Less dream, more factory

H'w'd steels itself for a perfect storm

Hollywood woke up last week to the fact that it has become Detroit.

Layoffs are rising as the global conglomerates demand higher returns. Contentious negotiations loom as guilds and unions feel they are being shut out of the growing world of digital distribution.

NBC Universal said it will cut operating expenses by $750 million this year and eliminate as many as 700 jobs. Those disclosures riveted attention on one ineluctable reality:

Having lived in its own economic cocoon for a generation, the media and entertainment community is facing the reality that it’s just another industry and that its artisans must expect to be treated accordingly.

There’s little chance that this will be accepted with equanimity.

“Hollywood has essentially become a microcosm of the overall U.S. economy, rather than the exception to it,” says Stephen Katz, head of the Center for Entertainment Industry Data & Research. “That means if you’re a manager, you make normal cuts and then you have to make more cuts. And then you have to cut again.” Hence, as corporate America posts record productivity and profits, wages for the average worker are flat or falling.

How is Hollywood taking all of this?

Certainly not in stride. In fact, it’s catching a case of conglomophobia.

Gone is the entente cordiale that has long kept labor peace, as more militant leadership at the Writers Guild of America and the Screen Actors Guild signal they will be taking a hard line when their contracts expire in the next 24 months. The results could be devastating to the Hollywood economy as well as to its sense of community. To friends and associates, Warner Bros. CEO Barry Meyer has warned of what he calls a “perfect storm” of labor unrest.

In part, Hollywood is reflecting the constant drive for corporate profits — a statistic that now represents the highest share of the nation’s GDP (gross domestic product) since the 1960s. Meanwhile, wages and salaries make up the lowest share of the GDP since 1947. It’s an anomaly across industries that explains why the economy may be growing, but it doesn’t feel that way to the average Jane or Joe.

The NBC Universal cuts follow a quarter in which entertainment was the only one of parent GE’s divisions to show a sharp dip in profitability.

As Hollywood has been transformed over a generation from the single-product entities of studios and networks to massive conglomerates, there has been more pressure to shore up the bottom line and boost stock prices. Official stats show full-time showbiz jobs fell 8.5% to 171,200 between 2000 and 2005. Union workers, managers and CEOs alike have been shown the door. Even top-tier actors like Tom Cruise and Jim Carrey are getting kicked in the teeth.

“Hollywood has taken on the characteristics of American industry,” says longtime showbiz analyst Harold Vogel, author of “Entertainment Industry Economics.” “There’s no longer the situation of the 1970s, where people were almost guaranteed lifetime compensation and pension plans. That no longer applies anywhere.”

As one industry insider says: “If Tom Freston can get fired, then anyone can.”

The widespread perception — from the Great Depression to the stagflation of the 1970s to the market crash of the 1980s — is that Hollywood had been immune to the outside world and protected by Americans’ never-ending desire to be entertained, that this immunity lasted until conglomerates gained control of studios in the 1990s.

That perception isn’t entirely true, as the industry has endured painful periods of retrenchment as well as wrenching labor upheaval in earlier generations. Nor is corporate ownership a new phenomenon. As studios teetered toward bankruptcy in the 1960s, such firms as Kinney National bought Warner Bros.-Seven Arts, Transamerica purchased United Artists and Gulf & Western acquired Paramount. But lording over these conglomerates were the likes of Charles Bluhdorn and Steve Ross, industry outsiders who had a passion to indulge the business.

Meanwhile, MCA’s Lew Wasserman could be counted on to help balance management and employee relations, via above-average salaries and job security.

“He’d say to both sides, ‘Don’t tell me what you want. Tell me what you need,’ ” says one industry insider. “It’s a different world than the Wasserman era. He had such tenure. He knew the business from the agency side on up. He was a very good master negotiator and he understood both sides. I don’t know if anyone can or will be like that again.”

Another veteran agrees, “Hollywood used to be a small town, a village. Now they have to deal on a global basis. There are a lot more people to talk to, potential conflicts, demands, interests.”

Today’s corporate owners are much more obsessed with stock price and quarterly earnings, at a time when studio profits are as ephemeral as box office hits.

“The stock market is driving all this, because if you don’t have 15% annual growth, your stock goes down,” says Katz. Studios now represent a relatively small chunk of revenue for giant conglom parents, “so the notion that they (or their employees) should be treated differently has gone by the boards,” he adds.

It’s an open question whether corporate masters always know the best way to shore up their film studios. Who ever expected GE chief Jeffrey Immelt would be the one dictating whether Universal should buy DreamWorks or pass?

Some savvy Hollywood insiders claim that cuts too close to the bone imperil the creative process and the health of a studio.

In the past year, more than 400 jobs were cut at Warner Bros., about 150 at Paramount, 1,100 at MGM and 650 at the Walt Disney Co. Bonuses are down. Perks are disappearing. In a radical move, Disney chief Bob Iger recently said the studio will link executive compensation to the success of its slate — meaning if the slate does badly, the execs will be penalized.

And many noted that the month after the Mouse cut a swath through its film division, it reported a 40% increase in quarterly profits.

Studios defend the layoffs, insisting one profitable quarter, or even a string of them, can’t disguise the fact that the future is loaded with uncertainty. The era of rapid revenue growth from DVDs is over. Piracy is very much alive. The syndication business is on life support. Predictions that cell phones, digital downloads and other technology will eventually make up for lost revenue seem a far way off.

“The studios are very nervous about their business models,” says Stephen Prough, a founder and managing director of Los Angeles investment bank Salem Partners. “There are clearly more consumer choices out there, and that’s determining whether a consumer buys movie product. … No one knows how those (new) business models will shake out, and what they will do for the overall profitability of the studios.”

“It’s certainly the most eggshell time that I have ever seen,” says one industry vet. “Because you can’t look at any one thing and say, ‘Whatever happens, it will be OK.’ ” That makes it particularly hard for the media congloms to take a conciliatory stance with unions.

There’s ample evidence that the problems are more than cyclical. Some economists point to the loss of jobs to foreign countries. International locations now are home to more than half of all feature shoots, costing the U.S. economy some 47,000 jobs per year since 2000, according to a study by the Center for Entertainment Industry Data.

“Those jobs aren’t coming back,” says Katz, who authored the study.

What worries Hollywood’s guilds is not only runaway production but the prospect that they won’t get their fair share of revenue from such outlets as digital downloads, still in its infancy. As homevideo exploded over the past two decades, the guilds wrangled repeatedly with studios to gain a bigger piece of that coin.

Much of the attention in the coming year will be placed on the WGA, as its contract is the first to expire, on Oct. 31, 2007. (The DGA and SAG contracts expire in July 2008.) Leaders including president Patric Verrone and WGA West executive director David Young have fired up members in recent months with strident talk about confronting the giant congloms.

When the guild held a recent rally as a show of unity for its hard-line strategy, some 900 people turned up, the biggest labor turnout since the Screen Actors Guild strike in 2000. One board member, Phil Alden Robinson, lamented that a 1985 compromise over homevideo residuals lost members some $2 billion.

The fear is that the WGA will stall, as it did in 2004, and work under an expired contract until SAG and DGA deals are up. The danger is that this can lead to a “go to hell” mentality among execs who will become more hawkish as time passes without a deal.

“The WGA has a lot of leverage in series TV, but they can’t really stop features,” says one exec. “On the other hand, SAG really drives film and it can close down film in a single day.”

The DGA is keeping its cards close to the vest. Leaders have avoided provocative statements that might inflame members, and it is regarded as the most unlikely of the showbiz unions to strike.

At SAG, president Alan Rosenberg took a hard line in his campaign, but he received unexpectedly high marks when he landed a two-year extension of the union’s commercials contract, which allows for new revenue platforms in advertising.

But SAG could face more internal squabbles, as its Hollywood board recently ousted Rosenberg ally Anne-Marie Johnson in favor of Kent McCord, viewed as the most uncompromising among SAG leaders.

“The guilds are going to go all out and demand everything they seem to have missed,” Vogel says. “They will try to get a percentage of new media. But it’s a different game. I don’t think they are going to move the needle very far.”

Top executives would like to avoid hammering out labor deals. The massive size of the media congloms makes it harder for the individual heads of studios and networks to get completely on the same page.

“At the same time, the parent company doesn’t want a black eye in the media,” says one Wall Streeter. “They can’t afford a strike and all of the disruptions. I don’t think these negotiations are going to be easy by any means, but in the end the congloms have to admit they need the skilled workforce and have to pay them something of what new and old media are getting.”

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