Generating stunning visual effects, but not enough revenue

This should be a golden age for visual effects in movies. Thanks to the box office success of movies such as “The Avengers” and “Life of Pi,” demand for visual effects has never been greater. Studios are spending $100 million or more to put ever more stunning digital images on the big screen.

But the companies that create the computer-generated imagery for those blockbusters are struggling as a rising tide of globalization and runaway production takes a toll on an industry that California pioneered.

In a dramatic sign of the malaise, the preeminent effects house Rhythm & Hues of El Segundo laid off 250 workers and filed for bankruptcy protection last month just days before it received an Oscar for its work on “Life of Pi,” which relied heavily on digital effects.

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Coming on the heels of a bankruptcy filing by Digital Domain, an industry-leading effects house co-founded by “Titanic” and “Avatar” director James Cameron, the travails of Rhythm & Hues have sent shock waves through the industry, sparking protests outside the Academy Awards ceremony.

In all, about a dozen visual effects studios, many in California, have shut down or filed for bankruptcy in the last five years, putting hundreds of skilled high-tech employees out of work.

“We should be celebrating at this moment, but unfortunately it seems like we’re in the gutter looking for coins,” Scott Squires, a veteran visual effects artist and supervisor, said in a recent online forum on the state of the industry. “The bankruptcy filing by Rhythm & Hues shows something is really out of whack and out of balance with our industry.”

Other smaller companies that in the past have relied on small chunks of work that the big effects houses farmed out also are teetering.

“We had the worst year we’ve ever had last year, and this year is not shaping up to be a whole lot better,” said Mark Dornfeld, owner of Custom Film Effects, a small Burbank company founded in 1999, where half of a 12-person staff is on reduced hours because work is so slow.

“It used to be we didn’t have to go search for work, it just landed on our door,” Dornfeld said. “We’ve been told by studios, ‘We’re sorry, we have to bid this offshore.’”

Many local businesses are being outbid for studio projects by foreign rivals who can take advantage of low-cost labor in Asia or tap into film tax subsidies offered in Canada, Britain and New Zealand.

Rhythm & Hues cited film subsidies as key to its mounting losses, which totaled $22.5 million in 2012. Founded in 1987, the venerable studio was one of the first to open offices in India and recently opened a facility in Vancouver, which has a specific credit for visual effects work, as well as Taiwan, where “Life of Pi” was filmed.

But the expansion didn’t occur fast enough, said Lee Berger, president of the film division for Rhythm & Hues.

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“We expanded into Vancouver too late and we didn’t expand into Asia fast enough,” Berger said. “Subsidies are an important piece of the puzzle. If we can’t stay competitive with Montreal, Vancouver or London, then we will fall by the wayside.”

The Visual Effects Society recently demanded that Gov. Jerry Brown and state lawmakers expand California’s film tax credit, which excludes large-budget movies, calling the current credit “woefully inadequate.”

“The amazing irony is that while 47 of the top 50 films of all time are visual effects-driven and billions of dollars of profits are generated yearly, the actual people who create the work are becoming an endangered species in California,” VES Director Eric Roth wrote in a recent open letter to the industry. “Hollywood, the birthplace of all this art and commerce, is quickly becoming the land where creative dreams die on the vine and pink slips for dispossessed artists are being issued at an alarming rate.”

Global competition is not just in the form of subsidies. Indian companies, long a source of outsourcing in animation and visual effects, also are planting stakes in Hollywood, using digital pipelines to farm out labor-intensive work to India, where labor costs are as much as 60% cheaper.

Prime Focus, one of India’s leading visual effects companies — which acquired New York-based Post Logic Studios and Frantic Films’ visual effects offices in L.A., Vancouver and Winnipeg, Canada — has opened a large office in Hollywood and placed a bid for Rhythm & Hues. Prime Focus has done effects and 3-D conversion work on such movies as “Clash of the Titans,” “Star Wars” and “Men in Black 3.”

Another India conglomerate, Reliance, also has stepped up its presence in Los Angeles. The company’s post-production subsidiary joined with China’s film and TV company Galloping Horse to acquire Digital Domain’s Venice studio. Reliance previously acquired the Burbank digital film restoration company Lowry Digital.

Technology has also heightened the global competition. The visual effects industry was once dominated by a few California companies, such as ILM, with proprietary techniques and tools and staffs of artists trained to use them. But the development of low-cost computer software and ubiquitous digital workforces have leveled the playing field.

Some longtime observers say the industry has been its own worst enemy, operating on a flawed business model where companies, desperate for jobs, will submit bids well below what it costs to do the work.

Costs often spiral out of control when directors request changes to the scenes or when a movie is delayed. At the same time, pressure has grown from studios to keep costs down as budgets for visual effects have ballooned.

The result is that most companies operate on profit margins of 5% or less. A single unforeseen event can be enough to put a business underwater.

Scott Ross, who ran ILM in the 1980s and was a founder of Digital Domain, advocates forming an international trade association that could develop standardized contracts where bids are not open-ended.

“The business model is such that visual effects companies can’t make any money,” said. “It’s like the old George Lucas line, if you feed them enough beer and pizza, they will work forever. Nothing’s really changed from 1977.”

richard.verrier@latimes.com