Thursday, April 12, 2012

Textor, DD, and our industry in crisis.

I will give him a listen to be fair but am very skeptical. 

AFAIK, being CEO of DD (by virtue of becoming the largest investor in the private equity group that bought DD under Carl Stork's leadership a few years earlier) in the past 2 years is his only connection, ever, to the industry.  He has historically shown no interest in VFX per se, or even filmmaking.  His $17MM/year as CEO of DD is a small fraction of his income from other sources. He is a very wealthy businessman who now realizes that his plans could be disturbed by a bunch of prickly nerds and is most likely just telling us what we'd like to hear, just as his talks to investors have been filled with what they'd like to hear.

Unfortunately for us, one thing he is not is stupid.  He is a very smart, perhaps ruthless businessman, and if he is saying that the work-for-hire VFX model is not a business worth pursuing, we'd freakin' better pay attention.  Not that we hadn't reached the same conclusion ourselves, but validation by a qualified professional is useful.

If he is serious about "detesting the cheap-overseas-labour-chasing side of the industry" then why do the deal with RMW at all? Indeed, why do the deal with Florida?  If you're looking to build a healthy VFX business venture, making it dependent on an outside infusion of capital + state subsidies + tax breaks + tuition charges + "free student labor" + a right-to-work state that's physically and politically isolated from the entire industry ostensibly being served seems to be a strange way to go about it.

Look at the numbers.  IIR, DD's reported income from film VFX work was less than $75MM last year. The State of Florida deal *alone* is worth more than $150MM, is it not? Of course he's going after that money -- he'd be a fool not to. But we all have to realize that makes DD no longer a VFX business -- it is a pursue-government-subsidies-and-tax-breaks business, which is obviously lower-risk and more profitable (an unusual combination in business!).

So Textor's message, to me, is not "John Textor isn't such a bad guy," nor "the students paying to work thing is no big deal," but "work-for-hire VFX is an officially failed business model."  This is HUGE.  This is a guy who understands business and making money better than any of us, saying that the core business model of our whole industry is NOT WORKING.

The work-for-hire model is, I believe, the root cause of all of the issues of workplace fairness, stress, long hours, shops closing when subsidies run out, lack of profit participation -- EVERYTHING.

David Stripinis has a dead-on accurate, and disheartening, post up on his blog, on why everyone's efforts,or wishes, to fix the labor side of the business (in the US at least) have already failed. I'm a tiny bit more optimistic, because I think Textor is showing us the only way out: change the core model.  His type of change will make him and a few people even richer, while hastening the demise of the industry that we need and love.  I think that we can, just maybe, eventually have the industry that we want, if we eliminate work-for-hire, and switch to a cost-plus model. Otherwise, we'll just continue as we are, with the industry we deserve.

(climbs down from soapbox and shuffles away, head down, pulling threadbare coat tighter against the growing chill)


Thursday, June 16, 2011

Some clarifications

Wow.  I really wrote that last post poorly, based on how it's been interpreted by several people.  I'm really sorry, and hope that this post will correct any misimpressions I've given. These are mostly addressed to commenter Steve Kaplan, who seems not to know me very well, and seems to have made several assumptions about me and why I am writing this blog.
  • I am very much pro-labor and pro-union (perhaps not pro- some particular unions).  Just because I owned a business and hired people for a while doesn't magically make me "management."  I have spent by far the larger part of my 28 years in the VFX trade as a freelance worker. The entire idea of rigid early-20th Century labor or management roles is an impediment to finding a solution to the industry's current problems.
  • I have exclusively worked as a freelancer or consultant for nearly 2 years, not as an employer.  I have had no employees or subcontractors in that time, other than an IT specialist for a handful of days. I have no intention of starting a new VFX business under the current conditions. I have no interest in promoting the agenda of shop owners over that of workers -- quite the opposite.
  • I have been a labor representative on a negotiating committee for a CBA.  I and my fellow reps had to repeatedly tell the business agents to take a stronger, less-conciliatory stance.  We voted to authorize a strike in the face of pressure from the local to take a bad deal.
  • I spent years on the Executive Board of Local 659, was a founding member of the National Executive Board of Local 600, and proudly sat on Haskell Wexler's subcommittee to help draft 600's constitution and bylaws.
  • I have never, and certainly not in my previous post, advocated misclassification of employees, advocated violation of labor laws, or passed on the costs of an underbid job to my hires. I went into considerable personal debt to not only pay every single one of my workers every cent they billed, but to do the same for my subcontractors and vendors. I have never asked a worker to put in overtime when I didn't put in at least as much myself. I (and my then-partner) have been stiffed by clients to the tune of 6 figures over the past 5 years, and I have never passed that on to anyone working for me.
  • I think a level playing field is essential to the survival of the US VFX business, and have been an outspoken proponent of not only not underbidding or "buying" jobs, but switching to a cost-plus model.  
  • Steve's appalled reaction notwithstanding, it was very much the norm for VFX and mograph/design shops in NYC to pay everyone not on staff as 1099 workers, up until the past 2 or 3 years. Now that the states are hungry for revenue, they are auditing like crazy, and many shops have reacted by requiring their freelance workers to contract with and bill through one or another fly-by-night EOR (Yucor, MBO). A long time ago, I proposed an organizing drive targeting the EORs.  As far as I know, no one has tried to card-check them.  
  • It may also appall Steve to know that the vast majority of freelancers that I hired and worked with preferred and asked for or demanded 1099 instead of W2 status, even if they didn't have a legitimate business entity. Some of those people even went on to file claims for unemployment insurance, citing me as their employer, triggering audits that ultimately resulted in my paying substantial fines (which I did not contest).  This last scenarios has happened to every single VFX/post/mograph/design business owner I know in New York.
  • Unless and until we can bill our clients cost-plus, yes, paying a 20-30% increase in labor costs would prevent any small shop from breaking even, much less making a profit.  I believe this is less of an issue for large shops, for obvious reasons of economies-of-scale, and leverage relative to clients' demands.
  • The money for benefits and legally-mandated OT has to come from somewhere.  It can't come out of existing shall-shop margins, because they're too small right now with current payscales and the much-abused-by-clients firm-bid model.  If small shops quoted rates high enough to make the margin healthy, they'd never win a bid the way things work now. ONLY if the field were level, and everyone were paying the same rates and billing their clients more than we can now, could any small shop owner stand a chance of surviving while also hewing to both the letter and spirit of wage laws.
  • As a freelancer, I now work 40-60 hours/week.  As a shop owner, I worked 50-110 hours/week (without health benefits, and not much of a retirement plan)  Most small shop owners I know work just as hard, and make just as little.  That's one reason they're closing up and going freelance -- at least in NYC.
  • Unless you want a world in which there are only big shops and their time-card employees, in which you can't be a worker this month and a vendor next month -- a world without opportunities for entrepreneurship -- you can't just take the "Goodfellas" approach of "f__k you, pay me."  You have to think about whether you could afford to treat your (perhaps hypothetical) employees the way you want to be treated.  And if you couldn't, then you either have to work for a world in which you could, which may include tempering your own demands, or you need to stop complaining.  Personally, I vote in favor of complaining and working hard for change.
  • The main point of the previous post was simply this: if you want to not be pressured into working when it's unfair, if you want to have more time for your family, if you want to have portable healthcare for everyone in the business (not just yourself!), then you have to be willing to level the whole playing field, not just between the studios and the VFX shops, but between the VFX shops and the workers.  If you want a kid starting out to not have to "pay dues" by working in sweatshop conditions, even if you did, you have to be prepared to organize, fight, and, yes, pay for it.  You'll have a better life.  Your children and colleagues will have better lives. That kid starting out will have a better life. You'll still have a US industry to work in.  But you may have to take home less cash at the end of the year, if you're in, say, the top third or quarter of industry workers.  You'll be making more per hour. You'll be more secure. But you will no longer have the option of saying "screw it, I'm gonna get mine right NOW," and devil take the hindmost.
  • And that would be a very good thing in my opinion.  We all, workers and shop owners alike, need to stop shooting ourselves in the foot (or face) by working too hard for too little, "just this time," or taking advantage of the inequities in the system, "just this time." That's going to take hard work, discipline and sacrifice on all sides.
  • Maybe in feature film tentpole-land, the studios will loosen their claws enough to add to the pool.  If they were long-term smart, they might. But in the commercial world, there's no additional money to be had for our work -- it has to come out of someone's pocket. Maybe the big shops have something in there. The small ones don't.
Sorry.  That turned into a bit of a rant. But, hey, it's a blog, right?  I hope it's clearer where I stand.  We need to hang together, or separately, as the man said.  But we also have to deal with the real world and not create straw-man enemies or raise unrealistic expectations  in order to pander to the widest group while serving only a narrow one -- we've had enough of that for generations to come.  This is not being defeatist. This is about facing and dealing with what is real, not wishful thinking.  Hope and change, yes, always and forever. Fantasy and wish-fulfillment, not on this blog.


Wednesday, June 15, 2011

What's best for *you*?

The VFX and Motion Design labor movements are real.  Maybe better to call them 'workplace reform" or "fair trade" movements? Regardless, they are resonating with a lot of people in those fields, both artists/craftspeople and employers/managers.

Let's put aside, for the moment, what might be the best way to achieve the goals of the movements -- union, guild, foundation, code of ethics, pistols at dawn...

We can pick out some common goals:  affordable/portable health benefits, portable retirement plan, proper tax/employment classification, Social Security payments, overtime pay, prevention of workplace abuses.  That should be good for a start, right?  Sounds good to me.  Now, regardless of how these goals are achieved, they have to be paid for.  By whom? 

The VFX/design shop owners who are supposedly getting rich off the sweat of your brow? 

That might be possible if that were true.  However, most shop owners are practitioners themselves (let's ignore the Carlyle Group, Barclay's, Wyndcrest, Lucasfilm, and anyone else big enough to not pay taxes), and tend not to be as focused on the bottom line as they perhaps should be.  Based on my experience as a business (co-) owner, I'd have to look at what those things cost, and see what I could afford to carve out of a not very large margin.  Let's see -- okay, union P&W adds about $4/hour/employee.  Adding someone to payroll -- maybe $75, but that's for *each* time that person is hired for a project.  Overtime -- well, we usually assume a 50-hour week, so that means 2 hours of OT every day, at 1.5x.  Gee, this is getting complicated, I'd better hire a payroll service and pay my accountant to keep things straight. And unemployment and disability insurance -- nearly forgot that! (The last time I forgot that it cost me well into 5 figures...)

Okay, let's wave our hands and say that the traditional freelance/staff differential of 20% applies.  That is, if you're used to making $1000/week freelance (1099 and all that), you'd be paid $800/week for a staff position with nominal benefits and PTO.  So to an employer, if your effective hourly rate (assuming your day rate = 8 hours at straight time and 2 hours at 1.5x) were to stay the same as it currently is, labor costs would go up by 20%.  But that's a minimum. Whenever there's a need for OT, you'd be working the same 15-hour days as you do now, but the employer *must* pay 1.5x for those hours -- no more "comp days!".  So that's, oh, maybe another 10-20% of total annual labor costs, based on personal experience.  So total labor costs would rise by 30-40%, instantly.

Now, I'm a demonstrably poor businessperson, so my math might not be right, and maybe my experience isn't relevant.  But for the sake of argument, I'm willing to look even more foolish and say they are.  For small owner-operated shops, on VFX jobs, I think gross margins (EBITDA) may hover around 30%, net profit around 5%.  Design/mograph -- gross margins may be around 50%, net around 20%.  Labor costs seem to run about 30-40% of budgets in either area.  So for VFX, increasing labor costs by even 30% would cut gross margins to 18%, and net profit to, uh, a 7% loss.  Design goes to 38% margin, 8% profit.  Uh-oh.

That's unsustainable, especially for VFX-oriented small shops.  In fact, 5% profit is unsustainable, unless you assume the shop owner will work 100-hour weeks forever to make up for every mistake or shortfall.

So maybe design shops will pay for some of this.  VFX shops can't.  That means if you want those good things (affordable/portable health benefits, portable retirement plan, proper tax/employment classification, Social Security payments, overtime pay), you're going to have to pay for them.  You want OT after 40 hours (because the IRS says you're an employee, and there's no way around that)? Then you'll have to charge less. Probably not as much as it would cost you as an individual to buy your own health care, set up and manage your own S-corp or LLC, buy your own hardware and software, pay your own insurance, unemployment, disability, Social Security, vacation and sick days; but still a significant amount.  (If you're at the earnings level where this isn't true, you should already be taking care of those things yourself -- congratulations!)

Let's say that somehow, VFX and design shops manage to convince their clients to pay cost-plus or time-and-materials instead of firm-bid. Which means that shop owners won't have to eat every bit of overtime regardless of cause.  Even then, in order to just stay in the same un- or barely-sustainable position they're in now, *you* would need to be willing to earn 20-30% less per year. (This would be a result all these changes; for example, diligently paying overtime to employees -- if an employer has too much OT per employee, it's more sensible to add more employees, so no one will work tons of OT, even if they want to.) In return, you'd have more time for yourself and your family, less stress, some health insurance, decent retirement savings, unemployment insurance, probably more steady work, and probably fewer hassles from the IRS in the future.  Would you really choose that?

If you're over 35, and/or married with children, I'd bet yes.  For everyone else (the majority of the employee pool), mmmmmaaaayyybee not.  When I was young and stupid(er), I thought "make hay while the sun shines," and worked every chance I got. Now I regret some of the hours, days, and months I spent working when I could have been in the world, living. I think most of us in the business tend toward this behavior.

So, really:  are you willing to take a 25% annual take-home pay cut in order to help secure a better life for yourself and your family, and a healthier industry in which to work?  If you're not, then all the talk about organizing, sustainability, and fairness is just... talk.  Are we serious about all this?  Then we have to be willing to pay for it. 


Sunday, May 1, 2011

VFX companies need an old business model.

I'm coming around to the idea that the *only* way for VFX shops (as opposed to finishing, or editorial, or prodco, or design shops that also do some VFX) to survive in the long term is -- deep breath -- to refuse to work on a firm bid model.

NO ONE in any other business works on a fixed bid based on so many unknowns, except perhaps aerospace and defense contractors, who seem to have, um, other means of protecting margins.  Plumbers, general contractors, auto mechanics, electricians, carpenters, freakin' ditch-diggers all give you a good-faith estimate based on your description of the project.  Then, when they get into it, if they find more problems, they tell you about them and ask if you want them dealt with, for X dollars more.  We should do the same. 

We can read a script, break down a board, have endless conference calls with the creatives and director, but everyone knows that the number that comes out of that process might or might not have anything to do with the actual scope of work once the shoot and edit are done, to say nothing of the endless chain of approvals and tweaks.  Live-action can work on fixed-bid.  90% or more of a live-action shoot is totally predictable (weather and performing animals notwithstanding). There is over 100 years' worth of live-action production experience that is still applicable when bidding and scheduling a shoot.  I know live-action producers who can predict to within 2 or 3 percent what the actual costs for every single department will be on a live shoot (granted, not the crazy ones).  VFX on the other hand, is by definition exploration of the unknown, or at least rarely-visited fringes of production and possibility. 

We're going to have to be willing to lose some clients, at least at first, by telling them "This is a good-faith estimate, not a firm bid.  We can either give you a firm bid when you've locked the cut and we mutually define the exact scope of work, or we can work on a cost-plus or time-and-materials basis for as long as you'd like, at the following rates."

This is what freelance workers, in essence, do for the companies they work for.  They (or I should say, we) charge by the day, or hour, with or without overtime, but the key is this: if they work more, they get paid more.  As a company owner, this killed me, because I couldn't do the same.  If one of my artists was lazy, or less-productive than he or she should have been, or made a dumb mistake, or was a toxic personality, I couldn't penalize him or her other than by not hiring him/her on the next project -- and I had to pay someone even more to fix the problem. If my client made a last-minute change that exceeded the defined scope of work, I could demand an overage, but more often than not in the last 3 years, the response was, "there is no more money. we don't care if you bill us, we won't pay it."  And what is a shop that bills in the very low 7 figures annually gonna do -- sue Publicis or BBDO? Not only would that be a simple war of attrition for their lawyers, they'd certainly spread the word throughout the agency world.

I don't really see how to make this happen, since it would require a substantial number of high-end companies to simultaneously and without any appearance of collusion make a fundamental change in their client model. 

But I also don't see how small-to-mid-size VFX shops can survive without it. 


Wednesday, March 2, 2011

One more thing...

The previous post cited the example of live-action production companies that are signatories to collective bargaining agreements.  I neglected to clarify one thing -- most of those companies are not direct signatories -- they do not have individual CBAs with the various unions and guilds.  Most are signatories through their own professional association, the AICP.  

For VFX and animation companies of less than, say, 50 to 100 employees, it would generally be considered too troublesome and expensive to engage in collective bargaining directly.  (Although I worked at a 65-person company in the early 90s that did in fact negotiate directly and at length with the local that represented most of its employees, so you never know what a given owner might want to do.) It would behoove companies of that size and smaller to form a professional association like the AICP or AICE, empowered to bargain on behalf of its member companies.  

This is of course not a new idea.  But it might be time to start thinking about it again.

might unions be *good* for VFX/animation companies?

Naturally enough, when we talk about organizing VFX and animation workers, we focus on the benefits that would (we hope) accrue to the workers. It seems as though most of us assume that these benefits would come directly out of the pockets of the VFX business owners, who are already struggling.

What if they didn't?

We've been hearing and reading a lot about the VFX companies' woes, which boil down to inadequate compensation for the services they provide, given their operating costs. Adding the cost of union labor to their balance sheets would have to hurt their already-narrow margins.

What if it didn't?

Let's look at live-action production.

First, compare the overall business health of union-signatory major film studios with non-signatories. Ignoring the fictions of studio bookkeeping, I think it's fair to say that the signatories are generally better-off, as businesses. Look at their physical plants, their longevity, their executive compensation, their benefits packages for non-craft employees, their production slates, their assets. I'm pretty sure that the signatories all rank higher in all of these categories.

Now make the same comparison in commercial production companies -- you find the same pattern. There are some non-signatory company *owners* who make more money than they might if their staffs were organized, but I would argue that their businesses are less-healthy -- that these are fundamentally greedy people out for a short-term dollar, uninterested in building value in the business itself.

What's going on here? Shouldn't the companies burdened with union and guild agreements be suffering more than the others?

What if organized labor and collective bargaining actually *benefit* businesses as much as employees?

Now, correlation doesn't necessarily indicate causation. Even if this is a causal relationship, maybe it runs the other way -- perhaps only healthy businesses can afford to hire union labor. But that doesn't seem likely -- I think there are very few, if any, examples of non-signatory companies becoming really rich and healthy, and subsequently deciding to become signatories. What would motivate them to do so, especially if organized labor is universally burdensome to management -- wouldn't a strong company find it easier to just ignore it?

What would the mechanism be then? How does signing a bunch of union bargaining agreements make a production company or a film studio healthier, when everything else stays the same?

I think the answer is simple and subtle: it imposes standards. Standards of fairness. Standards of costs. Standards of work rules. Standards of, indirectly but perhaps most importantly, fiscal responsibility. Collective bargaining agreements are not negotiated company by company -- they are industry-wide (at least within a given local's jurisdiction). This creates exactly what VFX shop owners continually cry out for: a level playing field.

Standards make it impossible for a signatory to shoot itself in the foot by saying "we'll do this one project for half what it should cost" -- for whatever reason (We're building our reel, it's just this once, they'll bring us the next one at full price, it'll be so cool, etc.) But what about the non-signatory (or out-of-state or overseas) competitor who *will* say that? How do we keep the job from running away? Again, the same way as the live-action production industry: reciprocal agreements with other locals, guilds, and unions.

If one of the majors let its SAG agreement lapse, and tried to hire non-union actors, not only would any SAG talent refuse to work and picket the studio, its DGA, WGA, IA, IBEW, and Teamster workers would honor the SAG picket line. If a signatory live-action commercial production company tried to hire non-union camera crew, the grip and electric and carpentry locals would honor Local 600's picket line.

The reciprocal honoring of picket lines means that if a studio violates one of its bargaining agreements, it effectively loses *all* of its labor. This in turn escalates the issue -- the studio could, in principle, run away completely, but that would move it out of the labor market it most wants to be in. The size and competence of the local workforce is a powerful motivation for the majors to stay in L.A. -- although we are seeing more and more runaway production as alternative pools of talent deepen, which is worrisome.

If feature VFX houses were organized, especially through an existing powerful union like the IA or DGA, reciprocity would make it possible to, um, encourage the major studios to take their work only to union shops. Those shops in turn would not be willing to bid the job irresponsibly or unethically, as their own bargaining agreements would impose standards that would make that behavior too risky. For example, if a bargaining agreement strictly compelled a shop to pay overtime, it would be strongly discouraged from deliberately bidding a job with too few staff or too short a schedule. So, in addition to ensuring workers' fair treatment, the agreements help ensure rational, more profitable behavior from shop owners and managers.

Now, what about the small shops, the upstarts, all of us trying to break into the business or make our own way? There is no doubt that restrictive and exclusive union membership and eligibility rules stifled innovation and growth in VFX and commercial production for a very long time. Some craft locals continue to work in this unenlightened manner. For VFX organization to work, this simply cannot continue. If, and it's a big if, the IA or IBEW can, in their entirety, move out of their mid-20th-century mindset and make it easy and desirable for people to join the unionized workforce, this can work.

In this scenario, a small group of artists wanting to create a new company to do VFX work might, as they often do today, seek subcontracts from larger shops. Assuming those shops and their studio clients were organized, it would be necessary to make it easy for this new entity to work as a signatory as well, and easy for its employees to join the labor organization. Easy, but not free. Realistically, there will be some costs associated with this, a barrier to entry -- which in my view is a good thing. It has become too easy for anyone to buy a few workstations and start soliciting work without any real understanding of what makes a business work well (goodness knows that's what I've done!). Those of us who want to run companies need to do our homework better than has been usual. If you make it possible for any fool to not only start a business but compete in the marketplace, and further, encourage self-destructive behavior like underbidding and working impossible hours, then, well, you get a market of fools -- and those who prey upon them.

This has gotten too long. If you read this far, thanks!