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Posted: Tue., Dec. 28, 2004, 3:37pm PT
Blighty challenging U.S. f/x companies
London shops taking on ILM, Digital Domain

HOLLYWOOD -- When Industrial Light & Magic recently announced it would be the lead effects company for Paramount/DreamWorks' "War of the Worlds" and DreamWorks' "The Island," the news caused barely a ripple. When the biggest effects company lands a couple of big jobs, why take much notice?

But for U.S. effects companies, even the 800-pound gorilla ILM, such announcements are becoming rare. Though they've long ruled the digital effects universe, U.S. shops like ILM and Digital Domain are being squeezed like never before by fast-rising competition from abroad, especially London.

Generous tax breaks are leaving U.S. firms shut out on many projects; talent is being siphoned off but can't be imported; and even when work does flow to U.S. shops, it's likely to be more specialized than in the past.

Worse, not even the weak dollar, which makes London shops more expensive in dollar terms, has been enough to lure work back to the U.S.

"The No. 1 question facing our business is exactly this, the number of dollars not even coming our way," said Richard Hollander, prexy of the film division at Culver City-based f/x house Rhythm & Hues. "There were a lot of films that went to the U.K. and producers aren't even asking us to bid on those shows."

Soho on fire

Soho's digital effects industry has exploded -- so much so that the popularity of London as an effects source was a factor in Thomson-Technicolor's recent $101 million purchase of the Moving Picture Co.

MPC worked on "Alexander" and all the Harry Potter films, as well as Warner's upcoming "Batman Begins."

The story of the effects on MPC pic "Alien vs. Predator" reflects the f/x world's shift to Blighty. Though Ridley Scott's original "Alien" had its effects done in the U.K., visual f/x on its James Cameron-helmed sequel and the original "Predator" were done in the U.S.

Yet when it came time for the two movie monsters to square off, all the work went to London f/x shops.

The U.K.'s generous tax breaks, despite recent tightening, are driving producers to spend their production coin there, with U.S. shops cut out from the get-go.

'Creativity or Death'

"We have signs up in our office that say 'Creativity or Death,' " said Jules Roman, prexy of Bay Area-based Tippett Studios. "If we're not doing the best work we possibly can, we're dead, because we can't compete with that sort of government intervention."

That's not to say U.S. shops are losing money, or even seeing their revenues decline; the proliferation of digital effects, in both features and commercials, has prevented that. But with the big contracts going abroad, they're scrambling just to keep revenues steady.

U.S. shops long boasted the best software, the deepest experience and the most talented artists. But the quality gap is closing, and there's really only one area of competition, says ILM prexy Chrissie England.

"It usually comes down to price these days. First it's price and then it's quality," England said.

Work sometimes flows back to the U.S. from abroad when U.K. shops are overloaded or a U.S. shop has an edge in a particular area.

But such spillover work isn't enough, effects bizzers say, for their shops to keep their technological lead. When an f/x house books a major project with new technical challenges, that forces it to develop new techniques and improve its software. Piecework doesn't give f/xers the same opportunities to do R&D, so over the long run, their U.K. competitors catch up.

Tax crackdown

The pendulum may shift back somewhat with the new U.K. tax crackdown on "double-dipping." But London's shops have been on a hiring binge, raiding American companies for talent in the process. That creates even more pressure on American companies.

"We've had clients tell us our shot cost is similar," said England. "But (London companies) are holding on to people for future work, so they'll drop their price in downtime."

Meanwhile, tougher post-9/11 immigration rules keep U.S companies from hiring some of the best effects artists, who have long followed the work from country to country.

One thing the U.S. shops have going for them is their history. They've had time to build up relationships with filmmakers. ILM's England cites that as key to its ability to land "War of the Worlds" and "The Island."

"Michael Bay worked with us on 'Pearl Harbor' and had a great experience," she said, "and it was very important to him to take the work that he trusted and had worked with before."

But England admits that's not enough to trump the financial advantages of taking work out of the country.

"With filmmakers producing their own shows, they'll ask, 'Do I need ILM?' and sometimes they'll decide they don't. But we still want to compete in that market."

A piece of the backend

To stay in business, effects houses are even trying to get a piece of the backend.

One way to do that is through ownership of projects. Several shops, including Digital Domain, the Orphanage and Tippett Studios, have begun developing projects inhouse, but none reports much success generating revenue. "It's so hard to get a picture made, we're still 100% reliant on our service business," said Nancy Bernstein, VP at Digital Domain.

If all this weren't tough enough, China and India stand poised to enter the market, at least for less creative work such as wire removal, which doesn't demand much interaction with filmmakers.

"It is a worrying time," said Tippett's Roman. "I just have to believe in the dynamism of the American economy and the ability of America to compete.


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