May 30, 2022 – On today’s show we talk about visual effects and movies with DNEG Chairman and CEO Namit Malhotra. DNEG is a high-growth, technology-enabled visual effects and animation company executing ground-breaking, award-winning work for the world’s largest content creators.
On the show, Namit discusses:
- How he got involved in the movie business
- The barriers to entry for blockbuster movies effects companies
- How DNEG won 7 Oscars for visual effects in movies
- DNEG as the only pure-play publicly-traded visual effects and animation company
- And more
Welcome investors to The Absolute Return Podcast. Your source for stock market analysis, global macro musings and hedge fund investment strategies, your hosts, Julian Klymochko, and Michael Kesslering aim to bring you the knowledge and analysis you need to become a more intelligent and wealthier investor. This episode is brought to you by Accelerate Financial Technologies. Accelerate because performance matters. Find out more at accelerateshares.com.
Julian Klymochko:
So I’m excited to speak about visual effects movies. And my favorite movie over the past year was Dune, a spectacular film, especially the stunning visual effects and Namit, I’m sure we can get into the details on that one specifically. Prior to getting into that, you are third generation in a filmmaking family. What drew you to the family business and what caught your interest?
Namit Malhotra, DNEG Chairman and CEO:
So interestingly, you know, while I’m third generation within the industry, it wasn’t a family business because my grandfather was a cinematographer who was, you know, uh, you know, he, it wasn’t of business that he ran. He used to work as cinemograph that shot the first colorful film in India in the fifties. And then my father produced Bollywood films, which he then stopped, uh, making in the late eighties, after having made a big blockbuster, uh, back in the day, he decided to move away from it. And I kind of grew up in the hope of trying to take after them in wanting to be a firm director. So by no means, was this a business that was running or any of that? It was, you know, sort of just an aspirational connect that we had with the industry and, uh, you know, much like any, because I was literally 18 when I had that chat with my father about my future.
And I expressed him, I want to be a film director. He kind of guided me towards saying, you know, film business has always been a bit volatile. And while, uh, you know, the opportunity in the film business will always be ever great, wanted to build something more substantial, more structured, and then you can always go back to doing it. And that sounded like sensible advice, and, uh, made sense to me. And I was like, okay, let’s do something different. So I set up this little computer graphic shop in the garage with the three guys who taught me computer graphics. And, uh, we, I was all of 18, 19 and they were 21, just came together as a band of four. And, uh, got started, uh, in my father’s car garage in Mumbai. And, uh, and here we are, you know, many years later still fighting on.
Julian Klymochko:
That’s quite the journey. And I’m sure you’re no longer four in a garage in Mumbai, just given the repertoire of movies that you’ve been involved in. I’d be curious to know, like how significantly have things changed on the visual effects side since you first entered the business. Like it, it must be just, you know, a, a massive change.
Namit Malhotra, DNEG Chairman and CEO:
Yeah. I think, you know, it was fair to say that I was inspired like many others in my generation, you know, when we all saw Jurassic Park in 1993 and it was like, wow, how did they even dream of this? Forget about the fact that they pulled it off and it looked fantastic. So that was a massive inspiration to me back in the day. And then you learn more about the technology of when you realize there’s not much possible computers back in the day. There was, you know, they had to still rely on physical, uh, you know, capabilities of these, uh, you know, robotic, uh, you know, and prosthetics and a lot of, uh, other forms of visual effects and using computer graphics was a new thing. And the technology was extremely limiting versus where we are today, where, you know, our line to our clients is that if you can dream it, we can do it like whatever you can think about now, we can pretty much do. And that is a pretty significant transformation from where I kind of remember the very first phase of how these things were done to where we are at today.
Julian Klymochko:
And how did you make that transition going from garage based four person startup in India to now winning the mandates to produce visual effects for some of the largest blockbuster films in the world?
Namit Malhotra, DNEG Chairman and CEO:
Yeah. You know, when you put it like that, it does sound very cool.
Julian Klymochko:
Very cool
Namit Malhotra, DNEG Chairman and CEO:
To be honest, uh, you know, it’s been such an organic process for us, you know, because we, I used to always say this, uh, people all along. I said, you know, we started very early and hence, you know, we dealt with a lot of problems and a lot of challenges very early. And, uh, I think fortunately we were able to, you know, sort of accomplish or, you know, jump over these obstacles or challenges, whether they were financial, technological, uh, geographical, whatever it was, we were able to sort of transcend those, uh, challenges pretty effectively. But there were no short cuts basically we were constantly building and I still feel like we’re building 27 years later, you know, it’s been, uh, one hell of a ride. And, you know, it’s been literally starting at the, at the ground floor of the building and then building up the best you can be in that.
And then going to the next one to the next one. So we did that in television post production. We did that in, in commercials. Then we provided services for, uh, movies. Then we launched our visual effects capability. So it was a very organic process, as I explained. And, uh, it just sort of, as the industry grew as a technology and the adoption of technology grew, we kind of were, uh, I think either ahead of the curve or just try the right place the right time to really make sure that we made that leap to keep ourselves relevant and to keep ourselves moving on. And, uh, that’s sort of been the journey that we’ve been on and that’s why it’s a pretty cool thing to be able to see that journey and that transformation, you know, within where we started in what kind of work we did back in the day. And, you know, to be honest, yeah. You know, I’m, I’m super excited when we see great films come to life, you know, we take tremendous pride and I’m also equally excited, like the audiences are, about what is being produced today. It’s pretty spectacular.
Julian Klymochko:
And speaking of great films, you’ve picked up a significant number of accolades along the way. I believe at last tally was seven Oscars that DNEG has won. I was wondering with respect to these awards, which movies were these for and what specifically, uh, allowed or made DNEG the choice to win these awards.
Namit Malhotra, DNEG Chairman and CEO:
So I think the very first Oscar that DNEG won was for Christopher Nolan’s Inception.
Julian Klymochko:
Oh, right. That was unreal.
Namit Malhotra, DNEG Chairman and CEO:
You know, which was, uh, again, masterpiece, you know, from the director and obviously the visual effects were so far ahead of its time it was, uh, absolutely, you know, so fresh and so different to what people were generally seeing. And then the second one was again for Christopher Nolan, for Interstellar. And, uh, and then after that it was Ex Machina then, uh, then I think came Blade Runner. And then First Man, And then, uh, and then Dune.
Julian Klymochko:
Yeah. And I believe I’ve seen all of those movies and, you know, you can’t find it…
Namit Malhotra, DNEG Chairman and CEO:
Sorry, Tenet. Tenet came…
Julian Klymochko:
Tenet, right. Yeah. Yeah. All blockbusters and, uh, exceptionally films with, uh, just amazing special effects. Now with respect to creating these, like audiences such as myself. We literally have, have no idea the time and effort and process that goes into it. So could you quickly walk us through, you know, what’s the timeline, how many people required, what’s the sort of work involved in generating these amazing special effects in these movies?
Namit Malhotra, DNEG Chairman and CEO:
So, you know, we do have in all of the big, uh, in all the names we mention Ex Machina was probably one of the smallest visual effects, budget movies we probably worked on, that caught us an Oscar as well. And that really speaks to the underlying thesis of what we really, I think at DNEG we really have a very strong DNA of which is we work in service of the story and to the vision of the director that’s at the core of what we do. And that is where I think our success at the Oscars has been much more effective than most of our competitors or other companies out there. Uh, everybody does great work, but, you know, it’s, it’s, uh, it’s the fact that our work tends to be so naturally integrated into the structure of how a film is being directed or being shown to the audience where you don’t really look at the visual effects separately.
You’re not just getting wild moments that are, that just aren’t really woven into the core fabric of the, of the vision of the filmmaker or of the story. And that’s where all these films that I just mentioned really will have that one sort of common commonality amongst them. Uh, the process certainly involves with, you know, a lot of these very highly accomplished filmmakers who come to us expecting to do something that, you know, typically the brief this time we want to do something that we haven’t seen before. So that’s always at the heart of what you’re trying to do. Otherwise, why bother, you know, a lot of these filmmakers have that natural aspiration and their own interest in really pushing the boundaries of storytelling.
So that’s always the starting point. And then you get handed down a, a script, a treatment, or a, you know, vision of what the filmmaker has, which we then circulate with the right creative leaders within the company. They then work in collaboration with the filmmakers and other heads of department, whether it’s a cinematographer, to really come up with the right methodology or the right technique on how we would achieve, what’s been put out there. And that then creates, you know, a whole sequence of events from planning the right from designing the, the visual effects all the way to how we plan to work on the filming of those pieces or shoot components that have to be captured, uh, on location and then take it all the way to the finish. And then that’s something that we do, uh, from a, literally from the start to the end. And that’s, uh, you know, the way our engagement really plays out and, uh, has proven to be incredibly successful because as a company or as a business, we’ve actually tried to insist that that be, uh, a way in which we like to work, uh, as a preference relative, relative to a lot of our competitors. And that is where I think we’ve seen the maximum success.
Michael Kesslering:
And so how does monetization work for you as a company, as you mentioned before, the differing levels of budgets for different films. So, you know, Ex Machina having a lower budget versus, um, Dune do the content creators pay a licensing fee per project, or is it more of a subscription? How, how, how does this monetization aspect work?
Namit Malhotra, DNEG Chairman and CEO:
Yeah, so I think the monetization works on a, you know, like frankly it’s a very straightforward contract for this scope that gets defined by us. We get, when I mentioned that we get handed over a script or a vision, we then start to break it down into its logical end outcomes of what we call a shots or clips that basically make it into the film or episodic TV or whatever it may be, and that gets costed based on certain assumptions. So we go to the, from the choice of methodology, to the assumption, so that it’s clear to everyone what it is that we are going to actually do once we’ve received the brief, and then what that costing looks like. And then once that scope is agreed in conjunction with the budget, then we get a contract for it. And we get paid based on the milestones of work that gets performed.
Julian Klymochko:
Now, aside…
Namit Malhotra, DNEG Chairman and CEO:
A services contact.
Julian Klymochko:
That makes a lot of sense. Now, aside from working on other stories, DNEG’s story has a big event happening, which is its merger with the SPAC Sports Ventures Acquisition to become a publicly traded company. Specifically, the only pure play publicly traded visual effects and animation company, which I suppose is exciting for investors, but what are the sum, what are some of the reasons why investors should pay attention to DNEG and be excited about the stock?
Namit Malhotra, DNEG Chairman and CEO:
I think, you know, the, the fundamental macro environment for what we do has never been better, but I can say that to you without, you know, doubt that in my 27 year career, which is really at the start of when visual effects and animation started to really take, uh, take off, you’ve never had this sort of momentum in the industry, whether it’s in where I started in India or in America and that, or the rest to the world for that matter, because the need for that high quality content has become really the name of the game. And that is, is creating significant tailwinds for us as a, as an industry and specifically for us as a company. And that I think with our creative credentials, industry-beating margin profile, globally diversified talent pool, and a macro environment that is sort of growing at pretty significant clip, I think should become attractive to any investor that’s looking to, you know, sort of play in a new evolving, uh, sub sector of the media entertainment space and the technology space. Because we transcend both those pretty effectively. At the core of what we do is technology enabled or it sort of serves up this massive demand that’s playing out of the content space.
Julian Klymochko:
These macro tailwinds specifically, are these related to more and more blockbuster movies, higher budget, the theater type movies. Are they more so related to streaming and a lot of the big, big movies that are going straight to Netflix, Disney and all these other streaming services? Or is it a combination of both of those?
Namit Malhotra, DNEG Chairman and CEO:
Yeah. See, see, the thing is that, you know, for us, we are in the content business. We don’t really care what screen it goes. All we know is that on the back of whether the big movies do really big business in the cinemas or as a consequence of them doing a lot of business on the cinemas, all these big movies also make their way onto television sets and onto streaming platforms. So ultimately content is being consumed regardless of what screen you put it on. So as far as we are concerned we’re screen agnostic, it does, it doesn’t really matter to us. What matters is that what they, what the industry and what the audiences have said globally is that they want to see content that’s a little bit more exciting level with the imagination and the storytelling is much more, let’s say upper, you know, above and beyond what you would otherwise get. Let’s say pigeonholed, if you are telling the story of, uh, you know, that’s relevant in a particular country or in a, in a particular culture versus making these spectacles that are actually the ones that travel across the world across billions of people and get consumed across the world. And that is where, you know, our participation plays and that’s really what any of the streaming companies or the studios will unanimously agree that that’s the most effective or the most successful content. And that’s where DNEG’s really, uh, tier one participant or, or partner with these content creators. And that’s why the opportunity comes from the success that’s happening across all these platforms. Pretty simultaneously.
Julian Klymochko:
One tailwind that I think of, you mentioned these platforms, specifically the streaming platforms and there’s this huge battle for content where you have Netflix, Amazon, Apple, um, you know, a few others yeah. Disney+. Yeah. They’re all literally spending billions of dollars per year producing content, which I’m sure is great for DNEG. Now you mentioned tier one content producers and certainly DNEG has fostered long-term creative relationships with these studios. Can you describe a how important that is and how that can lead to these recurring revenue streams in the future?
Namit Malhotra, DNEG Chairman and CEO:
Yeah, so, you know, because we go back over two decades of really delivering high quality work to all the big studios to start with and have done well with their filmmakers and the franchises that they created that have continued to be very dependable and big box office successes. That obviously sits as a core, let’s say, credibility check box that we already have. And then this tailwind of streaming that’s become much more global and much more specific where, you know, today because of streaming like movie theater business, where, you know, how many tickets you sold in particular market, streaming, you know, can sort of very quickly come back with very accurate data that how many millions of people in the world played the film or TV show and for how, what duration did they see the whole thing? Did they see it once? Did they see it 10 times?
Namit Malhotra, DNEG Chairman and CEO:
There’s a lot of, you know, analytics and a lot of data that’s available that gives everybody the confidence to continue to invest in that paradigm. The other piece of the puzzle is that because the audiences have basically become global, um, each of these streamers are now not licensing content from each other because that would’ve been more expensive for them. Right. So, you know, if you see, if you remember the early days of Netflix, it had content from all the big studios there, because that’s where you found on the streaming platform everybody’s content was available on, on the Netflix platform. Today, Netflix is looking to create more and more of their own content. And so is Apple or Amazon or HBO Max or Disney, and they’re all creating their own and taking their underlying IP and really, you know, making those, uh, uh, their, you know, for their clients and for their ultimate consumers who are consuming that content and the overarching data that I think supports all of this is that there is a lot of demand for it.
So it doesn’t matter how much content is going there, anything that’s high quality and anything that’s of a certain, you know, sort of a real experiential, uh, you know, sort of level is being consumed massively. Like, you know, there was a data point. I just read that, uh, on the opening day or on the opening weekend of The Batman releasing on HBO Max, it had as many people streaming it as there were as many people seeing it in theater, even though they came at two separate times, there is, there is a lot of, so that saying to the content creators that, Hey, there’s a marketplace there, these consumers who are technically buying it or they consuming it. So that should only give them more conviction to really create more of those types of projects that ultimately, you know, the, the consumers want to consume.
Julian Klymochko:
And anyone with any of the streaming platforms can see that massive deluge of content. And a lot of it very, very high end now with respect to DNEG’s competitive mode, I assume that high end visual effects is a very tough business to break into because you need this incredible amount of specialization and resources. So, I assume that industry’s quite limited in terms of providers and competitors, but could you describe to us quickly how the competitive environment looks and if you feel that DNEG has a moat or competitive advantage within this industry?
Namit Malhotra, DNEG Chairman and CEO:
So there are a couple of components. And as I mentioned, right at the start, it’s a technology and a talent business. So technology is something that has been created over the last two and a half decades of just the company getting from the very early days of computer graphics to being able to create really bespoke and high quality specialization in what we create. And that’s not stuff that’s available off the shelf because a technological limitation that companies, anybody who’s in the visual effects world recognizes or acknowledges, because they know that they’re not going to just get water, destruction, creatures coming out of some software at the press of a button. There’s a lot of fine tuning and a lot of, you know, lot of science, a lot of, uh, you know, capability or technology R and D that goes into any of these projects. That’s one aspect of it.
The other is how many people actually are qualified and trained enough to be able to use that technology and deliver those experiences. That’s again, a limitation on high end experienced talent. And the competitive dynamic is that there are lots of companies that have all started very early on that have their own limitations and either the amount of money they could invest in technology or the number of locations they could have in the world to service or use the, uh, demand out there. And I think that’s where DNEG has really transitioned itself from not just having some of the most sophisticated tools and technology capabilities, but also this global diversified talent pool that is second to none in whatever market we play, whether it’s in the UK, in Canada, in India and North America overall, I think we’ve continued to harness and harvest the best talent and, and tools to ensure that we can continue delivering those high quality experiences.
And, and that the more you, you do the better you become. And that’s sort of what becomes, uh, you know, a big differentiator to the other companies who are still trying to figure out how they can deliver some of those, uh, very complex pieces of work and whether they can even deliver it for the amount of capacity they have. And that’s something that DNEG has been, uh, you know, a very reliable and a strong partner with all the content creators. They call us because we know that we’ve got the tools, the talent and the, uh, production capacity to actually deliver these what I call gigantic, uh, you know, experiences on time, on budget, on spec. And that’s not, that’s easy said than done. So that’s really how we’ve tried to build ourselves up over the last few years.
Julian Klymochko:
And you’ve built those experiences over the past 27 years since laying out your shingle in the visual effects business. And I assume things have changed massively, obviously. How do you expect things to change over the next decade? What do you think come out that we haven’t seen? The edit seems like the visual effects are so good these days that you can’t tell what’s real. And what’s not.
Namit Malhotra, DNEG Chairman and CEO:
To be honest. Some of that we were already there. You know, we also got a nomination on James Bond and, you know, we had both the films in the running, the first James Bond movie to get an Academy Award nomination for visual effects in maybe 40, 50 years was led by DNEG as well this year. So to me, I saw the, I saw some of the visual effects in James Bond and I was personally shocked by the quality. Like I had to see the, I saw the film before I saw the work and I went and asked my team, like, did we actually do that? Well, how did they shoot that and turned out that we actually had done the CGI on it. And it was completely better than what they could have shot to be, to be perfectly honest. So that’s already kind of already there, I think where the real opportunity comes and I feel that’s the real, you know, pivot in our industry, is that the metaverse is around the corner.
And while we talk about the evolution of content for streamers and movie screens and all of that stuff, while all that is happening, isn’t equal the web 3.0 revolution of saying social media is now going to be social engagement. How do you do that in a digital world? Where can we all of us, you know, while we do this over, you know, digital, you know, visual, visually connected, uh, you know, technology, could we have done this in the metaverse where all of us technically could be in the same room where our avatars could be having the same conversation, looking out the window and I can see, and what I, what I can see and where you are, what you can see where I’m at, could all be the same. And that could all be a function of how visual effects can be leveraged to create those experiences in the metaverse that start to create that new reality.
And that to me is a very, it’s a much bigger business. It’s a much bigger use case because now you can just imagine everything that’s happening in the physical world. If you’re able to do that in the virtual world with a level of absolute believable reality, you know, now we’ve just taken that to the next level up and that I believe in the next five to ten years is a very key thing because that underlying tech, the underlying hardware software speed of the internet is all sort of ramping up to be able to do that. And that’s why I feel incredibly confident that that’s, uh, that’s a pretty interesting, uh, you know, sort of opportunity that’s coming around the bend and that’s going to be, and the film business is going to look like, uh, a trailer or a, or, or a set of examples, to what the metaverse can become.
Michael Kesslering:
That’s really interesting with, when you talk about the metaverses, it’s really a kind of combination of different elements of movie making, gaming, social media, all, all combining into one. Um, one, one question that I had was that I was reading that you’ve been using the Unreal Engine, um, to create content for animation and live projects. So how exactly does the Unreal Engine differ from some of your technology and, and how can it be used in, in tandem for, for content creation?
Namit Malhotra, DNEG Chairman and CEO:
So the game engines basically are designed to create real time interactivity. Because that’s what you see in a game. The moment you’ve got these characters that you control or whatever, it’s that you’re doing, the moment you, you know, play with those controls, it gives you real time feedback. So the Unreal Engine acts as a very strong foundation or a base on which we can mount all our tools, all our bespoke technology tools and start to use real time technologies to create the same capabilities that we have in movies or in TV shows or animation, to be able to do that at a quicker pace. Because that’s something that’s also becoming critical. As we look at the demand out there, we can’t just service of the demand by adding headcount. We got to use technology to act while we can’t compromise quality. We also need, you know, that being of a certain quality and scale, that being said, the gaming companies in general, if you see from a qualitative standpoint, don’t necessarily measure up to the quality of work we produce, let’s say on the big screen.
So this is a perfect culmination of our technology tools of certain quality at a certain skill level. That’s now leveraging the real time interactivity of game engine fused together and create outcomes that are now not just now going to be using movies and animation, but also potentially taking that now capability to the game engine or to the games. And then applying that into the metaverse. So this new transformation is, is what I believe for us. Uh, you know, again, the new foundation on which we can now drive greater efficiencies, but also open up new markets and new opportunities, whether it’s in gaming or the metaverse, because now our tools and our high end capabilities can now go across a wider, uh, you know, opportunity.
Julian Klymochko:
Maybe the biggest opportunity set in the next 10 years or the biggest change will be a metaverse that these virtual worlds that you can’t tell from real life they’re just so exceptional looking and functional, uh, with respect to the technology, especially when you combine it with these gaming engines. Now, prior to letting you go today, and I thank you for giving us a great primer on the visual effect and movie business I had a fun question for you. What’s your favorite movie and why?
Namit Malhotra, DNEG Chairman and CEO:
Well, that’s a great question. So my favorite movie of all time is Forrest Gump.
Julian Klymochko:
Okay. <laugh>
Namit Malhotra, DNEG Chairman and CEO:
And, uh, it sort of speaks to my, you know, growing up, uh, in Bollywood and then as I’ve sort of, as I grew up as a kid and saw a lot of Bollywood movies, saw a lot of Hollywood as well, and then it sort of the culmination of what I call is the perfect story. When it’s a journey of this one character who basically experiences life across from when he’s a little child all the way, you know, when he grows up and has his own child, and there’s a certain beautiful arc of a story, and it has actually been able to weave that very beautiful story, very, you know, that touches upon all kinds of human emotion, but delivered with such high quality, uh, or such unbelievable visual and audio capabilities. Because if you, you go back and check, it got the best visual effects Oscar as it did for the best, uh, audio on the best, uh, background score as well. That to me was like, okay, that’s a, it’s a great way to summarize, you know, where you see, uh, that sort of, uh, excellence across all paradigms of storytelling, really hitting together. And that to me was a, and continues to be one of my favorite, uh, films of all time.
Julian Klymochko:
Well, there you go Forest Gump, not necessarily the Dune or the James Bond that I was expecting, but, uh, I love those movies too well. Namit thank you for coming on the show today and your merger with Sports Ventures Acquisition in the next, you guys have a ticker symbol for the company, once it is, uh, the merger is done and it’s up in trading.
Namit Malhotra, DNEG Chairman and CEO:
Sure. We know we we’ll, we’ll be able to announce that soon enough we’re in the process of, uh, getting all of that, uh, validated with the stock exchanges and everything.
Julian Klymochko:
Okay. Well, we look forward to that and we wish you the best of luck in both the market and the big screen, I’m looking forward to some of the new releases that you guys are working on, which I’m sure there are many. So thank you so much.
Namit Malhotra, DNEG Chairman and CEO:
Thank you. Thank you all. It’s been the pleasure talking to you.
Julian Klymochko:
All right. Bye Namit.
Namit Malhotra, DNEG Chairman and CEO:
Bye.
Thanks for tuning in to the Absolute Return Podcast. This episode was brought to you by Accelerate Financial Technologies. Accelerate, because performance matters. Find out more at www.AccelerateShares.com. The views expressed in this podcast to the personal views of the participants and do not reflect the views of Accelerate. No aspect of this podcast constitutes investment legal or tax advice. Opinions expressed in this podcast should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment strategies. The information and opinions in this podcast are based on current market conditions and may fluctuate and change in the future. No representation or warranty expressed or implied is made on behalf of Accelerate as to the accuracy or completeness of the information contained in this podcast. Accelerate does not accept any liability for any direct indirect or consequential loss or damage suffered by any person as a result relying on all or any part of this podcast and any liability is expressly disclaimed.
