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

begin to understand. Grage shines a light on just why and how the movie

business and the VFX business are so royally screwed up. Tis book, with its

statistical analysis and commonsense approach, fully encapsulates the problems.

It should be a primer for every student of VFX or animation, a must-read for

anyone who works in the industry and, in fact, should be mandatory for every

studio executive who might be looking to put (yet another) VFX studio out of

business.

SCOTT ROSS Co-Founder of Digital Domain and former CEO of

Industrial Light & Magic, Sr VP Lucaslm Ltd.

"Inside VFX is a must read for anyone interested in the lm and VFX business.

Te amount of information Pierre Grage uncovers is groundbreaking. Tis is the

one and only book about the lm and VFX industry you need to read.

MICHAEL PANGRAZIOCo-Founder of Matte World Digital & Art

Director for Weta Digital Ltd.


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insidevfx

an insiders view

into the visual effects

and film industry

pierre grage


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Te views and opinions expressed in this book are solely those of the author and do not

represent and no way are affiliated with, sponsored, approved, or reect the views of

Lucaslm, Industrial Light & Magic, Weta Digital, Animal Logic, Double Negative or any

other of the authors past, current employers, clients or any of their respective affiliates or

licensees. Tis book expresses solely the authors views and opinions which are subject to

change without notice.

All data and information in this book are provided on an as-is basis and obtained from

sources believed to be reliable but accuracy, completeness, currentness, suitability, or

validity cannot be guaranteed.Te information contained may become outdated and there

is no obligation to update any such information. Neither the author nor the publisher

shall be held liable or responsible to any person or entity with respect to any loss or

incidental or consequential damages caused, or alleged to have been caused, directly orindirectly, by the information or data contained herein.

Te information and data in this book are strictly for general information purposes only

and should not be construed as an offer of advisory services. Please seek the services of a

competent professional advisor on your specic situation before beginning any

improvement program.

T

e author has no responsibility for the persistence or accuracy of URLs for external orthird-party internet websites referred to in this book and does not guarantee that any

content on such websites is, or will remain, accurate or appropriate.

Copyright 2014 by Pierre Grage

All rights reserved. No part of this publication may be reproduced, distributed, or transmitted

without the express written consent of the author except for the use of brief quotations in a book

review.

Cover photo licensed by istockphoto.com-lisegagne. Cover design by carstenbiernat.com

First Publish: December 2014

www.InsideVFX.com


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For Sabrina


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Foreword by Scott Ross Te Good Ol Days

Enter Pierre

PART ONE

INTRODUCTION TO THE BUSINESS OF FILM

AND VFX

SECTION 1HOLLYWOODS FILM BUSINESS

Chapter 1: Box-Office Deception

Chapter 2: Where Hollywood's Real Money Comes From

Chapter 3: Hollywood Demographics

Chapter 4: Behind the Mask of Hollywood

Chapter 5: Low-Risk Film Financing

Conclusion

SECTION 2

HOLLYWOODS PRODUCTION COSTS AND VISUAL

EFFECTS

Chapter 6: chapter 6 - Ination 101

Currency Versus Money

Te Slow Death of the US Dollar

Ination Measurement

Chapter 7 Hollywood's Real Production Costs

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Inside VFX

Cleopatra - History's Most Expensive Film Ever Made

Titanic - History's Second Most Expensive Film Ever Made

Steven Spielberg's Cleopatra

Conclusion

SECTION 3

THE DIGITAL REVOLUTION

1977 - Star Wars

1982 - Star Trek II: Te Wrath of Khan

1982 - Tron

1984 - Te Adventures of Andr and Wally B.

1984 - Te Last Starghter

1985 - Young Sherlock Holmes

1989 - Te Abyss

1991 - Terminator 2

1992 - Lawnmower Man

1993 - Jurassic Park

1994 - Forrest Gump

1995 - Toy Story

1996 - Independence Day

1997 - Titanic

1998 - What Dreams May Come

1999 - Te Matrix

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Pierre Grage

2000 - Perfect Storm

2001 - Te Lord of the Rings Trilogy

2002 - Spider-Man

2003 - Pirates of the Caribbean

2004 - Te Day After Tomorrow

2005 - King Kong

2006 - 300

2007 - Transformers

2008 - Te Curious Case of Benjamin Button

2009 - Avatar

2010 - Inception

2011 - Harry Potter Film Series

2012 - Life of Pi

2013 - Gravity

Summary

PART TWO

INSIDE THE VFX BUSINESS

Introduction

SECTION 4

THE PRICE COLLAPSE OF TECHNOLOGY

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Chapter 8: VFX Hardware

Chapter 9: VFX Software

Conclusion

SECTION 5

THE IMPORTANCE OF DIGITAL VISUAL EFFECTS TO THE

FILM INDUSTRY

Chapter 10: VFX Demand

Chapter 11:VFX Supply and Margins

Conclusion

SECTION 6

VFX EDUCATION ON THE RISE

Chapter 12: Te awakening of the education industry to vfx

Chapter 13: Graphic Design Education Industry as Competitors

Conclusion

SECTION 7

VFX AND GLOBALIZATION

Chapter 14: chapter 14 - Globalization 101

Industrial Globalization

Service Globalization

Chapter 15: VFX Goes Global

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Pierre Grage

Chapter 16: chapter 16 - Film Subsidies 101

How Europes Film Subsidies Are Supporting Hollywood

Chapter 17: How lm subsidies inuence the visual effects industry

Creative Destruction

War of the Film Subsidies

Chapter 18: chapter 18 - International Criticism Against Film Subsidies

Desperate Measures

Foreign Aid for Hollywood

Chapter 19: Why are governments subsidizing lms?

Conclusion

SECTION 8ASIA - THE RISE OF A GIANT

Chapter 20: chapter 20 - India

India's VFX Industry

India's VFX Scam

Chapter 21: chapter 21 - China

China's Film Industry

Hollywood's Flirt With China

China's Graphic-Design-and-Animation Education Industry

China's VFX Industry

Conclusion

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Inside VFX

SECTION 9

THE VISUAL EFFECTS ROLLER COASTER

Chapter 22: chapter 22 - Top of the Eighties

Apogee

Chapter 23: Top of the Nineties

Boss Film Studios

Dream Quest Images

Chapter 24: chapter 24 - Top of the Two Tousands

Chapter 25: chapter 25 - Digital Domain

Textor Digital

Digital Remains

Chapter 26: chapter 26 - Rhythm & Hues

No Piece of the Pie

Cash Crunch

Chapter 27: chapter 27 - VFX Industry Fluctuations

Current Momentums

Conclusion

SECTION 10

BOOM, DOOM AND IMPLOSIONS

Chapter 28: chapter 28 - Business Cycles 101

Historys First Documented Business Cycle

Te New Business Cycle

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Pierre Grage

Reasons for the Business Cycle in Our Modern Economic World

Chapter 29: chapter 29 - Recessions and the Film Industry

Te Cinemas Need for a New Positive Technological Shock

Chapter 30: Hype Cycle 101

Chapter 31: chapter 31 - Trouble in Blockbuster Town

Te Digital-VFX Blockbuster Hype Cycle

Conclusion

SECTION 11

MONKEY BUSINESS

Chapter 32: chapter 32 - VFX Business Models

Proting on Volume

Chapter 33: VFX Marketing

No Honor for VFX Artists

Chapter 34: chapter 34 - War of the Schedules

Digital Killed the Deadline

Chaos Coordinating

Real-Time VFX Postproduction

Chapter 35: chapter 35 - Te Leading Kind of VFX People

Would Te Real Business Managers Please Stand Up?

Chapter 36: chapter 36 - Te Wrong Kind of VFX People

Te Sociopaths Inner Urge to a Political Environment

Chapter 37: chapter 37 - Te Different Kinds of VFX People

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Inside VFX

Te VFX Industry's Expectation to Work Like an Asperger

Conclusion

SECTION 12

UNDER PRESSURE

Chapter 38: Treat of New Entrants

Chapter 39: Treat of Substitute Products or Services

Chapter 40: Bargaining Power of Customers

Chapter 41: Bargaining Power of Suppliers

Chapter 42: Intensity of competitive rivalry

Conclusion

SECTION 13

BACK TO THE FUTURE

Chapter 43: Te Future of the VFX Industry

Chapter 44: More Creative Destruction

Chapter 45: Endgame

Closing Toughts

Acknowledgments

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Foreword - Te Good Ol Days

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

(THU), in Tria, Portugal. On the eve of the rst day, the conversation among me

and twenty or so VFX artists turned to a discussion about the state of the

industry and how it is most denitely facing tumultuous times. Te group was

made up of artists from various countries the United Kingdom, the United

States, New Zealand, France.

Earlier that day I had given the keynote address, and, as is my bent lately,

talked about the race to the bottom, the disastrous effects of subsidies as well

as the seeming commoditization of VFX. A rather depressing way to kick offwhat

turned out to be a great four days of fantastic tutorials and life lessons by some

of the greatest digital artists on the planet.

Interestingly enough I was the sole businessperson attending the conference.

In the 1980s I had headed Industrial Light & Magic, helping birth the era of

digital visual eff

ects and, in the early 90s, had founded Digital Domain alongwith Hollywood legends Stan Winston and James Cameron.

After several glasses of port, someone started to wax about the good old

days, when VFX used more models and miniatures, blue-screen photography

shot on VistaVision lm with motion-control cameras, optical printers and when

VFX companies made money real money.

I scanned the group, and it seemed to me that I was the only member who

had actually worked in VFX during the so-called good old days as everyone else

was well under forty-ve years of age. I took a long sip of my drink and said,Hey, the good old days were actually the bad old days. Teyre just not as bad

as the present really bad current days.

Some members of the group protested. Tey said, Well, VFX artists didnt

have to constantly move to far-offplaces, leaving their families, to follow the

work. One said, Or not get paid overtime or, worse yet, be owed months of back

pay because the company that youre working for just went bankrupt. Another

jumped in to add, Or be signicantly underpaid because some third-world

country can pay its workers so much less.

Everything they said was, indeed, true. However, the VFX companies that

produced the stunning images, which were paramount to box-office success,

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Inside VFX

invariably lost money. So, maybe, back then, it was better for the VFX artist (at

least in the short run), but it was really difficult for VFX companies to operate a

protable business.

Todayeven though VFX is, by far, the most marketable part of any

blockbuster lm (twenty out of twenty of the largest grossing lms are VFX-

heavy or CG animated)the current climate is so dire that it is almost

impossible to run a protable business.

Te issues surrounding this seemingly strange business model are difficult to

understand. After all, shouldnt studios that make billions on VFX-laden lms

want to ensure that VFX companies remained healthy and protable?Tey

shouldnt want to kill the goose that lays golden eggs.

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

begin to understand. Grage shines a light on just why and how the movie

business and the VFX business are so royally screwed up. Tis book, with its

statistical analysis and commonsense approach, fully encapsulates the problems.

It should be a primer for every student of VFX or animation, a must-read for

anyone who works in the industry and, in fact, should be mandatory for every

studio executive who might be looking to put (yet another) VFX studio out of

business.

Scott Ross

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Enter Pierre

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

far away as a trip to Mars. Like any other child of the 90s, I enjoyed watching

lms, such as those in the Indiana Jones series and the Star Warssaga, plus the

1978Battlestar Galacticalm, but my real passion was for my Commodore 64. I

would spend hours playing games, consumed in the worlds that programmers

had created for me. At that time there was nothing more exciting than those

blocky graphics and tinny sound tracks.

It didnt take long for me to develop the thought of creating my own games. I was

fascinated by the opportunity to create something others might enjoy. A few

friends from school joined me in my efforts. It didnt matter that none of us had

any idea how to code. We just hacked some game tests together in BASIC.1

Graphics were a problem of course, but then we found the extended ASCII

character set. Awesome! Tat will do. It was a very basic approach to game2

design, but, in its own way, it worked.In the end what my friends and I came up with were not one, but ve, not-so-

different Tycoon games. One, if not all, of these masterstrokes had to be3

published so offto a publisher with them. We attached to the oppy disks a nice,

professional-looking cover letter, which stated how much money we would like to

receive for the rights to publish each of our masterpieces. We celebrated our

victory with real Coke and full-fat, salty pretzels. However, the publisher was not

so amused. He had no idea that he was dealing with twelve-year-old kids and

returned our oppy disks with an angry letter. He noted that we were greedy but,worst of all, that our games were bad, boring and technologically outdated. In

hindsight it seemed like the 1990s really werent the time for ASCII graphics

BASIC is an easy-to-learn programming language (according to Wikipedia, its an acronym for1

Beginners All-Purpose Symbolic Instruction Code. Who knew that?). There are many dialects for it outthere. The Commodore 64 had one of them preinstalled and launched as its operating system. Great fun!

ASCII stands for American Standard Code for Information Interchange. Computers can only understand2

numbers. An ASCII code is the numerical representation of every letter on a keyboard. The ExtendedASCII Codes were little lines and blocks that could be alienated for drawing very rough pictures. ASCII artis still found today. Most of us continue to use it for displaying a smiley face, for example. ;-)

Economics-simulation games were very successful in Germany. Strangely no one else in the world3seemed to care much about them.

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Inside VFX

anymore. Seriously our graphics sucked, even for the 90s. But there had to be a

way to make them suck less. I was spurred on.

Tis was the starting shot for my adventure into the world of computer graphics.

It became my obsession to try out every computer-graphic program I could get

my hands on. All this seemed much more exciting than my studies in economics

college. I only chose to graduate with a Bachelor of Science in Economics with a

specialization in Computer Science because of the computer-science part. Not the

economics part. Yet I was surprised to nd out that I had actually enjoyed

learning about economics. I was fascinated how economics and business play an

important part in all our lives. I learned about what it means to manage a

company, its logistics, marketing, human resources and even accounting. Te realdisappointment was the computer-science portion, which required us to write

boring code in HTML, Microsoft Excel and other database programs. But I was

ne with it, since I was learning with my friends how to code computer games

with good graphics.

My parents, on the other hand, were happy to see me studying something

normal, even though I did not know what on earth all this theoretical stuff

about economics was good for. Back then I could not know how these studies

would provide me with a solid economics foundation. A foundation I can rely onup to this day.

Still the career of a suburban bank clerk or small merchant didnt sound very

appealing to me. Reluctant to get a normal job, I decided to do a 3D artist

internship at Software 2000, a small respectable computer game company in

Eutin, northern Germany. Tis internship eventually grew into a real job, and

suddenly, out of nowhere, I got bitten by Hollywoods VFX bug.1

When, in 2001, I received an offer to be part of Germanys rst full-feature CG-

animated lmBack to Gayaat Ambient Entertainment in Hannover, it was

impossible for me to resist. At the time no one in Germany had tried full-CG

animation before, so we had to gure things out as we went. When we really

managed to nish the lm after more than three years of production time, we all

earned ourselves our street education in state-of-the-art CG animation and

visual eff

ects.T

is experience became my very foundation for an even deeperVFX know-how. One that enabled me to live and work in ve different countries

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

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Pierre Grage

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

the visual effects industry. Yet I didnt have to. New Zealand, Australia and

Southeast Asia seemed far more exciting to me.

On the outside it might have appeared that I never looked back at my economics

education. From the inside, however, my interest in economics and nance was

fueled by the euro and its accelerating ination. When the nancial crisis of1

2008 hit us, I intensied my economics studies and traveled the world. Te

combination of studying economics and traveling made me really aware of how

the world is changing at a rapid paceand with it the whole visual effects

industry.

Tis book is the result of my observations and studies. I dont cover any hard-core

technological details about how to create visual effects or lms.Tese kinds of

topics are countlessly covered in other publications. Instead this book is

exclusively about the business economics of creating visual effects and movies.

Te digital VFX industry has undergone massive changes in the last thirty-ve

years. All these changes eventually accumulated in the biggest transition period

the industry has ever experienced. Tis book documents these trends and offers a

holistic analysis. In addition the book aims to get a glimpse of a possible futurefor the VFX industry.

You will certainly get the most out of this book if you read it, like most books,

from beginning to end. But you wont have to do this if you cant wait to dive in

to a specic subject. You are welcome to read the book in any order you prefer. To

justify the holistic approach, I included a few 101 crash courses on certain topics.

At rst sight you might think that these 101 sections are not directly related to

the VFX industry. If you are only interested in the VFX and lm business and

nothing else, please feel free to skip them. However, if you feel curious and

adventurous at the same time, these sections will offer you a deeper

understanding and analysis of certain industry trends.

I have tried to offer you a window into the inner works of a world that has been

hidden for far too long. And for those who are already working within the movie

and VFX industry, I am hoping to off

er valuable insights that will assist you inmaking decisions. Tis book offers all the information I wish I had at hand when I

After the introduction of the euro, many Germans (me included) felt just how their purchasing power got1

cut in half.

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Inside VFX

started my professional career in computer graphics fourteen years ago.

Unfortunately I had to nd out many of these things the hard way. Now you

wont have to.

Pierre Grage

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Pierre Grage

part one

introduction to the

business of film and vfx

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section 1

hollywood's film business

Show Me the Money ROD TIDWELL in Jerry Maguirefrom 1996

Before we dive in to the world of visual effects, we rst have to take a peekat the lm industry itself. Tis will help us to better understand the coherences

how diverse elements integrate and relateand some of the ongoing tensions

between those two businesses. It will be a brief chapter, so buckle up! By the end

of it we will have a good overview of how the modern lm business really works.

Yes, it operates a whole lot differently than most people believe.

In 1947 cinema attendance in the United States peaked at over 4.7 billion.

Cinema entertainment was a new, fascinating and cheap experience. People were

ocking to see movies. Te studios, who owned most of the theater chains, had

total control over what people were able to see. In addition the studios owned

the stars, writers and directors, forcing them into long, exclusive contracts.

Without these contracts no star would even be allowed to rise to fame.

By the 1950s this Hollywood studio system had become so feared that

the United States Supreme Court ordered all major Hollywood studios to

liquidate their theater chains. But the challenges the studios faced did not

stopped there. Te rise of TV and the increased star-bargaining power were

eating huge chunks into the studios prots. Harry Cohn, a then sixty-ve-year-

old Columbia Pictures executive, unburdened his heart in his companys annual

report from 1957:

We nd ourselves in a highly competitive market for these talents [stars,

directors, producers, writers]. Under todays tax structures, [a] salary to those we are

dealing with is less inviting than the opportunity for capital gains. We nd ourselves,

therefore, dealing with corporations rather than with individuals. We nd ourselves,

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Pierre Grage

too, forced to deal in terms of a percentage of the lms prots, rather than in a

guaranteed salary [as] in the past. Tis is most notable among the top stars.1

To survive, the studios developed an impressive set of strategies and deceptions.

Tese developments changed the lm industry in a way that made it nearly impossible

for an outsider to understand. It just doesnt make sense to read how big blockbuster

hits such as Harry Potter and the Order of the Phoenix or Star Wars: Episode VI -

Return of the Jediare box-office successes but still end up deeply in the red. Like

so often in show business, many things are just not the way they seem.

Source: Life Magazine, 10 June, 1957, p. 1461

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

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chapter 1

box-office deception

Media outlets of all kinds are eager to publish box-office lists as a kind of

benchmark on how nancially successful a lm has performed. Web sites such as

boxofficemojo.com or Wikipedia.com also publish production costs of a lm.

However, these costs are, at best, close estimations since the true cost of a studio

movie is one of Hollywoods best kept secrets. Production-cost estimations

usually already include factors such as:

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

Preproduction (producers, concept drawings, animation, location

scouts, traveling, etc.)

Production (principal photography with all the actors plus1

technological- and production-staffcosts)

Postproduction (Tis chunk of costs grew over the recent years

together with the demand.)

Even for small independent productions this is a huge chunk of money. For

a typical Hollywood production these costs are often in the multimillions. To nd

out if a movie was protable or not, people often simply compare budget

numbers with the total amount of income from the box office. Very often this

picture looks quite rosy. Some people are then quick to conclude Wow! Tis

movie totally sucked, and it made that much money? Nice! I better sign up for a

lm school, become a director and get rich quick.

Wait, hold your horses!

Te box office is just one side of the story. Tese numbers only reect the

gross revenue. We have to take a couple deductions into account before we can

obtain a more realistic gure:

CinemaTeaters(their share of the total box office)

This is the phase of a film where all the action happens and the movie is filmed. In this phase you can1

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

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Pierre Grage

Distribution (by the lm studios, expensed to the movie, with each1

lm as a separate company on paper)

Marketing (trailer, TV, Internet and print advertisements, publicity,

etc.)

Taxation(Taxation varies from country to country. Generally a studio

pays less domestically.)

Te rst in line are the theater chains. Normally they keep about 50

percent of the box office, depending on the lm. Tis is not a small cut but still2

not enough for the cinema chain to make a prot from ticket sales alone. So the

theater chains had to change their business model from sales of admission tickets

over to concession stands. Tanks to sweet popcorn-prot margins of over 1000percent and overpriced soda, cinema theaters are able to make about 85 percent3

prots entirely on junk food.4

Te second in line are the lm studios in their role as distributors. In the

world of Hollywood accounting each lm production is a separate corporation5

a Spider-Man 2, Inc. or an Iron Man 3, Inc., if you like. Tis is a smart thing to do

since any movie production is a high-risk venture. Other benets include

bookkeeping gains such as keeping a lm in the red for as long as possible. Sinceeach lm is a separate company, on paper, the lm studios can charge for their

services such as nancing and, of course, distribution.

To be sure, distribution costs are not cheap, and they are a necessity to get

a lm into the cinemas. Te lm studios also have no choice but to outlay huge

amounts of money for lm prints and marketing. While lm prints are

increasingly being replaced by cheaper digital versions, on the ip side global

advertisement campaign costs have gone up. Ever since household entertainment

has been competing with the cinema, studios need to create audiences for their

Mostly a physical copy of a movie will be sent to movie theaters. One single copy on celluloid can cost a1

four-figure sum, depending on the length of the film. On top comes logistical costs for getting the copiesfrom point A to point B. This is also why film studios are pushing for a digital-film distribution system.

source: http://www.businessinsider.com/theater-chains-not-selling-man-3-tickets-2013-4?IR=T2

source: http://finance.yahoo.com/news/20-world-most-overpriced-products-095521796.html3

source: http://business.time.com/2009/12/07/movie-theaters-make-85-profit-at-concession-stands/4

Also known as creative accounting.5

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Inside VFX

movies. Te only way to do this is to countlessly repeat ads on the most popular

TV networks. Movie posters in every major city of the world does additionally

help to make audiences aware of the trailers and ads.

For a huge blockbuster, a global marketing campaign can easily amount to

close to 50 percent of the original production budget. Disneys John Carter, for

example, was reported to have a $100 million advertisement budget which is 401

percent of its original $250 million production budget. After this op, Disney2

was reported to increase the marketing budget for Te Lone Rangereven higher to

the $150$175 million range. Tis is a whopping 80 percent of the lms original3

$215 million production budget.4

Risk has its price. Which is why the distributors charge a hefty distribution

fee in the range of 33 percent based on the total theater receipts. A few verystrong leaders in this industry can become partners and negotiate this fee

down to around 12 percent and maybe even lower. In 2009 Spielbergs

DreamWorks Animation signed a seven-year distribution agreement with Disney

for a fee of 9 percent. But these kinds of deals are extremely rare. Even a lm5

which gains its nancing independently outside the studio system still has to face

a going distribution fee of around 18 percent.

Te bottom line is that any lm will have a hard time being protable from

only its box-office revenues. Te lm studios will always collect their distributionfee rst before any other prot participant can get a payout. Tis fee structure,

plus interest charges for the lm studios investments, help the studios make

some prots from the box officeassuming that the lm is a hit. In the worst-

case scenario, the lm studios have at least a chance to earn back their initial

investment while the lm corporation itself (Te Wolf of Wall Street, Inc., for

example) is unlikely to make any money at this point. Tis means, for any other

investor and so-called net-point participants, they wont earn a cut of the movies

box-office revenuesalmost no matter how successful the lm has become in the

cinemas.

source: http://www.hollywoodreporter.com/news/john-carter-cost-disney-millions-3017041

source: http://www.boxo#cemojo.com/movies/?id=johncarterofmars.htm2

source: http://www.hollywoodreporter.com/news/disneys-lone-ranger-could-lead-5815033

source: http://www.boxo#cemojo.com/movies/?id=loneranger.htm4

source: http://www.theguardian.com/film/2009/feb/10/disney-to-distribute-dreamworks-movies5

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http://www.hollywoodreporter.com/news/disneys-lone-ranger-could-lead-581503http://www.boxofficemojo.com/movies/?id=johncarterofmars.htmhttp://www.hollywoodreporter.com/news/john-carter-cost-disney-millions-301704http://www.theguardian.com/film/2009/feb/10/disney-to-distribute-dreamworks-movieshttp://www.boxofficemojo.com/movies/?id=loneranger.htm


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chapter 2

where hollywood's real money comes from

Tis presents a very important question. If a lm is not making money from the

box office, where does the real money come from?

To nd an answer to that, we have to take a look at the lm industrys

combined revenues. In 2012 they amounted to around eighty-six billion globally.

Below is a graphical representation of the lm industrys global revenue.

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

revenue really comes from the box office after the standard theater-chain

deductions of 50 percent. Marketing and lm-print outlays from the distributers

would reduce this percentage even furthernot to mention insurance, taxation,

translation and lawyer-fee deductions. Considering all this, the biggest driver forthe lm industrys revenues is, in reality, the DVD/Blu-ray sales. Tis is despite

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Inside VFX

recent reports about a decline in DVD sales. As of today Hollywood expects1

higher future box-office revenues from China. While this might be the case, we

can expect revenues from streaming services to have an even higher impact on

future global revenues.

Terefore, box-office numbers and benchmark lists are irrelevant. Except

for one small thing: advertisement. If a lm can claim that it was once a

number one box-office hit, that recognition will act as a seal of quality and attract

more audiences. Hence the studio is able to charge higher network and streaming

licensing fees and can also hope for higher DVD/Blu-ray sales numbers.

source: http://www.theguardian.com/media/2010/nov/29/dvd-industry-sales-slump-blu-ray1

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chapter 3

hollywood demographics

After the rise of TVs popularity and the increased bargaining power of

superstars, Hollywood was forced to nd new streams of revenues or face

extinction. Cinema attendances went into a free fall, revenues declined and big-

name movie stars demanded prot participations. Movie demographics soon

revealed what was going on. Older audiences (especially those with kids)

preferred to stay home and indulged in their home entertainment. Young teens,

on the other hand, still enjoyed eeing their parents homes to go to the air-

conditioning comfort of cinemas. Tis male and female audience, under the age

of twenty-ve, also prefers to go to the movies more frequently. Tese days,

frequent moviegoers purchase a staggering 50 percent of all movie tickets.1

Terefore, it just made economic sense for the studios to shift their focus over to

young audiences.

Male and female audiences under the age of twenty-ve tend to:

Purchase the latest music.

Play computer and casual games.

Consume similar content on TV and in books and magazines, which

makes them very effective (cheap) to promote too. A great example is

how Disney cross-promoted its number one box-office hit Te Avengers

with its new TV series calledMarvels Agents of S.H.I.E.L.D.

Care more about action and visual effects extravaganza then big name

stars.

New franchise installments like 2 Fast 2 Furious, Transformers, Twilightand

Hunger Games, to name just a few, managed to establish themselves entirely

without a single big star in them. Unknown actors are always easier to handle in

contract negotiations than already-established brand names, such as Tom Cruise

or George Clooney, who negotiate like corporations. Tese kinds of stars know

that their names act as a guarantee to pull a certain minimum quota of attendees

into the cinemasand they charge a premium for that. But recent box-office

source: http://www.mpaa.org/wp-content/uploads/2014/03/MPAA-Theatrical-Market-1

Statistics-2013_032514-v2.pdf

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disappointments, like the star-driven Cowboys & Aliens(Harrison Ford and Daniel

Craig), R.I.P.D. (Jeff Bridges) and Lone Ranger (Johnny Depp) wont encourage

studios to change their blockbuster strategy all too much.

Why accumulate more economic risk by adding costly brand-name stars to

the costs of visual effects and explosions if the lm can work entirely without any

expensive faces?

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chapter 4

behind the mask of hollywood

With the studios focus on younger age groups, the real business has changed.

Great original content made room for movies offering manifold exploitable high-

concept IPs . Te classic blockbuster-lm recipe, visible in lms like Jawsand the1

Indiana Jones series, changed into so-called tent-pole movie events, such as the

Transformers, Iron ManandAvatarfranchises.

Tent-pole lms are, in principle, the same as blockbuster lms, just without

any rough edges as seen in the lms made for more mature audiences. Tese

kinds of tent-pole movie events are designed to appeal to all age groups under

twenty-ve, which means they have to be as safe as possible. Scripts that feature

violence, nudity and swearing are huge red ags for the lm studios tent-pole

strategy. Te possibility to license lm characters to toy factories and gaming

companies is often a key criteria to push scripts into production. But regardless

of whether the cinema lm is a blockbuster, tent pole, comedy or drama, amovies theatrical release today is nothing more than a huge advertisement

campaign for Hollywoods real moneymaking pillars:

Licensing to cable TV and streaming networks.

Character or story-setting licensing to toy, gaming, book, clothing and

theme-park companies.

DVD and Blu-ray sales.

DVD and Blu-ray rentals.

In-ight entertainment.

Foreign presale distribution rights.

Product placements.

Music records.

One often-underestimated stream of revenue is the character and

entertainment licensing. In 2012 this licensing segment scored, on its own, a

mind-blowing $49.3 billion in global revenues. Disney plays this licensing piano

Short for Intellectual Property. A perfect exploitable IP is something that can sell not only sequels but1

also toys, games and pictures on household items.

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Inside VFX

particularly well for its shareholders. Te big mouse dominates the character and

entertainment segment with global annual revenues of $39.4 billion. Tats a

surreal dream market share of 80 percent. With its takeovers of Pixar, Marvel

and Lucaslm, Disney took over a whole industry without anyone noticing.

Te mouse turned Disney into the worlds largest licenser with brands like

Disney Princess and Star Wars. Just these two licenses ood Disneys money bin

with around $3 billion in yearly global revenuesfrom each. Te studios other1

top-selling billion-dollar character licenses include Cars, Mickey & Friends, Toy

Story, Disney Fairies and Spider-Man. In this industry Warner Brothers, with its

lucrative six billion in revenues, looks like a dwarf next to Disney. Even lagging

further behind are Nickelodeon ($5.5 billion), DreamWorks Animation ($3

billion), Cartoon Network ($2.8 billion), 20th Century Fox ($2.35 billion) andSony ($1.2 billion).2

Licensing became, for modern Hollywood, the most important business

since the rise of home entertainment. Once a blockbuster tent-pole IP is

successfully installed, the lm studios make billions with licenses for clothing,

diapers, games and toys. Unlike the box-office game, the licensing business is

near risk free and very rarely has to share prots with other partners. Yet

Hollywood tries to convince us with its biggest awards show that it is still in thebusiness of creating great and original contentand not IPs for its licensing

businesses.

Everyone knows that blockbusters have almost a zero chance of winning a

certain golden statue. Except maybe one for best visual effects and sound. Is that

because Hollywood really cares about the past best lm winners, such as 12 Years

a Slave,Argo, Te Artistand Te Kings Speech?

Or is that because blockbusters dont really need another boost in cinema

attendances and DVD sales?

Judge for yourself: Of the nine nominated lms for best picture in 2013,

every single one of them was released in the last three months of the year. Tis

pattern repeats itself in most of the preceding award years. No matter how far we

Sources: http://www.hollywoodreporter.com/news/george-lucas-star-wars-2885131

http://www.forbes.com/sites/jennagoudreau/2012/09/17/disney-princess-tops-list-of-the-20-best-

selling-entertainment-products/

source: http://variety.com/2013/biz/news/disney-star-wars-princesses-licensing-1200498040/2

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go back, a clear majority of best picture nominations are those lms released

during the end of the year.

Does the awards committee really have such short-term memory, or is the

rest of the year traditionally such a lousy lm year?

Whatever the case may be, the fact is, when the worlds biggest movie

awards show announces its nominees in January, chances are very high that most

of the nominated lms will still be running in a theater somewhere in the world

or come out on DVD in a store close to you. Tis award-sale effect is especially

utilized to perfection if an actor or actress wins a golden statue and also happens

to star in a huge blockbuster tent-pole IP. Tis was the case with the doubtlessly

very gifted Jennifer Lawrence in 2013 (Hunger Games) and Natalie Portman in2011 (Tor).

With millions of viewers in the double digits, Hollywoods biggest award

show is one of the worlds most successful image and advertisement campaign

ever launched. Its nothing but a huge promotional event for the American lm

studios.1

Does this mean that non-tent-pole movies are only made to win awards?

Probably not. Dramas and independent lms might not make any money

at the box officebut on DVD, streaming and TV they do. For as long as people

are willing to pay for original content in one way or the other, someone will fulll

this demand.

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

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

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chapter 5

low-risk film financing

Acclaimed Hollywood screenwriter William Goldman famously summarized the

lm industry in his book Adventures in the Screen Trade with the sentence

Nobody knows anything. He said so because there is no one who can explain

beforehand why a lm will work and another one wont. So the best way studio

executives know how to play this uncertainty is to diversify the risk by producing

at least, lets say, ten lms in a year. Ten these mighty executives can only cross

their ngers and hope two of those lms will allow the studio to break even for

the year. And hopefully a third or fourth lm will be such big hits that the studio

will make money on its licenses and DVD releases. Only then are studio

executives able to keep their jobs for another round in the next year.

An improved version of this risk-diversication strategy is the release of a

safe backup movie shortly after or before the release of a risky, unproven IP. Te

New York Times reported in 2009 that 20th Century Fox was ensuring its $5001million bet on Avatar with Alvin and the Chipmunks: Te Squeakquel.2 Te rst2

Chipmunk lm cost only about $60 million to make and took in globally $361

million at the box office. Indeed, the Squeakquel turned out to be a perfect

insurance. Te second franchise installment took in a global box office (not

counting DVD sales, rentals and licensing revenues) of $443 million on a $75

million budget.

Multiple lm releases per year is denitely a smart way to diversify and

reduce the overall risk of a lm studio. An even better way to reduce risk is to use

as little of the studios own money as possible. In business this magic formula is

called OPM, which simply stands for Other Peoples Money.

Over the years Hollywood could rely on funding by all or some of the

following ways:

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

_r=4&src=twr&pagewanted=all&

Estimated figure includes production and marketing budget.2

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Pierre Grage

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

Globalization)

Tax Shelter Deals (a legal method to decrease taxable income and,

therefore, the liability of a production)

Product Placement (Its safe to assume that no brand featured in a

movie happens to be an accident.)

Presales of distribution rights (Te studio keeps, for instance, the

American distribution rights but sells the European rights before the

lm goes into production. Surly, these monetary gains limit the

studios upside. But since the studio pours such gains directly into the

production budget of the lm again, they also limit their risk.)

Hedge Funds (Investors pool money to back one or multiple movieproductions for prot participation points.)

Even though a lm studio could nance its own entire slate of movies, it

will only tap into its own pockets as a last resort because ultimately OPM also

translates into Other Peoples Risk. And as pointed out, movie productions are

always a high-risk crap-shooting venture. Why should a lm studioeven

though it also gets consistent cash ow from DVDs and licensing revenues

nance its own movies if they can outsource their risk to taxpayers and outsideinvestors?

Tanks to the studios clever accounting techniques they are able to push

outside investors into a smaller share of total earnings. If the lm studios had to

use their own money, they would never earn as much as they do with the

outsiders capital.

Lets look, as an example, at Paramounts nancial masterstroke of the $95

million production Lara Craft: Tomb Raider from 2001. In a nutshell, here is how

the studio reduced its nancial risk from 100 percent down to below 10 percent:1

Presales: Intermedia pays $65 million for distribution rights for Britain,

France, Germany, Italy, Spain and Japan.

Government Subsidies: A $12 million subsidy for shooting part of the

lm in Britain.

source: http://www.edwardjayepstein.com/LaraCroft.htm1

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Inside VFX

Tax Shelter Deals: A German company buys the movie rights and leases

or sells it back to Paramount at a loss. Te result is another cool $10.2 million.

Paramounts Remaining Budget: $8.7 million.

A more aggressive use of product placement would have reduced

Paramounts production budget even further. After the successful franchise

installment, Paramount made up for this lack in 2003 for the second Lara Craft

lm, Lara Croft Tomb Raider: Te Cradle of Life. In a very stylish and scenic African

setting, Lara parachutes into a Jeep Wrangler Rubicon from Chrysler. Tis scene

worked not only well in the movie but also in a separate commercial, which cross-

promoted the movie on TV. JeffBell, vice president of the Chrysler Group, hadonly this to say about this deal:

Tis is more than just a product placement. We have created a 360-degree

integrated marketing campaign around the movie and the debut of the Wrangler

Rubicon Tomb Raider model.1

Hollywood does not like to talk much about its product-placement deals, despite

the fact that those deals have become a very important part of its lm-nancingpractices.

It all started with the James Bond franchise signing a product-placement deal

for motor vehicles in 1974. All chase scenes, starting with Te Man with the Golden

Gun, had to use cars made by American Motors. In return, the producers received

a check of over $5 million. In 1997 the James Bond series wrote product-2

placement history again with its $100 million deal for Tomorrow Never Dies. AMC

reported that brands like Avis, BMW, Ericsson mobile, Heineken, LOral, Omega,

Smirnoffand Visa all paid for the lms entire production budget. Only this time3

the brands were very obviously noticeable in long shots.4

source: http://www.ign.com/articles/2003/05/21/jeep-wrangler-rubicon-tomb-raider-edition1

Doesnt sound like a lot, does it? Think again. Adjusted for inflation, this number amounts closer to $232

million by o#

cial inflation calculation. Thats some very serious money even by todays standards.

source: http://blogs.amctv.com/movie-blog/2010/05/product-placement-in-the-movies/3

A shot in filmmaking means a series of frames that runs for an uninterrupted period of time. Transitions4and cuts are used to glue these shots together to create whole scenes and sequences.

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Pierre Grage

Other lmssuch as Transformers, Battleship and Te Lego Moviecarry

the product right in the title. Additionally a franchise like Transformers is also

perfect to advertise cars made by General Motors and the power of the US Army.

Some lms even come directly across as two-hour-long commercials. Take Te

Internshipfrom 2013 as an example. Tis funny lm deals with two uncommon

guys getting an internship at Google. By the end of the credits even I found

myself browsing the job pages of Google.

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Inside VFX

conclusion

Since the early 1980s Hollywood has successfully managed to quietly shift theirbusiness model from the box office over to licensing models. George Lucas was

taking the lead with his legendary Star Wars IP. To this day all Hollywood studios

go to great lengths in making everyone believe that they still care about the box

office as their only major form of income. In reality though they just see the box

office as an advertisement for either a new IP or as maintenance to keep an

existing IP valuable. For Hollywood a good box-office performance results into a

high-value IP for increasing TV licensing sales and hopefully very lucrative

character-licensing deals. A bad box office, on the other hand, results into a close-

to-worthless IP and low TV-licensing sales. Hollywood is no longer in the

business of making great original movies. Its in the business of selling their

brands and characters as toys, computer games and on diapers.

But Hollywoods new economics does not stop there. Te lm studios also

perfected their strategies to reduce the naturally high risk of producing movies

down to close to nothing.Tanks to the lm businesss sex appeal, Hollywood has

no problem exporting risk to outside investors and governments. In return theseoutsiders often gain little besides invitations to celebrity parties. Tere is

practically no chance in hell that Hollywood will ever allow any lm talent or

outsider to tap into its real money: the licensing revenues.

Most peopleeven many industry professionals who have to nd it out

the hard way are largely unaware of Hollywoods economic realities. Te lm1

studios are just too successful in creating economic box-office distraction. Very

few books have been written on this subject, and, without Te HollywoodEconomist by Edward Jay Epstein, the information about Hollywoods magical

world of economics would be even thinner.

Like myself for example. I became a financial coproducer for the first film I worked on as a CG artist. The1

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

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Inside VFX

Summer blockbusters are very expensive to make. Tey have things that have to

be expensive, such as six hundred effects shots or CG characters who have to go a

certain way or a lm design that is different but expensive.

Its tempting for lmmakers to remember the good old times when big

blockbusters did not cost more than $10 to $20 million to make. Compared to

the $200 million budgets, the risk to make a lm these days seems to be, indeed,

unbearable. In June 2013 Steven Spielberg even went so far as to predict an

implosion over these expensive blockbusters:

Teres going to be an implosion where three or four or maybe even a half-dozen

megabudget movies are going to go crashing into the ground, and thats going to change

the paradigm again. 1

If we compare a recent big lm release with a blockbuster from the 1980sor the 1930s, this logic denitely seems to make sense. Even adjusted for

ination, this argument appears to be undisputed.

Neither blockbusters Star Warsnor Gone with the Windcome close to the

estimated production cost of Avatar. Even Star Wars ination-adjusted $42

million budget looks like nothing compared to Avatars massive nonadjusted

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

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

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Pierre Grage

$250 million production budget. However, is this huge difference really because

of the extensive use of CGI inAvatar? Is it really possible to produce a Star Wars1

today, the way George Lucas did it in the 1970s? For only the ination-adjusted

$42 million? Especially if we decide not to use CGI, just real celluloid with

optical and practical VFX? I highly doubt $42 million would still be a sufficient2 3

budget if we strictly limit ourselves to use technology from the 1970s.

But if the $42 million were not enough, it would imply that there is

something seriously wrong about the ination numbers provided by the US

government. Could it really be that the United States is understating their

ination rate? Why would they do that? I know that most of us have probably

heard about ination. But if you are not quite sure what ination means for our

standard of living, the rst 101 section is for you. After reading this, you willknow far more about ination than 90 percent of the average Joes out there.

Short for Computer Generated Images.1

Optical e!ects are mostly understood as a chemical process, done in a laboratory to produce film2

e!ects.

Practical e!ects are e!ects that are produced on a movie set by a skilled group of people. These e!ects3can be gunfire, splatter e!ects, bullet wounds, rain, wind, fire, explosions and even mechanical-drivencreatures like dinosaurs (animatronics).

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chapter 6

inflation 101

In a nutshell we call the effect of a price increase for a commodity, such as an

apple, ination. Price increases can happen every hour, day, month and year.

Despite the fact that there is nothing different about the apple itself. It still

tastes and looks the same.

So why does the apple become more expensive?

Tis is where people usually use the word ination. Which is not quite

right. Rising prices are merely a symptom of ination. What the word ination

really describes is the declining value of the currency we hold in our hands.

Responsibility for the declining value aka ination falls to the entity thats

issuing or controlling the currency. In most countries this is our government.Te

problem with most governments is that they have huge spending decits. To

grow or to keep their size, operations and spending intact, governments have

three major options:

1. Issue bonds.In the United States they are called Treasury Bonds. For

the government they are nothing else but debt which has to be repaid

with interest in a time frame from one month to thirty years.

2. Print more currency into existence.Also known as expanding the

money supply. Tis happens mostly virtually these days. With the push

of a button.

3. Increase taxes. Usually a very unpopular decision. Since most

politicians like to stay in power, its traditionally the last resort. High

taxes also have very negative effects on the economy because it

punishes success. It just sucks to work hard, make more money and

then see most of it go to the government. So most people just stop

business activities or leave the country. Which in turn results in overall

lower tax revenues.

Governments all around the world really hate shrinking. Teir instinct as

an organism is very similar to cancer. First rule is to survive. Second rule is to

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