Hollywood's VFX Shops: Trouble in Boom Times

The industry behind the block-busters is reeling from cheap competition and low profits

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Douglas Curran / Disney

Olivia Wilde and Garrett Hedlund in the upcoming Tron: Legacy

If you want to see the names driving Hollywood's growth, you have to stay for the movie's credits. The very end of the credits. After the actors and electricians — sometimes even after the people who serve the tacos on set — come the visual-effects artists. These are the people who make superheroes fly and cities fall into the ocean, and the effects-reliant films they work on, like Avatar and the Harry Potter franchise, are Hollywood's biggest moneymakers.

Their place in the credits says something about visual effects (VFX) artists' place in the Hollywood pecking order. Ironically, just as they are peaking in creativity and propelling box-office hits, VFX companies are facing a crisis years in the making. Thanks to fierce global competition, the hangover from Hollywood labor unrest and a lack of negotiating power with studios, many VFX firms are closing up shop or outsourcing to stay afloat.

"Fundamentally, visual effects is a crappy business," James Cameron told me when I interviewed him for my book, The Futurist: The Life and Films of James Cameron. "You don't make much of a margin. A good year for us was 5%. Sure, we were doing huge volume but at a low margin." In 1998, after the VFX company he helped start, Digital Domain, won an Academy Award for its groundbreaking work on Titanic, Cameron resigned amid dispute about its direction. Since then, Digital Domain has emerged as one of Hollywood's leading VFX shops, alongside George Lucas' Industrial Light & Magic (ILM) in San Francisco; Peter Jackson's Weta Digital in Wellington, New Zealand; and Rhythm & Hues and Sony Pictures Imageworks, both in Los Angeles.

Yet the global VFX industry has been fragmenting. It encompasses everything from Lucas' 35-year-old state-of-the-art empire to months-old shops in India and China. Scott Ross, a former CEO of Digital Domain and general manager at ILM, estimates that VFX is a $1.35 billion industry, with the big five shops each pulling in $80 million to $100 million a year and the many smaller shops taking in as little as $1 million. Effects companies work on movies, TV shows, video games, commercials and music videos and are constantly hiring and firing, depending on their project loads.

The VFX business should be thriving. Nine of the 10 highest-grossing movies worldwide in 2009 relied heavily on special effects, making the industry more central to Hollywood's business model than movie stars are. As much as a third of the budget of the $200 million — to — $300 million movies that are the foundation of Hollywood studios' earnings are devoted to special effects. "It's no longer about Tom Hanks or Tom Cruise," says Ross. "It's about flooding New York or creating blue people."

But in the past 15 months, companies including Disney's ImageMovers Digital in Novato, Calif.; C.O.R.E. Digital Pictures in Toronto; and the Orphanage in San Francisco have shuttered. "It's pretty much an open secret in the business that you do feature-film visual effects for prestige — to get a great reel, to keep your artists happy — but they don't make money," says David Cohen, an associate features editor at Variety who covers the VFX industry. "If you're lucky, you break even on them. If you're not lucky, you're out of business."

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