Sorting out the financial crisis in special effects

It really doesn't make any sense considering the contributions these production companies play in today's souped-up blockbusters. But this week's bankruptcy filing by Rhythm & Hues in El Segundo is the latest indication of an industry in turmoil. It follows the Digital Domain bankruptcy last year and a recent round of layoffs at Glendale-based DreamWorks Animation. Other companies are said to be running out of cash as well. From Variety:

Eric Roth, executive director of the Visual Effects Society, said he hoped this incident would alert the entire industry to the crisis facing visual effects companies. "From all accounts R&H was a company that appeared, from the outside, to be well run, to take care of its employees, to take advantage of worldwide tax incentives and have locations in other countries." Studio sources say the company wasn't doomed by any financial manipulations or mismanagement, but by a simple cash flow crunch that left it unable to meet payroll. "If a company like that can't survive in today's marketplace," wondered Roth, "is this the moment in time when the industry at large takes notice and says maybe we need to take a fresh look at how we do business?"

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R&H is famed for its creatures and character animation, especially digital animals. It uses proprietary software, which makes it hard for studio clients to pull animation work in progress and hand it to another facility. To do so essentially means starting over. The news of R&H's bankruptcy was met by an outpouring of sadness and sympathy by visual effects artists. R&H is known for its worker-friendly management andhas enormous goodwill in the vfx community -- unlike some other companies, including the pre-bankruptcy management of Digital Domain,whose demise was widely celebrated."If the R&H rumors are true, I will be devastated," wrote vfx supervisor Thad Beier on Twitter Monday morning. "Hughes and Co. built the most transparent VFX house ever, and never threw stones."

Among the culprits cited: State and foreign incentive programs that effectively subsidize productions and cause prices to fall artificially. R&H, along with the other houses, established offices in other locations around the world, but that's an expensive - and risky - investment. Then there are the unpredictable ups and downs of the business that make it hard to hold onto cash when times are tough. These days, the survivors tend to be affiliated with major studios.