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Recession strategies

Designed by Amanda Fletcher

Contrary to reports, Hollywood remains a busy place in this economic downturn—just a different kind of busy. Instead of deep production work, many companies are spending time jockeying for position in response to the recession and smaller waves of difficulty that are unique to the entertainment business—waves that have helped the recession roil Hollywood.

Although box-office numbers remain solid, production overall has slowed dramatically, thanks to the toxic combination of the threat of an actors'' strike combined with the credit crunch, which has made financing major projects more complicated. Many facilities have been laying people off, and a few have gone under—among the most prominent, San Francisco''s acclaimed visual-effects company The Orphanage and, just breaking at press time, a venerable Hollywood facility born before the Great Depression, Pacific Title, which failed to secure fresh financing to continue operations for the second half of this year. Illustrative of just how unstable the situation is and how quickly financial fortunes are changing across the industry, officials from Pacific Title originally spoke to millimeter for this story eager to discuss their strategies for navigating the economic turmoil. Then, just after the print edition of this story went to press, the company instead announced it would be have to be liquidated. Sadly, it''s likely more such announcements will be forthcoming across the industry before things stabilize. Manufacturers, of course, are also hurting, with many reporting that infrastructure upgrades have been put on hold and projects across the industry are scaling back.

 
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Industry veterans have strong views about the industry''s current difficulties. Millimeter recently talked with a few of them to get their theories, solutions, and predictions about where it is all going. The following is not a comprehensive survey of their views, but rather it illustrates the kind of creative thinking going on in the industry as the ultimate response to the financial crisis. After all, if any good has come out of the financial squeeze, it''s the fact that old ways of thinking are finally being challenged and creative management is becoming increasingly valuable.

As Marc Petit, SVP of the media entertainment business for Autodesk, puts it, “Because of the recession, resistance to change is virtually nil now within our industry. People have more open minds than ever before.”

What''s going on?


Industry veterans point to two main causes of the current hurt: the global recession and the recent threat of a possible actors'' strike. Some suggest the strike threat was the primary reason studio production slowed dramatically, hinting that factors unique to Hollywood''s needs are a bigger game-changer for an industry once known as “recession-proof” than an actual recession. Others argue that some industry sectors, such as visual effects, are not particularly safe arenas to play in, even in good times.

“It''s a rough industry,” says Payam Shohadai, president/CEO of Luma Pictures in Venice, Calif. “Almost every year since I''ve been doing this, we''ve seen multiple U.S.-based visual-effects facilities going out of business. So in that sense, I would suggest the industry downturn is less about the current recession, and more about the nature of the beast. The real truth is that the nature of the product makes the visual-effects industry extremely susceptible to macroeconomic trends. The digital product we create, in conjunction with the globalized economy, means that U.S. facilities have to compete against overseas companies with artist rates and overhead far below the U.S. equivalent, and which often receive tax subsidies from their governments. On top of that, wildly fluctuating currency markets add another twist to the drama.”

And it''s not just the visual-effects business. Ebbs and flows in projects, personnel, technology, and spending are hardly unusual for most industry sectors. Staffing up and down for projects is something of a way of life. However, some industry veterans say there is something different, and more unsettling, about this particular cycle.

Veteran movie producer Marshall Herskovitz (Legends of the Fall, The Last Samurai, Blood Diamond) is among those seeing things this way. He says he sees the breakdown of the credit industry as a major hit to the movie business.

“My feeling is that [the recession] has definitely impacted the movie business [longterm] for the first time,” he says. “In many ways, we were recession-proof in the past. But there has been a complete shift in how investments and loans are made [globally] now. Those big companies [that make loans] have their own problems, and that never happened before. That affects TV and movies, and so [studios] have cut back their staffs and development and producer deals and budgets. The potential of an actor''s strike had an intermittent effect, but what I think is more germane is the simple difficulty in raising money, along with the lowered valuation of some of these [media] companies and seeing ad dollars on TV diminish.”

Herskovitz adds that studios didn''t have much leeway to take the hit of a major credit crisis when you consider that, in his opinion, their business models were built on a shaky foundation anyway.

“The other aspect to this is that DVD [sales and rentals] have leveled off,” he says. “DVDs propped up our industry for the last 10 years, and the movie business without DVDs is not really a profitable business. It used to be, but now the business model doesn''t work without DVDs. There is also the problem of huge actor fees and other things, so in many ways, it''s a shaky business anyway.”

Up until press time, Adrian Newby was serving as senior vice president at Pacific Title, just before the company''s collapse. Even before Newby knew Pacific Title''s fate, he said he felt strongly that the credit crisis was having a deep and lasting impact on Hollywood.

“Just like any other sector, the scrutiny on credit quality certainly impacts major studios and their ability to secure financing for major productions, and that, in turn, impacts [all the facilities they normally do business with],” Newby says. “Access to credit is governed by the amount of risk the lender perceives, and in Hollywood, where the threat of an actors'' strike could potentially terminate a production in the middle of a shoot, there is an added degree of risk, which I''m sure leads to even more difficulty securing financing for projects.”

The current state of affairs indicates how clearly the fates of production companies and postproduction facilities are tied to the major Hollywood studios. Many boutique operations are feeling a severe pinch.

“Clearly, we''ve been too closely tied to the fate of the studios and the networks,” says Darrell Van Citters, head of the creative team at Renegade Animation in Glendale, Calif. “When they sneeze, we catch a cold. We are definitely seeking alternate sources for distribution and financing, as well as other markets for our products and services.”

These markets include videogames; mobile content; increased involvement with smaller, independent projects; content creation for overseas productions; and working on projects in other industries, such as architectural design. How companies are managed during the crisis will end up being every bit as crucial as the kind of work they pursue.

Renegade Animation

Renegade Animation

Hunkering down


As with other industries, a key manifestation of how the recession is affecting postproduction facilities is in the realm of overhead, especially staff. Shohadai says Luma Pictures has avoided significant layoffs by reducing its employees'' work week from 45 hours to 40 hours. Renegade Animation instituted pay cuts across the board and eliminated a handful of staff positions, according to Van Citters, and numerous studios have downsized in recent months.

One of them is Digiscope of Santa Monica, Calif.—a visual-effects facility that began in the mid-1990s. Management there points out that downsizing when necessary is nothing new. It''s a common strategy whenever projects slow to a trickle, whatever the reason. They say this time, it might be a more serious and longer period of reduction, but there is a right way and a wrong way to downsize a facility to maintain continuity and strength to ramp up later.

“We started [in 1996], and at that time, you had to get your money together [for hardware] and only staff up when you were sure you had shows lined up,” says Digiscope Cofounder and Visual Effects Supervisor Dion Hatch. “But our approach has always been to keep a core group of artists [around 20 people] and move between that number and upward to about 70. I feel that one of the things that has kept us profitable all this time is that we have stayed medium-sized. We have seen companies come and go as a result of maintaining too large of an overhead without the ability to downsize appropriately. I think our ability to downsize, as a business decision, has been part of our success.”

Hatch adds that Digiscope''s structure is designed so that the company can quickly go from hiatus to maximum workflow. “Reducing when workflow slows enables us to send employees on vacation, shift our workflow to preproduction previsualization, and write new pipeline scripts for proprietary software,” he says.

Many facilities also have been investigating other ways to reduce costs and improve efficiency. For instance, Digiscope Cofounder Mary Stuart says the company is analyzing the possibility of putting solar panels on its Santa Monica building to reduce its massive electrical bill.

Many companies have also been cutting or altering their fee structures to lure work in recent months. “The visual-effects industry has always been extremely competitive in bidding, and I must admit, in this downturn, it''s even more exaggerated,” Hatch says.

“We''re a service business, so number one is always giving clients the best creative solutions,” he says. “But now, it''s also getting into the lowest price. The truth is, shot costs have moved downward recently. Clients are seeking the best price, and that has had an impact across the industry.”

The other key reduction area for such companies has been in the area of technology acquisitions and upgrades. Some are skipping upgrades altogether, while others are upgrading more strategically. In May, technology provider Autodesk reported a Q1 revenue reduction of an unprecedented 29 percent compared to the previous year, according to Petit.

“I don''t think we''ve seen this behavior before,” Petit says. “In November, business is usually good because of Super Bowl [commercial] production, and we normally sell new [software] seats. We didn''t see that happening as much this past year. Customers were trying to go with the capacity they already had. Right now, they aren''t purchasing as many upgrades, and that will probably continue until [the financial crisis] eases.”

Like many manufacturers, Autodesk has been instituting cost-cutting measures. But the company has also been accelerating development and delivery of what Petit calls “value products,” such as its new Flare visual-effects software, which complements Autodesk''s Flame and Inferno systems. Flare is part of a larger strategy to strengthen relationships with and serve the needs of Autodesk''s existing customers.

“We''re also restructuring our service offerings,” Petit says. “I have to be vague about it because details have not been made public yet, but the idea is to improve significantly the value of our support programs for customers. We''ve divested from some projects and doubled down on others, especially in terms of engineering, so that when [the recession] is over, we have a very good idea where we will be in terms of technology—especially in the field of immersive, interactive 3D.”

Company 3 was able to make certain recent upgrades to its theaters in Los Angeles and New York through capital expenditures that took place before the recession hit.

Company 3 was able to make certain recent upgrades to its theaters in Los Angeles and New York through capital expenditures that took place before the recession hit.

Making moves


Despite an overall slowdown in technology purchases, many facilities are strategically moving ahead with specific upgrades and other related projects right now. This is partly because capital expenditures for those projects were made before the economic bottom hit, but also because of their long-term, strategic alliances with high-profile manufacturers that periodically permit creative financing.

Even as some high-profile industry facilities such as The Orphanage and Pacific Title falter, others around Hollywood continue to grow their operations and appear to be busier than ever. For instance, Santa Monica''s Company 3, which is partly owned by Ascent Media Group, has DI theaters in both Los Angeles and New York—facilities that were expanded in the last year to accommodate such factors as stereoscopic 3D requirements. But as Stefan Sonnenfeld, president and managing director of Company 3, puts it, the financing of those new theaters “was based on how the economy was a year and a half ago—it is a tough time to be moving or rebuilding right now.”

That said, Sonnenfeld adds, the company''s whole approach is to run “lean and mean” in terms of amortizing its facilities and technology across all market segments and projects.

“We don''t have many multiple theaters, and we don''t do [DIs on] hundreds of movies a year,” Sonnenfeld says. “We do about 25 movies a year, and we do them well,” Sonnenfeld says. “But we made sure to sustain ourselves by limiting our size to be viable in good times and rough times going forward. That''s why we integrated and diversified our [DI suites] to do commercials, music videos, TV shows, feature films, and to do remastering—all in the same room. That is the only way to stay alive these days. This business has changed. Commercials and music videos have declined, while TV shows and movies have increased. You have to be designed to ebb and flow, and be agile and nimble and change direction quickly.”

Even busy facilities right now are anticipating a looming work decline, while projecting that projects will begin returning by early 2010, once the crisis eases.. Therefore, many are finding themselves making sure their infrastructures can handle current projects while being properly positioned for anticipated future work. Fortunately, the price of technology was falling even before the crisis and continues to do so, allowing some companies to make strategic upgrades even in the current environment.

“You need the tools to get the work done, or there is no point to it,” says Colin Green, founder of previsualization house Pixel Liberation Front (PLF) of Venice, Calif. “Fortunately, hardware and software prices are radically lower today than when our company started, and therefore, [upgrading] is not as strategic a decision for us as it used to be. Finding computers to render on is never out of reach anymore. The render farm that cost tens of millions [a few years ago] now costs tens of thousands.”

Still, many companies need to overhaul pipelines in order to accommodate new kinds of work they anticipate will be in demand once the crisis eases, such as 3D stereo¬scopic work, which industry types insist is here to stay. Many of them say that even in a difficult economy, post companies that wish to remain viable need to invest in stereoscopic technology now. Given this belief, some facilities are prioritizing precious funds for various kinds of 3D upgrades, including many DI color-grading suites being upgraded to do realtime, stereoscopic color grading.

Renegade Animation

Renegade Animation

Looking ahead


Most industry professionals millimeter spoke with agreed with the old adage that there is opportunity in chaos, and they are currently hunting such opportunities. Most say that 3D represents one of those potential opportunities, as do videogames, but there are many others. Among them is the business of previsualization. The early concept of previz gave birth to PLF in 1995. The company has since expanded its service menu to include finished CG visual-effects work as well, and it has “a few big projects persevering” as it attempts to navigate through the recession, Green says. Other companies are adding previz to their slate of services, and some, such as Digiscope, are routinely using previz techniques to storyboard shots as part of proposals as they bid on new work.

Data management and restoration is another service area that some facilities are exploring in order to serve new and emerging industry trends. Just prior to Pacific Title''s closure, Newby made the point that companies across the industry need to search for what he called “pockets of opportunity” to service studios in ways unrelated directly to new production.

“Obviously, the studios have large libraries of titles, and they are only going to be more interested than ever before in figuring out how to mine those libraries to generate additional sources of revenue,” Newby says. “... There are a couple of industry trends driving [these new business areas]. One of them would be the drive to distribute content through home channels and through retail stores, generating revenue from titles that would otherwise be gathering dust. That stands as an alternative for them to new production.”

Expertise developed over years working on major visual-effects projects also opened up a new production-management service for Digiscope to offer clients. “For the last couple of years, we have been doing production-pipeline management—managing the business side of [visual effects] when a show is often split up between several vendors,” Stuart says. “Maybe none of the work is even being done at Digiscope. Especially when shots are at other facilities that don''t have the same experience, clients have found it valuable to have us work with those facilities to get better end results by providing schedules and breakdowns, taking care of weekly status reports to producers, the calendar, etc. Recently, we''ve also moved to take on and finish troubled shows that were running into problems in other countries.”

There also appears to be a growing number of educational programs and manufacturer training and free software appearing across the industry. Autodesk has launched a new program to provide free software licenses and online training to artists and designers who have lost their jobs. It''s called the Autodesk Assistance Program, and unemployed artists can get access to resources at students5.autodesk.com/?nd=assistance_home. Autodesk also offers a community site (area.autodesk.com) that offers virtual access to Autodesk presentations at tradeshows, product demos, master classes, and various tutorials.

Few of these strategies were invented for the current economic downturn, but many of them became higher priorities in recent months. Many of the people millimeter spoke with say these strategies will continue to have relevance as conditions improve and normal production patterns resume. The analysis from many people is that will start to be the case by the end of this year or early in 2010, particularly since at press time, it appeared the threat of an actors'' strike was over.

The questions, then, are if facilities can weather the storm until that point and what the industry business landscape will look like going forward. Certainly, there will be fewer facilities to compete with in some categories. Beyond that, some people also say there will be subtle shifts in who produces content and hires facilities to begin with.

“It''s clear the major studios are, for the moment, producing fewer feature films, but at the same time, it''s clear that the so-called minimajors are growing, and they may fill some of that gap as production comes back,” says Technicolor Chief Technology Officer Ahmad Ouri. “We''ve done a number of deals in recent months with some of them, such as Overture Films, and their work is offsetting some of the main studio''s production decline. Animation also appears to be gaining, along with 3D. So I do think things will come back, and companies have to be ready for when that happens.”

“I don''t see anything going on that seems like a fundamental risk to the whole business,” Herskovitz says. “More productions will be funded by foreign money, and somehow, the industry will find a way through it. And remember that cable TV is a real growth sector right now. So I don''t see fundamental damage as much as incremental changes to how our industry operates.”