Comments on the Daily Variety Article about Rhythm and Hues

There is an interesting article in the Daily Variety about the cash crisis and related issues at Rhythm & Hues. You can read it here:  VFX House Rhythm and Hues Endures Cash Crunch

There are a number of amusing things about this article that someone who has not had the pleasure of working in this business might not realize.  The situation probably sounds worse than it is, although companies do go out of business as a result of things like this, they probably won't.   Here is some background information: 

1. R&H has done this sort of thing before and always survived.

Running what is essentially an unfinanced, work-for-hire, production service facility is a juggling act that requires immense skill and stamina. Every two years or so, in the early days of R&H, I would be told something like "R&H is in trouble, they are on half salary, maybe they will go out of business".  

But the reality is that when the work is not there, a good production company will have to reduce payroll. They can either lay people off, or find a way to help people stay on but at a lower salary. And then eventually the work comes in and people go back on full salary. Don't worry, I would say, they will be fine.  

2. The visual effects facilities business is a very low margin business.

The visual effects facilities business is incredibly labor intensive, skill intensive, capital intensive, R&D intensive, risky and competitive.

In the days when commercial (e.g. advertising) production was the primary work, a facility like R&H would completely recreate itself every 12 weeks or so. Motion picture projects last longer than advertising projects and are often much bigger, but they are then by definition more risky. If a project is delayed, it has a much larger impact on the cash and work flow of the studio.

3. The Studios do not care about your cash flow.

Projects start when it is convenient for them to start, and end when it is convenient for them to end. The facility has no (or very little) say in the matter. But a company like R&H has an astounding payroll to make every two weeks. They either have to have the projects that make that payroll, or they have to lay people off. If they lay people off, they may or may not be able to hire them back if your project finally decides to start.   (1)

4. The Studios are adversarial.

The studios could not care less if a facility goes out of business. If anyone tells you differently, laugh at them and call them stupid. I can give you example after example where a vfx facility saved a screwed up production from itself and got slandered for doing the studios a favor. (See for example, ILM and Paramount on Hunt for Red October, which will be the subject of a later post). (2)

5. Any situation like this will be manipulated by the competition.

Your competition will do everything in their power to manipulate the situation to reduce confidence in the troubled facility, and thus cause all their clients to pull the work, forcing the company out of business.

6. Notice this happens as they await the word on their Academy Award.

R&H has been nominated for an academy award for Life of Pi.  Actually, a facility can not be nominated, but they did the work and people from R&H are listed.   Notice that doing good work, which everyone says about Life of Pi, doesn't seem to help that much in the short run.  (The proper way to say that is "... that and three dollars and fifty cents will get you a decaf espresso in this town").

I want to finish this incomplete analysis (there is much more that could be said) with the following thought: Although this is probably a very difficult situation for R&H, or we would not be reading about it in Daily Variety, this is the kind of weirdness that a production company like R&H is expected to be able to deal with.   And deal with it they probably will.    They may have to restructure and / or downsize, but that would be par for the course.   The only reason why R&H would not be fine is if the founders, John and Pauline, decided they wanted to do something else.

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1. A production company will of course have a cash reserve that they have carefully built up to tide them over the unevenness of payments and down periods.  But that reserve will go very quickly indeed.  It is one of the reasons it was healthier when a studio could balance their production across several different industry areas (e.g. advertising vs motion picture vs special venue) to maintain some income when one area was depressed.

2. Boss Film Corporation (BFC) was doing the visual effects for Hunt for Red October and was being treated very harshly by the studio and the director of the film.   There are many potential reasons for this, but I doubt it was because Boss was completely screwing up.  There were (past tense, Boss Film Corporation is no longer in business) many excellent people at BFC and Dave Stewart certainly knew how to shoot "dry for wet", as it is called.   Mike Fink was called in to help supervise, and ultimately the production was pulled from BFC and given to ILM with a change in schedule (more time) and budget (much more money).  ILM did a very good job, of course and they charged Paramount a lot of money to come in at the end and do this production.  Paramount, being cowards, used ILM to manage their difficult director, e.g. they let ILM be the bad guy when Peter Hyams wanted changes.   Ok, fine. The movie comes out and it does well, even if it is a silly story, and for years and years and years I heard Paramount complaining about how ILM had "reamed them a new asshole" for doing the work under those circumstances.  I am sure ILM charged a premium, why not?

In other words, the studios are spoiled children who want it all for free, and don't want to invest their own money to have the capability in house.  They want to be able to buy the service cheaply when they want it and not pay for the R&D or maintaining the infrastructure.  And they are able to get away with this because they are, after all, the only game in town.