Tuesday, August 02, 2016

ARC and the Hazards of Animation

The news that ARC, one of Toronto’s largest animation studios, has gone into receivership spread in record time thanks to social media.  I’ve been dismayed at many of the comments I’ve read in various places online.  Many are ignorant; some are accusatory.  I have no inside information, but anyone with experience in the animation business knows that a bankruptcy is always a possibility, especially for studios doing service work.

Everyone in animation has probably worked on a project that’s gone bad.  It could be due to demanding or ignorant clients.  It could be due to unforeseen technical challenges.  It could be due to an inadequate schedule.  If a job goes over budget, the costs have to be covered from the next job.  With luck, the profits from that job are enough to cover the loss, which leaves the studio in a break-even position.  But if the profits are not enough, or the next job goes bad as well, the debt begins to pile up.  This puts a studio in the position of using income from current jobs to pay off old jobs, and it becomes necessary to keep new jobs coming in so as to service old debts.

Every budget and schedule (really two sides of the same coin) contains unknowns.  Studios try to build contingencies into budgets to cover the unknowns, but in the competitive market that service studios face, budgets are lean and sometimes intentionally lower than the job requires.

There are valid reasons for under-budgeting.   The studio wants to work with a client that commissions a lot of work and the studio has to land a project in order to establish a relationship.  Or the studio has a crew that will finish a project shortly and needs something to keep the crew on the payroll.  Finally, there’s the need to keep money coming in to meet overhead and maybe service debt.  Every day that the studio stays alive is another chance for the studio to find the profitable job that will solve its problems.

There is also the issue of cash flow.  A studio can be profitable on paper, but if the money isn’t flowing in at a rate fast enough to meet the studio’s expenses, the studio is forced to borrow to bridge the gap.  That borrowing has costs attached to it: legal fees and interest to name just two.  If the cash flow can’t be straightened out, the interest piles up and the studio may be forced to seek other bridge financing.  The end result once again is debt that is paid by diverting money from current jobs.  This just pushes the debt forward.

Either of the above cases can drive a studio into receivership.  It’s important to understand that studios are forced into receivership by creditors.  It’s not something they would choose to do.  So when a studio shuts suddenly, it’s because the creditors have forced it to happen, not because management was trying to screw over artists.  Undoubtedly, management was negotiating with the creditors, hoping to reschedule debt payments or restructure the debt.  If the creditors decide that they’ve had enough, meaning they have no confidence that the studio can meet its obligations, they force receivership, capping their losses and hoping to recoup something from the bankruptcy.

No one – the creditors or the management – wants that to happen.  The creditors would prefer to be paid in full, something that rarely happens in a bankruptcy and won’t happen when a studio’s only assets are computers and furniture.  Management prefers to run a profitable company.  It puts more money in their pockets and makes their resumes look better.  Having a bankruptcy on a resume is not the greatest job reference.  It is possible that ARC’s management made bad decisions.  It’s equally possible that clients, competition and bad luck forced them into decisions they did not want to make.

There is no question that the closing of the studio is a tragedy for all concerned.  But without inside knowledge, no one can assume to know what went wrong.  Bankruptcies are common in all industries because sales, overhead, production and cash flow are difficult to get right.  Attributing malicious motives to this bankruptcy is wrong.  Attributing it to gross mismanagement may also be wrong. 

More than any other studio, ARC (under a series of owners) got Canada farther into the animated feature game than any other studio to date.  While the studio had an unhappy ending, it provided lots of jobs and opportunity while it lasted.  If the management is going to be criticized for the bankruptcy, the least we can do is give it credit for what it accomplished.


Anonymous said...

Let's give credit where credit is due then. Arc's major accomplishments all happened under David Stienberg and the Starz label. It should have ended better than it did. A real tragedy.

Anonymous said...

What about lying to employees about not getting paid because of a "glitch"?
Or continuing to hire people and encouraging them to leave jobs and relocate?
How do you spin that to appear honourable and noble?
These are people's livelihoods they are dealing with. Their behavior is dispicable and unethical.

Anonymous said...

IMO, There's no real proper long term stability for creative people in this industry, no matter how it's spun. With the success and influx of cash Vancouver has received as being a leader in the entertainment industry, the support and protection for the people actually doing the real work is pitiful. Always at the head of such matters is business people that seem to manage studios into the ground by cutting corners and ignoring the experts, all while making 10x what the real talent makes.
I don't mind hearing the other side of the story, but the bottom line is that someone at the top screwed up, and the sad part about it is that they'll likely be in the job much sooner than the artists who create the magic. Everyone will go somewhere else and get the same thing again ... Turn around times for work get smaller, over-outsourcing, and overworking talent is usually the status quo to studio success. That to me, is what is sad. No meaningful change to the industry. Just studios that want so bad for people to live there and never stop working. Good luck to all the talented artists out there not to mention the people with families, paying rent in Vancouver. Hopefully some inspiring studios will pop up and try to change a few things.

Anonymous said...

Giving a company a free pass because they didn't purposely bankrupt themselves is not only ridiculous, but a slap in the face of all the employees who are now suffering.

Of course Arc’s management was FORCED by clients into decisions they "did not want to make". But they put themselves and their artists in that situation by making bad decisions earlier on that led to that circumstance.

You're saying we should wait to hear the whole story. Okay, what are the only facts we know so far?:
- Arc was continuing an aggressive push to hire people, encouraging them to leave current employment and relocate, even offering them one week accommodation to do so.
- Arc moved into a new state of the art building which undoubtedly had egregious rent fees
- Arc recently invested in re-branding themselves
- Arc lied in their description of the only hint of something possibly going awry, the payment lapse on Friday, calling it a "glitch".

We might never know the whole story. But looking at these facts, we don't have to know the whole situation to understand that absolving Arc management of all possible responsibility-- regardless of what the ultimate bankruptcy circumstances end up being-- is to learn nothing as an industry from this tragedy. Saying these kinds of events are an inherent unavoidable hazard is not the way forward.

Yes, in the past Arc provided huge opportunities to Canadian Animation. But now, their carelessness has fractured Toronto and left so many broken.

It's like saying, "At least those animals we sent to slaughter got fed by us until we killed them! Besides we didn't WANT to kill them, it's just we hadn't responsibly rationed our food and had no choice because we left ourselves starving!"

"Credit where credit is due" and "excusing accidental mistakes" is not the conversation we should be having right now. Instead, let's start insisting on our industry making meaningful change so these kinds of failures stop happening over and over again.

Mark Mayerson said...

@anonymous2: I never implied that ARC's management decisions were honourable or noble. I was trying to make the point that events sometimes force people's hands. The decision to be hiring people was made with the assumption that the money would be there. Management expected the money to be there to meet payroll. That may or may not have been a realistic expectation. It's possible ARC's management was living in a fantasy world or it's possible that the creditors were on board until something caused them to change their minds. That something could have nothing to do with ARC, but another part of their business that forced them to cut back. I doubt we'll ever really know.

@anonymous3: Working conditions are an ongoing problem in all industries. There's constant pressure to do everything faster and cheaper. In L.A, where there is an animation union, there is still a problem with studios pressuring people to do unpaid overtime. If it's happening in a union situation, I don't know how it can be stopped anywhere.

@anonymous4: I never intended to give the company a free pass. I was trying to counter the comments I was seeing that management was wholly at fault, not absolve them of any wrongdoing. As we have no idea what Grosvenor Park Media Fund LP was thinking or what it's own financial situation was when it decided to push ARC into receivership, we can't know where blame lies. I suspect there's enough blame for everyone, but without knowing the facts, I'm not willing to single any party out.

These failures will never stop happening. They happen all the time in every industry. Animation studios were going out of business in the 1910s and have been ever since. The best defense is for individuals to have enough money in the bank to survive until the next job and be versatile enough to stay employable as the marketplace shifts. Blame management if you want to, but ultimately we're all responsible for our own survival.

Anonymous said...

The media is seriously focussing in on the government grants Arc received from a Liberal government, and now the Conservatives are raking political hay over it. This is NOT good for anyone in this industry. People who don't understand how things work in animation are going to get all worked up over government grants and possibly put pressure on their politicians to end such grants, which will sink us all. The full story of what happened to Arc should be made public, if only to end all this speculation.

Anonymous said...

"Grosvenor Park Media Fund LP" now I know where to look for my money.

Anonymous said...

I'm pretty sure that government grant/NGOJ money would have run out a while ago. It was only for 5 year period or something. Also, that only took a small amount off the top of their spending. 35 million over a few years is nothing against the costs of running a studio with hundreds of people. All it did was give them a slight competitive edge enabling them to attempt to undercut other studios on bids. Apart from that they probably just got the same tax breaks every other company in the industry gets.

But yes the perception is that all that money was a wasted endeavour is not a good sign.

Anonymous said...

I will assume no one posting here actually worked for the studio and if you want an idea of some possible reasons for the studios demise, as a former employee I wold like to add my 2 cents.
First of all blaming a huge part of the fall on gross mismanagement would be pretty spot on. Business is business wether you are manufacturing carS or producing cartoons and should be treated as such. Hiring production managers who have zero business acumen or solid knowledge of the industry is bound to fail. Hiring a lot of inexperienced artists on the cheap instead of a few talented artists for reasonable rates never works out. Bidding on projects based on the productive output of your most talented artist on their best week then hiring students to do the work never works out. Continually under bidding your actual productions costs to get jobs is not the secret to succesS.
One bid in particular had clients scratching their heads when Arc'S bid for a pilot was on average 6-700 000 below the other bids.
If you care solely on the bottom line and disregard the actual project you are putting on the screen eventually people and especially clients catch on. Filling a studio full of talented people and using non creative non business educated people to management just doesn't work. Creative people were let go and yet managers and PA'S only seemed to fail upwards. Projects would be mismanaged and go over budget and over time and the managers would be rewarded months later to producer status for their achievements. In what other successful business do these actions occur? I can' t recall a single person on the production staff at that studio who had ever worked as an animatio artist at any point in their career and most of them had not graduated from a program in business or the arts.

So who IS to blame then?

Anonymous said...

Having also worked there a few years ago, I'm surprised they were able to stay afloat as long as they did. I saw first-hand how petty politics, inexperience and financial mismanagement put Arc into a death spiral. They were already starting the practice of under-budgeting then, making costly concessions that resulted in over-worked staff and unrealistic timelines. On top of that, they'd hype up upcoming projects that would only fall through, time and time again. Management over-promised and under-delivered and hired and fired seemingly at will. So when I found out that they had re-branded and moved into larger facility, I was floored, because the same incompetent group of people was still running the show. R.I.P. Arc. Maybe they can finally stop glomming off Gnomeo & Juliet, a movie they were involved with six years ago under different management.

Anonymous said...

The former head of Big Idea Studios, another CG animation company, wrote a 10-page article about his experience running a studio that eventually failed by becoming too large and stretching itself too thin. It really is a case of even if leaders have the best intentions, adapting a company to a feature animation pipeline can be a death march. Even Dreamworks messed it up and had to close a studio that was roughly Arc's size last year. And Dreamworks actually owns the rights to their properties. For a service studio it's even harder.
I hope some of the younger artists at Arc were able to learn a lot from their experienced seniors, and now have a better chance of finding a new position in the industry with that experience.

Anonymous said...

I'll repeat what I said in my first post. Arc's reputation and success was built on the back of David Stienberg. I spent a lot of years there, I know.

Do you ever watch Dragon's Den or Shark Tank? You know the pitches where people with successful, profitable companies fail to get an investor for the simple reason that none of the Sharks are passionate about the product? That's what happened at Arc. To say that Tom Murray was invisible would be an understatement. How can a studio succeed when ownership has no understanding, desire or interest in the product? In the years we worked under him I saw him less than a handful of times. Zero interest in the projects, the people or thier ideas. I was told on more than one occasion that he preferred little to no contact with artists. Mark, could you imagine running a studio without laying eyes on the work? If it sounds insane it is.

I also echo most of the previous posts. For the most part it's pretty spot on.

It saddens me on a personal level having watched the company grow from the early days of Dan Ketch to the glory years of David Stienberg. To be handed the keys to a profitable, successful growing company only to run it into the ground is a crying shame.

Charlie Bonifacio said...

Thanks for this post Mark, your perspective as a content creator, former business owner and industry watcher are invaluable and I found your article informative and very non biased.

Having worked at Starz, Arc for over 9 years I have some perspective myself but perspective is always relative to where one stands and the understanding they bring to what they see. From my perspective, I learned CG animation there without going to school, from talented people I sat near. I enjoyed the experience of contributing great animation and story sketch on 2 very successful animated features, foreign owned but produced in Canada at a time when no other producers had the courage to take that risk. I was able to impart years of my own experience to animators I worked with as a lead and continued to do so for every project I was assigned to. I contributed to development on pitch projects for years, none of which actually panned out to actual productions. Content development on IP costs money and takes risks, so all the development art I produced didn't earn the company a penny, but I got paid.

Recently the studio committed to a lot of work at a time when projects in Toronto exploded. It was difficult to find experienced people so the studio hired who they could and still produced stellar quality work for their clients through the intensive supervision of the senior artists and tons of hours put in from people who took the opportunity to have actual jobs and further their skills and talent. Much of the overtime put in from artists on my projects was done willingly to further their skills and improve their art. I know many of them lifted their game.

Perhaps Arc bit off more projects than it could chew but that is a calculated risk and it seems the complex calculations weren't working on a financial level that I have little experience in. You described some of those complexities quite well Mark. I know for a fact that Arc had a stellar deal with the same management company that we rented the old building from. I believe the rent was equal for more space. Of course the move cost money and the branding as well but those would be negligible in the grand scheme of operating a business. As you said, perhaps mistakes were made but creating something successful takes risk.

I appreciate every penny I earned there and every effort of management to make something great for the Canadian industry. Knowing all the owners and top level business people, I perceive all of them as people of integrity with no malicious intent. They are all extremely proud of the work that was produced there and I'm sure each one of them is as disappointed as the people they created jobs for. I'm also pretty sure there was no golden parachutes for anyone, In fact, most likely the opposite as each of the owners were in some way, investors themselves.

What has impressed me most in the past few days is the amazing support of the animation industry in Toronto and abroad to take care of the 500 plus people who are displaced by the closing. This industry takes care of its own. That's the spirit that I applaud.


Anonymous said...

^^^ what this person said is very true.

Anonymous said...

I'd like to respond to what Charlie said. While much of what you say is true, the notion that Arc couldn't find experienced artists is bullshit. In my department, Arc had a huge contempt for its junior and intermediate artists. They refused to give them opportunities to develop into intermediate and senior artists, so anyone with any ambition, left, taking their skills and experience with them. Then Arc would try to lure in senior artists with feature experience with false promises of high calibre projects (of which there were few). Of course most senior artists were not attracted by low profile projects + shitty work life balance. If they did take the bait, they eventually left.

Anonymous said...

I will agree with the last comment. As a former Arc employee I as well witnessed the culture of hiring more juniors rather then holding on to more seasoned animators. And holding those juniors on "junior" status for as long as they could, way longer then was fair, under the pretense of "we will teach you", "you are getting amazing experience". They also regarded those "tv animators" as lesser then their prized feature animators, regardless of the fact that TV was what helped Arc survive as long as it did, and payed the salaries of those higher payed feature animators who were not even working on a feature anymore.
Of course those people probably learned, but they also were taken advantage of. Meanwhile more experienced people didn't want to go back to the low salaries and the false promises of high end projects.

Anonymous said...

amen sister. I was in a different dept., but what you describe is very similar, especially the hierarchy of tv vs. feature artists. They were so snobby to the tv artists, meanwhile the tv work was subsidizing the feature artists. Arc had an ego problem. And you think, what does ego have to do with whether a company is financial solvent? But it turns out, the inability to retain and attract staff, and the flagrant overspending contributed to the company's demise.

Anonymous said...

As a senior lead artist and I was actually laid off for 5 days while a recent hire was kept on in my place. After my 5 day absence they graciously offered me a contract at a demoted status so..................unable to find talented artists isn't exactly the reason for the demise. The long history of bad decisions regarding hiring and promoting artists was the problem.

Anonymous said...

Ahhh, I forgot about that. It wasn't just juniors/intermediates they abused, they also screwed over many long time seniors. If you didn't work at arc, you may be wondering, why the hell did we stay? Well, there were many reasons ranging from stockholm syndrome, false promises/ carrots on sticks, industry lulls, and lastly, the sheer difficulty in assembling a decent reel there.

Anonymous said...

One year ago my husband was offered a supervisory position on a feature animation project at Arc. They convinced him to leave his job and paid our relocation expenses from the west coast + gas/food/lodging expenses, secured work visas for us both (we're American) and put our family up in a high rise hotel downtown while we searched for a house. This came to about $30,000 and to their credit, they paid it. On his first day of work my husband could tell that Arc was disorganized. He was shown to a cubicle and left alone. Weeks went by and emails to the supervisors who hired him went unanswered. He was given menial work but the position he was promised never materialized. He spoke with HR and mentioned he had no communication with his supervisors. A few weeks later he was let go and the only reason given was that they couldn't find a position for him. It was devastating to our family, both emotionally and financially. We gave up jobs and sold our house and moved our kids to a foreign country where we had zero connections or means to move back to America. It seems now that we weren't the only international family lured by Arc to relocate and then abruptly abandoned.

My husband soon found work at another company and we recovered, but we still consider moving to Toronto and associating with Arc as the biggest mistake we ever made. My heart goes out to all the hard working artists and support staff who abruptly lost their jobs. Management there was indeed terribly inept.

Anonymous said...

At the end of the day - people saw this company ... whether one chose to believe it or not, this was not a surprise. Management was outt o lunch and pushing good people out. Arc is just an example of what happens when you let uneducatedand unqualified individuals run a business. They will protect themselves and mess with the livelihood.

Anonymous said...

I work at a different studio that got to deal with ARC on a project with a shared client. It was a nightmare. The feeling I got wasn't that they were spread too thin, it was that they had completely lost track of the end goal of a service studio- Provide the client with product in a timely manner that exceeds client expectations.

Their management style was exactly the opposite. It actually seemed like they were trying to sabotage their own project. Communication was brutal. Ask for a creative note, wait a week to ten days, get a technical note instead. Requests for key information had to be repeated again and again. Everything was delivered late. Their own assets would fail the stringent delivery specs they insisted we provide. This was at a point they were months behind and had burned down 3/4ths of the allotted time without producing a single final approved shot.

It was a constant question at our studio- "How are they still in business?" They ended up losing that contract, mid-production. This was with a major client, and I know they were extremely unhappy with ARC. I don't think it's that they were too big. Plenty of bigger studios can manage to keep their clients happy. The problem seemed to be a top-heavy managing style. In my experience, middle management begets more middle management, and the only thing over-managing creates is bureaucracy and bad decisions.

I'm sure there was more to ARC imploding than just that, but I'll bet them losing two large contracts within a year from this sort of management incompetence was a big part of their financial problem.

Good luck to all the people from ARC.

Anonymous said...

Really interesting comments. I'm really sorry to hear what happened to the American couple. That's appalling. I knew things were bad but I didn't know they had screwed around with people's lives to that extent.
The relations with the other studio are illuminating. I wonder what project it was. While I wasn't involved in that side of the business, I can certainly confirm that they had a top heavy management, excessively bureaucratic style that artists were not able to penetrate. Artists were to be seen and not heard. If you had some ideas of how things could be improved, telling anyone meant wading into a political quagmire.

Anonymous said...

As someone in the executive and managerial chair in this biz, I lost a lot of staff to Arc because they were paying much better and I can't blame folks for leaving for greener pastures. I actually lost a few a month or two ago to Arc and even told them to enjoy it while they can because there's something wrong with the aggressive rate that Arc as hiring and their cash flow. Even with the government grants, at the rate they were paying people, it would mean they would burn $1.6-2M+ EACH MONTH. Tax credits are great and offset the cost but that money doesn't show up until 18-24+ months after the taxes have been filed.

Given that it was mostly service work they do, it's not like they had a steady cash flow coming in to match the cash flow going out. Needless to say, I'm not surprised they shut down operations. It is however very common in this industry for studios that focus on service work to shut down because of cash flow issues.

I'll most likely take back a few of the folks that left but until I get my projects off the ground I just wish all the staff at Arc the best of luck in finding new jobs.

Anonymous said...

You sir just articulated the exact reason why i have left the industry indefinitely after nearly a decade of working. Not from Arc but feels like deja vous. Terrible management/leadership is the reason why great things fall apart. This is not limited to ARC but most larger Canadian television studios in general. The truth is Producers/owners know that there are fresh waves of keen grads every 6-12 months. This makes up the bulk of labour on a production and is the nature of the industry. Producers I've gotten to know are manipulative shill's more than accountable leaders. Communication with the client is managements job. There are management strategies that can be used to make the artists/teams lives easier while creating higher quality projects. Win/win. This isn't a new frontier. When a project is disorganised, running behind, people are working on weekends and management blames the client, or the budget, that's a red flag of incompetence in management. Theres always growing pains on a production but it's a producers responsaibity to get the key areas of stress the support they need. There's more opportunities for artists today than ever, you don't have to be a hero to compensate for someone else's lack of education and failed strategy... Just be glad you are not one of them.

Anonymous said...

Bad production teams often don't get penalized for their incompetence. They burn through artists, then just get brand new shiny ones to burn some more.

Anonymous said...

"As someone in the executive and managerial chair in this biz, I lost a lot of staff to Arc because they were paying much better and I can't blame folks for leaving for greener pastures. "

Toronto in general is not known for studios paying all that well. As far as Arc goes, the pay, in my experience, was not stellar, but that did depend on the position and expertise of the artist. I had to leave Toronto to get a decent wage. There ARE a number of studios who do pay competitively in Toronto, my point is, it is not a majority of them. There is a reason why PPL leave to places like Vancouver and the US. Mostly, the quality of the work and the higher wages.

Having said that, the industry in Toronto has improved a lot in recent years. The one thing that has deteriorated is the cost of living. Housing in TO is just crazy!!

Anonymous said...

"As a former Arc employee I as well witnessed the culture of hiring more juniors rather then holding on to more seasoned animators. "

I can attest to this. The truth is they couldn't retain seniors simply because the seniors did not get a fair treatment, some very experienced animators not getting cast on the features, instead, these positions were given to recent grads, while the experienced animators ended up working on tv series. That just does not compute!!

David Garner said...

I think the underlying issue is that people have become so used to hearing that big corporations are abusing the bankruptcy laws, that when a legitimate one takes place, we all tend to look at funny. Some companies like the studio had no other alternative, it’s not to game the system, it was out of necessity to bridge the gap.