Crunch in Tinseltown

Crunch in Tinseltown

Economic troubles will likely affect way Hollywood does business
Movie studios are having trouble getting financing for new projects.

Published: January 4, 2009

HOLLYWOOD – There is no Hollywood ending in sight in 2009 for the entertainment industry, which along with the rest of the nation is experiencing its worst economic slump in decades.

The fallout from declining local TV ad revenue, weakening DVD sales and diminishing sources of film financing will continue to pound Los Angeles’ signature industry, which employs more than 200,000 people and pumps an estimated $20 billion to $30 billion into the local economy.

Many people expect that will trigger further layoffs at the studios, networks, independent production outfits and other media companies on top of the thousands of job losses that have occurred in recent months. Industry executives contend that the steep downturn will force Hollywood to change the way it does business.

"You can eliminate all the limos and velvet-rope events you want," said former studio executive Marty Kaplan, the director of the Norman Lear Center and a research professor at the University of Southern California’s Annenberg School for Communication. "But if you’re still spending $100 million on pictures that have little chance of being hits, you’re in a business that is inherently nuts."

Compounding the angst is the threat of another industry strike, this time by the powerful Screen Actors Guild, which would halt most movie and prime-time TV production and throw tens of thousands of actors, technicians and others out of work. Estimates of how much last year’s strike by screenwriters cost the local economy vary widely, from $380 million to $2.5 billion. One study concluded that the strike led to the state losing 37,700 jobs tied to the entertainment industry.

"It’s not business as usual," said Marc Shmuger, the chairman of Universal Pictures. "We are all facing economic uncertainty, and (2009) is going to be tough. We are deep into a recession. None of us have been here before."

The signs of distress are evident. In December, Universal laid off 70 executives as part of parent company NBC Universal’s move to cut 500 jobs across its business units. The same day, Viacom Inc. shed 850 jobs at its various media companies, including MTV Networks and Paramount Pictures.

Most recently, video game giant Electronic Arts Inc., based in Redwood City, Calif., said that it was cutting 1,000 jobs amid declining sales; New York-based Cablevision Systems Corp. announced that it will close its Voom high-definition channels and cut jobs in the unit. Time Warner Inc.’s Warner Bros. and Walt Disney Co.’s ABC are considering similar moves in the first quarter.

Studios also are scaling back the number of movies they are making.
Indeed, the capital crunch will help ensure it. Paramount and MGM weren’t able to close so-called slate film financing deals in 2008, and prospects for securing such arrangements in the near term appear bleak. Even one of the world’s most famous filmmakers, Steven Spielberg, is struggling to raise hundreds of millions of dollars in debt financing to help bankroll his new studio.

Although most studios have long-term financing deals in place, their lenders are looking to renegotiate terms, including lower distribution fees that studios earn for releasing the movies. The studios might have to resort more to self-financing their productions.
That would force them to take on greater risk and make fewer films, says Richard Dorfman, the managing director for the New York investment company Richard Alan Inc. "The credit crunch will have a pervasive effect on the movie business in 2009 and 2010," Dorfman said.
Some studios say they are hoping to save money without having to sacrifice jobs.

"We have been implementing aggressive cost-containment initiatives specifically designed to mitigate layoffs," said Julie Henderson, a spokeswoman for News Corp., parent of 20th Century Fox. Fox expects to save $400 million this fiscal year by not filling open positions, reducing marketing and production costs, and slashing travel and entertainment budgets, the studio official said.

Similar moves are under way at Culver City-based Sony Pictures. "We’re cutting costs across the board, with restrictions on overtime, the filling of open positions and those that become vacant, use of temporary workers, and travel and entertainment expenses, as well as consolidating shared services," Sony spokesman Jim Kennedy said.

Other studios say they, too, are cutting back on traditional Hollywood perks such as lavish premieres, first-class and "entourage" travel, limo services and hair and makeup sessions. Expect to see fewer executives at upcoming festivals in Cannes in the South of France and at Sundance in Park City, Utah, as well industry events.

For the first time, Universal won’t send executives to the movie theater industry’s biggest trade show, ShoWest, scheduled for March in Las Vegas. Sony canceled executive meetings in Latin America in December and Europe in June.

Warner Bros. abandoned its long-time ritual of sending holiday turkeys out to a host of actors, executives and agents. Instead, the studio sent virtual Christmas cards via e-mail.
Jon Feltheimer, the chief executive of Lionsgate Entertainment Corp., a studio that specializes in low- and midrange-budget films, said that the economic downturn will force Hollywood to cut back on more than parties and perks.

"It’s a great wake-up call to ask ourselves if we’re operating as smartly and strategically as we can," said Feltheimer, whose movie and TV studio in Santa Monica recently eliminated 41 positions, or 8 percent of its head count.

Confronted with rising costs and diminishing returns, studios are reining in costly talent deals that can leave them in the red while stars walk away with millions. For example, Warner negotiated a deal with Yes Man star Jim Carrey — the first comedic actor to break the $20 million benchmark — in which he deferred his usual upfront fee for an ownership stake in the movie.

This is occurring against a backdrop of declining DVD sales, which have propped up studio profits for years. Consumer spending on DVDs, already slowing, is believed to have dropped 5 percent to 7 percent in 2008, according to Adams Media Research, which projects a similar decline for this year. The slowdown in DVD sales reflects the maturity of the business, which began to slow in 2005 but is exacerbated by a drop in overall consumer spending that began a few months ago, said Tom Adams, the president of the research enterprise.

Moreover, sales of the high-definition Blu-ray discs have been brisk, but not brisk enough to offset declining DVD sales. Adams estimates that overall spending in the home-entertainment sector, including Blue-ray discs, will have dropped 3 percent to 5 percent for 2008.

Meanwhile, broadcast networks — grappling with rising production costs, lackluster prime-time ratings and a loss of viewers to the Internet — face a very difficult year as automakers and other big TV advertisers slash spending.

As for box-office revenue, the studios saw nearly as much money generated in 2008 as they did in record-setting 2007, although that was due to ticket-price inflation. Attendance was off an estimated 5 percent from 2007’s 1.4 billion admissions.
"If you have good movies, people tend to come even during down economic times," said John Fithian, the president of the trade group National Association of Theatre Owners. Fithian, noting that in 2005, when the economy was booming, "We had the worst year we’ve had in decades because the movies were terrible."

Nonetheless, Fithian acknowledged that if the recession dragged on, it could affect moviegoing at a time when consumers are getting more of their entertainment at home with their big-screen TVs, video games and Internet.

Such changes could prompt the studios to speed up their efforts to distribute entertainment on the Internet, cell phones and other new outlets.

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