Digital Domain: The Fall of a Movie Empire

"What the fuck is up, Coachella?"

In the dark California desert, a rapper who had been dead for 15 years shouted to tens of thousands of fans. Snoop Dogg and Dr. Dre flanked the stage, but the projected likeness of Tupac Shakur was the main attraction at the 2012 Coachella Valley Art and Music Festival. Everyone knew this image of Tupac wasn't real. But sometimes, people want to believe.

The resurrected West Coast legend belted out "Hail Mary" and a reunion duet with Snoop of "2 of Amerikaz Most Wanted" as he paced across the stage. A crucifix pendant glinted and swung over his glowing, tattooed torso.


Digital Domain

"Hey yo, Pac. Let these motherfuckers know what kind of party they in right now," said Snoop.

"Ain't nothin but a gangsta party," sang Tupac.

It was a viral-marketing gold mine. Every smartphone within sight recorded the performance, and within minutes it was coursing around the web under headlines like "Rapper's De-Light: Tupac Hologram May Go on Tour" and "Tupac Hologram: The Future of Live Entertainment Is Dead." This newspaper's own music blog declared a few days later that the show had "crossed a new boundary in culture."

Despite the hype, this kind of special effect had been done before. It technically wasn't a hologram, but a two-dimensional video projected onto an invisible screen in an illusion called "Pepper's Ghost" that's been around since the 16th Century. But it was arguably the first time the technique had been combined with computer animation to simulate an actual person.

It was also a moment in the spotlight for one of the most important companies in the digital video effects business. That company, Digital Domain, had cooked up some of the greatest technical marvels in recent film history, notably the special effects for Titanic and the reverse-aging face of Brad Pitt in The Curious Case of Benjamin Button. Digital Domain, in collaboration with other effects companies, produced Tupac's computer-generated face for the "hologram," an idea that had been conceived by rapper Dr. Dre. In the days following the fake Tupac's debut, rumors spread that it might go on tour.

"There's certainly been a lot of talk on that; that's entirely up to Dr. Dre," said John Textor, the soft-spoken 46-year-old chairman of Digital Domain. He sat at a rakish angle, with a silver tie and combed-back hair, during an interview with CNBC.

Textor, a venture capitalist from South Florida, grew up in Palm Beach County. His business background included finance jobs, involvement in the snowboarding company Sims, and several hits and misses during the dot-com boom. He had little film industry experience except that he'd gone to college with Michael Bay, who'd gone on to direct Transformers and Armageddon. In 2006, Textor, along with Bay and other investors, including Dan Marino, purchased Digital Domain.

At the time of the purchase, Digital Domain was a California special-effects shop that did contract work for film studios. But by 2012, Textor had developed grandiose plans to move parts of Digital Domain to Florida and expand it here, making it a major player in the film industry — essentially, a Hollywood East. By the time Coachella rolled around, Textor had secured more than $130 million of government money to build two landmark projects in the Sunshine State: a film and visual-effects school called the Digital Domain Institute and a state-of-the-art film studio in Port St. Lucie.

Everyone wanted a part of the dream: City governments threw money at him, investors worldwide backed the company, and bright-eyed students believed they could have careers in film despite the industry's dismal economics.

But before the school was filled or a single feature film made it out the door, Digital Domain folded, and Textor turned from a savior to a villain in a blink of the public's eye. Digital Domain's heavily hyped future turned out to be as much a mirage as Tupac stomping around the stage at Coachella. Its downfall can really be traced to Textor, a man who has a way of stoking big dreams in politicians, moviemakers, and the public. His rise and fall says much about the get-rich-quick culture that rules Florida politics — and our own myopia about what it means to establish a lasting economy in America's southernmost swamp.

Scott Ross, a communications student from New York, headed out to California in the '70s to pursue a career in film and television. He was a sound mixer, engineer, and cameraman and ran his own video postproduction company. After selling the company in 1993, he was recruited by George Lucas to run Industrial Light and Magic (ILM), the groundbreaking effects shop behind Lucas's Star Wars trilogy. ILM continued to be the premier effects shop of the decade, and Ross ended up as senior vice president of several divisions of LucasFilm. One of Ross's clients at ILM was the up-and-coming director James Cameron, who had a huge hit with the Terminator films.

In the early '90s, Ross struck out on his own, founding a scrappy upstart shop called Digital Domain. He got a call from Cameron, who wanted to be his partner in the new venture. Cameron wanted a shop he could rely on for an effects-heavy film he was working on about the sinking of the Titanic. Ross says he needed a big-name backer, so he let Cameron have a piece of the company for free.

Ross's partnership with Cameron attracted big-name investors such as IBM, but that didn't solve all of his problems. "It was a tough business then, and it's even tougher now," Ross says. Effects began to eat up bigger portions of film budgets, and studios fought to keep costs as low as possible.

The economics can be brutal. Typically, large film studios subcontract the special-effects "service work" to small shops, which are forced to underbid one another for the jobs. Industry veterans say contracts often stipulate that if a studio doesn't like the work, it has to be redone at no additional charge.

"The producers would just use these companies like Kleenex," says Rob Legato, a world-class special-effects designer who worked at Digital Domain during its early days and now runs a one-man effects shop out of his basement. "It's a very low-profit-margin business."

When a multiyear job on a feature film is over, months might pass before a studio gets another big project. Today, the business has been upended by lower labor costs overseas and cities that offer huge tax breaks for film companies. Nowadays, incentives determine who gets the work and where they do it.

There's one exception: companies like Pixar, which transitioned in the '90s into a full-fledged production studio that produces entire films, not just effects-driven scenes. Ross thought mimicking that reinvention was the only chance for survival. "My vision and hope was to make a company that was similar to Pixar... to become a content owner."

Ross says that he and Cameron had disagreed and that Digital Domain was essentially driven into the ground doing overtime work on Titanic. (Cameron's office did not respond to an emailed request for comment.)

Never mind the film's record-setting box office gross of $1.84 billion. Digital Domain "cost $7 million to $9 million just on that film," Ross told Forbes in 2005. "The ship sank in the movie — and Digital Domain almost sank with it."

In 2006, John Textor showed up in California as a potential investor in the flagging company and offered to buy out the owners, including IBM, Cox Enterprises, Cameron, and Ross. Textor was joined by Bay, Marino, and a few other partners.

Textor's name sounded familiar to Ross. Years before the acquisition, Digital Domain had been asked to produce an animated logo for Sims, Textor's snowboard company. Ross says Sims left Digital Domain with an unpaid bill that couldn't be collected.

"That was the first time I heard of John Textor, when we couldn't get payment on the work that we had done," Ross says. "Years later, that same fellow shows up to acquire the company."

Textor is a distant relative of the wealthy DuPont family but has said that after his parents divorced, his mother worked three jobs to support the family. He went to high school in West Palm Beach, where he played soccer and skateboarded. After college at Wesleyan, he worked a series of management jobs. In 1997, in the early days of the dot-com boom, he assembled investors to buy a website that offered link recommendations to visitors.

"The guy is a fucking genius," says Michael Koretzky, who worked until 2001 as a content editor at another of Textor's online businesses, Jester.com. From Jester's office in downtown West Palm Beach, Textor imagined a website as a virtual hangout for teenagers into snowboarding, skateboarding, videogames, and music. Users could click around 3-D, interactive "rooms" on the site, spending hours online. It was a precursor to successful immersive online experiences like Second Life — only a decade too early.

Koretzky remembers Textor as a skateboarder turned cool-guy entrepreneur. He'd toss out new ideas every day at the office, which had a foosball table and a refrigerator stocked with Mountain Dew.

Also in the late '90s, Textor teamed up with Bay, Marino, and former Microsoft executive Carl Stork to form an investment group called Wyndcrest Partners. Together, they assembled a minority ownership of Sims Skateboards. Textor reorganized the company and became chairman of the board in May 1999.

That same year, Wyndcrest invested $1 million for a 10 percent stake in BabyUniverse, an online retailer selling toys and supplies for babies and toddlers. A year later, the dot-com bubble was bursting and the company's investors bailed. Textor and his partners were able to take over 90 percent of the company for another hundred grand. "Nobody wanted to put money into an e-commerce company in the fall of 2000 — except us," Textor defiantly told the South Florida Business Journal.

But in the early '00s, Textor's business ventures took turns for the worse.

"The problem was, in 2000, most of our users had dialup. So you weren't moving very fast," Koretzky says. Jester "was a great idea, but he wasn't really practical about its execution." One day, employees showed up to find the office doors locked.

Sims, too, was in trouble. The world-famous company, founded by Santa Barbara boarding legend Tom Sims, was no longer the star of the industry. In the early '00s, Textor and his partners moved in for a controlling stake, brought in new investors, and completely reorganized the company. But shipments of new products for the 2002 season were late, and the company stumbled when a supplier shut down its factory.

In an interview with Transworld Skateboarding magazine about the problems, Textor boldly noted, "I'm the only investor who is willing to put in more money. "

Carl Domino, who was then a West Palm Beach investment advisor, had invested $50,000 in Sims.

"Textor said the company was really doing well but they had an inventory buildup and just needed some money to get through the season," Domino recalls. "The guy could answer every question. He's got a real silver tongue."

Domino says he asked for his money back, and Textor suddenly cut off contact with him. Domino figured the money was lost and he'd never hear from Textor again. But years later, when Domino had won office as a state legislator and was working in Tallahassee, Textor's name popped up.

Ross says that when Wyndcrest Partners took over Digital Domain, it brought in old executives from Industrial Light and Magic — adding a corporate vibe to what had been a scrappy upstart. "It was kind of like bringing A-Rod and Jeter into Fenway Park," Ross recalls. Ross left the company shortly thereafter.

In Florida around 2006, Textor started another branch of Wyndcrest. He would eventually use the new Florida company to absorb the California company. "He's allowing himself about $8.5 million in compensation for his own shares," according to a lawsuit later filed by onetime partner Carl Stork, the former Microsoft exec.

Florida also offered incentives to studios for film production, plus cheaper labor and lower taxes than California. And the Sunshine State was chock full of officials whom Textor could persuade to pour millions of dollars into his new Florida-based company, which would eventually take on the name Digital Domain Media Group.

These successes might have been a welcome distraction from the fact that the IRS filed a lien against Textor in 2008 for $7.8 million in unpaid personal taxes. The next year, he satisfied the lien but ran into more trouble: BabyUniverse went into Chapter 11 bankruptcy.

Bay's Transformers, with effects by Digital Domain, came out in 2007. The California company got to show off with The Curious Case of Benjamin Button, in which the reverse-aging head of actor Brad Pitt, from ages 87 to 63, was completely computer-generated. Benjamin Button won the Digital Domain team the 2009 Academy Award for digital effects.

In July of 2009, the Florida arm of Wyndcrest announced plans for a digital production studio in Port St. Lucie, about two hours north of Miami, promising hundreds of local jobs. Wyndcrest had been in talks with St. Lucie County officials, and a multimillion-dollar land deed for a new facility was in the works. In September, Textor announced a partnership with Florida State University to build a film school in South Florida that would work closely with the new studio.

In the state capitol in Tallahassee, Carl Domino (R-Jupiter) shared a suite with Kevin Ambler, a Republican from Tampa. "We're used to people coming in and visiting," Domino says. "But all of a sudden, near the end of the 2009 legislative session, I saw Textor in there."

Textor had already applied for a state grant the normal way, through a quasi-public agency called Enterprise Florida, which recommends grants for companies that promise jobs. He had been rejected. So here he was at the source, lobbying legislators for incentives. Soon he had Ambler and Gov. Charlie Crist on his side.

Domino says that it was unorthodox to fast-track gifts to private companies and that Textor's project was code-named "Project Bumblebee." Domino tried to block the incentive payment, but Textor and his colleagues dismissed him as a former investor with an ax to grind.

Eventually, Domino says, the grant was put directly into budget law, with approval from the governor. Textor received $20 million of state money from a fund normally used to lure out-of-state businesses to Florida. The money was contingent upon the creation of jobs. Ambler was later named to Digital Domain's board of directors.

The deal was approved, and just before Thanksgiving, the City of Port St. Lucie followed suit, giving Wyndcrest land and a brand-new studio building in exchange for 500 full-time jobs by 2014.

By January 21, 2010, construction on the Port St. Lucie facility was underway, and Digital Domain had already hired dozens of people, including veterans of Disney and Pixar. That day, Textor was on an airplane traveling to the Academy Awards "bakeoff," where Oscar nominees are winnowed down to finalists. A Star Trek revival with scenes by Digital Domain was up for Best Picture.

He typed out an email (later made public in a lawsuit) that boasted of his influence on legislators. "Just yesterday, I finished drafting legislation for the state of Florida to create a 20%-30% tax credit (effectively a rebate) for film production in Florida beginning July 2010," he wrote. "Our relationship with the legislature far exceeds that of the [film] industry lobby... So while the industry was waiting to see the new bill, I was actually drafting the bill (personally). State legislators here in Florida are not full-time, so they really need help."

As Textor was working these deals, he persuaded his partners to sell him their stock. Stork sold all of his shares to Textor's new company in February 2010. Bay sold his that May.

In September 2010, Textor closed a deal with the West Palm Beach City Commission to build the Digital Domain Institute — a film and animation college that would be run in cooperation with Florida State University in that city. West Palm offered Digital Domain a $10 million piece of prime real estate, free of charge, in the heart of downtown. The city also agreed to give Digital Domain a $10 million grant in several installments, contingent upon the company's hiring employees and enrolling students over the next few years.

"We have vetted this project extensively, and there's nothing... of concern," Kim Briese­meister, the executive director of the West Palm Beach Community Redevelopment Agency, said at the approval meeting.

The city had hired a private investigation firm to run public-records searches on Textor, Teaford, Sims, and BabyUniverse. It also contracted a California entertainment lawyer, Steven Beer, for $15,000 to review the company. He produced a glowing report.

"There was not one statement in there that had anything to do with financing," Domino fumes. "They hired some frickin' entertainment lawyer."

Commissioner Kimberly Mitchell and Mayor Lois Frankel were Textor's main champions on the dais. Few critical voices were heard as the gavel came down.

The film school in West Palm Beach was slated to open in 2012 in temporary quarters while construction began on a shiny new 300,000-square-foot building. As part of the welcoming brigade for Textor and his crew, city officials hired kids and a teacher from a digital video after-school program to make a documentary about Digital Domain.

Textor wore an open-collared paisley shirt and a dark blazer to an interview that the students filmed. In it, he told the youngsters just what they wanted to hear, suggesting they could have wonderful futures in film. "I'm not sure why we have such difficulty getting parents to support their kids' dreams," he said.

At another point, he said, "One of the toughest things is to come back to your hometown, where everybody's watching. Some are rooting for you; others are rooting against you, hoping you fail."

By the end of the interview, Andrew Spence, a 21-year-old West Palm native, thought Textor was "the coolest guy ever" and decided to apply to the Digital Domain Institute's four-year film degree program.

Dwayne Taylor, the teacher, was equally impressed with Textor's promise to employ the top 10 percent of the institute's class at the new Port St. Lucie studios.

"He sold me," Taylor says. "There's no doubt about it."

But even with the government grants and freebies, Digital Domain was spending more than it brought in. In 2011, it hired hundreds of employees, including Disney veterans, to work in Port St. Lucie. Its first film as part of the company's Pixar-like reinvention was underway: The Legend of Tembo, an animated feature about an African war elephant trying to return home. Success was not assured, though: The film didn't have a distributor yet, and no major celebrities were signed on for voice-overs.

Tembo was a hugely ambitious undertaking. An average animated feature can cost around $100 million, and industry sources have indicated Digital Domain set aside far less than that amount for the project. Few animated films survive long without the support of a major film studio and star talent. Sources say Digital Domain also sank about $3 million worth of preliminary work into the film Paradise Lost — an adaptation of the Milton poem slated to star Bradley Cooper — at a discount, in exchange for production credits. But the movie was shelved due to budget issues by Legendary Pictures before filming even began.

In 2011, seeking an infusion of capital from new shareholders, Textor and the management moved to take the company public.

Before the offering took place in November, Textor made a video presentation to potential investors. Talking up the company's prospects, he raised a controversial idea: saving money on films by getting the students from West Palm to work on them for no charge. "While the rest of the industry is chasing cheap labor all over the world... we'll have this right under our nose at the Digital Domain Institute: student labor. It's not only low-cost; in our model it's free."

Industry veterans, already dispirited by the cutthroat world of digital effects, were livid. Textor's speech eventually ricocheted around blogs, garnering angry comments. ("When I was a student, I would have loved to have been taken advantage of like that," Textor later explained.)

The initial shares were priced at $8.50, down from the company's goal of $12. Just days after the offering, Textor did something that would have likely spooked investors if they'd known about it. He took out a bank loan for $10 million to personally buy up shares of the new public company — roughly a quarter of them. "That, in my lay judgment, is as close to stock manipulation as you can find," Domino says.

During a conference call to shareholders in December 2011, Textor made excuses and urged them to be patient. The effects side of the business was busy, he said, but cash flow from major film projects can take a long time to materialize. Textor admitted, "If you finish a project and you don't have another project immediately on its heels, you can show an irregularly large cash burn in that particular quarter."

The hiring requirement attached to the state and city money was also a headache, he claimed. The new hires in Florida "weren't ready to walk in and start doing Star Wars-caliber work," Textor explained. The cost of training these workers offset some of the government largess.

By May of 2012, the stock was looking like anything but a sure bet. Textor — who received $791,000 in base compensation in 2011, along with a $400,000 bonus and stock options valued at more than $5 million — wrote in a news release that the company had made "significant progress," including "the first product of our Virtual Performance business, a virtual Tupac Shakur who performed at the Coachella music festival [and] launched an entirely new form of entertainment."

But one analyst on the website SeekingAlpha.com saw through the nifty illusion, writing, "One of the biggest misconceptions in the world of investing is that being a 'cool idea' firm instantly makes a company profitable and worthy of investment." The analyst cited declining revenue and iffy prospects for profits from the new school.

The analyst continued, "Domain Media has managed to weasel its way into the hearts of Florida politicians, receiving approximately $135 million in cash grants, land grants, low-interest financing, and tax incentives. I think this is merely going to kick Domain Media's can down the road until the road ends at the edge of a cliff."

In September 2012, the cliff appeared. Not only had Textor borrowed money to prop up the stock price, but also the company had taken out a $35 million loan from investors, led by Tenor Capital, that required it to keep more than $7.5 million of cash on hand. When it didn't meet that requirement, the directors defaulted on the loan, and now the amount owed jumped to $51 million, with no clear way to pay it back. Bankruptcy loomed. With these embarrassing revelations, on September 4, the stock price fell to around a dollar per share.

The collapse was quick and painful. On September 6, the company announced that it was laying off all but 20 of its nearly 400 Port St. Lucie employees and that Textor had resigned as CEO. On September 11, Digital Domain Media Group filed for bankruptcy, and the New York Stock Exchange announced it was delisting the stock, which by now was virtually worthless.

The next day, the Palm Beach Post reported the Digital Domain Institute had suspended its continuing-education classes. Tembo lay half-finished in the brand-new, but now shuttered, studio building. The West Palm Beach school building — which was supposed to be a majestic, cantilevered glass building — never got further than architectural renderings.

John Textor lives in a sprawling white $3 million house on Hobe Sound. It's not the kind of place where people just stop by. So he was not happy when he opened the thick wooden door on a recent Wednesday afternoon to be asked to comment for this story. He was wearing a faded green polo shirt, khaki slacks, and sandals. A small dog barked in another room.

"I lost my job too," Textor said defensively. "It's been a witch hunt. Please do not come back here ever again."

Indeed, the onetime savior of Digital Domain has been feeling like a hunted man lately. In July, anonymous commenters who identified themselves as investors began posting nasty notes to Textor on the Yahoo! Finance page for Digital Domain's stock, even insulting his wife.

In August, Textor filed a cyberstalking claim in domestic violence court to get the comments removed. A judge granted the injunction.

In bankruptcy court, creditors claim they are owed about $200 million. The old special-effects division of Digital Domain was sold to a pair of Chinese and Indian competitors for $30.2 million.

The fate of the Port St. Lucie studio is uncertain; the city is seeking a new tenant but is unlikely to recoup the $7.8 million grant. Some employees involved with Tembo hope to get the film finished somehow.

Hundreds of talented former employees are looking for work. They include Ronn Brown, a Star Wars industry veteran who also taught a class on digital background painting at the new school. "I taught the first round of classes but stopped working for them because they didn't pay me," Brown says. "I used to work at ILM. I worked there nine years and left to try to get experience from other places. I had no idea I would never have a real job again." In a class-action lawsuit, employees are fighting for final paychecks and unused vacation pay.

The lawsuits against Textor have piled up. Stork has sued him for fraud. One of Textor's friends, Sean Heyniger, has also filed suit, alleging Textor and his wife owe $986,707 on a personal loan. Legendary Pictures has sued too, claiming that it loaned Domain Media $3 million and that Textor personally guaranteed the loan.

The City of West Palm Beach had to hire bankruptcy lawyers, at the discounted rate of $375 per hour, and eventually reclaimed its downtown piece of land.

Thanks to a system of benchmarks that the city imposed on the $10 million it was prepared to give Digital Domain, only $2 million was paid out. That money was contingent upon Digital Domain attracting FSU and establishing the four-year degree program. FSU has said it will continue running its film school; for now, it is still operating out of temporary classrooms above the CityPlace mall.

Andrew Spence, the 21-year-old who helped film the documentary, still has nothing but praise for Textor. "He had a lot of great ideas," Spence says. "He was taking Hollywood against the grain."

West Palm Beach Mayor Jeri Muoio, who replaced Lois Frankel in 2011, still thinks the film industry can bloom there. She says, "The city, together with Florida State University, [is] creating an economic incubator for a new and exciting industry here in West Palm Beach."

Frankel, who ran for U.S. Congress this year, announced she would give $20,000 in campaign donations from Digital Domain executives to a charity. Her opponent, Adam Hasner, still painted her as wasting millions in taxpayer money.

The downfall of Digital Domain could be blamed on the competitive state of the industry, or the politicians who saw nothing but opportunity in the promise of jobs for Florida, or John Textor himself. But the man had a way of stoking big dreams — whether they were the dreams of people who believed they could change Florida's economy, the dreams of kids who wanted bright and exciting futures, or the part of us that wants to see fast cars, space invaders, and a living Tupac.

Sometimes, you just want to believe.

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