A handful of upstarts are challenging the high-tech kingpins

Last year, when producer Alan Marshall needed state-of-the-art special effects for his upcoming movie, Showgirls, he might have considered the usual suspects: Industrial Light and Magic, Pacific Data Images, Digital Domain, and the few other well-heeled companies that have come to dominate the field of Hollywood special-effects wizardry. But Marshall ended up passing over those ultra-high-tech top-tier companies in favor of Hammerhead Productions -- a four-employee start-up ensconced in a dreary, $525-a-month apartment in Burbank, Calif. Hammerhead didn't even own a computer, the primary tool of the big-effects companies; it couldn't afford one. Only by talking Marshall into kicking in an up-front payment of $75,000 were Hammerhead's owners able to lease a few computer workstations.

And yet even as some of the larger special-effects companies are cutting back in the face of stiffer competition, Hammerhead is taking off. It grossed $500,000 in 1995, its first year, and is now on track to a $1.5-million second year. The upstart company has even swung an ambitious deal that few of its far-bigger counterparts have managed: it is coproducing a full-length feature film, financing its share of the costs by donating its special-effects capabilities to the film.

In more and more industries, smaller companies are positioning themselves to compete with giant competitors by investing in low-cost computer technology. The neighborhood bookstore can instantly go global by building a site on the World Wide Web, for example; a small clothing manufacturer can tie its computer systems into those of huge retailers, allowing it to tailor its production to the shifting tastes of millions of consumers.

But the red-hot Hollywood special-effects industry has gone well beyond that stage: the start-ups that turned to computers to produce stunning effects that the giant studios couldn't match in-house have in many cases themselves become the dominant players, armed to the teeth with the very best in technology. Is there room for tiny companies to compete in that more sophisticated business environment?

The answer turns out to be a resounding yes. A growing army of "cybergnats" is stealing business away from the more established special-effects companies by eschewing the giants' high-priced staffs and state-of-the-art computers in favor of a more personal, guerrilla approach to technology and highly tailored, low-cost service. To the extent that the lesson applies outside of Hollywood, that's good news for little companies looking to muscle into an established industry -- even one packed with digitally intensive competitors. By the same token it should serve to warn today's successful technology-savvy small company that getting big may mean having to give up competing strictly on a technological edge.

Much has been written in recent years about the growing power of computer-focused companies in the special-effects industry. With the debut of George Lucas's Star Wars in 1977, interest in new visual technologies exploded. Formerly the province of in-studio model makers, computerized special effects began to transform the industry in the 1980s, starting with movies like Looker, Star Trek II: The Wrath of Khan, and The Last Starfighter. Today many of Hollywood's biggest hits, such as last summer's Mission: Impossible, Twister, and Independence Day, are effects-dominated movies.

With audiences, and consequently studios, hooked on special effects, huge wads of cash were suddenly being thrown at a handful of digitally sophisticated companies, led by George Lucas's Industrial Light and Magic (ILM). As had happened in the early 1980s with the computer industry, special-effects businesses -- for example, ILM, Pacific Data Images, Dream Quest Images, Robert Abel, Metrolight Studios, and Apogee Productions -- set up elaborate facilities and began hiring large numbers of software programmers. ILM alone employs more than 400 digital experts and 250 high-end computer workstations. All told, the digital-production business is growing at a rate of more than 25% a year.

But for the once-brash young companies that have been maturing into the industry's leaders, growth has created problems. The need to outshine the competition with the brilliance of their effects has forced companies to invest more of their resources into new computer-graphics machines from Silicon Graphics and Sun Microsystems that can cost upwards of $100,000 each -- not to mention software, which can exceed the cost of the hardware per machine. It's not unusual for the larger companies to invest as much as $30 million in hardware and software.

And that's not including the cost of the people who sit behind those machines. The insatiable demand for skilled technicians and graphic artists calls for salaries ranging from $50,000 to $150,000 a year or more, with computer-savvy graduates of film schools like the California Institute of the Arts being bid over like NBA prospects. Per-employee salary costs at Rhythm & Hues, a $30-million up-and-coming industry powerhouse, have more than doubled in the past two years. Salaries now constitute roughly 70% of expenditures at the West Los AngelesÑbased company, which last year won the visual effects Oscar for its work on the surprise hit Babe.

What's more, as the companies grow, they find themselves needing an ever-expanding cadre of managerial and administrative employees, who add mightily to expenses but don't produce product. At Rhythm & Hues, for example, a staff of 200 -- including everyone from lawyers who structure corporate alliances to publicists who keep the company in Hollywood's eye -- supports the 80 people who actually work on the company's computers. "You get bigger and bigger but the costs kill you," says Al DiNoble, a former executive with Pacific Data Images and Metrolight Studios who's now with Eastman Kodak Co.'s Los AngelesÑbased Digital Motion Imaging division. "If the next job gets delayed, you end up going through all the profits you made on the last one."

Competitive pressures have been exacerbated by the recent decision of major studios such as Sony and Warner Brothers to launch their own effects operations in-house. Dream Quest Images, a southern California company that won academy awards for The Abyss and Total Recall, was bought by the Walt Disney Company. Apogee and Robert Abel, which produced the groundbreaking Looker, have closed shop altogether.

In a modest, boxy industrial building in a working-class neighborhood of Van Nuys, Calif., Syd Dutton and his team of artists are reconstructing 16th-century Venice for the movie Honest Courtesan. On one wall hangs a "matte" (part oil painting, part computer graphics) of a Cardassian world from Star Trek: Deep Space Nine; on another a precise rendering of Albert Speer's grandiose vision for postwar Berlin, used for the television version of Robert Harris's Fatherland.

The idea of putting oil to canvas in this age of dazzling high-tech effects might seem anachronistic. But Dutton, an earnest and unpretentious man in his 50s, sees in the artistic roots of Illusion Arts Inc., his 15-person company, a critical niche that has made his business a key player in the evolving world of special effects. "A computer is not always the solution to a problem," observes Dutton, who cofounded Illusion Arts with partner Bill Taylor in 1985. "You don't get the range of feeling you get in oils -- or the happy accidents that lead to great images."

The success of Illusion Arts -- which this year expects revenues of about $3 million -- suggests one way that tiny companies can carve out niches in the special-effects business. By blending new technology with old-fashioned craftsmanship, Illusion Arts competes against better-established competitors without relying solely on computer technology. The company's images have appeared in movies like The Birdcage, Courage Under Fire, Glory, and A Walk in the Clouds. In 1995's Dragonheart, the high-powered digital effects came not just from George Lucas's studios in San Rafael, Calif., but also from Illusion Arts' far-less-storied digs in the San Fernando Valley.

"Everything is becoming an effects movie," says Dutton, standing in his dark, loftlike studio. "It can be simple things like taking off power lines in a shot that's supposed to be the 10th century. ILM is a big place. They don't want to do small movies or specialized shots. We can do it -- and like it."

Studios are increasingly turning to cybergnats for several reasons. For starters, many special-effects jobs in Hollywood are simply too small to justify bringing in one of the high-powered companies. Scott Ross, CEO of leading special-effects producer Digital Domain, not only acknowledges that logic but even recommends cybergnats to clients that have only three or four effects shots in a movie -- as opposed to, say, the roughly 150 used in Apollo 13, which were done by his company .

Cybergnats can also often turn specialized jobs around more quickly, a big lure to producers, who are under the gun to wrap a film on time. When Warner Brothers approached ILM to create the effects for the recent Arnold Schwarzenegger vehicle Eraser, ILM told the studio it would have to subcontract out some of the work because of previous commitments. So Warner Brothers hired visual-effects supervisor John Sullivan, who decided to use ILM for the most technologically sophisticated shots, but to go to smaller firms for the rest. For a mechanical crocodile, for example, Sullivan went to KNB, a cybergnat based in Chatsworth, Calif., that specializes in animatronics. Some animation and other shots were given out to Mass.Illusion, a company based in Lenox, Mass. And for the shots that called for matte painting, he turned to Illusion Arts. The original models for the dinosaurs in Jurassic Park and the gorillas in Congo came from the animatronics studio of Stan Winston, located just down the block from Illusion Arts.

In Hollywood, where egos rule and personal relationships determine business relationships, the cybergnats' friendlier and more easygoing personae are helping them win work over their more slick and corporate competitors. In some cases, the very success of the people at the helms of the larger companies can get in the way of a deal. Some producers, for example, admit being put off by the visionary arrogance of ILM's George Lucas, who often publicly dismisses the rest of the industry as five years behind his pace. Smaller companies typically also allow producers to exercise greater control over individual shots.

Cybergnats also save producers money. On Courage Under Fire, veteran effects supervisor Alan Munro needed to set up a group of tanks for an important shot -- but he didn't have tanks on the set. A larger special-effects company would have created the entire scene digitally -- for a cost of hundreds of thousands of dollars. But Munro turned to Illusion Arts, which took a more resourceful approach. The company built a model of a tank, photographed it, and then, using the computer, cloned it. Next, employing an old effects technique, Munro cut and pasted the model tanks into the shot. "What you got was a mixture of painted elements, live action, and computer elements," Munro says. "Its a combination of illusions that's very convincing." And a lot cheaper, too: costs came in under $50,000.

Technology trends favor the cybergnats. The accelerating power of smaller, more affordable, and easier-to-use machines has enabled tiny special-effects companies to match some of the big guns' digital effects. A decade ago, notes former ILM president Tom Smith, now an independent producer, it took a Cray supercomputer to do The Last Starfighter; today that same work could be performed on a high-end Mac or PC. "The days when you needed an $800,000 optical printer to compete with ILM are over," he says.

Smith's latest film, The Arrival, includes a number of effects developed on the cheap, relatively speaking, by a cybergnat called Available Light Ltd. Founded in Burbank in 1983 by John Van Vliet and his partner, Katherine Kean, Available Light now comprises 12 employees armed only with Macs and PCs. Available Light specializes in supernatural effects like ghosts and lightning, rather than giving across-the-board service. That specialization, along with the low staff overhead and low-powered equipment, allows Available Light to save its clients money. The company's work on the upcoming Tales from the Crypt Presents Bordello of Blood cost $350,000 for 30 shots -- about one-fourth of what a better-known house would have charged.

Or take Hammerhead Productions, the cybergnat that won the Showgirls work. Hammerhead was founded by four partners who started with nothing but their personal savings -- and a wealth of experience. At Apogee and later at Pacific Data Images, Dan Chuba had worked on more than 30 feature films, including True Lies, Cliffhanger, and Die Hard II: Die Harder. Partner Jamie Dixon had worked with top directors such as Jim Cameron, Barry Levinson, and John Landis, while partner Rebecca Marie had served as Oliver Stone's visual-effects supervisor on Nixon and Natural Born Killers. A fourth partner, software maven Thad Beier, has remained in Silicon Valley, producing much of the company's high-end effects software.

Chuba and his partners' goal is to keep operating expenses, including salaries, under $5,000 a week -- a good day's lunch bill at the big studios. To meet that goal, they continue to lease their computers -- Silicon Graphic Indys and Indigo 2s -- for $2,500 a month. Instead of hiring high-priced talent, they hire freelance animators for about $2,000 a week on an as-needed basis. "It's a good thing we're all cheap bastards," growls Chuba.

That cheapness has enabled Chuba and his partners to begin production of Shadowbuilder, a full-length feature film, in partnership with independent producer Imperial Entertainment. Hammerhead partner Dixon will direct the film. The deal is simple: Imperial puts up most of the cash, and Hammerhead does the special effects. Imperial thinks it's getting a good deal. "We're getting the ILM or Digital Domain look at a tenth of the cost," observes Ash Shah, Imperial's executive vice-president.

Hammerhead's second film is also in development -- a more elaborate project called Supernova, written by Chuba and to be produced by United Artists. If Chuba and company can keep it up, then Hammerhead may well become the first of the special-effects companies to jump into the big leagues of Hollywood production houses.

That's a morph that Hammerhead's larger special-effects competitors might well envy.

* * *

Joel Kotkin (jkotkin@earthlink.net) is a Los AngelesÑbased John M. Olin Fellow with the Pepperdine Institute for Public Policy and a senior fellow with the Pacific Research Institute.