New Zealand's Movie Magic Success

On the Weta Digital Acquisition

Author’s note: You can watch the video below

I had originally wanted this to be more of a deeper dive into New Zealand’s visual effects industry. But as it turned out, that cluster was not that big or worth profiling. Sadly enough.

And then Ben Thompson’s article came out and I was like, “Great. Now I got to rush this out.” Just kidding, he did a fantastic job

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I had such a great time on my last podcast appearance, I did it again. Check out the episode where we talk about the life of content creation.

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In November 2021, American software maker Unity Software announced that it would buy New Zealand-based Weta Digital for $1.65 billion.

Weta Digital is one of New Zealand's most well-known technology companies. It provides visual effects services for movie productions.

It also produces the computer tools for making those visual effects services. Unity is apparently buying the latter. The former will be spun off into a new company.

The company was cofounded by Writer-director Peter Jackson. Who is most well known for his work on Heavenly Creatures, the Frighteners, and the modern-day fantasy classic - the Lovely Bones.

New Zealand is a pretty isolated economy that mostly exports milk and sheep. So the development of a leader in the high-tech visual effects industry is really interesting. In this video, we will look at Weta Digital and what its new owner might want to do with it.

New Zealand, an Intro

I have never mentioned New Zealand in any of my videos before. So consider this a brief introduction to the economy of the Kiwis.

New Zealand is a developed economy sitting on the periphery of the world, far from its biggest trading partners. Auckland is some ten thousand kilometers from Beijing and Los Angeles - translating to a 17 hour flight. And it is 18,000 kilometers away from London, a 24 hour flight.

Despite this isolation, the New Zealand economy has done well over the past 150 years. Its economic production and trade have been primarily agricultural. Their biggest exports are concentrated milk, sheep and goat meat, and butter.

These are staple goods that almost everyone - except perhaps the lactose intolerant - needs. During the 1950s and into the 1970s, New Zealand had been one of the world's richest countries. Largely on the back of this trade.

However, the two decades from the 1970s into the 1990s saw economic stagnation. A number of external shocks hit the New Zealand economy and exposed its lack of flexibility to adjust to those shocks.

In response, the country radically reformed its economy. People generally consider these reforms to have been successful. The economy is today still reliant on agricultural exports, but now it hosts a few interesting technology companies too.

Xero and Weta Digital are probably the most well known of the bunch.

Hollywood Economics

Today's big blockbuster movies are heavily reliant on visual effects. They regularly make up to a third of production spending. And are probably as pivotal to the movie-making process as cinematography, editing, and costume design.

While special effects have been a thing in movies since the black and white days, digital imaging started to reach the mainstream in the early 1990s. Titanic and Jurassic Park brought movie-goers a brand new world.

The increasing usage of digital visual effects have greatly reshaped the movie economy. Since each $100 million movie has to return over 2.5 times its production and marketing costs, studios have had to more carefully manage their financial risks.

This means investing only in pre-packaged intellectual properties with a lot of flashy interesting visuals. Which is why every movie in the theater nowadays feels like a VFX blockbuster.

Warner Brothers was one of the first studios to catch onto this trend. President and COO Alan Horn shepherded large franchises like the Dark Knight trilogy, the Hobbit trilogy, and the Harry Potter series. Warners did very well throughout this period of time.

He then moved to Disney and moved its focus onto big blockbuster franchises like Marvel, Star Wars and Pixar. Avengers Endgame might have cost nearly half a billion dollars to produce and another half a billion to market, but it is the first or second highest grossing movie of all time. Estimates say it has returned at least $900 million in profit.

Movies in New Zealand and Peter Jackson

In 1978, the New Zealand government established the New Zealand Film Commission or NZFC. Its goal was to sponsor New Zealand films for New Zealanders, but in a market sustainable way.

The NZFC worked in a manner similar to a bank. While there were a few bright spots, most of the films did not make a lot. And while they did nurture a few promising directors, many of them left the country to make their big movies. With one big exception.

Peter Jackson was discovered and nurtured by the NZFC. His first application to them was rejected, but he was encouraged to re-apply. And so he did two years later with the movie "Bad Taste". NZFC decided to fund that.

The commission's reports found that his story and scene structure needed work, and brought in foreign screenwriters to help. The NZFC also funded his next work, Braindead, and that caught Hollywood's attention.

Two of his subsequent works, Heavenly Creatures and the Frighteners, were funded with offshore resources. But unlike with other directors, he insisted on filming them in New Zealand - a benefit to the local economy. These two films also pushed Jackson into the tech entrepreneur world with Weta.

Weta Limited

Weta Limited is made up of two companies - Weta Workshop and Weta Digital. The former provides miniatures, costumes, and props. The latter does visual effects.

The company was formed when Jackson came up with the script to Heavenly Creatures. While reading it, one of the production team members remarked that the digital effects would have to be done in America. But doing that would cost too much.

So founding visual effects artist George Port leased a computer, film scanner and film recorder from Kodak and then he did the effects himself. Once the film was done, they pooled their resources to form Weta and bought this computer.

Weta Digital and Weta Workshop worked in harmony to deliver special effects on time and under budget. When Jackson started on his biggest production yet, the $14 million Frighteners, they used both digital effects and miniatures to produce something ... frightening.

The Brutal Visual Effects Industry

Practical effects still and always will have their place in the world. Just look at Jurassic Park or Dune or any assortment of horror movies out there. But digital visual effects tools have made very rapid gains into the industry.

The growing need for blockbuster set piece visual effects has fueled a massive arms race towards digital realism. Millions of lines of code have been developed to model water, fire, light, and people.

Despite this technical sophistication, the actual visual effects industry is pretty brutal. Ever since the anti-trust courts broke up the vertically integrated Hollywood studios, much of the actual film production work gets sub-contracted out to small, independent companies. 90% of the Hollywood work force work for companies of less than 10 people.

Independent VFX companies negotiate with the studio producers, offering the most competitive bid that they can possibly do. These bids rarely offer leeway for cost overages or redos due to creative decisions.

As a result, the VFX industry has become a pretty brutal place to work. There are over 500 firms competing for VFX contracts from television and film production companies. Many of them outsource work to overseas low cost labor in places like the Philippines.

Of the four biggest effects firms that existed in the 1970s, only one today remains: Industrial Light and Magic or ILM. Which has had the fortune of being part of the Lucasfilm complex.

Having a famous film-maker as the cofounder of your special effects company does not mean all that much. For instance, Digital Domain was co-founded by James Cameron, did the effects for Titanic, and still went bankrupt in 2012.

Weta Digital's Tools

Jackson's Lord of the Rings trilogy brought Weta Oscars and a ticket into the big game. They then blew everyone's minds with their work in the new Planet of the Apes series and the Lion King.

To do that, Weta developed their own suite of powerful visual effects tools. Tools like MASSIVE, which simulated amazing battle scenes in the Lord of the Rings trilogy.

But in recent years, the company seems to have been changing up its corporate strategy a little. Many of the tools that they have been using to create special effects for others, they started offering to outsiders.

For instance in June 2021, they recently announced a deal with Autodesk in which they made some of their Autodesk Maya tools available to users on the cloud. A month later, they did the same for SideFX's Houdini 3D animation software.

I think this is a recognition that special effects tools are expensive to make. But providing special effects services to film and television projects is a brutal, lowest cost-denominator game.

Such massive film projects like Lord of the Rings and War of the Planet of the Apes funded Weta's tools. But how many times are you going to need to create and render a super-realistic ape? The way the film and television world is going, the number of $150 million projects out there is only going to get smaller.

The acquisition by Unity fulfills this corporate goal to a tee. Now Weta Digital has completely monetized their tools and investment in a way that is independent of the whimsical creative choices of an individual film project.

Unity and Weta Digital

So these are some interesting visual effects tools. But Unity's core product is a video game engine. Why on earth would they be interested in a visual effects company?

Ben Thompson wrote about this deal on the Stratechery website - just as I was halfway through the script for this video. Sigh.

As always, he delivers some great things. He compared Unity to TSMC. The metaphor is that in the same way TSMC seeks to be a partner to chip designers, Unity seeks to be the 3D tool technology partner to developers and creators.

He has an interesting point, and I am still trying to get my head around it. I only want to add that Unity's angle also has a lot to do with the increasing power and general applications of the video game engine. As well as shoring up a gap of its own.

There was an interesting tweet by VC Matthew Ball that caught my eye and it goes:

"Game Engines Are Eating All of Media & Entertainment"

Game engines were originally created to help game developers make better games more quickly. As games needed to get better, the engines powering them got more powerful and feature-rich to the point where they have started to cross over into narrative entertainment.

For instance, the virtual production sets for the tv series "the Mandalorian". Where actors and artists can act within an immersive LED screen powered by a video game engine - Unreal Engine. Unreal is developed and maintained by Epic Games, Unity's biggest competitor.

There is a lot of potential here. Films and TV series can be filmed with less unnecessary back and forth between the artists and the VFX teams. And thus be made faster and cheaper.

Right now they are generating entire cities inside the computer. Why bother doing a location shoot in New York or Italy anymore?

Video Game Engines In the Real World

Outside the entertainment world, video game engines like Unity are getting powerful enough to be suitable for simulating complex systems in the real world.

Notably, architects, designers, and project managers can use these virtual game engines to create digital twins of locations and infrastructure to run simulations. For instance, of traffic flows through choke points at an airport.

They also have important safety applications for education purposes. For instance, hazard recognition and hands-on safety training. Unity and other 3D video game engines can simulate a complete virtual construction site and add different hazards to it.

Recently, Unreal Engine 4 was used to create an open source simulator for autonomous driving research - called CARLA. Researchers can generate a specific urban driving environment right inside a computer. The simulator could thus help generate data of rare driving scenarios to train a machine learning model.

Imagine that. Programming a computer to train another computer to act like a human!

Anyway, speaking of wild ideas - Thompson closes with a banger about the face-less Metaverse. With faces replaced by realistic avatars in 3D and all. Who knows what the Metaverse is going to be in the future, but everyone seems to agree that avatars will be necessary. Weta's tools made Andy Serkis look like a real life chimp so they will be a great addition.

Conclusion

One last thing. The Weta Digital acquisition allows Unity to close the gap on one of its bigger weaknesses: The end result doesn't always look photorealistic.

Unreal Engine has been doing a lot here. The latest demos for Unreal Engine 5 set new bars in photorealistic real time rendering. While Unity never had a reputation within its developer community for ultra-amazing graphical fidelity, it shouldn't run the risk of falling too far behind.

The company's customers are not gamers, but developers. Giving them access to Weta's powerful visual effects and simulation tools lets them create a better visual experience. And thus makes them more likely to stick with the company for their next project.

As Thompson points out, it is a union of two companies in complementary situations. And I think the marriage will probably work out well. I just hope they keep running the New Zealand part of the company the way it has been.