See the update/clarification at the end

The Problem

It’s almost a month since the word broke loose on an otherwise unusual Friday morning that Digital Domain was in very serious trouble indeed. Oh sure there were the warning signs of rough seas ahead, but on the whole, it appeared that the studio was simply in the middle of the kind of cash flow crisis that plagues any business. However the problems were a good bit more severe than even an emergency loan could fix.

Yup, cash flow was a big part of the problem, and a big part of the problem’s problem was the production of animated feature film, The Legend of Tembo. Now many questions can be raised as to how this production was the main part of the problem, but the gist of it is, animated features are still phenomenally expensive to plan, produce, distribute and maintain.

In Digital Domain’s case, Tembo sucked up capital, but it was still only in pre-production; hoovering up funds with nothing to show for it at all. In other words, Tembo was a dollar-shaped black hole. Now this isn’t to pan the production or anything like that. It’s the nature of the business; you have to saddle the costs before you get anything back, something that’s especially so for your first feature. All this combined with a drop in DD’s VFX business halted any incoming monies that were used to service the loan that was financing Tembo. Without either, the company collapsed.

The Solution

The solution to the problem of reducing the risks associated with such projects, funny enough as it seems, is to make cheaper films. Now cheaper in the context of DD’s problem means much cheaper than even they were attempting to do. Tembo was not an expensive film but by all accounts had already swallowed millions and was still in pre-production. Disney and DreamWorks on the other hand spend many hundreds of millions on their films (Toy Story 3 was apparently the most expensive to date at around $350 million).

The problem is that pouring many millions into an animated feature is a poor way to go about it. Features are naturally more expensive than TV episodes, but there is also a much larger risk involved. Studios can normally suffer one or two flops unless, of course, said flop was your first production. They’ve also been moving ever more towards films that are safe; sequels, series and the like in order to hedge those risks.

What the solution calls for is for cheaper features, or rather, features that don’t cost nearly as much money.

Proof? The Secret of Kells cost all of about €6 million (~$9 million at the time). A Monster in Paris was budgeted at around €22.8 million. Think about those numbers; the latter was produced for just over what Disney spends on pre-production alone. The former was made for about the same amount that they spend in coffee (OK, not really, but you get my point).

What I’m getting at is that there is a widening gap, a hole if you will, in the market for the budget feature to exploit. If you can knock out films for, say, under $20 million make and at least your money back, you’re doing pretty well, aren’t you?

Coupled with the new digital economic model and I’m afraid the days of the massively budgeted feature are rapidly drawing to a close. Snow White heralded a good 80 or so years of it, but in the near future such lavishly expensive productions will become even rarer than they already are. Alas Digital Domain discovered that too late.

Clarification: After a twitter conversation with Digital Domain founder Scott Ross, I need to clear up a few things:

• The collapse of DD was about more than just the Legend of Tembo’s production and included many other factors that together contributed to the company’s collapse. I didn’t mean to imply that the film was sucking all of DD’s money, except that as the company’s first feature, it was absolutely using funds that would not see a return for some time and thus wasn’t doing DD any immediate favours.
• My solution calls for cheaper features but I forgot to clarify that they are only one part of an overall realignment of how features are made. At present, they swallow up capital and labour for many years, thus contributing to their enormous cost. Cheaper features are more likely to take longer to make, but the payoff is that the resources used are spread out so that it is not necessary to devote an entire department of employees to a production. In conjunction with lower project costs, studios also need to take into account marketing, distribution and home media costs as well. A cheap film will likely have a lower marketing budget but that does not preclude a low gross. Great films will always be seen as word of mouth spreads. How to Train Your Dragon is proof that the concept is not as dead as many advertisers will have you believe. With home media, it is a similar situation. Cheaper films cannot afford the large marketing to support a widespread release, but the shift to digital media will reduce the need for such large expenditures and level the playing field.
• My two examples of The Secret of Kells and A Monster in Paris were chosen form personal experience and knowledge. Both were from small studios and had vastly lower budgets. However despite neither being a box office success, their requisite studios survived thanks to the project’s low cost and the fact that they were not complete losses. A more realistic example would be Hoodwinked. A film but whose ~$8 million cost was earned back many times before culminating in a total gross of $110 million. Such films are proof that cheap films can succeed.
• The overarching point of the post was to point out that expensive features can beget financial failures and that cheaper features can eliminate some of the bigger risks to a studio’s business.

If anyone needs any further clarifications, please post them in the comments below.

Thanks,

Charles