology (52%) and a shortage of skilled labour (46%)

were seen as less pressing.

Despite these significant concerns, when asked about opportunities the industry may be able to take

advantage of, the response was extremely optimistic. Respondents saw the following as potential

opportunities (combined moderate and very significant responses): pursuing intellectual property

ownership (87%); diversification into non‐film/TV (83%); technological innovation (83%). The

potential of contracting‐out to a developing country received a comparatively low response of 61%.

57 http://www.casont.ca/membership.php and http://www.omdc.on.ca/AssetFactory.aspx?did=5630.


61

Figure 8: Challenges facing the Industry

Figure 9: Opportunities for the Industry

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increased government incentives in

other jurisdictions

fluctuations in the Canadian

dollar

competition from developing countries

changes in technology

shortage of skilled labour

% combined m

oderate and very significant challenge

Challenges facing the industry over the next 5 years

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pursuing intelectual property ownership

diversification into non‐film/TV

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contracting‐out to a developing country

% combined m

oderate and very significant opportunity

Opportunities industry may be able to take advantage of


62

The lower enthusiasm in the industry for contracting out some work of developing countries may be

tied to the perception that the quality, convenience, speed and reputation of work from developing

countries are fairly low for both digital animation and VFX. Moreover, only about half of respondents

felt that developing countries provided better than average value for money.

Figure 10: View of Developing Country Competitors

Figure 11: Perceptions of Ontario Studios

0

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quality convenience speed reputation value

% combined

world class and better than

average

Perceptions of developing countries

animation

VFX

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quality convenience speed reputation value

% combined

world class and better tahn average

Perceptions of Ontario

animation

VFX


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In contrast, respondents rated both Ontario’s digital VFX very highly (better than average or world

class responses) for quality (91%), convenience (76%), speed (67%), reputation (81%), and value

(57%) and Ontario’s animation very highly (better than average or world class responses) for quality

(95%), convenience (83%), speed (87%), reputation (96%), and value (65%).

At present, only 25% of respondents produce their own intellectual property; 17% contract out a

portion of their services to developing countries, 26% work on international co‐productions, 35%

work cooperatively with other Ontario studios on projects, none are involved with gaming, 9% are

involved with other forms of interactive entertainment, 4% are involved with providing medical

simulations, and 4% are involved with providing military simulations.

In contrast, of those respondents who are not currently engaged in the above activities, many

indicated that they expect to become involved with these activities in the near future: 35% plan to

produce their own intellectual property; 26% plan to contract‐out some services to a developing

country; 17% plan to work on an international co‐production; 39% plan to start work with another

Ontario firm; 39% plan to become involved with gaming; 48% plan on getting involved with some

other interactive entertainment; and 9% plan to get involved with medical simulation. This means

that, if all respondents actually pursue the activities they claim to, total activity in each area will be as

follows: 51% will produce their own intellectual property; 39% will contract‐out a portion of their

services to developing countries, 39% will work on international co‐productions, 60% will work

cooperatively with other Ontario studios on projects, 39% will be involved with gaming, 48% will be

involved with other forms of interactive entertainment, 12.6% will be involved with providing

medical simulations, and those involved with providing military simulations will remain at 4%. This

represents a substantial willingness to diversify revenue sources.


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Figure 12: Activities of Ontario Studios

These findings are consistent with some of the written comments provided on the survey regarding

the future of the industry.

“Ontario needs to have a clear and concise message to generate work. We need to know our

market segment in the global economy and how we are going to move forward to increase or

shift it. I think the Industrial Strategy is a good first step. The OMDC should start tracking

digital VFX and animation dollars on a yearly basis from both foreign and domestic producers

separately. We need quantifiable results to build the industry on. Ontario VFX and animation

need to work with the film community as a whole to represent our full package. This includes

Film Ontario”.

“I believe that we will not succeed until all companies work together in giving Ontario a

healthy working environment both for the artists and the productions that shoot here. If the

0%

10%

20%

30%

40%

50%

60%

70%

% of Survey Responden

ts

Activities Inolved With

Plan To Do

Currently Do


65

atmosphere continues with price gouging and the unwillingness to cooperate then we won't

be around long and productions won't want to come here”.

5.4.2 Government Support and Tax Credits

In our survey, 90.9% of respondents indicated the tax credits were a very important element of

government support for the digital animation and VFX industry. Only 14% of the respondents felt

that the current OCASE design was optimal. About a third of the respondents felt that a tax credit

administered jointly with the OPSTC and OFTTC, like the DAVE tax credit in British Columbia would be

the best form of tax credit for the Ontario industry. A little less than 30% of the respondents felt

that a tax credit similar to the existing OCASE tax credit but which was assignable to the project's

producer would be optimal. These findings were strongly reinforced by the written comments in the

survey. The vast majority of comments provided on the survey related to government support in

general and tax credits in particular. The following are examples of the comments received.

( DISCLAIMER: The following comments are solely the opinions of interviewees and are reproduced

without edit. Neither Tom Wesson Consulting nor CASO has verified the accuracy of the comments

and takes no responsibility for either their accuracy or for the opinions stated. They are produced here

to demonstrate the range of opinions that exist among members of the industry.)

“Credit should go directly to Producer ‐ will give them the transparency they want. All labour

should be covered”.

“Put clearer rules in place for eligible costs that prevent/minimize eligible costs being

disallowed by CRA at audit. Rules for eligibility are too vague and open to interpretation.

Having estimates reduced at audit because of "interpretation" by CRA is incredibly harmful.

Studios count on ‐ in fact they sometime BANK on ‐ this money. To have a shortfall because

CRA's interpretation is different from the OMDC's is unacceptable”.

“Make the OCASE assignable so that studios remain entitled to it, but have the option to

assign”.

“Make it like DAVE. Have the producer access credit directly. This will save Ontario vendors

from passing it on through discount, then having to finance the cash flow themselves for 18

months or longer ‐ if the project has small margins (which is very likely), this negative cash

flow can severely hurt a digital VFX studio”.

“Need to also shorten time it takes to receive tax credits (some states receive within 90 days),

and/or support tax credit with financing either with EDC co‐operation (guarantee's like they

do with SR&D) or other means. Producer in LA question Ontario structure as opposed to BC,

and Louisiana, New Mexico”.

“Make it impossible for Producers to demand the OCASE tax credit from the service studio as

part of the Producer's financing. Hard to structure, but frustrating for service houses that

need that credit for upgrades and development and are told to give it up or Producer chooses

another Studio who will offer it up”.


66

“When the Government announces a 23 million dollar grant to Starz ‐ a US owned company ‐

and 234 million dollars to Ubisoft ‐ a Quebec company ‐ it is a huge kick in the face to local

producers such as myself who have sweated it out in the Ontario trenches for 25 years and

still managed to employ hundreds of people in spite of the obstacles. These public

announcements are bad ideas. They punish the producers who have demonstrated a

commitment to Ontario and job creation and reward big name entities who come to our

province and city and immediately enjoy a massive competitive advantage. The so called new

jobs they create are mostly jobs they steal from other producers who cannot compete with

their deep pockets. This only serves to put existing studios out of business and shift talent

around and it teaches foreign companies that they do not have to work with Canadian or

Ontario producers to access the Canadian tax credit system, they can do it themselves. Profits

from these ventures do not stay in Ontario ‐ they go to the owners in other territories. The

amount of money used to lure Ubisoft to Ontario is obscene and could have done immense

good to the local economy had it been given to proven Ontario producers. It was only done

because the government thought it made a sexy story in the newspapers. When Ubisoft starts

raiding other studios for talent and driving them out of business, how sexy will the story be

then? The answer is it won't because no one will be reporting on that. It will be kept very

quiet”.

“Increase awareness of the Ontario Incentives. Vancouver's DAVE is well known with

producers, and seems to have more clarity, giving potential clients a higher comfort level.

They seem to be confused with Ontario's incentives, leading to being dismissive when the

topic arises”.

“Increase incentive if production is based in Ontario, and they use a local VFX facility. Our

competitors in UK never lose work to us in local productions due to the rules in the production

spend. They use local facilities, they get a greater spend for overall production. The studios

tend to leave VFX production there to increase their spend, and in turn London has grown

rapidly”.

“Decrease time for collection of tax credits. Some states receive their tax credits within 90

days of filing”.

“Assist with Financing. Due to the low margins (and lower in today's economy) at times we

are passing at least 20% of the overall VFX budget onto the producer as a discount, meaning

we require financing to cover this negative cash flow. Either collaboration with another

government institution (like EDC) to guarantee the taxes credits and make it easier for the

vendor to finance, or offer some other form of financing. When times are difficult, financing

of the tax credits appear riskier, banks tend to bail out of our industry”.

“Allow production to directly access OCASE themselves. Give them easier access to all credits

similar to DAVE. May need to split tax credit depending on whom is accessing it and for

what (i.e. OCASE for Visual Effects Companies, another for Animation companies creating

their own IP ‐ to ensure financing of projects before production begins)”.


67

“Both work together AND allow the Producer to apply for all three tax incentives Federal

PSTC, Ontario PSTC and OCASE”.

“Having the most lucrative tax credits would attract and keep the work in Ontario and not

have it bleed out to other provinces”.

“I believe the tax credit should be solely for the VFX and Animation companies since they are

losing money with what producers are asking for. This tax credit allows some breathing room

to develop. Implement a tax credit that is independent from the VFX and animation

companies and producers”.

5.4.3 Employment and Staffing Issues

Because of the nature the industry, digital animation and VFX firms are frequently engaged in hiring

new staff and bringing on board contract workers. These workers are hired in global labour markets

in which individuals are mobile both within Canada and around the world. Throughout our research,

interviewees made frequent reference to the number of Canadians employed by foreign firms in the

industry. The majority of the respondents to our survey (65%) felt that shortages of skilled labour

would be either a moderate or slight challenge to the industry over the next five years.

When it came to hiring workers from outside of Ontario to fill vacancies, two issues in particular were

raised in our interviews with industry members. The first involves Ontario residency requirements

for eligibility for the OCASE tax credit and will be discussed in detail below. The second issue

involves difficulties hiring foreign workers because of the long delay in processing visa applications.

A visa application for a foreign worker typically takes about six months to process. Given the

relatively short duration of projects in the industry, especially in the VFX segment, this processing

delay makes hiring foreign workers totally impractical for many projects.

Only one written comment relating to staffing was provided on the survey. One respondent was

concerned that the industry needs “to seriously look at ways to improve Ontario labour qualification”

as there is a “lack of senior experienced talent for large “A” level projects” in the province.

5.4.4 Key Survey Results

The following provides a summary of the most important survey results along with a brief discussion

of some of the implications.

Over 80% of survey respondents indicated that they expect to see very significant or

moderate diversification opportunities into non‐film and television activities. This is

particularly important because the industry has had difficulty developing /maintaining

intellectual property within the film and television sectors. The response to this question


68

indicates recognition that revenue must be created from other sources if this industry is to

grow and prosper.

The industry acknowledges that the cost to value relationship with respect to digital VFX

productions appears to be superior in developing countries. This will pose a considerable

threat to the industry in the future and is confirmation that the existing value creation

paradigm will continue to remain under severe stress.

In a series of questions for the VFX industry, it appears that the industry considers itself

better than average or world‐class with respect to quality. However the industry does not

appear to have a world‐class quality reputation. This discrepancy is disturbing and has no

easy explanation.

On the other hand, digital animation studios suggest that they have a better than average or

world class reputation and that they have a significantly better than average or world‐class

cost to value ratio. The difficulty that the industry is experiencing suggests that this cost

advantage is not well understood by the client.

We asked a series of questions with respect to the tax structure in Ontario. The majority of

respondents indicate that they participate in OCASE tax credits. However, industry

representatives in this survey indicate relatively little interest in government funds such as

the Entertainment and Creative Cluster Partnerships Fund, Intellectual Property

Development and the OMDC Film Fund. These funds were created specifically to help screen‐

based content creation industries create economies of scale and to diversify into new areas

of activity. The low levels of interest may be based on the relative newness of these

programs but warrants further investigation.

Survey respondents did not participate in the Export Fund or in the Next Generation Jobs

Fund. The OMDC describes the purpose of Export Fund as follows: “The OMDC Export Fund

has been developed to provide eligible Ontario companies with funding to pursue export

development activities that correspond to a strategy for company growth. Primary activities

supported are market event attendance and targeted sales trips that support the strategy58.”

However, it appears that the firms that responded to our survey have generally not been

able to take advantage of this funding opportunity.

The overwhelming majority of respondents indicate that tax credits are very important for

the long‐term health of this industry; however most felt that the current OCASE design is not

optimal. Respondents stressed the importance of labour tax credits paid to the producer and

labour tax credits paid to Ontario digital animation and VFX studios.

At the present time very few firms have been able to capture intellectual property rights.

The survey indicates that a number of firms intend to implement strategies to capture

intellectual property rights in the future.

58 http://www.omdc.on.ca/Page3222.aspx, assessed on June 21, 2010.


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Many industries have aggressively pursued outsourcing opportunities to add value by

contracting out services to lower cost developing nations. Very few firms plan to outsource a

portion of service activities to firms in developing nations.

Firms do not currently participate in work with other Ontario firms as an integral part of their

business strategy.

Some industry members indicate a desire to undertake other interactive entertainment work

in the future. The majority of firms indicate that they expect to generate additional revenue

from electronic gaming five years in the future and there is also some interest in educational

simulations.

Industry members indicate that the majority of firms will either remain the same in size or

will expand. However a significant proportion of respondents (22%) predict that the industry

will in fact become smaller. There appears to be little if any interest in merger activity.

There appears to be some interest in facilitating collaboration within the industry as 67%

indicated that this would be very important or moderately important. In fact, 55% indicated

that working together while maintaining separate corporate identities could assist the

Ontario digital animation and VFX firms to compete for higher value projects.


Research indicates a steady growth in market demand for digital

entertainment with the greatest growth in non‐theatre distribution channels. There is a trend towards interactive content and convergence in platforms. There is a lack of consensus within the industry as to whether an individual

business will have greater stability and success by specializing in a very narrow

segment or diversifying across multiple segments within the industry. The major concerns of industry insiders for the coming years telate to a lack of

stability within the industry and include: the value of the Canadian dollar;

outsourcing to lower cost countries; and the tax credit system in Ontario. Industry insiders have identified the following as possible opportunities:

pursuing intellectual property ownership; diversification into non‐film/TV; and

technological innovation.


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6 Analysis

While the goal of this study is to make recommendations to improve the competitiveness of the

Ontario computer animation and VFX industry, we must remember that it is not industries that

compete but the individual firms within the industry that compete, both with each other and with

firms from other jurisdictions. Therefore, the question we must ask in this study is what changes can

be made in the industry and its environment that will help the firms within the industry to compete

in the global digital animation and VFX industry. In terms of individual firms, lacking specific

information about their competitive position, their resources and even their long‐term and short‐

term goals, we can only make broad recommendations that would apply to all or most firms in the

Ontario industry.

When it comes to understanding the industry conditions that contribute to the success of the firms

within a particular industry, the concept of a cluster, introduced in Section 2.1 of this report, is

extremely useful. As described above, a cluster is a geographically concentrated group of firms and

institutions in related fields that support and strengthen each other and help one another compete

against rivals from outside the cluster. The cluster is a dynamic environment in which there is

constant change and constant upgrading of the sources of competitive advantage.

The leading thinker in the field of industry competitiveness and clusters has been Michael Porter of

the Harvard Business School. In his work Porter has identified the elements of an industry's local

environment which contribute to its success in international competition (see for example, Porter

1993a and 1993b). In other words, Porter has described what makes a cluster strong. His model is

often referred to as the Diamond Model.

6.1 The Diamond Model

Porter's Diamond Model of cluster analysis includes four interrelated elements that contribute to the

success or failure of an industry in international competition. The four elements are: firm strategy

structure and rivalry; demand conditions; related and supporting industries; and factor conditions.

The model also acknowledges the important roles that governments and chance events sometimes

play in the development of industries. However, Porter does not think of these two additional

elements as direct contributors to industry performance, but rather sees them acting through the

four main elements of the model. In Porter's view, an essential element of successful and dynamic

clusters is the interaction among the elements of the model. For example, strong factor conditions

contribute to the development of strong related and supporting industries and vice versa. This

mutually reinforcing interaction among elements of the diamond creates a unique industry


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environment that enables local firms to excel in global competition. The interaction among elements

of the diamond also makes it difficult for competing national industries to catch‐up with a world

leader. Replicating part of a cluster environment is likely to prove ineffective. Reaping the full

benefits of clustering requires that all elements of the diamond be in place simultaneously.

Figure 13: Michael Porter’s Diamond Model for Cluster Analysis

It is also important to note that it is not the case that there is necessarily one best industry

environment or even type of industry environment for a particular industry. Different locations can

provide different cluster environments that provide different advantages to local firms and allow

them to compete globally in different ways. For example, in the auto industry, Japan and Germany

have both provided strong home bases for their domestic auto manufacturers. However, the nature

of those home bases and, therefore, the nature of the firms they have produced are very different.

Porter argues that cluster development is a key contributor to global competitive advantage,

especially in the long‐term. One rarely, if ever, sees firms that have long‐term success in

international competition which are not part of a strong cluster of related firms. We have utilized

the results of our surveys and in‐depth interviews to develop an assessment of the Ontario computer

animation and VFX cluster. This will lead directly to recommendations that will improve the

performance of the firms which make up the Ontario computer animation and VFX industry.

We will look at each element of Porter's Diamond Model in turn, beginning with factor conditions.


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6.1.1 Factor Conditions

One of the key strengths of the Ontario computer animation and VFX industry is the availability of

skilled labour for the industry in Ontario. Because of the existence of many educational institutions

with strong programs in digital animation and related fields, there is a steady supply of new entrants

into the job market. The value of this labour force to the industry is further enhanced by

government programs which reduce the cost of these world‐class workers to the firms in the

industry. Government support begins with the publicly funded education system that funds the

colleges which produce most of the workers. The most crucial elements of government support

however, are the OCASE and other tax credits that reduce industry costs in general and, in the case

of OCASE, labour costs in particular.

Despite these general strengths in terms of labour, there are still some issues the industry faces.

Firms often have difficulty accessing skilled labour when needed on short notice to meet the

fluctuating demand levels that characterize the industry. When demand in the industry is strong,

there is fierce competition among industry members to hire skilled labour. This problem is greatly

exacerbated by the residency requirements of the Ontario government programs that support the

industry. If an Ontario firm hires a worker from outside of the province to complete a particular

project, that firm will not be eligible for Ontario government support in paying that worker’s wages.

Given the international nature of the industry and the mobility of its workers the inability to hire

from outside of the province is a major issue for firms. Ironically, in many cases the out‐of‐province

workers that Ontario firms would like to hire are actually former Ontario residents who were initially

trained in Ontario's community colleges. Easing the residency requirements on the OMDC

administered tax credits would make it easier for the province to attract these workers in whom

much public money has been invested back to Ontario.

Tight labour markets have repercussions for Ontario firms beyond simply hiring workers. Because it

is often difficult to hire experienced workers in the Ontario digital animation and VFX industry, firms

are often reluctant to let workers go even when the firm does not have enough work to keep its

workers busy. Retaining workers this way has several negative impacts on the industry. First, of

course, it lowers the number of workers available for other firms. It also increases the fixed costs of

the firm retaining workers and exacerbates the effects of the project nature of work in the industry

on firm profit levels and variability. Finally, and perhaps most importantly, this effect on fixed costs

means that firms are often forced to accept projects which are not profitable on a full cost basis in

order to cover some of their fixed costs. Larger firms in the industry sometimes referred to this

pressure to cover variable costs as needing to "feed the beast." The impact of this pressure is even

greater than might originally seem to be the case. Because firms need to "feed the beast," they find

themselves cutting their usual rates and competing for contracts on price as well as bidding on

contracts for which the purchaser is extremely price sensitive. Competing on the basis of price

lowers the perception of the quality of the firm and the Ontario industry as a whole in the

marketplace. An issue that was raised repeatedly in our interviews is the feeling among Ontario


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industry members that the Ontario industry is not perceived in the marketplace as producing as high‐

quality work as it actually does. For example, even Ontario firms with well‐established reputations in

the industry often have to produce demos to prove that they are capable of completing a particular

job before a contract is awarded to them.

A second major concern for the industry in terms of factor conditions is a lack of steady and

predictable access to capital. When it was first conceived, the OCASE tax credit was designed in part

as a tool to address this problem. However as it is currently structured and as it is treated by the

industry's customers, especially the major Hollywood studios, the OCASE tax credit actually has a

significant negative effect on working capital of Ontario digital animation and VFX studios. Like the

labour market issues discussed above, this problem is exacerbated by the lumpy project based

nature of work in the industry and the irregular cash flows that work produces.

Furthermore, the requirement that firms in the industry install and maintain expensive physical

infrastructure to enable their workers to do their jobs also contributes to this pressure to lower

margins in order to maintain workflow and cover fixed costs. This problem is exacerbated by the fact

that in Ontario (and even within Toronto) there is not a high‐speed network with sufficient

bandwidth to easily allow work to be shared across multiple locations and coordinated in real‐time.

In the United Kingdom, SohoNet runs a network which connects various locations with dedicated

high‐speed lines that allow real‐time collaboration. SohoNet also connects digital animation and VFX

studios in the UK to clients in Los Angeles and elsewhere with dedicated high‐speed connections that

allow the UK studios to work closely with their clients much more easily than would otherwise be the

case.

6.1.2 Demand Conditions

The second element of Porter's Diamond Model, demand conditions, considers the extent to which

the nature of local demand for an industry's goods and services provides advantage to the industry.

While it is useful for an industry to encounter high volumes of local demand, there are other aspects

of local demand that are much more important. For example, having sophisticated customers who

push an industry's firms to innovate constantly and improve their products is far more useful than

just having high levels of demand. Similarly, having customers who tend to lead customers in other

regions in terms of product preferences ‐ demanding today with customers in other places are going

to demand tomorrow ‐ can provide local firms with the huge advantage.

Looking at the Ontario computer animation and VFX industry, we can see several attractive demand

conditions. First, Toronto is the centre of the Canadian media industry, giving firms based in and

around Toronto preferred access to the major Canadian television networks. Similarly, but less

distinctively, Toronto is one of the three large centers of motion picture production in Canada.


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However, there are also significant weaknesses in the demand conditions encountered by Ontario

computer animation and VFX firms. First, as is discussed above, Canadian produced film and

television shows tend to have much lower budgets than their American counterparts. This difference

in budgets significantly impacts spending on VFX, since VFX are seen as something of a luxury item in

the industry. Canadian produced programs will avoid the use of VFX where at all possible, and when

VFX are used, price not quality will be the major decision‐making criteria in selecting a VFX studio. If

the average budget of Canadian film and television productions could be increased, it would allow

greater use of sophisticated VFX.

Perhaps even more significant is Ontario's weakening position in the service production market.

Since service production projects are mostly produced for US studios, they tend to have larger

budgets than Canadian produced projects, making them one of the strongest potential markets for

the industry’s skills. However, it is much easier for Ontario‐based VFX firms to win service production

work on projects for which the principal photography is taking place in Ontario, because for a foreign

studio producing a project, it is much easier to deal with a primary service production studio and a

VFX studio who are located in the same city. In addition, for the service producer and the VFX studio

it is obviously easier to work together and coordinate their work on the project when they are

located close to one another. Ontario digital animation studios are losing significant market share in

the service production business to studios from other jurisdictions, especially British Columbia. Not

only have indigenous British Columbia firms grown rapidly in recent years, but it also has been able

to attract several prominent Hollywood studios to build significantly sized animation studios in the

Vancouver area.

Finally, although it was noted above that Toronto is the center of the Canadian television industry,

competition in the industry is not overly intense. Canadian broadcasters do not feel a constant need

to innovate in order to survive and therefore do not pass an intense pressure to innovate on to those

who produce their programs for them. There is a tendency for television broadcasters to follow

trends which leaves them all looking for similar types and styles of programs at the same time. For

example, one animation service producer told us that several years ago all of his customers were

working on programs that combined animation and live‐action but that today such programs are out

of style. Also, for most genres of programming there are relatively few potential buyers in the

Canadian television market. This means that Canadian producers have few choices when selling the

Canadian broadcast licenses for their productions. This issue was raised in particular with respect to

children's and youth programming, but it clearly applies in other areas as well.


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6.1.3 Firm Strategy, Structure and Rivalry

The third element of Porter's Diamond Model is firm strategy, structure and rivalry. This element of

the diamond looks at the way firms are organized, how they are created and grow, and how they

compete with one another in a domestic industry.

In the Ontario digital animation and VFX industry many firms have developed strong reputations in

the market and have become known as specialists in particular areas. Industry members have also

been able to work together through CASO and the OMDC to market the Ontario industry as a whole

while still competing individually. In fact the creation of CASO reflects in part the realization of the

industry members they cannot thrive individually if the industry as a whole does not thrive as well.

The ability of the industry to work together through CASO is crucial given the fact that individually

Ontario firms are not large enough to bid on large projects. However, firms in the Ontario industry

have yet to demonstrate their ability to coordinate to complete large projects shared among several

firms. Some members of the industry are working on joint or coordinated bids for projects, but they

are yet to have won a major contract. They are hindered in their ability to win a large contract by the

fact that in most cases they are bidding on projects which are not filmed in Ontario. Likewise, it

would be easier for specialized members of the Ontario industry to participate in large projects if the

projects were being filmed in Ontario or at least if the primary VFX contractor was Ontario‐based.

Another issue with the Ontario industry is that many of the smaller firms lack a clear strategy or

sense of what differentiates them from their competitors. This lack of a clear strategy forces firms to

compete on the basis of cost, such that they are doing little more than selling their principals’ time

on a fee‐for‐service basis. This exacerbates the problems discussed earlier that occur when larger

firms feel the need to underbid on contracts in order to cover fixed costs. Once again, Ontario

studios are positioned in the marketplace as low‐cost rather than differentiated competitors.

Also contributing to the tendency of Ontario firms to emphasize price over differentiation in their

attempts to win new work is the fierce competition that exists among governments from different

jurisdictions to provide their local digital animation and VFX industry with a price advantage through

various support regimes. This competition places the OMDC in a position where, in its dealings with

Hollywood producers in particular, it is forced to emphasize Ontario's tax policies in order to ensure

that producers understand that Ontario is cost competitive. While it is obviously important for

potential clients to understand that the tax credit regime in Ontario makes our industry cost

competitive, it is also essential that they receive the message that Ontario digital animation and VFX

firms produce world‐class output.

A further consequence of the small size of Ontario digital animation and VFX firms is that they are

largely privately held and find it difficult to access external capital. Therefore, they are often reliant

on their founders' personal funds and their own cash flows to fund start‐up and ongoing operations.

Their inability to access capital once again exacerbates several of the trends we have already noted.


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For example, inability to access external financing pushes firms to either let go of experienced

workers or bid aggressively for work when they have idle capacity. Lack of access to capital also

makes it difficult for firms to grow and become large enough to compete for major projects.

6.1.4 Related and Supporting Industries

The final element of Porter's Diamond Model is related and supporting industries. This element is

included in recognition of the simple fact that firms in industries that have local access to world‐class

supplier and other related industries have an advantage in global competition. The Ontario digital

animation and VFX industry is supported by many world‐class related industries. Perhaps the best

recognized of these is the Ontario education "industry," which is a global leader in the training of

computer animation and VFX artists.

The Ontario digital animation and VFX industry is also helped by the fact that one of the leading

software firms in the industry, Side Effects Software, is located in Toronto. The Ontario animation

software industry is not as strong as it once was, however. Prior to the takeover of Alias by Autodesk

in 2006 the two leading providers of digital animation software were located in Toronto. Currently,

Montréal‐based Autodesk has a near dominant position in the industry because of its multiple

products and its easy access to capital. Autodesk is a large publicly traded company with a market

capitalization of about $US 7.5 billion. Its fiscal year 2010 revenue was about $US 1.7 billion, of

which only about 11% came from the media and entertainment segment of its business. Also of

some concern to the Ontario industry is the fact that Side Effects seems to be working less closely

with the industry then in the past. For example, a very close working relationship existed between

Side Effects and CORE Digital Pictures during the production of The Wild. Our interviews indicated

that Ontario‐based studios no longer had a particularly close working relationship with any major

software firm. In the meantime, Side Effects has established an office in Santa Monica California to

provide local service and support for its LA customers.

Looking more broadly within the digital animation software industry, we see that Ontario has a very

strong position in computing, telecommunications and related industries in general. These industries

are clustered largely around the Waterloo area. They include such well‐known firms as Research in

Motion, Christie Digital and Open Text. This strong regional cluster has also spawned the creation of

several important organizations that further strengthen the industry. Among these organizations are

the Accelerator Centre, Communitech and the Canadian Digital Media Network. Of course, the

University of Waterloo also plays a pivotal role in this cluster. Unfortunately, the Ontario digital

animation and VFX industry does not make as much use as it could of its proximity to the cluster of

related industries in the Waterloo area. We found that there was surprisingly little interaction

between industry firms and members of the Waterloo‐based cluster. Of course, interaction ‐ or a

lack of it ‐ is a two‐way street. Although Toronto has long been the center of the computer


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animation industry, the University of Waterloo's world leading computing faculty is relatively weak in

this area.

As a final note in terms of related and supporting industries in Ontario, much has been made of late

of the relative weakness and lack of competition in the Canadian telecommunications sector. As we

have seen in a discussion of SohoNet and its role in supporting the UK industry, having access to

leading‐edge telecommunications services support collaboration and specialization among digital

animation and VFX industry members and also facilitates work on service productions.

6.1.5 Summary of Cluster Analysis

The Ontario digital animation and VFX cluster has made significant strengths that should contribute

to its ongoing growth and success in international competition. However, the industry's firms are not

able to take full advantage of the resources they have available to them. Because the industry is not

taking full advantage of its opportunities to offer a unique and differentiated value proposition, firms

are increasingly competing on the basis of price. Competing on price leads in turn to decreasing

margins, which mean less capital is available to invest in renewing and upgrading sources of

advantage, pushing firms further towards cost‐based competition and creating a vicious cycle. Given

that price competition in the international market can only increase in coming years as digital

animation and VFX studios in developing countries continue to improve their skills and the

sophistication of their work, it is imperative that the Ontario industry break out of this cycle and

begin to compete on the basis of offering a differentiated high quality product.

6.2 SWOT Analysis

A SWOT analysis is a strategic planning method used to evaluate the Strengths, Weaknesses,

Opportunities, and Threats for a company or an industry. The aim of a SWOT analysis is to identify

the key internal and external factors that are important competitiveness drivers. These come from

within the value chain. A SWOT analysis groups key pieces of information into two main categories:

Internal factors – The strengths and weaknesses internal to the organization or industry.

External factors – The opportunities and threats presented by the external environment to

the organization for industry.


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Strengths

Ontario has developed a reputation for producing both high quality digital animation and

special effects. Ontario’s reputation is particularly strong in the area of children’s animation.

This reputation is built in large part on the quality of education programs in the province and

the consistent high calibre of graduates, particularly in terms of their innovation.

Ontario has a competitive advantage over some non‐western jurisdictions in that the

working language is mainly English, its proximity to the major North American producers is

favourable, and it provides film production locations which can easily be identified as any

North American jurisdiction.

The Ontario government has consistently demonstrated a strong support for the industry

through the Ontario Media Development Corporation (OMDC), including a range of tax

credits, incentives, and marketing support.

The Computer Animation Studios of Ontario (CASO) association has been instrumental in

developing close working relationships among various industry stakeholders and it has the

potential to facilitate more formal collaborative arrangements with multiple studios to

attract larger scale projects to the regions.

Weaknesses

The Ontario special effects studios have become largely “custom” service providers with little

opportunity to develop intellectual property that can either be re‐sold or generate an

ongoing revenue stream. An exception is Ontario’s animation studios that have had greater

success in developing and retaining intellectual property.

Despite a generally positive perception of the quality of their work, many Ontario studios

have found themselves negotiating on the basis of price. Some studios admitted to

undercutting competitors’ bids to maintain some minimal level of work in order to retain key

employees. In addition, several industry insiders have raised concerns that government

pitches to sell Ontario’s industry focuses too much on low cost rather than high quality,

despite an acknowledgement that the OMDC has done much more promoting of Ontario

companies in recent years independent of the issue of cost.

Access to working capital is limited. Some banks will provide funding based on a proportion

of tax credit revenues that a studio is waiting to receive from government. Other sources of

funding are extremely difficult to come by.

The Ontario tax credit system is complicated and leaves Ontario studios with too much risk

and in a position of funding the credit for the producers for months and often years.

Labour costs in Ontario are relatively high. Tax credits offset some of these costs but there

are narrow rules determining which labour costs qualify and it is never possible to match the

labour costs of low‐cost jurisdictions (developing countries).

Opportunities

There is the possibility that Ontario studios can expand on the services they provide to

include gaming and educational simulation (medical, military etc.). This could allow studios


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to smooth out the highs and lows of demand for their film and television work. The difficulty

is maintaining sufficient expertise in all areas. Moreover, some studios may simply have no

desire to expand the services they offer. An alternative may be to build a virtual organization

composed of numerous small (and specialized) Ontario studios to achieve the same goal

expanding services with fewer risks.

There are some opportunities for Ontario studios to retain more intellectual property. While

this is ideal in principle it will be extremely difficult in practice due to the power imbalance

between the producers and the smaller Ontario studios. This power imbalance might be

altered sufficiently if Ontario studios work together on the development of some projects

and pursue alternative distribution channel such as social media, Weboids, mobile

transmission, and new theatre developments.

It is fairly straightforward for the Ontario government to make some alterations to its current

system of supports, including the tax credit system, to make them less complicated and

removing some of the risk from the Ontario studios without investing additional dollars.

Expanding the number of international co‐productions could help to reduce some of the

fluctuations within the industry.

Out‐sourcing to lower cost jurisdictions such as India and China for the less creative aspects

of the animation and special effects services might be an option for increasing the viability of

Ontario studios. While this approach may take jobs out of Ontario it may also protect the

jobs that are currently here.

Threats

Customers (or demand) for services from the Ontario digital animation and special effects

industry come predominately from outside of Canada. This leaves Ontario studios vulnerable

to fluctuations in:

o international demand for film and television products;

o the value of the Canadian dollar; and

o shifts in government supports (tax credit levels) from competing jurisdictions.

The result is extreme fluctuations in work (and revenues) and complications associated with

attempting to downsize or ramp up with little lead‐time.

The threat of competition from other jurisdictions remains high. Some higher cost

jurisdictions may be perceived as being better quality or value than Ontario (especially with

fluctuations in the Canadian dollar and frequent changes to tax credits). At the same time,

lower cost jurisdictions have steadily been improving their quality.

Powerful producers have had great success in forcing Ontario studios in relinquish all or most

of their potential intellectual property rights.

Competition from foreign companies/studios that move into Ontario.

The significant decline in revenue from foreign presales realized by Canadian animation

producers.


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Figure 14: SWOT Analysis

Threats

‐ Client demands for IP control.

‐ Competition from gaming companies.

‐ Emergence of new delivery platforms and changing producer business models.

‐ Out‐sourcing to low cost jurisdictions such as India and China.

‐ Fluctuations in tax credits from other jurisdictions.

‐ Rising Canadian dollar.

‐ “Process IP” is lost when people leave and take skills with them.

‐ Economic recession and competition for shrinking number of projects.

‐ The enhanced attractiveness of Vancouver and Montreal as cluster centres.

Strengths

‐Work quality.

‐ Good pipeline (IP in the process) for delivering work on budget and on time.

‐ High calibre graduates from local educational institutions.

‐ English speaking.

‐ Historical hub for animation and software.

‐ Ontario has strong reputation for children’s television and animation.

‐ CASO and OMDC support for marketing.

‐ LA representative for marketing and networking.

Opportunities

‐ Related industries including gaming, medical and military simulations.

‐ New distribution channel such as social media, Weboids, mobile transmission, new theatre developments, 3‐D.

‐ Potential for Ontario studios to collaborate in order to bid on large assignments and compete at the next level.

‐ New technologies providing opportunities for efficiency and scale.

‐ Government support, such as the OMDC partnership fund and support for post‐secondary education programs.

‐ International co productions.

Weaknesses

‐ Projects are "custom".

‐ Tax credit system has negative impact on working capital (complicated tax credit system with staff residency requirement).

‐ Focus often on cost rather than quality.

‐ Derived demand from international producers.

‐ Big swings in revenue year to year.

‐ Downtime gaps are hard to fill ‐ Limited access to working capital working capital.

‐ High cost of labour and lack of training for midcareer professionals.

‐ Ontario marketing in Los Angeles may be too focused on low cost.


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The Ontario Industry is extremely vulnerable to: o changes in government policy; o the rising value of the Canadian dollar; o competition from low‐cost jurisdictions; and o changes in consumer demand (fluctuations in film and television

production which utilize digital animation and special effects). Competing on the basis of price will lower international perceptions of the

quality Ontario offers and will not support long‐term strength in the industry. The industry firms need to stabilize cash flows. Options include diversification

of services offered and developing and maintaining control of intellectual

property. Building a strong industry “cluster” is an essential component of a strong

industry.


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7 Recommendations

The following recommendations have been developed with the recognition that the digital animation

and special effects industry in Ontario is multifaceted with no “one size fits all” solutions and that in

the short to medium term there should be no expectation of any significant additional provincial

government financial support for the industry. Moreover, many organizations within the industry

are currently in an extremely difficult position. Demand for services has fluctuated wildly, both

domestic and international competition has intensified, there is a significant power imbalance

between the small to mid size service providers in Ontario and the extremely large international film

and television producers/distributors, and there are numerous external factors constraining the

industry’s growth that are beyond the control of the industry itself. Many of the challenges faced by

the Ontario industry seem to be common more or less throughout the global industry, especially

among VFX firms. According to a recent article on the Hollywood VFX industry “VFX companies are

facing a crisis years in the making."59 While some Ontario studios have successfully carved out a

niche within the industry many others find themselves in the unenviable position of being providers

of a narrow range of services that need to compete on price during low‐demand periods in order to

cover overhead costs.

Building a stable and thriving industry over the long term requires the current business model to be

re‐invented. While some industry players may wish to continue with business‐as‐usual, most within

the industry will have to reconsider how they do business. In the short to medium future, this will

mean maximizing adaptability and improving the predictability of cash flows (Recommendations 1‐5).

This may be achieved by expanding services into less familiar territory, working with former

competitors to be able to attract larger projects, identifying opportunities and approaches to

developing and maintaining some control over intellectual property, and enhancing supports to the

industry (Recommendations 6 and 7). In the long term, this will mean coming together as an industry

to promote Ontario having a quality rather than cost advantage so that premium pricing may be

commanded on a more consistent basis (Recommendations 6 and 7).

Recommendation 1: Promote the Industry on the Basis of Quality

It is recommended that CASO, the members of the industry and the OMDC work to shift the focus of

the industry’s marketing strategy to promoting the quality of Ontario service providers.

Rationale:

Competing on cost is not an effective strategy for growing an industry. Both CASO

59 Keegan, Rebecca (2010), “Hollywood's VFX Shops: Trouble in Boom Times,” Time, 5/31/2010, Vol. 175 Issue 21, special section p1‐2, 2p.


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and the OMDC have a role in shifting the industry to a quality focus. We heard

from numerous industry members that the promotional activities of the OMDC are

incredibly valuable to the industry but that, because of its role as a government

agency, the OMDC tends to emphasize Ontario's tax benefits and not the technical

and artistic strengths of Ontario's firms. There was a consensus among

stakeholders that the industry would benefit from a marketing approach which

emphasized the high quality product produced by Ontario studios. Our interviews

indicated that potential customers are well aware of the variations in tax

advantages from jurisdiction to jurisdiction. A marketing approach focused on

quality rather than cost will support industry efforts to differentiate Ontario from

other jurisdictions.

In terms of tax credits, it seems that the best alternative for Ontario and other

competitive jurisdictions would be to clearly indicate to one another that they will

not allow any major competitor jurisdiction to maintain a significant advantage in

terms of their tax credit regime. If most jurisdictions credibly apply this policy,

then the “race to the bottom” on tax credits should cease. Historically, the

Hollywood studios have effectively played competitive jurisdictions off against

each other. By cooperating together to end the constant battle to establish a

taxation advantage, competing jurisdictions can reduce the power of the

Hollywood studios and shift the focus of competition in the industry away from

price towards quality. This cooperation can be established either inter‐

governmentally and/or among trade associations like CASO.

Recommendation 2: Seek New Opportunities to Apply the Industry's Skill Set

CASO should work with industry members to identify and exploit additional markets in which the

skills, resources and intellectual property of the industry could be applied.

Rationale: During the course of our analysis we identified a number of potential opportunities for

industry members to expand their operations in new directions. Currently, the majority of

CASO members view these opportunities as beyond the scope of the industry. CASO should

establish formal mechanisms to assess these areas of potential growth for the industry.

For example, there exists significant activity in computer simulation in the following fields:

Flight simulation

Traffic control

Medical simulation

Vehicle simulation

The expanded use of computer game technologies for military simulation


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Similarly, the Nordicity study identified the rise of cross platform interactive media as a

potential opportunity for the computer animation and VFX industry. Specific areas of

opportunity include:

Websites

Games

Mobisodes

CASO members are currently not well equipped to participate in these fast growing markets.

There would need to be significant refocusing of business strategies, as well as financial

resources, in order for CASO members to take advantage of these potential new

opportunities. The power of these alternative methods of distribution can be seen in

examples like the mobile game “Everyday Shooter,” which has achieved significant success

on the iPhone mobile platform and in the growth of Facebook as a gaming platform.

Facebook and similar platforms may provide an opportunity for small and medium‐sized

Ontario firms in fields such as computer animation and gaming to find alternative channels of

distribution that will allow them to capture intellectual property value. Although there are

clearly significant issues to be dealt with ‐ including the most fundamental question of how

to turn value into revenue ‐ these approaches could be critical to the long‐term growth and

survival of the industry in Ontario.

Recommendation 3: Develop World Class Communications Infrastructure to Support the Industry

It is recommended that CASO investigate the feasibility of establishing a high‐speed data network

(something similar to SohoNet in the UK) along with options for attracting investment for such a

project.

Rationale:

Investing in a high‐speed data network would allow firms to collaborate and communicate

with clients more efficiently. It could begin within Toronto and then expand to connect to

clients (especially in the Los Angeles area) and eventually to new areas of the province.

Government support for this project would complement investments made through the Next

Generation Jobs Fund in Ubisoft and Starz. It would also benefit other high‐technology

industries by facilitating intra‐provincial and global cooperation on all sorts of projects.


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Recommendation 4: Ontario Studios Should Work Together on Projects

It is recommended that the industry enhance flexibility and adaptability by creating a virtual

cooperative in which studios can seamlessly work together on projects.

Rationale:

Development of such a virtual cooperative will have numerous advantages to the

industry including:

Serving as a networking site to attract larger‐scale projects. A lack of

capacity (large studios) within the industry has limited the industry’s ability

to attract large scale feature film projects. Working together in a seamless

fashion will allow the industry to market its virtual scale to be more

competitive in attracting these projects.

Allowing for virtual horizontal integration. Niche companies that do not

wish to expand out of their particular areas of expertise can work together

on projects and each can focus on their particular area of specialization.

Serving as a virtual labour market. This will minimize the need for studios

to retain full‐time staff and maximize the likelihood that they will be able

to find the staff they need. It will also help ensure that skilled personnel

will not have to move to other jurisdictions to find work.

Serving as an incubator, helping small firms to build the reputation and

become established in the industry.

Expanding the Ontario industry cluster beyond the greater Toronto area to

include firms in more remote areas of the province.

Stabilizing fluctuations in cash flows for participating organizations.

The development of this virtual cooperative will need to be spearheaded by CASO

but the resulting organization should be a standalone entity controlled by

members of the industry.

Recommendation 5: Work to make the OCASE Tax Credit Payable to Producers

CASO and members of the industry should work with the Ontario Government revise the current

tax credit system in order to flow both benefits and risks directly to the producers.

Rationale:

When the current tax credit system was introduced it functioned as intended and

helped Ontario studios to increase their margins and working capital. But today,

however, it has actually become a burden for many Ontario studios. Rather than


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providing financial support to Ontario’s digital animation and visual effects studios,

the financial benefit of the tax credits is now frequently transferred to the

producers. Moreover, the Ontario studios are often left with the inconvenience

and expense of applying for the tax credit and funding the credit for many months

or years before it is collected. Finally, any shortfall from the expected amount in

the tax credit is absorbed by the Ontario studio.

Recommendation 6: Provide Transition Funding Until Changes to OCASE are Fully Implemented

CASO, other members of the industry and other stakeholders should work with the Ontario

government to design and implement a transitional loan guarantee program for qualifying Ontario

studios.

Rationale:

In order to facilitate adjustment within the industry to alterations in the tax credit

system there will be a temporary benefit from assisting studios that are waiting

for tax credit funding to be received. The cost to the government for this

temporary program will be minimal as any guarantees would be based on

pending tax credits and therefore the province should not be called upon to fulfill

its guaranty.

Recommendation 7: Modify the Residency Requirement for OCASE Tax Credits

It is recommended that the provisions of the OCASE tax credit be modified with respect to the

residency requirement for an employee’s salary to qualify for the credit. We recommend that the

residency requirements be changed so that an employee need only be a resident of Ontario for tax

purposes at the time his or her work on a project is performed to meet the residency requirement.

Rationale:

To a greater extent than other media and entertainment industries, the digital

animation and VFX industry is characterized by extreme shifts in demand from

jurisdiction to jurisdiction which necessitates that the workforce be mobile. As a

result, when Ontario studios take on larger projects they need to ramp up quickly,

often having to hire employees who may not meet the current residency

requirements. The residency requirement serves as an impediment to the

objectives of the tax credit system to maximize support to the industry and

facilitate broad economic activity within the province. The residency requirement

also plays a role in discouraging firms from reducing their work force in times of


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low demand and may even discourage bidding on projects when firms are

approaching their current capacity level. Overall, industry conditions demand that

firms be flexible. The residency requirement for the OCASE tax credit significantly

reduces flexibility. This recommended change will also bring the residency

requirements of the OCASE tax credit in line with those of British Columbia's DAVE

tax credit and the federal government’s CPTC program CPSTC.

Recommendation 8: Enhance Mid‐Career Retraining Opportunities

It is recommended that CASO and the provincial government work with the educational institutions

in Ontario to ensure that there is adequate availability of part‐time and short‐term re‐training

programs for mid‐career individuals wishing to upgrade or alter their career paths.

Rationale:

There is clear agreement within the industry that the educational institutions in

Ontario that provide digital animation and special effects training are of extremely

high quality. However, it appears that the bulk of retraining opportunities for mid‐

career individuals require extensive time out of the workforce (in some cases more

than a year). Industry insiders commented on the need for greater access to part‐

time and short‐term opportunities. This might include weekend workshops or a

series of evening courses. Many of the workers who would benefit from these

programs have experience and artistic skills that are very difficult to replicate but

lack the technical skills required to take full advantage of their other skills.

Recommendation 9: Moderate the Power of the Buyers of Animation by Exploring the Possibility of

Harmonizing Tax Credit Requirements

CASO and the Ontario industry should explore the possibility of working with other interested

groups (for example Film Ontario and the CFTPA), and the OMDC to make the requirements of the

Ontario Film and Television Tax Credit consistent with those of the OCASE tax credit in terms of

proving the commercial viability of the project.

Rationale:

Currently, to be eligible for the OFTTC a producer must have “an agreement with an Ontario‐

based distributor or a Canadian broadcaster [for the project] to be shown in Ontario within 2

years of completion (broadcast must occur between 7:00 p.m. and 11:00 p.m., except for


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children’s programming),”60 while to be eligible for the OCASE tax credit a producer must

only demonstrate that a production has been “produced for commercial exploitation.”61 If

the OFTTC rules were consistent with the OCASE rules, it would allow the OMDC to apply its

judgment and industry knowledge to ensure that only commercially viable projects received

the tax credits, but would greatly reduce the ability of broadcasters, especially the few

Canadian broadcasters who regularly broadcast animated programming, to gain control of

intellectual property rights for projects developed by independent Ontario animation

producers. This change would likely not result in any more projects receiving tax credits; it

would only affect the control of intellectual property rights. This change would be especially

beneficial for Ontario producers who have established track records of producing

commercially successful animated programming but still find themselves at the mercy of a

small number of broadcasters when it comes to qualifying for Ontario's most significant tax

credits.

Recommendation 10: Moderate the Power of the Buyers of Animation by Expanding Animation

Producers' Potential Distribution Channels

It is recommended that virtual cooperative (recommendation #4) and CASO should facilitate the

development and retention of intellectual property for industry members, especially by Ontario

animation studios.

Rationale:

By bringing together industry organizations, the virtual cooperative can facilitate

the development of intellectual property by sharing risks, developing alternate

distribution channels, and supporting firms in their negotiations with traditional

producers/distribution channels.

These recommendations are designed to leverage industry resources and current government

support. They are also designed to be mutually re‐enforcing. In order to achieve the highest

probability of success and industry returns they should be implemented together.

60 http://www.omdc.on.ca/Page3399.aspx 61 Ontario Media Development Corporation (2009), Ontario Computer Animation And Special Effects Tax Credit (OCASE): Information/Application Package, October 2009. Page 4. Accessed at http://www.omdc.on.ca/AssetFactory.aspx?did=5559, November 15, 2009.


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8 Conclusion: A New Business Paradigm

The current business model of the Ontario digital animation and VFX industry is under stress. For

many years, the Toronto cluster was a leader in the digital imaging industry. However, for a variety

of reasons Toronto has been challenged by other jurisdictions. The Toronto industry has continued

to be composed mainly of locally owned small and medium sized enterprises and subsidiaries of

larger foreign multinational enterprises that have been attracted to Ontario by the presence of

subsidies and sophisticated factors of production. In recent years, other jurisdictions such as British

Columbia, the United Kingdom and New Zealand, have built reputations for quality consistency and

reliability. At the same time, there is now competition from low‐wage areas such as India. As a

result of this increased competition from two sides, Ontario is “stuck in the middle,” ‐ not clearly

differentiated from other higher‐cost competitors and unable to profitably match the prices charged

by lower‐cost competitors. The Ontario industry is certainly not unique in this. Superstar director

James Cameron recently summed up the industry very bluntly when he said "Fundamentally, visual

effects is a crappy business."62

However, the recommendations made in this study can help move the Ontario industry into a

position where Ontario digital animation and VFX firms differentiate themselves from their

competitors and will be able to earn sustainable margins.

The benefits of the recommendations made in this report will extend beyond the Ontario digital

animation and VFX industry. By strengthening the industry, these recommendations will also

strengthen the entire Ontario digital media cluster. As the work of Michael Porter and others has

clearly shown, we can expect firms and institutions throughout the digital media and computing

cluster in Ontario to benefit from a strengthening of the Ontario digital animation and VFX industry.

For example, strengthening the Ontario digital animation and VFX industry will provide Ontario

producers of related software with increasing and increasingly sophisticated local demand for their

software. Similarly, there will be more local jobs for graduates from Ontario's community college

and university programs relating to the industry. This will increase demand for places in these

programs, and provide a boost to the institutions offering the programs.

Of course as the most closely related industry to the digital animation and VFX industry, we would

expect the Ontario film and television industry as a whole to benefit the most from strengthening the

Ontario digital animation and VFX industry. Interestingly, as this project was nearing completion we

saw an excellent example of the interrelationship between these two industries. The Ontario

produced film Splice was released on June 4, 2010. It has been widely praised by critics and seems

well on its way to profitability. While Ontario talent is in evidence in all aspects of this production, a

62 Keegan, Rebecca (2010), “Hollywood's VFX Shops: Trouble in Boom Times,” Time, 5/31/2010, Vol. 175 Issue 21, special section p. 1‐2, 2p.


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key element of the success of Splice is the breathtaking array of digital VFX created by CORE Digital

Pictures.

A key lesson from this study and countless other studies of industries facing global competition is

that strong firms and strong industries do not exist in isolation. They are part of vibrant and dynamic

ecosystems where they are able to thrive and grow. Strengthening Ontario's digital animation and

VFX industry will strengthen the entire ecosystem in which the industry exists. Our research has

identified several ways in which these benefits can be realized with little or no incremental spending

by the government of Ontario.