VFX Houses in Turmoil: How Bad Can It Get?

This story first appeared in the April 12 issue of The Hollywood Reporter magazine.

Hollywood’s visual effects business has had another turbulent week. The shutdown of one VFX division comes amid major layoffs at another and a roller-coaster two-day bankruptcy auction for Rhythm & Hues, the Oscar winner for Life of Pi.

Prana Studios, a Mumbai- and Los Angeles-based animation and VFX company, acquired R&H on March 28 in a deal valued at $17.8 million. With the ink barely dry, R&H president Lee Berger tells THR that plans are to maintain the company’s bases in Los Angeles, India, Vancouver and Taiwan, while the operation in Malaysia “is a little unclear” because it had a different ownership structure. “Those details have to be ironed out,” he says.

At the time of the bankruptcy, R&H was working on three features — Universal’s R.I.P.D., scheduled for release July 19; Fox’s Percy Jackson: Sea of Monsters, slated for Aug. 16; and Legendary’s The Seventh Son, on which R&H is a co-investor/co-producer and which Warner Bros. plans to release Oct. 18. “We finished R.I.P.D., and Percy will finish in the middle of April,” Berger says, adding that Seventh Son is scheduled for completion in early May. With bankruptcy behind them, he adds, “We are talking to other studios about work already.”

PHOTOS: The Making of ‘Life of Pi’

When R&H filed for bankruptcy just before the Oscars in February, its troubles mobilized the VFX community to call attention to the issues — including globalization and tax subsidies — that are causing the U.S. industry to suffer.

The effects business is cyclical, relying on independent contractors who are hired as needed. No one disputes that the industry is suffering a low point — the question is: Are the pains temporary or a sign of a permanent contraction?

With Tippett Studio’s largest project, Sony’s After Earth, wrapping this month and a follow-up project not confirmed, the Berkeley, Calif., company founded by Phil Tippett that created the bear for Ted is reducing its head count by about 40 percent. “Part of us downsizing is about adjusting quickly,” president Jules Roman tells THR. “Labor is the largest cost. You can’t just keep on tons of people in between projects.”

Also in late March, London-based The Mill said it would close its TV effects unit, whose credits include BBC’s Doctor Who and Sherlock. “I think the work will return in both film and TV,” insists Mill CEO Robin Shenfield. Still, he admits, “Last year the U.S. studios spent far less than they did in 2011.”

STORY: Prana Studios’ Winning Bid for Rhythm & Hues Valued at About $17.8 Million

By contrast, India is seeing a VFX growth spurt, going from a $124 million industry in 2011 to $154 million in 2012. It is expected to reach $384 million by 2017, according to a KPMG analysis.

Notes Oscar-nominated VFX supervisor Scott Squires, “Los Angeles and California are most affected currently, but even workers in British Columbia are finding that as soon as there is a better subsidy out there, the work will leave.”