L.A.’s visual effects industry has been characterized lately by financial collapse, given the bankruptcies of Digital Domain and Rhythm & Hues.
But even as hundreds of L.A. special effects workers were handed pink slips from those companies this year, one Hollywood-based effects firm, Prime Focus World, is expanding – by pushing its work out of Los Angeles.
The company, a unit of a Mumbai, India, technical services firm for the film and television industries, raised $63 million in equity financing this year, boosting its valuation to $300 million. Meanwhile, the company is planning its next expansion into the booming movie market in China.
Prime Focus has made visual effects for movies including recent releases “The Great Gatsby” and “White House Down.” But this month, the company landed its biggest effects deal to date. It will do all the visual effects work for the Robert Rodriguez movie “Sin City: A Dame to Kill For,” which will be released next year.
Chief Executive Namit Malhotra said it has been crucial to set his firm apart from others that have failed in order to bring in business and secure investors.
“We have been building ourselves up to be different,” Malhotra said. “There has been a greater open-mindedness that our clients have had towards testing new models and trying out a different approach, because they recognize that somehow the current model doesn’t seem to be working.”
The traditional model works like this: Effects companies bid for work by the shot – such as building a monster using computer graphics. To win jobs, they undercut the competition’s pricing, which usually means thin margins. If the project goes over budget, the loss is absorbed by the effects firm rather than the studio.
That’s still the model Prime Focus employs. But the company enjoys lower costs by sending work to its Indian units. What’s more, it has supplemented the special effects work in recent years by adding a host of services, most notably by building a 2-D to 3-D conversion business. For example, it converted much of the recent Brad Pitt zombie film “World War Z” into 3-D.
Also, Prime Focus has been able to work out deals to mitigate risk and possibly share profits from potential hits by investing in a movie’s production budget. For the “Sin City” sequel, Prime Focus is investing nearly $10 million toward the Weinstein Co. release, Malhotra said.
Ken Williams, executive director of the Entertainment Technology Center at USC and a co-founder of effects firm Sony Pictures Imageworks, said diversification is essential for effects firms. He co-authored a white paper on the state of the effects industry that was released last week.
“It’s a very challenging business because of the cyclicality – that’s why we make recommendations of running it better as a business – more diversification so you’re not just waiting for the next big film,” Williams said.
Still, he said, for firms that have the capital to expand globally, there is plenty of opportunity.
“While there is some regional dislocation in the U.S. and particularly with California companies, overall the VFX business is a huge growth business,” he added.
Malhotra launched Prime Focus from a garage in his native Mumbai with the help of partners when he was 19 years old.
The company started as a postproduction services firm for Bollywood movies, TV shows and commercials. Its parent company is Mumbai-based Prime Focus Ltd., of which Malhotra is a large shareholder. Malhotra’s father, Bollywood film producer Naresh Malhotra, is chairman.
The parent company also owns Prime Focus Group, which does postproduction work for commercials and independent films, and Prime Focus Technologies, a licensor of content management software to broadcasters.
Prime Focus World is the largest of the three. It first expanded to London in 2006 to capitalize on a boom in postproduction work in the area due to generous tax incentives. It moved to Los Angeles in late 2007 to work on American studio movies. About 40 people work at the firm’s Hollywood headquarters near the 101 freeway.
Prime Focus also has 18 facilities in India that employ about 3,000 people, along with offices in Vancouver, Canada, and New York.
Bob Coleman, founder of L.A. effects talent agency Digital Artists Agency, said the international footprint gives the company the chance to benefit from a boom in overseas effects work as studios look to keep costs down.
“Prime Focus is unencumbered by the exodus of VFX work from Los Angeles,” he said. “They have a facility here but it’s a very small facility compared with their operations elsewhere in the world.”
It’s no secret that effects work is happening in places where the labor is cheaper and the governments are willing to offer financial incentives that California does not. Rhythm & Hues established offices over the years in India, Malaysia, Canada and Taiwan, along with its El Segundo headquarters.
But Rhythm & Hues fell prey to a cash crunch, even as the firm’s work on Ang Lee’s “Life of Pi” won an Academy Award.
Coupled with the collapse of industry titan Digital Domain some months earlier, the events led to a collective reimagining of how the effects industry could be sustainable. Both firms were purchased out of Chapter 11 bankruptcy protection for about $30 million.
Prime Focus has protected itself from the vagaries of the traditional effects industry in part with its 3-D conversion business, which has been growing. A conversion for a full-length feature film often costs $8 million to $12 million – and unlike traditional effects work, a conversion contract is typically awarded to just one firm.
Before moving into 3-D conversion work on a large scale a few years ago, the company was unprofitable and had revenues of just under $10 million, Malhotra said. Now, the company, which also has an animation unit, has annual revenues of more than $80 million.
However, parent company Prime Focus Ltd. reported a loss of $3.4 million on revenue of $128 million for the year ended March 31. The year prior, it had a profit of $16 million on revenue of $129 million, using current conversion rates.
But Prime Focus World’s plan has won the support of the financial community. The company paid back $79 million in debt late last year from a loan it took out in 2008 to expand into the United States and make acquisitions. It then scored a $10 million investment from Hong Kong firm AID Partners Capital to finance its Chinese expansion. After that, it raised a $53 million equity investment from Sydney’s Macquarie Capital – that sum is being doled out in two phases.
The financing will be used to look at new opportunities, including acquisitions. (Prime Focus kicked the tires of both Rhythm & Hues and Digital Doman but did not buy either, Malhotra said, because they were damaged goods.)
For now, Malhotra said he’s in the final stages of signing a joint-venture agreement to set up shop in China, where optimism is brimming due to a fast-growing movie market.
“We continue to be optimistic about the future of this business and this industry,” Malhotra said.
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